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https://www.courtlistener.com/api/rest/v3/opinions/4624945/	Robert L. McCoy and Eva M. McCoy v. Commissioner. Curry Engineering Company v. Commissioner.McCoy v. CommissionerDocket Nos. 4926-69, 4927-69.United States Tax CourtT.C. Memo 1971-34; 1971 Tax Ct. Memo LEXIS 296; 30 T.C.M. (CCH) 146; T.C.M. (RIA) 71034; February 23, 1971, Filed. 296 Held, numerous deductions for travel expenses, business promotion expenses, taxes, rental expense, dues and fees, advertising expenses and ordinary business expenses claimed by the individual petitioners, and the corporate petitioner are disallowed due to a failure of proof. Held further, the corporate petitioner is to be recognized as such despite its alleged failure to comply with State incorporation requirements and despite its status as a professional corporation. United States v. Empey, 406 F. 2d 157 (C.A. 10, 1969). Held further, the individual petitioners realized a gain on the transfer of partnership assets to and the assumption of liabilities by the corporate petitioner. Sec. 357(c), I.R.C. 1954. Orval Veirs, 219 Couch Dr., Okla. City, Okla., and Clyde J. Watts, for the petitioners. J.C. Linge, for the respondent. TIETJENSMemorandum Findings of Fact and Opinion TIETJENS, Judge: In these consolidated cases, the Commissioner determined deficiencies as follows: PetitionerYearDeficiencyRobert L. McCoy and1964$29,516.63Eva M. McCoy196515,398.82Curry Engineering CoFYE 9-30-652,877.23The issues facing us are numerous. They are: I Did the petitioners, Robert L. McCoy and Eva 297 M. McCoy, understate income from Curry Engineering Co., a partnership, for the year 1964 in the amount of $59,903.92? This involves answering these five subsidiary questions. A. Should deductions claimed by the partnership for business promotion expenses be disallowed in the amount of $4,184.20? B. Should deductions claimed by the partnership for travel expenses be disallowed in the amount of $9,423.98? C. Should the partnership be allowed a deduction for taxes accrued in but not paid in the year 1964 in the amount of $2,572.86? D. Should the partnership be allowed deductions for business expenses incurred in the year 1964 totaling the amount of $14,166.95, for which checks were written and dated in December 1964 but not presented to the bank for payment during the year 1964 and all of which were in excess of funds on deposit in the partnership's bank accounts as of December 31, 1964? E. Should the partnership be allowed a deduction for employees' bonuses totaling the amount of $87,000? II Should the deduction claimed for taxes by Robert L. and Eva M. McCoy in the year 1964 be disallowed in the amount of $342.33? III Did Robert L. McCoy realize a gain on the exchange of partnership 298 assets for Curry Engineering Co. stock and the assumption of the partnership's liabilities by Curry Engineering Co. in the amount of $73,767.02, of which amount $73,625.77 is taxable as a long-term capital gain and $141.25 is taxable as ordinary income? 147 IV Should the deduction claimed by Curry Engineering Co. for rental expense be disallowed in the amount of $1,675? V Should deductions claimed by Curry Engineering Co. for dues and fees be disallowed in the amount of $838? VI Should deductions claimed by Curry Engineering Co. for advertising and entertainment be disallowed in the amount of $3,610.29? VII Should deductions claimed by Curry Engineering Co. for travel expenses be disallowed in the amount of $5,398.38? VIII Should the deduction for contributions claimed by Curry Engineering Co. be limited to five percent of taxable income computed without regard to the deduction for contributions? IX Should Curry Engineering Co. be recognized as a corporation for the purpose of determining its income tax liability and the income tax liability of Robert L. and Eva M. McCoy? Findings of Fact Some of the facts have been stipulated. The stipulation and exhibits attached thereto are incorporated 299 herein by this reference. Robert L. McCoy and Eva M. McCoy (hereinafter referred to as the petitioners) are husband and wife whose legal address, as of the date the petition was filed herein, was Oklahoma City, Oklahoma. For the taxable years 1964 and 1965, they filed joint Federal income tax returns with the district director of internal revenue at Oklahoma City, Oklahoma. Curry Engineering Co. (hereinafter referred to as the corporation) is a corporation, incorporated under the laws of the State of Oklahoma on January 1, 1965. Its principal place of business, as of the date it filed its petition herein, was Oklahoma City, Oklahoma. It filed its Federal income tax return for the years ended September 30, 1965, 1966, 1967 and 1968 with the district director of internal revenue at Oklahoma City, Oklahoma. During the calendar year 1964, Robert L. McCoy (hereinafter referred to as McCoy) and James E. Curry were equal members of a partnership, Curry Engineering Co. (hereinafter referred to as the partnership), through which they functioned as consulting engineers. The partnership's principal place of business was located in Muskogee, Oklahoma and it filed its partnership return of income 300 for the year 1964 with the district director of internal revenue at Oklahoma City, Oklahoma. It filed no partnership returns of income for any period following the calendar year 1964. On January 1, 1965 the partnership transferred its assets to the corporation in exchange for capital stock, and the corporation assumed the partnership's liabilities. The petitioners reported no gain and no loss on such transfer. The corporation had authorized capital stock consisting of 20,000 shares of voting common stock and 20,000 shares of nonvoting common stock, with an assigned value of $10 per share for each series of such stock. On January 1, 1965 the corporation issued 10,200 shares of the voting common stock to Curry and issued 9,800 shares of the voting common stock to McCoy. In the exchange of assets by the partnership for the corporation capital stock and the assumption of liabilities by the corporation, the assets transferred and the liabilities assumed by the corporation were as follows: AssetsPrepaid interest$ 8,156.79Furniture and equipment$84,251.47Less depreciation58,751.2725,500.20Autos and trucks93,497.38Less depreciation69,681.2823,816.1013 Total (adjusted basis)$ 57,473.09LiabilitiesCash overdraft$107,439.75Accrued payroll tax2,572.86Retirement payable102.84Notes payable98,793.36Total liabilities$208,908.81Liabilities in excess of assets$151,435.72301 The cash overdraft in the amount of $107,439.75 includes: (a) Checks issued in payment of ordinary deductible expenses totaling the amount of $14,166.95; (b) Checks issued to J.E. Curry and R.L. McCoy as withdrawals totaling the respective amounts of $5,087.24 and $1,185.56; and (c) Checks issued to 18 key employees totaling the amount of $87,000. These checks were endorsed by the respective 148 recipients and returned to the partnership. None of them were ever presented to the bank for payment. The partnership kept its books and accounted for its income on the cash basis of accounting. Robert L. and Eva M. McCoy reported their taxable income on the cash basis of accounting. The corporation kept its books and accounted for and reported its income on the cash basis method of accounting. Neither the partnership nor the corporation kept records pertaining to deductions claimed for business promotion, entertainment and travel which would show the (a) Amounts; (b) Time, date and place of entertainment; (c) The business purpose for the claimed entertainment or the nature of the business benefit derived or expected to be derived as a result of the claimed entertainment; (d) The name and address 302 or location of the facility used in connection with the claimed entertainment and the type of entertainment; (e) The occupation or other information relating to the person or persons claimed entertained, including the name, title or other designation sufficient to establish a business relationship to the petitioners in these cases; (f) The business relationship between the partnership and the persons claimed to have been entertained; (g) The date of departure and return for each trip away from home and the number of days away from home; (h) The name of the city or town or identification of the locality visited in connection with the claimed travel expenses; and (i) The business reason for travel or the nature of the business benefits derived or expected to be derived as a result of the claimed travel. On January 1, 1965 the partnership transferred all of its assets to the corporation and the corporation assumed all of the partnership's liabilities, including the bank overdraft. The partnership had no bank checking account after January 1, 1965. The partnership wrote checks payable to 18 of its employees, all of which are dated December 31, 1964, totaling the amount of $87,000. The 303 18 checks were endorsed and returned to the partnership. Pursuant to agreements none of such checks was presented to a bank for payment by the employees. The partnership issued debentures to the employees in amounts that corresponded to the amount of the returned checks. The notes were signed by James E. Curry and Robert L. McCoy as partners of Curry Engineering Co. The notes, except names of payees and amounts, were identical. The employee chose the amount of bonus for which a check was written, endorsed and returned. For example, Daniel F. Seniura chose the amount of $6,000 and later received the amount of $2,300 in full payment of the note issued to him on January 6, 1965. The debentures were issued to redeem the checks issued to the employees. The bonus checks and notes were issued to the employees to improve employee morale, provide a substitute for a retirement program, and decrease the income tax liability of Curry and McCoy. Each of the 18 employees agreed to report the amount of bonus in his Federal income tax return as taxable income for the year 1964. The partnership withheld no income tax with respect to the bonus checks issued in 1964. The notes or debentures are dated 304 January 6, 1965 and contain contingencies regarding payments to the employees as follows: The said Curry Engineering Company agrees to pay the amount aforesaid upon the first to occur of any of the following conditions: (a) The death of James E. Curry, or (b) The death of the key employee, or (c) The permanent and total disability of the key employee, or (d) Upon the key employee attaining the age of sixty-five (65) years. In the event of the termination of the employment for any reason of the key employee, except the occurrence of any of the four conditions above specified, Curry Engineering Company reserves the right in the sole discretion of Curry Engineering Company to pay to the key employee all or any part of the principal sum aforesaid and upon such terms and upon such conditions as the Company in it's [sic] discretion shall determine; provided however nothing herein contained shall be construed as relieving the Company of it's [sic] obligation to pay the principal sum upon the occurrence of any one of the four conditions above enumerated. Payments were made by the corporation on the notes issued by the partnership as follows: 149 Date PaidKey EmployeeAmount PaidFace Amount ofNote11-30-66Johnny Cooper$ 1,000$ 5,0001-30-67Homer Frazier1,5005,0002-15-67Beveline Mitchell5001,0008-30-67Velma Hemperley1,0003,000Jan. 68Velma Hemperley100Feb. 68Velma Hemperley100Mar. 68Velma Hemperley100Apr. 68Velma Hemperley100May 68Velma Hemperley100June 68Velma Hemperley100July 68Velma Hemperley100Aug. 68Velma Hemperley1009-4-68Velma Hemperley1009-9-68Velma Hemperley10010-1-68Velma Hemperley10011-1-68Velma Hemperley100Oct. 67Daniel F. Seniura2,3006,000Mar. 68Carl L. Waldrop Est.5,0005,000Totals$12,500$25,000The 305 corporation, Curry and McCoy entered into agreements dated September 19, 1967 and November 6, 1968 pursuant to which Curry exchanged his corporation stock for corporation assets and assumed the balance due on the employee notes as of November 6, 1968 in the amount of $62,800. Since November 6, 1968 Curry has paid on notes issued to employees the amount of $6,800. Curry intended that the corporation assume the liability for paying the debentures issued to the employees and he intended the obligation to pay such debentures to be a valid liability of the corporation. During the period from January 1, 1965 to September 30, 1965 and later years, the corporation actively engaged in incomeproducing activities; had duly elected officers and had employees to whom it paid salaries and wages; kept books of account and maintained bank accounts; entered into contracts in its own name; filed Federal income tax returns for the period ended September 30, 1965 and later years; and paid tax on the income it reported. During the period January 1, 1965 to September 30, 1965, the corporation paid a salary to McCoy in the amount of $14,250. The corporation claimed a deduction for dues and fees which included 306 the following items: (a) Cash payment made to Curry in the amount of $200. (b) Payment to the Oklahoma State University Alumni Association in the amount of $5. (c) Payment to Ben Dickson in the amount of $3. Curry informed the examining agent that he had kept a diary which contained information regarding travel and entertainment expenses but he, Curry, would not show the diary to the agent or any other person. As of December 31, 1964 the partnership had accrued unpaid payroll taxes totaling the amount of $2,572.86. This liability was assumed by the corporation on January 1, 1965. Prior to January 1, 1965 the partnership issued checks to Curry and McCoy, totaling the amount of $6,272.80, which were in excess of funds on deposit in the partnership bank account as of December 31, 1964. In the statutory notice the Commissioner determined that the partnership understated income for the year 1964 in the amount of $119,807.85 and that McCoy understated his taxable income for the year 1964 in the amount of $59,903.92, which is one-half of the amount of $119,807.85. The adjustments involved are as follows: a. Dues and fees$ 2,439.86b. Business promotion4,184.20c. Travel9,423.98d. Repairs20.00e. Unpaid expenses103,739.81Total$119,807.85Opinion 307 The issues involved herein can be broken down into three main subdivisions: those relating to the partnership, Curry Engineering Co.; those relating to the individuals, Robert L. and Eva M. McCoy; and those relating to the corporation, Curry Engineering Co. Our resolution of these issues shall proceed in the above order. The Partnership The major issue involving the partnership relates to an understatement of income 150 therefrom by the individual petitioners in the amount of $119,807.85, broken down as follows: ItemAmountDues and fees$ 2,439.86Business promotion4,184.20Travel9,423.98Repairs20.00Unpaid expenses103,739.81Total$119,807.85 The individual petitioners' share of the above understatement is $59,903.92, and they have conceded the claimed deductions for dues and fees, and repairs. Proceeding to the remaining items in dispute: Business Promotion Expenses The claimed deduction herein is for $4,184.20. The petitioners have conceded $2,515.88 of the above. This leaves $1,668.32 in dispute. That amount consists of two categories of expenditures, the first being $668.32 claimed as entertainment expense and the second being $1,000 claimed as being a promotion expense paid to one 308 H.E. Bailey. As to the $668.32 claimed as entertainment expenses, deductions for items of this nature are governed by section 274, I.R.C. 1954. 1 That section, in addition to other numerous requirements, provides that no deduction is to be taken unless the taxpayer substantiates either by adequate records or sufficient evidence to corroborate his own statement - (1) the amount, (2) the time and place, (3) the business purpose of the expense, and (4) the business relationship to the taxpayer of the person entertained. Sec. 274(d). The regulations under section 274 delve into the specifics of the recordkeeping required, but their citation here would serve no purpose. Suffice it to say that petitioners' evidence falls far short of that required by the Code or allowed by the Second Circuit in LaForge v. Commissioner, - F. 2d - (C.A. 2, 1970). The only evidence presented was the testimony of Curry who in effect stated that the expenses were for business purposes. Such is obviously insufficient to support the deduction. In the absence of adequate records the deduction cannot stand. As to the $1,000 309 paid to H.E. Bailey, the only explanation of this item is a statement appearing on the partnership books stating: Educational program pursuant to $500,000,000.00 Bond Issue relative to Roads and Education. Primary Farm-to-Market Turnpike Expansion Educational Program, Glen Key, Treas. (Giant Stride-Organization to provide Bond Issue). The Commissioner contends this payment was made to influence the general public or a segment thereof, with respect to legislative matters. Sec. 162(e)(2). Petitioners offer no evidence in contradiction and we therefore must sustain the disallowance of the item as a deduction. Travel Expenses The claimed deduction herein is in the amount of $9,423.98. Of that amount, petitioners concede $2,400, such being sums paid for entertainment in Mr. Curry's home. The amount of the claimed deduction (including the $2,400 mentioned above) is represented by 11 checks issued to James E. Curry. Travel expenses also fall within the purview of section 274, discussed in the preceding section. Again petitioners have failed to carry their burden of proof. The only evidence offered consisted of 12 summary expense sheets and Curry's testimony that the expenses were for business 310 reasons. Curry did state, however, to the examining internal revenue agent, that he had kept a diary which would furnish additional information but he did not produce this document. Therefore, we must disallow the claimed deductions for the same reasons applicable to the promotion expenses, failure to prove the amounts claimed in accordance with the Code and regulations. Taxes This item, in the amount of $2,572.86, relates to payroll taxes accrued in 1964 but not paid until 1965 (when they were paid by the corporation). Since the partnership used the cash basis of accounting and further since the corporation assumed this liability upon its formation, no deduction is allowed to the partnership in 1964. Sec. 461(a); sec. 1.461-1(a)(1), Income Tax Regs.Unpaid Expenses As of December 31, 1964, there were unpaid checks of the partnership in the 151 amount of $107,439.75. The total consisted of the following: TypeAmountOrdinary Expenses$ 14,166.95Partners Drawing6,272.80Bonus87,000.00Total$107,439.75The checks totaling $14,166.95 were dated during 1964 and were issued for the payment of ordinary and necessary business expenses incurred prior to December 31, 1964. As of January 1, 1965, 311 the partnership ceased to exist, being replaced by the corporation which took over the assets and assumed the liabilities of the partnership. Petitioners contend that issuance and delivery of the checks constituted conditional payment of the expenses, which upon presentation and payment in the ordinary course of business became absolute and related back to the time of delivery. Mark D. Eagleton, 35 B.T.A. 551">35 B.T.A. 551 (1937), affd. 97 F. 2d 62 (C.A. 8, 1938). To prevail on its theory, petitioners had to show that the delivery was effectuated during 1964. The only evidence consists of copies of the checks and a summary sheet thereof. The latter document is of no aid. The copies of the checks, however, do contain many markings and stamps affixed by the various parties to the transaction by check. Some of these, teller's stamps indicating the date presented, etc., would indicate that certain checks were delivered during 1964 and therefore would come within the ambit of petitioners' theory. The following list, showing check number, date, the payee and the amount of the check, represents all those checks which are within the purview of petitioners' argument: CheckDateNo.(1964)PayeeAmount338612-26Voerster, Charles Allen$ 150.50339012-26Smith, Sidney H.154.27339312-26Campbell, Jo Beth128.20339512-26Compassi, Lena Marian105.95339612-26Cooper, Johnny Ray153.28340112-26Harris, A.V.94.27340212-26Hathcoat, Joseph97.12340312-26Hemperley, Velma99.19340412-26Jameson, Jimmie Wayne224.24340512-26Ledford, Jerry Wayne54.19340712-26Long, June Yvonne85.31341512-26Osburn, Andy H.156.52341812-26Rosson, Edward Lee103.61342012-26Scott, Basil E., Sr.229.91342112-26Scott, Basil E., Jr.166.05342512-26Slayton, Robert Owen190.091312812-26Andy H. Osburn20.001312912-29Muskogee County Tax Agent186.251291512-28Albert Dyer, Treasurer685.561313712-30Roy W. Entz40.57$3,125.08312 As to these checks, we believe petitioner is entitled to the claimed deduction since the president of the bank in which the partnership and then the corporation maintained its account testified that the checks would be honored when presented for payment. This is so despite what the Commissioner contends is a contrary holding in Mark D. Eagleton, supra. He says that case holds that, in a similar factual setting, a change in bank accounts by the drawer from his individual name to that of a partnership as of January 1 operated to disallow the deduction since the drawer no longer maintained an account when the checks were paid by the drawee-bank. This overlooks the theory of conditional payment stated above, which was favorably discussed in Mark D. Eagleton, supra, but did not form the basis of the decision therein. That decision was that the establishing of a credit on the books of the partnership therein, in the amount of the checks unpaid at the year's end, operated to nullify the theory of conditional payment since the credit was in effect another means of payment. As to the other checks which bear no such markings or their markings indicate delivery in 1965, petitioners' theory fails 313 and the deduction is disallowed. The next unpaid expense item involved herein is that of employees' bonuses, in the 152 amount of $87,000. Petitioners contend, as above, that the checks totaling the $87,000 should be allowed as deductions in 1964 since the checks were issued in that year and were subsequently honored by the bank. The action of the employees in endorsing their checks back to the partnership and accepting debentures in lieu thereof is the same, say the petitioners, as if the checks had been cashed and the cash therefrom loaned to the corporation. With this we cannot agree. We have the testimony of one of the employees, Mr. Seniura, and that of the petitioner, Mr. McCoy, to the effect that it was understood that the checks were not to be cashed, but rather were to be endorsed over to the partnership and the employee would be issued a debenture in the face amount of his "bonus" check. This agreement, not to cash the checks, whether it be tacit or formal is fatal to the claimed deduction. Mark D. Eagleton, 97 F. 2d 62, 63 (C.A. 8, 1938): The situation * * is that these checks were not paid during 1932 and before the end of that year there was an understanding that they 314 would not be paid during the year. In this situation there is no basis for a claim of deduction during that year where the tax return is on a cash basis. U.S. v. Mitchell, 271 U.S. 9">271 U.S. 9, 12. We have been given no evidence relative to the partners drawing items totaling $6,272.80. In such circumstances the Commissioner's determination must be sustained. The Individual Petitioners Taxes Petitioners offered no evidence whatsoever as to the claimed deduction for taxes in the amount of $342.33. The Code, section 162(a)(1), (2), allows deductions for taxes paid during the year. In the absence of proof on this item, the deduction cannot stand. Gain on Incorporation The Commissioner alleges that there was an exchange of partnership assets for the corporation's stock, that the corporation assumed all of the partnership liabilities and the petitioners realized a taxable gain thereby. Petitioners contend that the liabilities assumed by the corporation should be in the amount of $121,908.81 at most since the liability for the $87,000 worth of bonuses was not one of the liabilities assumed. Yet Mr. Curry, in testifying as to the corporation's posture after 1965, stated that he always intended the 315 liabilities to be valid. In view of the lack of any evidence to support petitioners' contention, coupled with Curry's testimony, 2 we find that the $87,000 worth of bonuses were liabilities assumed by the corporation 3Having resolved the preliminary question, we turn our attention to the question of gain to be recognized. Section 357(c) provides an exception to the general rule of section 351(a) that no gain or loss is to be recognized when property is exchanged for stock and the transferor is thereafter in control of the corporation. This exception is as follows: SEC. 357(c). Liabilities in Excess of Basis. - (1) In general. - In the case of an exchange - (A) to which section 351 applies, * * * if the sum of 316 the amount of the liabilities assumed, plus the amount of the liabilities to which the property is subject, exceeds the total of the adjusted basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset, as the case may be. That is the case here and the gain is to be recognized. Since petitioners do not question the Commissioner's computation, but only raised an objection to the amount of liabilities assumed, there is no need for further discussion. The CorporationRent ExpenseThis claimed deduction involves the following items:(a) Rent expense accrued to the partner- ship during 1964 for rent of$ 400office for Curry(b) Rent expense accrued to the partner- ship during 1964 for rent of500a car for Curry(c) Payments to Curry in 1965 for rent of a car for him775Total$1,675 As to the rental items relative to the partnership, there is no evidence to show that the corporation rather than the partnership incurred such expense, therefore, the deduction must fall. As to the amount paid Mr. Curry, again there was no evidence presented as to this item, hence 317 it too must be disallowed. Dues and Fees Of the total amount initially in dispute, $838, $580 paid as an incorporation fee and $50 paid as a contribution are no longer in issue. This leaves $208 for resolution. Two hundred dollars of this amount is alleged to be an entertainment item paid to Curry and discussed elsewhere in this opinion. It is not allowed. The remaining $8 includes a $5 item to the Oklahoma State University Alumni Association and $3 to Ben Dickson, a golf professional. The corporation concedes the latter amount. As to the former, we have no evidence of its nature and hence it too is disallowed. Advertising and Entertainment Involved here are cash payments to Curry in the amount of $1,450; contributions totaling $905 (which have been conceded by the corporation); payments to the Muskogee Golf and Country Club, the Albuquerque Golf and Country Club, Ben Dickson, various other clubs; and miscellaneous small items. Similar items were discussed in relation to the partnership and there they were conceded by the petitioners. Again no evidence is offered to overturn the Commissioner's determination, and on the grounds discussed relative to the partnership and on the lack 318 of evidence, the deductions are not allowed. Travel Expenses The amount is $5,398.38. This again is similar to a partnership issue. Again, there is no evidence and again the same Code provisions are applicable. Accordingly, these deductions are disallowed. Deduction for Contributions The statutory notice allows a deduction for contributions in an amount which is five percent of the corporation's taxable income computed without regard to such deduction. Sec. 170(b)(2). No evidence was presented on this issue as to the impropriety of the Commissioner's determination, therefore it is sustained. Recognition of Curry Engineering Co. as a Corporation The final issue herein relates to the recognition of Curry Engineering Co. as a corporation for determining its tax liability and that of the individual petitioners Robert L. and Eva M. McCoy. The petitioners assert two grounds for holding that Curry Engineering Co. should not be recognized as a corporation for Federal tax purposes. The first ground is the alleged failure of the company to comply with certain provisions of the Oklahoma Business Corporation Act, the recitation of which would serve no useful purpose. Suffice it to say that 319 such an argument is totally without merit. If there was such a failure, it is of concern to the State of Oklahoma and not this Court. The petitioner may not rely upon its self-asserted failure to comply with its own State law to avoid the effect of a Federal tax statute. Lodi Iron Works, Inc., 29 T.C. 696">29 T.C. 696, 701 (1958). The second ground advanced is that the regulations under section 7701, commonly referred to as the "Kintner" regulations, make it impossible for a professional service corporation to be classified as a corporation for Federal tax purposes. Again, this line of argument is fruitless. The facts, as set out in our findings, clearly show that a valid corporation existed and was so intended by Curry and McCoy. Further, a long series of cases, e. g. United States v. Empey, 406 F. 2d 157 (C.A. 10, 1969); O'Neill v. United States, 410 F. 2d 888 (C.A. 6, 1969), whose results negated the intent of the regulations, caused the Government to concede its former position and recognize professional corporations as corporations. We feel that petitioners' fate, had they had the opportunity to litigate this issue before the Government's concession, would have been the same as similarly *320 situated taxpayers, that is, recognition as a corporation. Their argument that the corporation was not what it claimed to be until it successfully contested an adverse determination by the Commissioner is wholly baseless. Accordingly, to reflect the concessions and determinations herein, Decisions will be entered under Rule 50. 154 Footnotes1. All statutory references are to the Internal Revenue Code of 1954 unless otherwise specified.↩2. Petitioners' witness, John O. Moffitt, a lawyer, certified public accountant and professor, testified that the liability for $87,000 worth of bonuses was assumed by the corporation. ↩3. Between November 30, 1966 and March 1968, the corporation paid $12,500 in respect of $25,000 face amount of debentures. Further, Curry testified that in his agreement with McCoy in 1968 relative to his exchanging stock for the corporation's assets, he agreed to pay off the balances on the notes.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624946/	HAROLD F. STROUPE and ELIZABETH S. STROUPE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentStroupe v. CommissionerDocket No. 2911-76.United States Tax CourtT.C. Memo 1978-55; 1978 Tax Ct. Memo LEXIS 455; 37 T.C.M. (CCH) 280; T.C.M. (RIA) 780055; February 14, 1978, Filed Richard D. Hall, Jr., for the petitioners. William S. Patterson, for the respondent. FEATHERSTONMEMORANDUM FINDINGS OF FACT AND OPINION FEATHERSTON, Judge: Respondent determined deficiencies in the amounts of $63,934 and $73,703 in petitioners' Federal income taxes for 1971 and 1972, respectively. Petitioners have conceded one issue, and the issues remaining for decision are: 1. The proper date for the valuation of the Food Town Stores, Inc., restricted, unregistered stock which petitioners received on the liquidation of Stroupe's Super Market, Inc.; and 2. The fair market value of the Food Town Stores, Inc., restricted, unregistered stock on that date. FINDINGS OF FACT Petitioners Harold F. Stroupe and Elizabeth S. Stroupe, husband and wife, were legal residents456 of Mount Holly, North Carolina, when they filed their petition. They timely filed joint Federal income tax returns for 1971 and 1972 with the Director, Internal Revenue Service Center, Southeast Region, Memphis, Tennessee. In approximately 1950, Harold F. Stroupe (hereinafter referred to as petitioner) formed Stroupe's Super Market, Inc. (Stroupe's Market). The shareholders of the corporation were petitioner, his wife, petitioner's brother, Charles Stroupe, Clyde Thrower, and Graham Terry. Petitioner owned the controlling interest. The corporation operated a store with a floor space of 28,200 square feet in North Belmont, North Carolina. The store served a shopping area which had a population of approximately 15,000 to 20,000 people. In addition to numerous independent grocers, Winn-Dixie, Harris-Teeter, and two A & P stores also served the area. In March 1971, Ralph Ketner, president of Food Town Stores, Inc. (Food Town) contacted petitioner regarding the possibility of Food Town's acquiring the assets and inventory of Stroupe's Market for cash and some of Food Town's common stock. Food Town operated a chain of food stores throughout the Piedmont section of North Carolina. 457 Petitioner was receptive to the offer. Because of concern for his health he wanted to cut back his work activities. Petitioner reported Food Town's inquiry to his fellow shareholders. However, none of them were interested in accepting Food Town stock in exchange for their Stroupe's Market stock. Consequently, petitioner negotiated with his fellow shareholders and consummated a purchase of their stock on April 1, 1971. The percentage of stock owned by these selling shareholders and the amounts paid by petitioner therefor were as follows: Percentage ofAmount ReceivedStock Ownedfor StockGraham Terry4.72$ 27,370.67Charles Stroupe1.428,234.40Clyde Thrower23.63137,100.00Total29.77$172,705.07Upon consummation of this transaction, petitioner owned all but one share of Stroupe's Market stock, and that remaining share was owned by his wife. On April 15, 1971, Stroupe's Market's shareholders voted to liquidate the corporation in accordance with the provisions of section 337. 1/ Subsequently, on April 20, 1971, Stroupe's Market entered into a purchase and sale agreement with Food Town. In pertinent part, the agreement provided458 as follows: (1) Sale of certain assets. The Seller shall sell to the Purchaser all of its inventory of merchandise or stock of goods located in its store in North Belmont, North Carolina, and all of its merchandising fixtures, equipment, supplies and all other physical assets * * and all other tangible assets of the store business owned and operated by the Seller at 510 Woodlawn Avenue, North Belmont, North Carolina, under the name of Stroupe's Super Market, Inc. 2. Purchase price. In consideration for such sale, the Purchaser shall pay to Seller the sum of One Hundred Thousand ($100,000.00) Dollars in cash, for the merchandising equipment, fixtures and supplies as described herein, and the Purchaser shall issue and deliver to the Seller, or to its nominees, Seventeen Thousand Five Hundred (17,500) shares of its common capital stock, which for the purposes of this Agreement has an agreed value of One Hundred Fifty Thousand ($150,000.00) Dollars, for the stock of goods, wares and merchandise of Seller. If as of the date of the closing of this transaction an inventory taken by the parties shall disclose the value of said complete inventory of goods, wares and merchandise459 to be less or more than One Hundred Fifty Thousand ($150,000.00) Dollars, then, if less, the Seller for the above agreed purchase price shall transfer cash to the Purchaser in the amount of such difference, or if more, the Purchaser shall pay the Seller an additional purchase price in cash in the amount of such difference. It is agreed that said inventory shall be taken on May 3, 1971, or such date thereafter as the parties may agree * . Said sum of One Hundred Thousand ($100,000.00) Dollars shall be paid to Seller by Purchaser on the date of the closing and the aforesaid shares of stock shall be delivered to Seller by Purchaser within fourteen (14) days of said closing date, or such earlier date as may be possible. * 5. Stock Acquired for Investment. Seller represents to Purchaser that it is acquiring this capital stock in Food Town Stores, Inc. as a long term investment after thorough investigation by Seller of Food Town Stores, Inc. and its operations. 6. Lease agreement. Seller represents that it is the owner in fee simple of the title to the tract of approximately three acres upon which its store is located and that it will enter into a lease460 of said premises to Purchaser simultaneously with the closing of this transaction on the following terms and conditions: For an original term of ten (10) years with two successive options thereafter of five (5) years each at a minimum rental of Forty Thousand ($40,000.00) Dollars per year, payable monthly in advance on or before the 10th. of each month, and additional rental in an amount equal to the amount by which 1% of the gross annual sales of the Purchaser in each 12 month period of the lease exceeds the sum of $40,000.00 per year, payable within 60 days after the end of each such period and upon such other terms and conditions as the parties have agreed upon. 7. Covenant not to Compete. Harold Stroupe, President of Seller, in consideration of the foregoing, covenants and agrees that he will not, either directly or indirectly, through stock ownership or otherwise, engage in a food super market business or any similar or competing business within fifteen (15) miles of 510 Woodlawn Avenue, North Belmont, North Carolina, at any time during the existence of the aforesaid lease or any extension or renewal thereof. 461 During negotiations leading to this agreement, the parties did not discuss the value of petitioner's covenant not to compete or whether any part of the consideration petitioner received was attributable to the covenant. Nor was there discussion of the transfer of any intangible assets to Food Town. On May 3, 1971, the parties entered into the lease agreement pursuant to provision 6 of the purchase and sale agreement. Also on that date Stroupe's Market transferred all of its inventory and other assets to Food Town in exchange for $100,000 in cash and 17,500 shares of restricted, unregistered Food Town common stock (also referred to as "lettered" stock). Although provision 5 of the agreement stated that the seller represented to the purchaser that it was acquiring the Food Town stock as a long term investment, petitioner did not understand that the Food Town stock received by Stroupe's Market would be restricted. An independent consulting firm took an inventory of Stroupe's Market's merchandise, as required by provision 2 of the purchase and sale agreement. The firm valued the merchandise at $127,166.92. Stroupe's Market therefore returned $22,833.08 to Food Town. In its462 audited 1971 annual report, Food Town treated the shares transferred to Stroupe's Market as if they had a total fair market value of $150,000. Food Town increased this estimated value to $201,250 in its audited 1972 annual report. After the sale to Food Town, petitioner and Clyde Thrower terminated completely their association with the store, and petitioner's brother began to work there only part-time. However, most of the Stroupe's Market employees continued to work for Food Town. Graham Terry became the manager of the store. On December 23, 1971, Stroupe's Market, in partial liquidation, distributed to petitioner 7,500 shares of its Food Town stock. The remaining 10,000 shares were transferred to petitioner on January 10, 1972. The following notation was printed on the stock certificates, each covering 500 shares of stock: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND ARE HELD FOR INVESTMENT PURPOSES ONLY.Under the Securities Act of 1933, referred to in this notation, exemptions from the registration requirement on463 the sale of securities are provided for their issuer in private placements and to persons "other than an issuer, underwriter, or dealer" (15 U.S.C. sec. 77(d)(1)). Food Town, as the issuer, therefore was exempted from the registration requirements when it issued the 17,500 restricted shares to Stroupe's Market in the private placement. Petitioner, on the other hand, in order to sell the restricted shares in a public offering without registration would have been required to show that he was not an "underwriter." He clearly was not an issuer or dealer. One element of the definition of an "underwriter" which petitioner would have been required to prove was that he did not acquire the shares from Food Town with a view to distribution (i.e., resale). In order to establish this requisite intent petitioner first would have been required to sign an "investment letter" in which he stated that he intended to hold the securities for investment. Provision 5 of the purchase and sale agreement satisfied this requirement. In addition, as further proof of his initial intent and in order to sell the stock publicly, petitioner would either have had to convince the Securities464 and Exchange Commission (S.E.C.) that there had been a change in circumstances or that the length of time he held the stock is evidence in itself that he originally had the investment intent. A 2-year holding period was generally the very minimum.The new S.E.C. Rule 144 ( 17 C.F.R. sec. 230.144 (1976)), effective April 15, 1972, applicable to shares acquired after that date and, at the option of the owner, to shares acquired before that date, provided that a person in petitioner's position publicly selling the unregistered stock would not be engaged in a distribution, and therefore not an underwriter, provided that: (a) The stock be owned and fully paid for by the seller for at least 2 years; (b) If not traded on an exchange, the amount sold during any 6-month period would not exceed 1 percent of the total outstanding shares; (c) If traded on an exchange, the amount sold during any 6-month period would not exceed the lesser of 1 percent of the outstanding shares on the average weekly trading volume during the 4-week period prior to the date of the required465 notice (to the S.E.C.) of the sale; (d) The stock be sold only in a normal brokerage transaction; (e) Adequate current information be available to the public about the issue of the stock; and (f) Notice of the sale be filed with the S.E.C. Petitioner nevertheless could have sold the stock at any time in a private offering to anyone willing to take the stock and hold it for investment. Also distributed to petitioner during 1971 and 1972 were Stroupe's Market's land and buildings, leased to Food Town, and all the other assets and liabilities not covered by the purchase and sale agreement. On May 13, 1971, Stroupe's Market filed with the North Carolina Secretary of State its articles of dissolution and on April 6, 1972, its certificate of completed liquidation. The following is a summary of Stroupe's Market's balance sheets as of June 30, 1969, June 30, 1970, and April 30, 1971: 6/30/696/30/704/30/71AssetsCurrent assets$180,913.90$215,836.84$190,112.14Fixed assets229,881.90217,249.53205,812.19Other assets21,406.6325,128.5327,400.00Total assets$432,202.43$458,214.90$423,324.33LiabilitiesCurrent liabilities$ 91,651.50$116,114.02$ 54,860.64Other liabilities38,439.7526,962.9417,739.26Total liabilities$130,091.25$143,076.96$ 72,599.90Shareholders' EquityCommon stock$ 69,800.00$ 69,800.00$ 69,800.00Additional paid-in capital28,200.0028,200.0028,200.00Retained earnings204,111.18217,137.94217,137.94Net earnings0035,586.49Total equity$302,111.18$315,137.94$350,724.43Total Liabilities andShareholders' Equity$432,202.43$458,214.90$423,324.33466 As of April 16, 1971, the fair market value of Stroupe's Market's real property, included in the fixed assets on the foregoing balance sheet summaries, was appraised by two independent appraisers, Walls Construction Co., Inc., and Bullard Insurance & Realty Co., on behalf of Stroupe's Market as follows: WallsBullardAppraisalAppraisalTract No. 1 - Woodlawn Road(3 acres and store)$236,950$228,000Tract No. 2 - Next toStroupe's Market13,25015,000Tract No. 3 - Clyde Throwerlot1,3001,200Tract No. 4 - Smith propertyopposite the store12,00014,000Total$263,500$258,200Tract No. 1 was the property leased to Food Town pursuant to provision 6 of the purchase and sale agreement. The following table summarizes Stroupe's Market's operations during the periods ended June 30, 1969, June 30, 1970, and April 30, 1971: 6/30/696/30/704/30/71Sales$2,157,074.54$2,234,598.71$1,751,878.88Cost of sales1,746,483.301,808,444.101,417,627.97Gross earnings$ 410,591.24$ 426,154.61$ 334,250.91Earnings beforeincome taxes$ 43,352.89$ 35,622.48$ 35,586.49Net earnings$ 27,673.78$ 22,848.680Cash dividendspaid$ 20,940.00$ 6,980.000467 Food Town was incorporated under the laws of the State of North Carolina on August 19, 1957, to operate a chain of retail food supermarkets. During the early 1970's the number of stores it operated increased steadily. In both 1970 and 1971, Food Town opened three new stores, including the Stroupe's Market store. By the end of 1972, during which year two new stores were opened, it was operating 17 stores. The average square footage of these stores was 16,568. By 1973, with the addition of three stores approximately as large as Stroupe's Market's store and the closing of a smaller store, the average square footage increased to 18,100. Food Town, through its subsidiary, Save-Rite, Inc., also served as its own wholesale supplier. The following is a summary of Food Town's consolidated income statement for the 52-week periods ended on the stated dates: 1/3/701/2/711/1/7212/30/72Net sales$15,432,484$22,397,340$37,526,813$50,963,673Cost ofgoods sold12,808,01918,891,62931,184,81442,238,982Income fromoperations315,540414,575898,0321,294,708Net income315,540468,428982,7491,396,863The following is a summary468 of the consolidated balance sheet of Food Town as of January 3, 1970, January 2, 1971, January 1, 1972, and December 30, 1972: Assets1/3/701/2/711/1/7212/30/72Current assets$1,324,270.46$2,336,374.14$3,373,463.56$5,051,596.10Fixed assets606,123.711,127,737.591,990,073.492,738,759.76Other assets192,025.08103,349.011/98,904.3096,052.68Total assets$2,122,419.25$3,567,460.74$5,462,441.35$7,886,408.54LiabilitiesCurrentliabilities$ 816,571.44$1,257,150.90$2,131,309.64$2,566,446.55Other liabilities59,301.5326,098.46025,758.38Total liabilities$ 875,872.97$1,283,249.36$2,131,309.64$2,592,204.93Shareholders'equity$1,246,546.28$2,284,211.38$3,331,131.71$5,294,203.61No. common shares(less 11,500Treasury stock)348,425400,000417,500865,000Book value per out-standing share$3.58$5.71$7.98$6.12On November 19, 1970, Food Town offered469 for sale in its first public offering 51,575 of its shares at a price of $12 per share. At the same time certain of its shareholders offered 57,000 of their shares for sale. After paying underwriting commissions of $54,153.75 and offering costs of $39,763.99, Food Town netted $524,982.26 or 84.8 percent of the total offering price. It was estimated that the shareholders in addition to paying the underwriter's commissions would pay $1,005 in expenses. Therefore, the combined discount was 11.8790 percent. The over-the-counter selling price of Food Town's registered, unrestricted stock increased greatly during 1971 and 1972. The records of Carolina Securities Corporation (Carolina Securities), the principal marketmaker of Food Town stock during that period (it purchased and sold approximately 90 percent of such stock), indicate the following: StockNumber ofStockNumber ofPriceMonthPurchasedTransactionsHeldTransactionsLowHigh1/ 12/7030015002$12.375$13.001/714,450173,3452012.2513.8752/716,374256,9864411,37517.003/714,525 203,2762616.0018.004/713,039183,8083316.2521.505/717,950437,4345420.5024.576/719, 083519,6026722.7525.007/719,424557,3905123.0027.008/715,420346,5873822.7525.751/ 9/719,620598,5644819.5034.0010/717,144366,8863826.5031.0011/715,995274,6243527.50 30.5012/719,2786211,8258027.0038.001/725,060424,2844132.5038.00Total87,66249085,111577470 As reflected below the size of the block of stock purchased or sold did not have an appreciable effect on its price: Largest BlockPurchasedPrice Per ShareMonthor SoldHighestLowest1/ 12/70300$13.00$12.3751/7150013.5012.502/7170016.7516.753/7175017.0017.004/711 ,00019.0019.005/7150024.0022.506/7160023.2523.257/7190025.7525.758/711,20024.0024.001/ 9/711,23026.0026.0010/711,00029.37528.7511/711,00029.2528.62512/7170030.5030.501/7240036.0035.00On December 23, 1971, on which date Carolina Securities purchased 150 shares, the over-the-counter price of Food Town stock was approximately $36 per share. On January 10, 1972, the price had decreased to $34 per share. On January 3, 1972, and January 10, 1972, petitioner received offers from two individuals to purchase 10,000 shares of his restricted, unregistered Food Town stock. The offers, which petitioner did not accept, were for $6 per share and $5.80 per share, respectively. On May 9, 1972, there was a 2-for-1 split of471 Food Town common stock. After this split, petitioner owned 35,000 shares. In late 1972, petitioner registered and sold 5,000 of his shares in a joint offering of 80,000 shares by Food Town and some of its shareholders. The prospectus describing the offering, filed on October 3, 1972, disclosed that the offering price was $27 per share. After underwriting discounts and commissions, petitioner received $25.20 per share for the shares he sold, less expenses of $741.30. Petitioner thus received 92.78 percent of the total sales proceeds attributable to his stock. Food Town absorbed nearly all of the costs of this offering, incurring expenses of $40,984, and received 86.54 percent of the total sales proceeds of its stock. The total discount for all the stock sold approximated 9.556 percent. During 1973, petitioner sold privately 2,500 shares of his restricted, unregistered common stock. The following schedule indicates the transaction date, number of shares sold, price per share, and gross and net amounts: PriceTradeNo. ofPerGrossNetDateSharesShareAmountAmount9/20/73500$18.00$ 9,000$ 8,857.629/24/7310019.001,9001,863.309/25/7310019.001,9001,859.639/26/7310019.001,9001,865.009/26/7320019.003,8003,730.0010/ 2/7350025.0012,50012,298.3210/24/7350023.0011,50011,321.1711/ 5/7350020.0010,0009,824.20472 Petitioners' expert witnesses, Ronald W. Ridgway and Glen A. Hultquist, in their report dated September 10, 1976, appraised the restricted, unregistered Food Town stock as follows: Valuation DateFair Market ValueMay 3, 1971Between $8 and $9 per shareDecember 23, 1971Between $10 and $11 per shareJanuary 10, 1972Between $10 and $11 per shareRespondent's expert witness, John A. Carrick, in his valuation report dated August 27, 1976, appraised the stock as follows: Valuation DateFair Market ValueMay 3, 1971No opinionDecember 23, 1971$27-3/16 per shareJanuary 10, 1972$25-5/16 per shareIn their 1971 and 1972 joint Federal income tax returns, petitioners valued the Food Town stock received in liquidation of Stroupe's Market at $6 per share. Petitioners reported $224,033 and $99,201 on their 1971 and 1972 returns, respectively, as additional amounts received in liquidation of Stroupe's Market. In determining deficiencies of $63,934 for 1971 and $73,703 for 1972, respondent used $36 per share as the fair market value for the 7,500 Food Town shares distributed on December 23, 1971, and $32 per share for the 10,000 shares473 distributed on January 10, 1972. Based on these values, respondent increased petitioners' basis for computing their gain on the sale of the 5,000 Food Town shares during 1972. ULTIMATE FINDING OF FACT The Food Town restricted, unregistered stock which petitioner received in the liquidation of Stroupe's Market had a value of $21.60 per share on December 23, 1971, and $19.20 per share on January 10, 1972. OPINION Issue 1. Valuation DateFor the purpose of determining the amount of their gain to be recognized on the liquidation of Stroupe's Market, petitioners contend that May 3, 1971, the date Stroupe's Market received the Food Town stock in exchange for its merchandising equipment and inventory, is the proper valuation date. Petitioners argue that they constructively received the Food Town stock on that date since, as sole shareholders of Stroupe's Market, they could have required the corporation to immediately distribute the stock to them. We disagree. The stock was still owned by Stroupe's Market, and petitioner's argument would require us to disregard Stroupe's Market as a corporate entity. That we cannot do. In Hill v. Commissioner,66 T.C. 701">66 T.C. 701, 705 (1976),474 where a corporation had been involuntarily dissolved under State law, this Court stated that for Federal income tax purposes: If a corporation retains assets, even though under State law its legal existence has been terminated and the corporation is in the process of liquidation, it will be treated as a continuing taxable entity. Sidney Messer,52 T.C. 440">52 T.C. 440, 448 (1969), affd. 438 F.2d 774">438 F.2d 774 (3d Cir. 1971). Further, even though the corporation is in the process of liquidation, if the corporation's affairs are substantially unsettled, it will remain in existence for Federal income tax purposes. Hersloff v. United States,159 Ct. Cl. 366">159 Ct. Cl. 366, 371-372, 310 F.2d 947">310 F.2d 947, 950-951 (1962). Although there is no precise minimal standard for continued corporate existence, the purchase or sale of assets, the presence of corporate debts, and the distribution of moneys suggest that a corporation is continuing as a taxable entity. Hersloff v. United States,supra.Subsequent to May 3, 1971, Stroupe's Market continued to hold cash and other475 assets not sold or leased to Food Town as well as the Food Town stock and lease agreement. The cash, other assets, and lease agreement were not distributed to the petitioners until late 1971 and early 1972. Likewise, during the period May 3, 1971, to April 6, 1972, the date Stroupe's Market filed a certificate of completed liquidation with the Secretary of State of North Carolina, the corporation was in the process of discharging its liabilities. Therefore, for Federal income tax purposes, Stroupe's Market was a continuing taxable entity. Issue 2. Fair Market ValueRespondent maintains that the Food Town lettered stock had a value of $27.1875 per share on December 23, 1971, and a value of $25.3125 per share on January 10, 1972. 2/ Petitioners contend that the stock's per share value was $10.77 on December 23, 1971, and $10.24 on January 10, 1972.The issue is strictly factual, and we hold that the stock had values of $21.60 per share on December 23, 1971, and $19.20 per share on January 10, 1972. 476 Fair market value is generally defined as the ( Jack Daniel Distillery v. United States,379 F.2d 569">379 F.2d 569, 574 (Ct. Cl. 1967))-- price at which property would change hands in a transaction between a willing buyer and a willing seller, neither being under compulsion to buy or sell, and both being reasonably informed as to all relevant facts. * * * [Citation omitted.] In reaching a conclusion as to the price at which the restricted stock would have sold on the crucial dates, we begin with the fact that Food Town registered stock was freely traded over the counter. We think the sales of such stock, as summarized in our Findings, were sufficient in number and amount to reflect that stock's value. Cf. Bankers Trust Co. v. United States,518 F.2d 1210">518 F.2d 1210, 1219 (Ct. Cl. 1975), cert. denied 424 U.S. 966">424 U.S. 966 (1976); Moore-McCormack Lines, Inc. v. Commissioner,44 T.C. 745">44 T.C. 745, 759 (1965). The price at which it sold was $36 per share on December 23, 1971, and $34 per share on January 10, 1972. However, since the subject stock was unregistered477 and restricted, it could not have been sold at these prices. To sell it, a discount would have been required. See LeVant v. Commissioner,376 F.2d 434">376 F.2d 434, 441-442 (7th Cir. 1967), revg. on other grounds 45 T.C. 185">45 T.C. 185 (1965); Bolles v. Commissioner,69 T.C. 342">69 T.C. 342 (1977); Husted v. Commissioner,47 T.C. 664">47 T.C. 664, 678-679 (1967). Deciding the appropriate discount requires the exercise of judgment in the light of all the facts. Petitioner argues for a discount of approximately 70 percent. Respondent argues that the discount should be about 25 percent. While we think petitioner seeks too much in the way of a discount, we think the discount should be somewhat larger than that advocated by respondent. On the crucial date of December 23, 1971, as reflected in our Findings and the record, Food Town was a thriving organization. This is reflected in the ratios of pretax profits to net worth (53.5 percent compared to an industry median of 16.3 percent), cost of sales to inventory (12.6 percent compared to an industry median of 14.4 percent), and earnings at 2 percent of sales (compared with 1.3 percent in the industry generally). 478 Moreover, in the 5-year period prior to the valuation dates, the number of stores Food Town operated was growing (increase from 6 in 1967 to 15 in 1971), total sales (increase from $5,852,725 to $36,996,498) and net income (increase from $36,273 to $982,749) were increasing dramatically, and the net income per common share had grown enormously. This growth in these areas was reflected in the sales prices of its registered shares which rose from $12 to $13 per share in early 1971 to $34 per share in January 1972. These statistics on Food Town's growth and the rising trend in the over-the-counter price of its stock would have tended to decrease the discount required to sell its restricted stock. Under the S.E.C. regulations, the restricted stock could have been sold in private sales and, under certain conditions, in public sales without registration. In the private sales, the purchaser in effect would have been required to agree not to resell the stock for 2 years. In addition, the stock could have been registered and sold. Registration, however, would have required action by Food Town itself, and the probability of other shareholders participating in a registration was conjectural. 479 In agreeing to hold the restricted stock for investment rather than resale, a purchaser would not have limited his consideration to Food Town's phenomenal growth and the over-the-counter price increases in its registered stock during the period immediately preceding the valuation dates. The purchaser also would have considered a number of negative factors. Among those negative factors, petitioner's expert points out, the book value per share of Food Town stock in December 1971 and January 1972 was only about one-fourth of the over-the-counter price.It is not at all clear that the actual value of Food Town's assets was greater in an amount sufficient to alter the picture appreciably. The price-earnings ratio was nearly three times higher than certain other companies engaged in similar businesses. As time passed, increased competition and greater sales costs could be expected to cut into future profits. The company's ratio of net worth to total assets was higher than the industry's average, thus indicating that Food Town was relying more heavily on equity rather than borrowed capital. As the company continued to grow, further borrowing would be required, and the price-earnings480 ratio would drop. Our Ultimate Finding as to the value of the Food Town restricted stock on the disputed dates reflects our judgment as to the weight to be given these and other factors in arriving at the amount of the allowable discount. Petitioner argues that the value of the Food Town restricted stock should be estimated by reference to the Stroupe's Market assets sold to Food Town. The sales agreement of April 20, 1971, provided that the 17,500 shares of its restricted stock "for the purposes of this Agreement" had a value of $150,000 or about $8.57 per share. Petitioner reasons that this $150,000 reflects the judgment of the parties as to the value of what Stroupe's Market gave up in order to acquire the stock.Under the so-called barter-equation valuation method, petitioner argues that the value of what Stroupe's Market gave up should be taken as the value of the restricted stock so acquired. In May 1971, when the stock sale transaction was closed, the over-the-counter price of Food Town stock was about $20.50 per share. Petitioner argues that che agreed value (about $8.57 per share) of the "goods, wares, and merchandise" given up by Stroupe's Market thus reflects a discount*481 of over 60 percent from the over-the-counter price. Petitioner would apply this 60-percent discount to the over-the-counter prices on the crucial dates in arriving at the proper values. The obvious weakness in this argument is that Stroupe's Market gave up more than the "goods, wares, and merchandise" referred to in the agreement. Stroupe's Market was a going concern with a prosperous business, a staff of experienced employees, and substantial goodwill reflected by customers accustomed to shopping in its store. The contract called for Food Town to be given a 10-year lease of the store building in which Stroupe's Market's business had been conducted. We do not think the "value" stated in the April 20, 1971, agreement has any substantial relationship to the value of the Food Town restricted stock as of December 23, 1971, and January 10, 1972. To reflect the foregoing, Decision will be entered under Rule 155. Footnotes1. /↩ All section references are to the Internal Revenue Code of 1954, as in effect during the tax years in issue, unless otherwise noted.1. /↩ The "other assets" are stated at cost. Among such assets were Food Town's investment in Bi-Lo, Inc., Greenville, S.C., which, Food Town's 1972 annual report states, had a market value of $2,060,250.1. /↩ Incomplete.1. /↩ Incomplete.2. / Petitioners contend that the difference between these values and the values determined in the notice of deficiency ( $36 per share on Dec. 23, 1971, and $32 per share on Jan. 10, 1972), shows that respondent's determination was arbitrary and excessive and relieves petitioners of their normal burden of proof. There is no merit in this contention. Mensik v. Commissioner,37 T.C. 703">37 T.C. 703, 723-725 (1962), affd. 328 F.2d 147">328 F.2d 147 (7th Cir. 1964), cert. denied 379 U.S. 827">379 U.S. 827↩ (1964).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624947/	Antoine L. Alaj v. Commissioner.Alaj v. CommissionerDocket No. 21521.United States Tax Court1951 Tax Ct. Memo LEXIS 204; 10 T.C.M. (CCH) 543; T.C.M. (RIA) 51568; June 11, 1951204 1. Petitioner has failed to sustain the burden of establishing that respondent did not correctly compute his taxable net income for the calendar year 1946. 2. The imposition of the negligence penalty of five per centum, under section 293 (a), Internal Revenue Code, is approved. Antoine L. Alaj, pro se. Paul E. Waring, Esq., for the respondent. LEECHMemorandum Findings of Fact and Opinion LEECH, Judge: This proceeding involves a deficiency in income tax and penalty for the calendar year 1946 in the amounts of $774.42 and $38.72, respectively. The sole issue is whether the respondent correctly computed petitioner's taxable net income for the year 1946. Findings of Fact Petitioner is an individual. His return for the period involved was filed with the collector of internal revenue for the district of Virginia, at Richmond, Virginia. During the period 1935 to November 23, 1945, petitioner operated a small winery at Arlington, Virginia, known as "Old Dominion Vineyards," as a sole proprietorship. On September 1, 1945, petitioner executed a 90-day note to the Arlington Trust Company, Inc., in the face amount of $2,000. On September 15, 1945 he205 paid $39.60 and on November 17, 1945 he paid $63.75 on this note, leaving a balance due on the last mentioned date of $1,896.65. This note is endorsed "Paid - Nov. 30-1945." As of November 23, 1945, an "Agreement" bearing date of January 4, 1946 was entered into between Antoine Louis Alaj, trading as "Old Dominion Vineyards," party of the first part, and Norman R. Pond, party of the second part. This agreement reads in part as follows: * * "Whereas the party of the first part is unable to continue in his business because he has not sufficient capital and is indebted to the Arlington Trust Co., Inc., Arlington, Virginia, in the sum of $1,896.65 as is evidenced by his note now held by the said bank, and to John E. Fowler in the sum of $1,644.54 for rent of the premises in which the party of the first part is now operating his winery, and whereas the Arlington Trust Co., Inc., John E. Fowler, and party of the first part have agreed that it is to the best interests of all of the parties that the party of the second part be appointed manager of the Old Dominion Vineyards with full and exclusive power to conduct said business until such time as the indebtedness of the Arlington206 Trust Co., Inc., and John E. Fowler shall have been liquidated. * * "Party of the first part agrees that he will not contract any indebtedness during the existence of this agreement. "Party of the first part is to remain actively employed in the business of manufacturing the products for sale, also is to assist in making sales, all under the direct management of the party of the second part, with a total drawing account for party of the first part of forty dollars a week. "Said party of the second part shall receive as his compensation five per cent of all moneys collected. "This agreement is to continue in effect until all indebtedness to Arlington Trust Company and John E. Fowler is satisfied." * During the period November 23, 1945 to August 6, 1946, Pond operated, as manager, the business of Old Dominion Vineyards, in pursuance of this agreement. On November 30, 1945, petitioner signed a new 90-day note, replacing the note of September 1, 1945, payable to the Arlington Trust Company, Inc., in the amount of $1,896.65. This note bears the endorsement "Paid." On December 5, 1945, petitioner executed a 90-day note payable to the Arlington Trust Company, 207 Inc., in the face amount of $3,000, and on December 6, 1945 received from the Arlington Trust Company, Inc., the sum of $1,000, which amount was deposited in a joint account maintained at the Arlington Trust Company, Inc., entitled "Old Dominion Vineyards by Antoine L. Alaj and Norman R. Pond, Sr." A payment in the amount of $65.43 was made on the note dated December 5, 1945, leaving a balance on that date of $2,934.57. This note is stamped paid. On March 15, 1946 petitioner executed a new note payable to the Arlington Trust Company, Inc., in the amount of $2,934.57. On December 5, 1945, petitioner executed an "Indenture" with Harry R. Thomas and Alan B. Prosise, Trustees, as security for his note dated December 5, 1945 in the face amount of $3,000, payable to the Arlington Trust Company, Inc. On July 16, 1946, the Arlington Trust Company, Inc., filed an "Attachment" proceeding against Antoine L. Alaj and Antoine L. Alaj, trading as Old Dominion Vineyards, in the Circuit Court of the County of Arlington, Virginia, for the collection of the amount of $2,934.57 due on the note of March 15, 1946, with interest from March 15, 1946. On July 16, 1946, an "Attachment" proceeding was208 similarly filed against Antoine L. Alaj and Antoine L. Alaj, trading as Old Dominion Vineyards, on behalf of John E. Fowler to recover the amount of $3,486.47. On August 6, 1946, the Paulsam Distributing Company executed an offer to purchase all the equipment and all wines from Antoine Alaj, trading as Old Dominion Vineyards, for the sum of $7,555.65. The offer to purchase provides as follows: "August 6, 1946 "For a consideration of $7,015.65, due to Arlington Trust Company and John E. Fowler, as follows: Arlington Trust Com-pany$2,934.57Interest63.46Attorney's fees266.85Court Cost Deposits15.00Sheriff50.00Total$3,289.88Due John E. Fowler$3,486.47Court Cost Deposits15.00Attorney's fee174.30Sheriff50.00Total$3,725.77Total amount combined$7,015.65"We, Sam Barocas and George Winnick, trading as Paulsam Distributing Company, agree to purchase all equipment and all wines from Antoine Alaj, trading as Old Dominion Vineyards, not incorporated. We will go through this agreement on the following terms and conditions: 1 - That Mr. Fowler will accept our note for six (6) months in the amount of $7,015.65, covering209 the above two items, for which we will reduce the above at the rate of $1,169.27, plus interest not to exceed 4 per cent. 2 - That we will be permitted by Mr. Fowler to operate the winery at its present location, paying the same rent as the Old Dominion Vineyards through September 15, will vacate then if possible or by October 15, 1946, at the latest. 3 - That Mr. Antonelli accept $540.00 instead of $900.00 originally owed by Mr. Alaj. 4 - That Mr. Alaj will render his services to us until all the wines are liquidated and equipment moved to our warehouse in Alexandria for which we will pay Mr. Alaj 25 cents per case for bottling wines now in the winery. A check in the amount of $200.00 will be advanced upon signing which is to apply against the 25 cents per case. A check in the amount of $1,000.00, certified, will be deposited with the bank to be turned over to him when all wines are liquidated and upon complete removal of all equipment. 5 - That Mr. Alaj will agree to let us use the title of Old Dominion Vineyards through a special permit authorized by the Alcoholic Tax Unit, temporarily until our applications are turned in to the proper authorities and permits issued under210 our name and new title. 6 - Any parts of equipment that would not be useful to Sam Barocas and George Winnick will be turned over to Mr. Alaj. Respectfully submitted, Paulsam Distributing Company by Sam Barocas (Partner) George Winnick (Partner)" The offer of the Paulsam Distributing Company, with petitioner's consent, was accepted, and the amount of $7,555.65 ($7,015.65 plus $540, the debt to Antonelli) was received by John E. Fowler. The proceeds were applied to the payment of the indebtedness of petitioner to the Arlington Trust Company, Inc., to Fowler, individually, and to Antonelli. The said amount was not recorded on the books of Antoine L. Alaj, trading as "Old Dominion Vineyards." On August 19, 1946 the Arlington Trust Company and John E. Fowler each obtained an order from the Circuit Court of Arlington County, Virginia, dismissing their respective attachment proceedings. During the period January 1, 1946 to July 16, 1946, the operations of the business of Old Dominion Vineyards by Norman R. Pond under the aforementioned agreement signed January 4, 1946, effective as of November 23, 1945, resulted in a loss, per books, of $468.47, arrived at as follows: Gross Sales$21,271.50Less: Discount on Sales82.84Net Sales$21,188.66Less: Cost of Manufacture$16,400.73Miscellaneous Expense638.40Payroll538.41Revenue Stamps andLicenses1,832.18Social Security Taxes5.43Pond's Fees1,200.40Pond's Expenses241.58Rent800.0021,657.13Loss from operations (per book)$ 468.47211 In his notice of deficiency, the respondent determined that the Paulsam Distributing Company acquired from petitioner 653 cases of wine on hand and 9,000 gallons of wine in vats. Of the total amount of $7,555.65 received from the sale of the wines and equipment, the respondent allocated $3,555.65 as having been received from the sale of the wine inventory and the remaining $4,000 as having been received from the sale of the equipment. The cost of the wine purchased by petitioner during 1946 was charged to expense. In determining the taxable net income from the operation of the business during the year 1946, the respondent determined that the $3,555.65 was ordinary income. From this amount he deducted the amount of $468.47, the loss shown on the books from operation during that year, leaving net taxable income from the business during that year of $3,087.18. The respondent also determined that the amount of $4,000 received from the sale of the equipment was subject to the capital gains provisions of the Revenue Act. Since petitioner had no records showing his cost basis of the equipment, the respondent determined that the cost had either been taken as an expense or had been fully212 depreciated prior to 1946, and included the amount of $2,000 as a long-term capital gain. The respondent also included, in determining petitioner's taxable net income for 1946, the amount of $300 in wages which petitioner had received from the Paulsam Distributing Company and which had not been reported on his return for that year. On his return for the year 1946 petitioner reported the single item of $43.77 as the net profit from the operations of the Old Dominion Vineyards. The respondent assessed a negligence penalty of five per centum, in the amount of $38.72. Opinion The sole issue presented is whether the respondent correctly computed petitioner's taxable net income in the calendar year 1946. Petitioner appeared on his own behalf to contest the deficiency. He is of foreign birth and speaks broken English. Although the Court experienced considerable difficulty in understanding petitioner, every reasonable effort was made to assist him in presenting his position in the controversy. Petitioner made no attempt to introduce into the record any amounts contrary to those presented by the respondent, which are set forth in our findings of fact. From the record and the briefs213 filed by petitioner, it appears that he takes the position that the business conducted by him under the name of the Old Dominion Vineyards was sold by his creditors, without his consent, for less than its true value; that he, individually, received no part of the proceeds, and therefore the proceeds of the sale are not taxable to him. The documentary evidence establishes that in the taxable year involved petitioner was indebted to the Arlington Trust Company, Inc., upon loans, to John E. Fowler for rent and supplies, and to other creditors in an aggregate amount in excess of the proceeds of the sale of the wine and equipment made to the Paulsam Distributing Company on August 6, 1946. The money received from such sale was applied to the discharge of petitioner's indebtedness. This being so, the petitioner constructively received the proceeds, although he did not personally receive the same. Hence such proceeds constituted the receipt of income to petitioner. While petitioner testified that he did not consent to such sale, the evidence appears to us to establish the fact that he did so agree, although perhaps reluctantly, since it is affirmatively shown that he later was employed214 by the purchaser, for which he received $300 as provided by the contract of sale. On the basis of the record before us, we have found as a fact that the sale was with petitioner's consent. Petitioner makes no contention that the respondent's basis of allocating the proceeds of the sale between capital and noncapital assets was not a proper basis. This record does not disclose any facts that would justify the use of any other basis of apportionment. The purchaser offered a lump sum for both the wine inventory and the equipment, without specifying any amount to be applied against either of such assets. Petitioner does not contest the fact that he received in the taxable year 1946 the sum of $300 as wages from the Paulsam Distributing Company, as provided in the agreement of sale. Petitioner did not report the receipt of such amount in his return filed for the year 1946. On the basis of the entire record, we conclude that petitioner has not established that the respondent did not correctly compute his taxable net income for the year 1946, and for failure of proof we sustain the respondent's determination. It is obvious that petitioner neglected to report the major part of the215 income he received in the taxable year involved. Therefore the respondent's imposition of the five per centum negligence penalty, under section 293 (a) of the Internal Revenue Code, is approved. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624949/	DONALD PALMER COMPANY, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentDonald Palmer Co. v. CommissionerDocket No. 24901-92United States Tax CourtT.C. Memo 1995-65; 1995 Tax Ct. Memo LEXIS 66; 69 T.C.M. (CCH) 1869; February 7, 1995, Filed 66 Decision will be entered under Rule 155. For petitioner: Mark S. Stein and David H. Bernstein. For respondent: Linda K. West. COHENCOHENMEMORANDUM FINDINGS OF FACT AND OPINION COHEN, Judge: Respondent determined a deficiency of $ 195,281 in petitioner's Federal income tax for the fiscal year ended June 30, 1990. The sole issue remaining for decision is whether officer's compensation of $818,533 paid to Donald Palmer (Palmer) is unreasonable and thus not deductible by petitioner. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. FINDINGS OF FACT Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. At the time the petition was filed, petitioner's principal office was in New Orleans, Louisiana. Prior to 1977, Palmer owned and operated a plastic bag manufacturing company. Palmer had been involved in the bag business since the age of 19. In 1977, Palmer sold his manufacturing business because of health and other problems that he encountered. In 1979, Palmer incorporated67 petitioner and capitalized the corporation with $ 5,000. Petitioner had a 1,100-square-foot office located on the first floor of Palmer's house. Petitioner was primarily engaged in the business of buying and selling various types of bags and packaging material. Petitioner maintained very little inventory and, in essence, functioned as a "broker" by purchasing finished goods or raw materials from a supplier and then arranging for such products to be delivered to the customer, or, in the case of raw materials, to another manufacturer for further production. The supplier billed petitioner, and petitioner, in turn, billed its customer. Petitioner was also involved in consulting work with respect to packaging needs of clients. Since its inception, Palmer was the president and sole officer and shareholder of petitioner. Palmer generated almost all of petitioner's sales and was responsible for the daily operation and management of petitioner. Palmer worked approximately 70 hours per week and took very little time off for vacation or illness. Petitioner's gross receipts, gross profit, officer's compensation, and taxable income were as follows: TaxYear GrossGrossPalmer's TaxableEndedReceipts Profit Salary Income 6/30/82$ 2,469,535$ 639,742$ 150,000$ 197,207 6/30/832,602,522707,338300,00099,092 6/30/843,112,563693,348300,00046,854 6/30/853,532,714801,997300,00087,697 6/30/862,948,626666,139275,00076,552 6/30/873,182,588725,687435,000121,080 6/30/883,395,436708,678350,000150,279 6/30/894,068,042801,490390,000262,126 6/30/904,017,3521,137,1821,259,979(339,417)6/30/914,057,664884,969617,11317,384 68 Petitioner did not pay or declare any dividends during the period July 1, 1979, through June 30, 1990. The employees of petitioner during all relevant years were Palmer, a secretary, a bookkeeper, and a cleaning person. Petitioner also briefly employed a sales service/delivery man. In 1985 and 1987, petitioner entered employment contracts with two different salesmen; however, neither salesman generated any substantial business, and their employment was terminated after a short period. The 1985 employment contract provided for a base salary for the salesman and a yearly bonus computed under a formula based on petitioner's net profit before taxes in the previous and current year. The 1987 employment contract provided for a base salary and a bonus of up to 25 percent, but not less than 5 percent, of the gross profit on sales in which the salesman had active involvement. The 1987 contract also provided for an additional bonus to be determined by petitioner based upon performance and cooperation. Prior to 1986, petitioner maintained a pension plan for its employees, and the following contributions were made by petitioner for the benefit of Palmer: Tax Year EndedAmount6/30/82$ 23,2396/30/8390,6756/30/84141,7506/30/85114,3006/30/86106,18469 In 1987, Palmer began to attempt to sell petitioner. On January 4, 1988, petitioner and Palmer entered into a Deferred Compensation Agreement (agreement) that provided for certain payments to be made to Palmer upon his retirement. The agreement provided that, on October 19, 1991 (Palmer's 65th birthday), and continuing on the first day of each month thereafter, petitioner would pay to Palmer $ 16,666 per month for 10 years and, also, that petitioner would set aside sufficient funds to meet this future liability. However, the agreement also provided that Palmer could remain employed after his 65th birthday and that no payments would be made until after Palmer's actual retirement from regular full-time employment. Further, pursuant to the agreement, all retirement benefits would be provided out of the general assets of petitioner at the time of payment and petitioner was under no obligation to set aside funds or to provide security for any of its obligations under the agreement. (There is no explanation of the apparently contradictory terms of the agreement.) On its income tax returns for its fiscal years 1988 through 1991, petitioner reported deferred compensation expense (accrued70 but not deducted) and deferred compensation liabilities as follows: TaxDeferredDeferredYear CompensationCompensationEndedExpense Liability 6/30/88$ 208,013$ 208,0136/30/89208,012416,0256/30/90208,012624,0386/30/91208,013832,050In 1990, petitioner paid to Palmer a bonus of $ 818,533 in addition to a salary of $441,446. The minutes from a meeting of the board of directors of petitioner, at which only Palmer was present, state: "It was proposed and resolved by all present that a bonus in the amount of $ 818,533 be paid to Mr. Donald Palmer." Petitioner paid the bonus by transferring securities that it owned to Palmer, and petitioner claimed a deduction of $ 1,259,979 ($ 441,446 plus $ 818,533) for compensation of officers on its June 30, 1990, income tax return. The balance sheet on Schedule L of petitioner's June 30, 1990, income tax return reported common stock of $ 4,800 and retained earnings of ($ 306,726). In 1991, Palmer sold petitioner to Steve Seeber (Seeber). Seeber was to pay the purchase price to Palmer over a 5-year period from the earnings of petitioner. After the sale to Seeber, Palmer continued to work for petitioner71 in the same capacity. Shortly thereafter, Seeber determined that he would have to hire several employees to take the place of Palmer. As a result, Seeber rescinded the sale and returned the stock of petitioner to Palmer. Other potential purchasers with whom Palmer had discussions indicated that they were interested in purchasing petitioner only if Palmer continued to work for petitioner. Palmer decided that, if he was required to continue working, he would prefer to work for himself. In the notice of deficiency, respondent determined that petitioner's deduction for officer's compensation on its June 30, 1990, return must be reduced by the bonus of $ 818,533 because that amount, in addition to salary of $ 441,446, exceeded a reasonable allowance for salaries and other compensation under section 162. OPINION Section 162(a)(1) allows as a deduction "a reasonable allowance for salaries or other compensation for personal services actually rendered." Section 1.162-9, Income Tax Regs., provides that bonuses paid to employees are deductible "when such payments are made in good faith and as additional compensation for the services actually rendered by the employees, provided such payments, 72 when added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered." Whether an expense that is claimed pursuant to section 162(a)(1) is reasonable compensation for services rendered is a question of fact that must be decided on the basis of the particular facts and circumstances. Paula Constr. Co. v. Commissioner, 58 T.C. 1055">58 T.C. 1055, 1058-1059 (1972), affd. without published opinion 474 F.2d 1345">474 F.2d 1345 (5th Cir. 1973). The burden is on petitioner to show that it is entitled to a compensation deduction larger than that allowed by respondent. Owensby & Kritikos, Inc. v. Commissioner, 819 F.2d 1315">819 F.2d 1315, 1324 (5th Cir. 1987), affg. T.C. Memo. 1985-267. The cases contain a lengthy list of factors that are relevant in the determination of reasonableness, including: The employee's qualifications; the nature, extent, and scope of the employee's work; the size and complexities of the business; a comparison of salaries paid with gross income and net income; the prevailing general economic conditions; comparison of salaries with distributions to stockholders; 73 the prevailing rates of compensation for comparable positions in comparable concerns; the salary policy of the taxpayer as to all employees; and the amount of compensation paid to the particular employee in previous years. Mayson Manufacturing Co. v. Commissioner, 178 F.2d 115">178 F.2d 115 (6th Cir. 1949), affg. a Memorandum Opinion of this Court; see also Commercial Iron Works v. Commissioner, 166 F.2d 221">166 F.2d 221, 224 (5th Cir. 1948). No single factor is determinative. Home Interiors & Gifts, Inc. v. Commissioner, 73 T.C. 1142">73 T.C. 1142, 1156 (1980). When the case involves a closely held corporation with the controlling shareholders setting their own level of compensation as employees, the reasonableness of the compensation is subject to close scrutiny. Owensby & Kritikos, Inc. v. Commissioner, supra at 1324; Elliotts, Inc. v. Commissioner, 716 F.2d 1241">716 F.2d 1241, 1243 (9th Cir. 1983), revg. and remanding on other grounds T.C. Memo. 1980-282. Petitioner contends that Palmer was "a one man corporation"; that Palmer was responsible74 for virtually 100 percent of the sales and profits of petitioner; that petitioner could not survive without Palmer; and, thus, that the bonus of $ 818,533 was reasonable. Although Palmer's contributions to petitioner are not disputed, the conclusion that his compensation was, ipse dixit, reasonable does not necessarily follow. In support of its position, petitioner cites Old Colony Ins. Serv., Inc. v. Commissioner, T.C. Memo. 1981-177, and Weaver Paper Co. v. Commissioner, T.C. Memo. 1980-72, where we held that payments made to valuable employees were deductible as compensation even though such employees were also shareholders of closely held corporations. Old Colony involved an insurance brokerage corporation that was owned by two shareholders who were also the officers and directors of the corporation. At issue there was an increase in the salaries of the two shareholders that had been adopted by the shareholders at a board of directors meeting. Although the corporation had never declared or paid dividends to the shareholders, we held that the salary increases were reasonable. We based our holding on our findings75 that the shareholder/employees were undercompensated in prior years and were not paid dividends in order to accumulate operating capital to meet obligations under its issued insurance policies. In Weaver Paper Co., we upheld as reasonable an annual salary of $ 100,000 plus a bonus of 30 percent of corporate net profits that were paid to a shareholder/employee who owned 97 percent of the taxpayer/corporation and was also its chief executive officer and chairman of the board. We reached that conclusion because the record there demonstrated that the shareholder/employee would have earned a similar amount had he performed the same services for another employer. Moreover, because the corporation had taxable income and paid dividends during the years in issue in that case, we were satisfied that the case did not involve "a situation where a corporate officer was trying to draw off corporate earnings under the guise of salaries." Weaver Paper Co. v. Commissioner, supra.The circumstances here are distinguishable from both Old Colony and Weaver Paper Co.. Here, there is no evidence that petitioner was undercompensated in years prior to 1990. 76 During petitioner's fiscal years 1982 through 1989, Palmer was paid salaries ranging from $ 150,000 to $ 435,000, which constituted a range of 23.5 to 59.9 percent of petitioner's gross profit. Moreover, Palmer was covered by a pension plan and, subsequently, by a deferred compensation plan that provided for yearly accumulations of over $ 200,000. Petitioner contends that the bonus was paid to Palmer in 1990 because Palmer had abandoned plans to expand the business, and, thus, the corporation did not need the funds that had been accumulated for possible expansion. However, even if we were to assume that the securities that were distributed to Palmer as a bonus were accumulated in order to fund future expansion and then "freed up" when Palmer decided not to expand, it is not conclusive that the payment of such securities to Palmer as a one-time bonus would constitute reasonable compensation as opposed to a dividend. Further, in contrast to Weaver Paper Co., no dividends were ever paid, and the compensation resulted in a taxable loss. Additionally, the record contains no evidence indicating that Palmer would have received the bonus at issue had he been working for an independent77 employer. Palmer testified that the main reason for the bonus was that petitioner had its most profitable year in 1990. Nevertheless, the record contains no evidence that the bonus amount of $ 818,533, paid in securities, was computed in conjunction with the increase in profits during the 1990 fiscal year or that it was based on any consistently applied bonus program. Compare Elliotts, Inc. v. Commissioner, supra at 1247(evidence of a reasonable, longstanding, consistently applied compensation plan is probative that compensation is reasonable). Under the circumstances here, an important factor is whether a hypothetical independent investor would be willing to compensate Palmer as he was compensated by petitioner. Elliotts, Inc. v. Commissioner, supra.In theory, an independent investor would not approve compensation to the extent that such investor is deprived of a reasonable return on his investment in an otherwise profitable business. The failure of petitioner to pay dividends does not, by itself, lead to the conclusion that the bonus that was paid to Palmer was unreasonable. Owensby & Kritikos, Inc. v. Commissioner, supra at 1326.78 However, where, as here, the compensation resulted in negative retained earnings and a negative return on shareholder equity (as measured by net income after taxes divided by capital contributions plus retained earnings), we cannot conclude that an independent investor would be pleased. Cf. Automotive Inv. Dev. Inc. v. Commissioner, T.C. Memo. 1993-298 (an independent shareholder would be pleased with a return on shareholder equity of 85 and 48 percent). Based on these negative returns, it is reasonable to conclude that funds are being "siphoned out of the company disguised as salary." Elliotts, Inc. v. Commissioner, supra at 1247. Respondent's failure to impose an accumulated earnings tax does not preclude a determination that payments to shareholders that are characterized as compensation exceed a reasonable allowance and, thus, constitute dividends. See J.H. Rutter Rex Manufacturing Co. v. Commissioner, 853 F.2d 1275">853 F.2d 1275 (5th Cir. 1988) affg. in part, revg. in part, and remanding T.C. Memo. 1987-296. Petitioner also argues that part of the bonus payment79 consisted of securities that had been accumulated to fund the deferred compensation agreement and, therefore, that part of the bonus payment was a payment under that agreement. Palmer testified that, because potential purchasers of petitioner did not like the appearance of the deferred compensation liability, he decided to terminate the agreement in 1990 in order to eliminate the deferred compensation liability. Thus, petitioner contends that the only issue is whether the amounts that were accumulated as deferred compensation in 1988, 1989, and 1990 were reasonable in those years. Petitioner's contention is not supported by the record and contradicts its earlier argument that the securities were accumulated in order to fund a potential expansion. Petitioner's income tax returns for its fiscal years 1988 through 1991 indicate that the deferred compensation increased each year; no reduction in the liability account was made to account for the bonus payment of $ 818,533 in 1990. Petitioner's contention that the entries for the deferred compensation liability on its income tax returns were erroneous is not persuasive. Moreover, the agreement expressly states that no payments would80 be made under the agreement until after Palmer actually retired from regular full-time employment, and, as of 1990, Palmer was still working full time for petitioner. Although petitioner contends that, under Louisiana law, the agreement could be modified orally, we are not persuaded that the agreement was modified or terminated or that any part of the bonus represented payment under the agreement. The record indicates that Palmer was the key employee of petitioner; nevertheless, limits to compensation exist even for the most valuable employees. Owensby & Kritikos, Inc. v. Commissioner, 819 F.2d at 1325. Based on this record, petitioner has not demonstrated that the bonus of $ 818,533 constitutes reasonable compensation, and, thus, it is not entitled to deduct that amount under section 162(a)(1). In our opinion, however, some bonus is reasonable. In reaching our best judgment on the entire record, we believe that 50 percent of Palmer's salary for the year, or $ 220,723, is reasonable. See Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930). This amount, combined with his salary, represents 58.2 percent of petitioner's81 gross profit for the year and, therefore, is consistent with prior patterns of compensation to Palmer. It is also consistent with the minimal evidence about contracts with other employees. Decision will be entered under Rule 155.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624951/	LLOYD JONES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Jones v. CommissionerDocket No. 90323.United States Board of Tax Appeals39 B.T.A. 531; 1939 BTA LEXIS 1016; March 7, 1939, Promulgated 1016 1. In 1926 petitioner purchased certain property for the sole purpose of providing a home for himself and his family, taking title to the property in the name of his wife. The property was used as a residence until the death of the wife in 1929. Petitioner acquired legal title as beneficiary under his wife's will and subsequently assumed personal liability on a purchase-money mortgage executed by the wife. The property was rented in 1931, but was again occupied by petitioner and his family as a residence in 1933. Thereafter it remained vacant until sold under foreclosure of the mortgage in 1934. Held, the loss, if any, sustained by petitioner from the foreclosure sale is not allowable as a deduction from gross income in computing taxable net income. W. H. Moses,21 B.T.A. 226">21 B.T.A. 226. 2. In 1926 petitioner purchased a parcel of real estate consisting of 10 lots, taking title in his wife's name. The wife died in 1929 and petitioner acquired legal title to the property under her will. Subsequently he assumed personal liability on a purchase-money mortgage executed by the wife. The mortgage was foreclosed in 1934, and petitioner thereby sustained a loss. 1017 Held, the transaction did not constitute a "sale or exchange" and allowance of the loss sustained is not limited by the provisions of section 117(a) or (d), Revenue Act of 1934. Lloyd Jones pro se. Loren P. Oakes, Esq., for the respondent. HILL 531 OPINION. HILL: Respondent determined a deficiency in petitioner's income tax liability for the year 1934 in the amount of $680.42. In his return for the taxable year, petitioner deducted from gross income a capital loss resulting from foreclosure sales in the alleged amount of $16,375.20. Respondent disallowed the deduction so claimed to the extent of $14,375.20, including that amount in taxable income, and on such basis computed the deficiency in controversy. The correctness of respondent's action on this point is the only issue presented for decision. 532 Petitioner is an individual, residing at North East, Erie County, Pennsylvania. In April 1926 petitioner purchased certain residential property, located at Long Beach, Long Island, New York, known as the "Long Beach property", title to which was taken in his wife's name. The purchase price of this property was $45,000. 1018 Petitioner paid $10,000 cash down; he also paid $10,000 in two annual installments of $5,000 each, and a purchase money mortgage of $25,000, signed by petitioner's wife, was given to the vendor. In May 1926 petitioner purchased 10 lots, located in the town of Oyster Bay, Nassau County, New York, known as the "Nassau Shores property", title to which was also taken in the name of petitioner's wife. The purchase price of the property was $13,150, and petitioner's wife executed a bond and mortgage to the vendor for the sum of $5,858 of the purchase price. Although the titles were taken in the name of petitioner's wife, petitioner furnished all money paid on the purchase price of both properties above mentioned. Petitioner's wife died testate on May 1, 1929. Petitioner was the sole beneficiary under her will, and the executor thereof. In 1931 petitioner executed extension agreements, and thereby assumed personal liability on the purchase money mortgages on both the Long Beach and Nassau Shores properties. Both of the mortgages mentioned were foreclosed in 1934, and as a result of the foreclosure proceedings the properties were sold to the respective mortgagees. In consideration1019 of the agreement of the mortgagee not to take a deficiency judgment against him, petitioner turned over to the holder of the mortgage on the Long Beach property certain furniture that remained in the house at the time of the foreclosure proceedings. The Long Beach property was originally purchased for the sole purpose of providing a home for petitioner's wife and their six children. Some time after the death of his wife in 1929, petitioner rented the property. It was rented during 1931, and it was for that year that petitioner first claimed deductions for depreciation and reported rentals. Petitioner reported no rental for the year 1932, and the property was not rented during 1933. Petitioner, with some of his family, spent part of the summer of 1933 there in residence. Thereafter, the property was vacant until the mortgage was foreclosed in 1934. In computing the deficiency, respondent determined that petitioner sustained a loss of $5,000 in 1934 from the sale of the Long Beach property pursuant to the foreclosure proceeding. Such loss was computed as follows: Respondent held that this property had a value in 1931, when converted to income-producing purposes, of 533 1020 $35,000, from which he deducted the unpaid mortgage of $25,000, plus depreciation allowable and allowed in 1931-1933 in the total amount of $5,000. Respondent likewise determined that petitioner sutained a loss of $5,942 during the taxable year from the sale of the Nassau Shores property under the foreclosure proceedings. The amount of loss claimed by petitioner on this property is the same as computed by respondent, except that petitioner did not deduct from the purchase price of $13,150, in addition to the unpaid mortgage of $5,858, the amount of $1,350 representing depreciation allowed (which was in excess of the amount allowable) for 1932. The method used by respondent in computing the amount of this loss must be approved, since the depreciation allowed was properly deducted under the provisions of section 113(b)(1)(B) of the Revenue Act of 1934. 11021 Thus, respondent determined that petitioner sustained an aggregate loss on the two properties referred to in the amount of $10,942, but since petitioner had held the properties "for more than 2 years but not for more than 5 years", only 60 percent or $6,565.20 of such loss could be taken into account in computing net income, pursuant to the provisions of section 117(a). 2 However, since petitioner reported no capital gains for the taxable year, respondent held that the amount of the allowable deduction for capital losses was further limited to $2,000 by the provisions of subsection (d) of section 117. 3 Respondent now contends that petitioner is not entitled to any deduction for loss on account of the Long Beach property for the reason that (1) such property was not being used for income-producing purposes at the time of the foreclosure sale, and (in the alternative) (2) that by the time this property had been appropriated to incomeproducing purposes its value had so decreased that petitioner's equity therein was worthless, and accordingly no loss was sustained from the foreclosure sale. Respondent further contends that, in any event, 534 a loss from foreclosure is a capital1022 loss, and that petitioner's total capital losses allowable are limited to $2,000 under section 117(d), supra.Petitioner argues that he sustained total deductible losses of about $23,792. In our opinion petitioner is not entitled to a deduction of the loss sustained from the foreclosure sale of the Long Beach property, if in fact a loss resulted therefrom, and hence we need not determine the value of the property or other factor which would enter into the computation of such loss. It is not essential to the allowance of a loss deduction taht the property be purchased or constructed by the taxpayer1023 in the first instance for the purpose of subsequent sale for a pecuniary profit. Even though the property were originally purchased for use as a personal residence, if it is thereafter abandoned for such purpose and devoted to business uses in the production of taxable income until sold, a loss from the sale is properly allowable. . But if a taxpayer (1) purchases or constructs a property for use as a personal or family residence and so uses it, (2) then abandons it for such use and rents it, (3) then reoccupies it as a residence for a time, and thereafter it remains vacant until sold at a loss, such loss is not a business loss and is not deductible is computing taxable income. . The use of property to produce revenue constitutes a transaction entered into for profit, but unless there is some appropriation of the property to rental purposes, which continues until it is sold, it retains its character as a residence rather than as a business property from the date it is last used as a residence. Cf. 1024 . See also ; ; ; . A more difficult question is presented in determining whether petitioner is entitled to deduct the full amount of the loss, or only a portion of the loss, admittedly sustained by him from the foreclosure sale of the Nassau Shores property. Section 117(d), supra, plainly limits the allowance of capital losses only where such losses result from "sales or exchanges." The loss involved in this case was a capital loss. The question, then, is whether or not such loss resulted from a "sale or exchange"; and the answer to this question depends upon whether or not a transfer pursuant to a proceeding for the foreclosure of a mortgage lien constitutes a "sale or exchange" by the mortgagor within the meaning of the statute. In , the owner of realty subject to a mortgage, but on which personal liability was not assumed, deeded the property to the mortgagee without consideration and thereby1025 sustained a loss, which we held was deductible in full and 535 not subject to limitation under section 117(d) of the Revenue Act of 1934. In , petitioners purchased property in 1927 subject to a first mortgage, which they did not assume. In 1934 the property was sold under foreclosure proceedings for less than the amount of the mortgage and petitioners received nothing by virtue of the sale. The loss sustained we held to be deductible in full and not subject to limitation under section 117(d), supra, following the Commonwealth decision. In our opinion, we said: In the instant case, just as in the Commonwealth case, the petitioners received nothing in exchange for their property, not even an acquittance of a liability under the first mortgage, because, as in the Commonwealth case, petitioners had purchased the property subject to the first mortgage and had not assumed any personal liability thereon. Petitioners neither sold nor exchanged changed anything. They lost their property through the operation of the law of foreclosure. The sale by the sheriff effected a transfer of title to the property, but it did1026 not constitute a sale or exchange by petitioners. In , decedent and his wife purchased property for which they paid cash in part, assumed a note secured by a mortgage on the property, and executed a second note secured by deed of trust on the same property. The first note was paid, but the second note was not paid when it became due in 1932. In 1933, pursuant to an agreement of the parties, the property was conveyed to the holder of the second note and the note was surrendered and canceled. We held that the voluntary conveyance of the property by the mortgagors in consideration of the cancellation of the debt constituted a "sale" within the meaning of section 101 of the Revenue Act of 1932 and the loss sustained was a capital loss. , involved a taxpayer-mortgagee instead of a mortgagor, as in the other cases cited. In that case the petitioner, who had sold real estate for cash and promissory notes secured by a mortgage, reacquired the property by means of a voluntary settlement, and thereby sustained a loss. The mortgagee released the mortgage and canceled and surrendered the notes. 1027 Forlowing , we held the loss was a capital loss under section 101 of the 1932 Act. The Rogers and Bingham decisions were predicated upon the conclusion that where, by mutual agreement of the parties, the mortgagor conveys the property to the mortgagee in consideration of the release of the mortgagor from personal liability for payment of the debt secured by the mortgage, the creditor or mortgagee thereby relinquishing his right to collect such debt, the transaction constitutes either a sale of the mortgagor's right, title, and interest in the property for the price of his obligation, or is an exchange of the real estate for the obligation, both properties having an equal value. 536 In the Commonwealth and Greisler, cases, supra, it was held that the transactions did not constitute either sales or exchanges for the reason that, there being no personal liability on the part of the owners to pay the mortgage debts, there was no consideration for the transfers. In the Commonwealth case there was a voluntary conveyance of the property to the mortgagee, while in the Greisler case the property was sold at sheriff's1028 sale, without equity of redemption. The instant proceeding, while similar in some respects to each of the cited decisions, we think is not ruled by either of them. Here, the petitioner was personally liable for the mortgage debt, but the property was transferred to the mortgagee under a foreclosure sale. Thus, petitioner was not acquitted of his personal liability by reason of a mutual agreement of the parties, and there was no voluntary conveyance by petitioner. As we said in the Greisler case, supra, petitioner received nothing in exchange for his property; he neither sold nor exchanged anything. He lost his property through the operation of the law of foreclosure. The sale pursuant to the foreclosure proceedings effected a transfer of the title to the property, but did not constitute a sale or exchange by petitioner. In order to constitute a "sale" there must be a purchaser as well as a seller, and there must be a meeting of the minds on a sale as between the seller and buyer. . In addition to the assent of the parties that the transaction shall be a sale, there must be a price or consideration1029 moving from the purchaser to the seller for the transfer. . Neither of those factors is present in the case at bar. Petitioner received no price or consideration, and did not convey the property or assent to its transfer. Petitioner did not "sell" his right, title, and interest in the property for the price of his obligation, nor did he exchange his real estate for the obligation. The debt was merely paid, or his obligation extinguished, to the extent of the proceeds of the forced sale. Neither full nor partial payment of a debt constitutes a "sale or exchange." ; ; , affirming . We hold, therefore, that the transaction in controversy was not a "sale or exchange", and that allowance of the loss sustained by petitioner from the foreclosure sale of the Nassau Shores property is not limited by the provisions of section 117(a) or (d), supra. The deficiency will be redetermined by allowing such loss in the full amount of $5,942, 1030 as computed by respondent. . Decision will be entered under Rule 50.Footnotes1. SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS. * * (b) ADJUSTED BASIS. - The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis determined under subsection (a), adjusted as hereinafter provided. (1) GENERAL RULE. - Proper adjustment in respect of the property shall in all cases be made - * * * (B) in respect of any period since February 28, 1913, for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent allowed (but not less than the amount allowable) under this Act or prior income tax laws. * * * ↩2. SEC. 117. CAPITAL GAINS AND LOSSES. (a) GENERAL RULE. - In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net income: * * * 60 per centum if the capital asset has been held for more than 2 years but not for more than 5 years; * * * ↩3. (d) LIMITATION ON CAPITAL LOSSES. - Losses from sales or exchanges of capital assets shall be allowed only to the extent of $2,000 plus the gains from such sales or exchanges. * * * ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624952/	Harry Roff and Marcia Roff, Petitioners, v. Commissioner of Internal Revenue, RespondentRoff v. CommissionerDocket No. 68200United States Tax Court36 T.C. 818; 1961 U.S. Tax Ct. LEXIS 100; August 10, 1961, Filed 100 Decision will be entered under Rule 50. Shortly prior to their respective maturity dates petitioner assigned two annuity contracts to a third party other than the insurer. Held, petitioner realized ordinary income rather than capital gains. Held, further, the provisions of section 72(e)(3) are not applicable. Jerome R. Miller, Esq., for the petitioners.Arthur Pelikow, Esq., for the respondent. Bruce, Judge. BRUCE 818 Respondent determined deficiencies in Federal income taxes for the years 1954 and 1955 in the amounts of $ 2,232.98 and $ 1,044.77, respectively. The issues presented for our determination are: (1) Whether increments realized upon the sale of annuity policies are taxable as ordinary income or as long-term101 capital gain; 819 and (2) if said increments are taxable as ordinary income, whether the provisions of section 72, I.R.C. 1954, are applicable.FINDINGS OF FACT.The stipulated facts are so found and are incorporated herein by this reference.Harry Roff, hereinafter referred to as petitioner, and Marcia Roff are husband and wife residing in Maplewood, New Jersey. Their joint income tax returns for the years 1954 and 1955 were timely filed with the district director of internal revenue at Newark, New Jersey.At all times material hereto, petitioner was in the tire business and was not a dealer in annuities, life insurance policies, or securities.On December 22, 1934, the Connecticut Mutual Life Insurance Company issued to the petitioner its policy No. 848,774, a so-called guaranteed endowment annuity, under which Connecticut Mutual agreed to pay petitioner an income for life of $ 153.10 per month beginning on December 22, 1954 (the maturity date), in consideration of the payment on December 22, 1934, of an annual premium, and of like annual premiums thereafter until 20 annual premiums shall have been paid. The cash value at maturity was listed as $ 26,480. Connecticut Mutual102 agreed, subject to petitioner's power to change any beneficiary, to pay to "Lena Roff, mother of the Annuitant, if she survive him, if not, to his executors, administrators or assigns" death benefits as follows:(a) in event of the death of the Annuitant after the maturity date but before the total of the annuity payments made, as herein provided, shall have amounted to the Cash Value at Maturity * , to pay the excess of such cash value over the total annuity payments made; (b) in event of the death of the Annuitant before the maturity date, to pay the cash value as specified herein for the end of the contract year current at date of death, or the sum of the premiums paid hereon if such sum be greater than the cash value. * The policy further provided that:The right to receive all cash values, loans, dividends and other benefits accruing hereunder, to change the beneficiary, to exercise all privileges and options contained herein, and to agree with the Company to any release, modification or amendment of this contract, shall, unless herein otherwise specifically provided, belong and be available without the consent of any other person, to the Annuitant or his assigns. 103 * * * The Dividend. This contract, upon the payment of the second annual premium and during its continuance thereafter until the maturity date as a premium-paying or paid-up contract, will participate annually in the divisible surplus which shall be determined and apportioned by the Company.The dividend shall at the option of the payee thereof be(1) paid in cash, or(2) left with the Company, subject to withdrawal, to accumulate at such rate of interest, credited annually at not less than 3%, as the Company may determine, or820 (3) applied on a premium due hereon.If the Company be not otherwise directed in writing prior to the expiration of thirty-one days after such dividend becomes payable, the dividend shall be treated as above provided under option (2).Any dividend accumulation to the credit of this contract at its maturity date may be then applied to increase the annuity otherwise payable in the proportion that such accumulation bears to the then cash value of this contract. Any dividends due and unpaid at the death of the Annuitant shall be payable to the beneficiary.Automatic Payment of Premium by Accumulated Dividends. If any premium or instalment 104 of premium be not paid as herein provided, and if there be at the expiration of the time herein provided for such payment accumulated cash dividends credited on account of this contract at least equal to the payment required, then said payment shall be made by the application of an equal amount of such credit, or if such credit be less than the required payment then out of such credit, if sufficient, shall be paid a semi-annual or quarterly instalment of the annual premium. * * Assignments. No assignment of this contract shall be binding upon the Company until the original or a copy thereof is filed at the Home Office of the Company in Hartford, Connecticut. The Company will not be responsible for the validity of any assignment.Reserves. The reserves on this contract are based upon the Combined Annuity Mortality Table and 3 1/2% compound interest. * * Cash Value. At any time after due payment of two or more full annual premiums hereon, and on or before the maturity date or within thirty-one days thereafter, on surrender of this contract, the Company will pay the cash value of this contract in full settlement of its liability hereunder; provided that the Company105 may defer such surrender and payment for a period not exceeding sixty days after application therefor.Such Cash Value shall be as follows:(1) If there shall have been no failure to pay premiums as provided in this contract the cash value, per $ 100 unit of annual premium exclusive of any disability premium, at the end of each contract year prior to the maturity date shall be as specified in the Table of Cash Values herein; a proportionate adjustment to be made on account of the payment of any additional instalment of an annual premium in excess of full annual premiums; and the cash value at any date other than the end of a contract year to be the cash value at the end of the term covered by the then current annual premium or instalment thereof, discounted at the rate of 5% per annum. If there shall have been no failure to pay premiums as provided in this contract, the Cash Value at the maturity date shall be as specified on the first page hereof.(2) If this contract shall have become a paid-up annuity through a default in premium payment, the cash value shall be the cash value at date of default accumulated at 3 1/2% interest compounded annually to the date of surrender, provided, 106 however, that in any case such cash value shall be decreased by any existing indebtedness to the Company on or secured by this contract. * * OPTIONAL SETTLEMENTS * * Option 3. Proceeds at Interest. Interest earnings upon the proceeds payable annually, semi-annually, quarterly, or monthly at such rate as shall from time 821 to time be determined and thereto apportioned by the Company, but at a rate not less than 3% per annum, during the lifetime of the payee or for a shorter fixed period, as may be specified in said agreement.Petitioner paid total premiums of $ 18,742.25 on the Connecticut Mutual policy. As of December 22, 1954, the total cash surrender value of said policy was $ 26,813.54, including accumulated dividends of $ 263.40 and interest thereon of $ 70.14.On December 14, 1954, petitioner executed an assignment of all his "right, title and interest in and to" said policy to Sydney A. Gutkin, his tax attorney, for a consideration of $ 26,813.54. A copy of the assignment contract, which was executed on an insurance company form, was received by the home office of Connecticut Mutual on December 17, 1954. Payment of the $ 26,813.54 was in the form of a107 check dated December 23, 1954, which cleared the bank on the same day.On December 22, 1954, upon Gutkin's election to take the interest option, an interest income contract was issued by Connecticut Mutual to Gutkin guaranteeing to pay interest to him. In August of 1956 Gutkin surrendered his interest income contract to Connecticut Mutual for $ 26,828.07.On May 1, 1936, the Prudential Insurance Company of America issued to the petitioner its policy No. 9,368,199, a retirement annuity policy, which provided for the payment to petitioner of monthly installments of $ 130.10 for 120 months certain and thereafter during the lifetime of the annuitant, commencing 19 years after the date of said policy. The death benefit provision named petitioner's mother as beneficiary. The policy further provided for annual premiums of $ 1,000, the first to be paid on delivery of the policy and subsequently on the first day of May in every year during the continuance of the policy until the due date of the first annuity payment.Prudential policy No. 9,368,199 contained the following clauses material hereto:Change of Beneficiary. -- If the right to change the Beneficiary has been reserved, the108 Annuitant may at any time while this Policy is in force, by written notice to the Company at its Home Office, change the Beneficiary or Beneficiaries under this Policy, such change to be subject to the rights of any previous assignee and to become effective only after a provision to that effect has been endorsed on or attached to the Policy by the Company, whereupon all rights of the former Beneficiary or Beneficiaries shall cease.Change in Policy. -- The Annuitant and the Company may agree upon a change in the mode of settlement provided for in this Policy or upon a change in plan or upon a change to an insurance policy on the life of the Annuitant, and to any such change the consent of any Beneficiary, unless irrevocably designated, shall not be necessary.Assignments. -- Any assignment of this Policy must be in writing, and the Company shall not be deemed to have knowledge of such assignment unless the original or a duplicate thereof is filed at the Home Office of the Company. The Company will not assume any responsibility for the validity of an assignment.* * * *822 Basis of Reserve. -- The reserve upon this Annuity Policy for which funds are to be held109 shall be based upon compound interest at the rate of three and one-quarter per cent. per annum during the period prior to the date upon which the first instalment of the Annuity is payable, and thereafter the reserve shall be based upon the American Annuitant's Select Male Table, females being regarded as four years younger than the actual age, with three and one-quarter per cent. per annum compound interest, provided, however, that in no event shall such reserve be less than that required by the laws of the State in which this Policy is issued.* * * Annual Dividends. -- Annually, during its continuance in force prior to the due date of the first monthly payment of an Annuity hereunder, any proportion of the divisible surplus accruing on this Policy shall be ascertained and apportioned to this Policy as a dividend by the Board of Directors. (See "Notice to Policyholder" below.) Such dividend shall be (1) paid in cash, or (2) applied to the reduction of any premium then due; or upon written request of the Annuitant it may be (3) left to accumulate to the credit of the Policy with interest compounded annually at the rate of three per cent., plus such additional interest, if110 any, as the Company may declare on such funds, and payable when the first monthly payment of the Annuity has become due, or withdrawable in cash on any anniversary of the Policy prior thereto. If the Annuitant selects no other dividend option the dividend shall be paid in cash.* * * Cash Surrender Value. -- If this Policy is continued in force by the due payment of premiums for at least one year, the Annuitant, by written application and return of the Policy to the Home Office of the Company at any time but not after three months from the due date of any premium in default, may elect, subject to the consent of any irrevocable beneficiary, to surrender this Policy for its net Cash Surrender Value. The net Cash Surrender Value of this Policy at the end of any policy year shall be the tabular Cash Surrender Value indicated in the following table less any indebtedness on account of this Policy existing at the end of such policy year. In computing such tabular Cash Surrender Value from the said table due allowance will be made on account of any fractional part of a year for which premiums have been paid. The Company reserves the right to defer the payment of any Cash Surrender111 Value for the period permitted by law but not exceeding six months after application for such Cash Surrender Value.Petitioner paid total premiums of $ 18,084.86 with respect to the Prudential policy. As of its maturity date, May 1, 1955, its total cash surrender value was $ 22,180.59, including accumulated dividends of $ 83.40 and interest thereon of $ 47.19.On April 22, 1955, petitioner executed an assignment of the Prudential policy to Sydney A. Gutkin. By rider dated April 25, 1955, attached to and made a part of policy No. 9,368,199, Gutkin was made the beneficiary of said policy. By rider dated April 25, 1955, the policy was amended to provide that --all legal incidents of ownership and control of the Policy, including any and all benefits, values, rights, options and privileges conferred upon the Annuitant by the Policy or allowed by the Company shall belong to [Sydney A. Gutkin] * * .Provided that, anything in the Policy to the contrary notwithstanding, if the 823 Policy is surrendered for its cash surrender value or matures as an endowment, any Provisions as to Modes of Settlement otherwise applicable to the Policy shall not be available to said Owner and, 112 if the Policy provides for periodic payment of instalments upon maturity as an endowment, then, in lieu thereof, the cash value of the Policy as of the date the Policy matures as an endowment shall be payable immediately in one sum. * Petitioner assigned the Prudential policy to Gutkin for a consideration of $ 21,250. Gutkin's check for said amount, dated April 11, 1955, cleared the bank on April 25, 1955. Shortly after the policy's maturity date, Gutkin surrendered the policy to Prudential for its then value, $ 22,180.59.The Connecticut Mutual and Prudential policies were both annuity contracts.The reserves or cash surrender values of the Connecticut Mutual and Prudential policies were accumulated at interest rates of 3 1/2 percent and 3 1/4 percent, respectively, both compounded annually.Respondent determined that petitioner realized ordinary taxable income from the assignment of the Connecticut Mutual and Prudential annuity policies in the years 1954 and 1955, respectively.The excess of the proceeds received upon the sales of the Connecticut Mutual and Prudential policies over the total premiums stipulated as having been paid thereon, respectively, constitutes ordinary113 income.OPINION.Shortly prior to their respective maturity dates, petitioner, Harry Roff, transferred to a third party two annuity contracts. He contends the transfers constituted bona fide sales of capital assets and that he is entitled to have the excess of sales price over net cost taxed at capital gains rates. Respondent maintains that the so-called sales were not bona fide and that, even if they were bona fide, petitioner cannot thereby convert into capital gains what would otherwise be ordinary income.Petitioners transferred to a purchaser for value all rights, title, and interest in the contracts, retaining no control thereover. We agree with petitioner that the transfers constituted bona fide sales of the annuity contracts in question. Arnfeld v. United States, 163 F. Supp. 865 (Ct. Cl. 1958), certiorari denied 359 U.S. 943">359 U.S. 943. Cf. Percy W. Phillips, 30 T.C. 866">30 T.C. 866, reversed on other grounds 275 F. 2d 33 (C.A. 4, 1960), wherein we held such a transfer of an endowment insurance contract constituted a bona fide sale. That the taxpayer's purpose was to achieve114 capital gains treatment does not destroy the bona fides of the sale. Gregory v. Helvering, 293 U.S. 465">293 U.S. 465 (1935). Characterization of the transfers as "accommodation purchases" make them no less "sales." John D. McKee, 35 B.T.A. 239">35 B.T.A. 239. We agree with respondent, however, that such sales resulted in ordinary income to the petitioner.824 We are concerned with two so-called annual-premium, deferred-annuity contracts, one issued by Connecticut Mutual Life Insurance Company, the other by Prudential Life Insurance Company. Each provided for an annual premium of $ 1,000. With respect to each, premium reductions were allowed to petitioner, Harry Roff, for prepayment of premiums.Connecticut Mutual applied an interest rate of 3 1/2 percent, compounded annually, to the effective rate of premium payments, i.e., total annual premium of $ 1,000 as reduced by $ 125 for administrative costs. Prudential applied a rate of 3 1/4 percent, compounded annually, to $ 1,000 less $ 170 for administrative costs. Because of the interest provided for by the contracts, the cash surrender values thereof, both at the dates of the sales and115 at the maturity dates, were in excess of the total premiums called for by the policies, and paid by Harry Roff.It is clear, therefore, that the gains reaped by petitioner on the sales of the contracts, are attributable to interest accumulated under the contracts at fixed and predictable rates. 1 Upon surrender of the policy, or receipt of annuity payments after maturity, petitioner would have been taxed on the gain as ordinary income. Sec. 72, I.R.C. 1954; cf. Bodine v. Commissioner, 103 F. 2d 982 (C.A. 3, 1939), certiorari denied 308 U.S. 576">308 U.S. 576.116 Accordingly, the issue before the Court is whether, through a bona fide sale, petitioner may convert this otherwise ordinary income into capital gains. We agree with petitioner that the contracts constituted capital assets held for more than 6 months, but this is not dispositive of the issue. Even though the property falls within the general definition of a capital asset, the sale under scrutiny may include the sale of certain ordinary income portions which will be taxed at ordinary rates. Fisher v. Commissioner, 209 F. 2d 513 (C.A. 6, 1954), affirming 19 T.C. 384">19 T.C. 384; United States v. Snow, 223 F. 2d 103 (C.A. 9, 1955). In United States v. Snow, supra at 108, the court stated that "the assignment of accrued ordinary income must be treated separately from the assignment of the capital asset which produced the income."We see no reason to treat the gains in the instant case differently from those in the cases cited above. Petitioner received the equivalent of interest on the sales of the contracts. Thus, this case is indistinguishable from Arnfeld117 , in which the Court of Claims held that by a bona fide sale of an annuity contract 3 days prior to the maturity 825 thereof, plaintiffs could not "convert what would in time constitute ordinary income * * * into capital gain."Our decision in Percy W. Phillips, supra, does not require a different conclusion. That case involved the sale of an endowment insurance policy which provided life insurance protection, whereas the annuity contracts here involved did not provide life insurance protection. The gain realized with respect to the endowment insurance policy in the Phillips case was due in large part to the favorable mortality experience of the insurance company, as well as its investment practice. The gain realized with respect to the annuity contracts involved is due entirely to interest earnings. While the Court of Appeals, in reversing our decision in the Phillips case, found no controlling difference between the Arnfeld and Phillips cases, we do not deem it necessary in the instant case, to express any view with respect to the Fourth Circuit's opinion in the Phillips case.On reply brief, petitioner has argued that 118 the issue of anticipatory assignment of accrued interest is not properly before the Court. We have examined the pleadings and are satisfied that the statutory notice of deficiency and pleadings as a whole place this matter in issue.We hold that the petitioner realized ordinary income rather than capital gain upon the sale of the annuity contracts involved herein.Petitioner contends, alternatively, that if the gains realized on the sales constitute ordinary income, then such gains should be included in petitioner's gross income ratably in the year of receipt and the 2 preceding taxable years, pursuant to section 72(e)(3), I.R.C. 1954. 2826 Section 72(e) provides specifically for lump-sum amounts "received under an annuity * * * contract." Nothing in this section or in the congressional comments thereon (see H. Rept. No. 1337 and S. Rept. No. 1622, to accompany H.R. 8300 (Pub. L. 591), 83d Cong., 2d Sess., both at p. 11 (1954)) justifies application of the section to amounts not received "under an annuity * * * contract." Clearly, the amounts received on the sales of the contracts here involved were not so received. The section is applicable to lump-sum payments made by 119 the insurer in discharge of all contractual obligations. See 1 Mertens, Law of Federal Income Taxation, sec. 6A.07, p. 22.120 Decision will be entered under Rule 50. Footnotes1. The stipulation of facts states that the total premiums paid on the Connecticut Mutual and Prudential contracts were $ 18,742.25 and $ 18,084.86, respectively. Testimony elicited from a representative of Connecticut Mutual evidences the fact that the stipulated amount paid on the Connecticut Mutual contract includes "dividends" of $ 263.40. While there is no specific testimony thereof, with respect to the Prudential policy, the record bears the inference that the stipulated amount paid on this contract includes $ 83.40 in dividends. Likewise, the stated cash surrender values of the policies include the dividends paid thereon with accumulated interest. Since dividends have been added both to cost and cash surrender values, the amounts realized are attributable solely to interest.↩2. SEC. 72. ANNUITIES; CERTAIN PROCEEDS OF ENDOWMENT AND LIFE INSURANCE CONTRACTS.(e) Amounts Not Received as Annuities. -- (1) General rule. -- If any amount is received under an annuity, endowment, or life insurance contract, if such amount is not received as an annuity, and if no other provision of this subtitle applies, then such amount -- (A) if received on or after the annuity starting date, shall be included in gross income; or(B) if subparagraph (A) does not apply, shall be included in gross income, but only to the extent that it (when added to amounts previously received under the contract which were excludable from gross income under this subtitle or prior income tax laws) exceeds the aggregate premiums or other consideration paid.For purposes of this section, any amount received which is in the nature of a dividend or similar distribution shall be treated as an amount not received as an annuity.(2) Special rules for application of paragraph (1). -- For purposes of paragraph (1), the following shall be treated as amounts not received as an annuity: (A) any amount received, whether in a single sum or otherwise, under a contract in full discharge of the obligation under the contract which is in the nature of a refund of the consideration paid for the contract; and(B) any amount received under a contract on its surrender, redemption, or maturity.In the case of any amount to which the preceding sentence applies, the rule of paragraph (1)(B) shall apply (and the rule of paragraph (1)(A) shall not apply).(3) Limit on tax attributable to receipt of lump sum. -- If a lump sum is received under an annuity, endowment, or life insurance contract, and the part which is includible in gross income is determined under paragraph (1), then the tax attributable to the inclusion of such part in gross income for the taxable year shall not be greater than the aggregate of the taxes attributable to such part had it been included in the gross income of the taxpayer ratably over the taxable year in which received and the preceding 2 taxable years.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4562858/	IN THE SUPREME COURT OF PENNSYLVANIA MIDDLE DISTRICT PENNSYLVANIA DEMOCRATIC PARTY, : No. 133 MM 2020 NILOFER NINA AHMAD, DANILO : BURGOS, AUSTIN DAVIS, DWIGHT : EVANS, ISABELLA FITZGERALD, : EDWARD GAINEY, MANUEL M. GUZMAN, : JR., JORDAN A. HARRIS, ARTHUR : HAYWOOD, MALCOLM KENYATTA, : PATTY H. KIM, STEPHEN KINSEY, PETER : SCHWEYER, SHARIF STREET, AND : ANTHONY H. WILLIAMS : : : v. : : : KATHY BOOCKVAR, IN HER CAPACITY : AS SECRETARY OF THE : COMMONWEALTH OF PENNSYLVANIA; : ADAMS COUNTY BOARD OF ELECTIONS; : ALLEGHENY COUNTY BOARD OF : ELECTIONS; ARMSTRONG COUNTY : BOARD OF ELECTIONS; BEAVER : COUNTY BOARD OF ELECTIONS; : BEDFORD COUNTY BOARD OF : ELECTIONS; BERKS COUNTY BOARD OF : ELECTIONS; BLAIR COUNTY BOARD OF : ELECTIONS; BRADFORD COUNTY : BOARD OF ELECTIONS; BUCKS COUNTY : BOARD OF ELECTIONS; BUTLER : COUNTY BOARD OF ELECTIONS; : CAMBRIA COUNTY BOARD OF : ELECTIONS; CAMERON COUNTY BOARD : OF ELECTIONS; CARBON COUNTY : BOARD OF ELECTIONS; CENTRE : COUNTY BOARD OF ELECTIONS; : CHESTER COUNTY BOARD OF : ELECTIONS; CLARION COUNTY BOARD : OF ELECTIONS; CLEARFIELD COUNTY : BOARD OF ELECTIONS; CLINTON : COUNTY BOARD OF ELECTIONS; : COLUMBIA COUNTY BOARD OF : ELECTIONS; CRAWFORD COUNTY : BOARD OF ELECTIONS; CUMBERLAND : COUNTY BOARD OF ELECTIONS; : DAUPHIN COUNTY BOARD OF : ELECTIONS; DELAWARE COUNTY : BOARD OF ELECTIONS; ELK COUNTY : BOARD OF ELECTIONS; ERIE COUNTY : BOARD OF ELECTIONS; FAYETTE : COUNTY BOARD OF ELECTIONS; : FOREST COUNTY BOARD OF : ELECTIONS; FRANKLIN COUNTY BOARD : OF ELECTIONS; FULTON COUNTY : BOARD OF ELECTIONS; GREENE : COUNTY BOARD OF ELECTIONS; : HUNTINGDON COUNTY BOARD OF : ELECTIONS; INDIANA COUNTY BOARD : OF ELECTIONS; JEFFERSON COUNTY : BOARD OF ELECTIONS; JUNIATA : COUNTY BOARD OF ELECTIONS; : LACKAWANNA COUNTY BOARD OF : ELECTIONS; LANCASTER COUNTY : BOARD OF ELECTIONS; LAWRENCE : COUNTY BOARD OF ELECTIONS; : LEBANON COUNTY BOARD OF : ELECTIONS; LEHIGH COUNTY BOARD OF : ELECTIONS; LUZERNE COUNTY BOARD : OF ELECTIONS; LYCOMING COUNTY : BOARD OF ELECTIONS; MCKEAN : COUNTY BOARD OF ELECTIONS; : MERCER COUNTY BOARD OF : ELECTIONS; MIFFLIN COUNTY BOARD : OF ELECTIONS; MONROE COUNTY : BOARD OF ELECTIONS; MONTGOMERY : COUNTY BOARD OF ELECTIONS; : MONTOUR COUNTY BOARD OF : ELECTIONS; NORTHAMPTON COUNTY : BOARD OF ELECTIONS; : NORTHUMBERLAND COUNTY BOARD OF : ELECTIONS; PERRY COUNTY BOARD OF : ELECTIONS; PHILADELPHIA COUNTY : BOARD OF ELECTIONS; PIKE COUNTY : BOARD OF ELECTIONS; POTTER : COUNTY BOARD OF ELECTIONS; : SCHUYLKILL COUNTY BOARD OF : ELECTIONS; SNYDER COUNTY BOARD : OF ELECTIONS; SOMERSET COUNTY : BOARD OF ELECTIONS; SULLIVAN : [133 MM 2020] - 2 COUNTY BOARD OF ELECTIONS; : SUSQUEHANNA COUNTY BOARD OF : ELECTIONS; TIOGA COUNTY BOARD OF : ELECTIONS; UNION COUNTY BOARD OF : ELECTIONS; VENANGO COUNTY BOARD : OF ELECTIONS; WARREN COUNTY : BOARD OF ELECTIONS; WASHINGTON : COUNTY BOARD OF ELECTIONS; WAYNE : COUNTY BOARD OF ELECTIONS; : WESTMORELAND COUNTY BOARD OF : ELECTIONS; WYOMING COUNTY BOARD : OF ELECTIONS; AND YORK COUNTY : BOARD OF ELECTIONS : : : PETITION OF: KATHY BOOCKVAR, IN : HER CAPACITY AS SECRETARY OF THE : COMMONWEALTH OF PENNSYLVANIA : CONCURRING AND DISSENTING STATEMENT JUSTICE WECHT FILED: September 3, 2020 I join the order granting the motion to intervene ostensibly filed on behalf of the Senate Republican Caucus—notwithstanding the reservations as to the propriety of unicameral legislative standing I expressed in my concurring statement in Disability Rights Pennsylvania v. Boockvar, 83 MM 2020. I also join the denial of intervention as to the remaining applications. I dissent from the Court’s grant of intervention to the Republican Party of Pennsylvania, however, because I do not agree that the political entity has satisfied the requirements for intervention under Pa.R.A.P. 2327. The party claims “a substantial and particularized interest in defending this action to preserve the structure of the competitive environment in which their supported candidates participate and to ensure that Pennsylvania carries out free and fair elections,” Application for Leave to Intervene, 7/27/2020, at 5, but ventures what amounts to a general concern in maintaining the electoral status quo. A generalized grievance of this variety is insufficient to justify [133 MM 2020] - 3 intervention under these circumstances. See Hollingsworth v. Perry, 570 U.S. 693, 707 (2013) (dismissing appeal for lack of standing where petitioners, sponsors of Proposition 8, a constitutional amendment banning same-sex marriage in California, “ha[d] no role— special or otherwise—in the enforcement of” the proposition, and “therefore ha[d] no ‘personal stake’ in defending its enforcement that [wa]s distinguishable from the general interest of every citizen of California”). In seeking to intervene in defense of a state law, the Republican Party of Pennsylvania can claim only the prospect of injury to their political interests, which does not constitute a cognizable basis upon which to intervene in this case. Whether certain or, as in this case, merely conjectured, the political consequences of a decision at odds with a party’s policy preferences is not the law’s concern, only the merit of Petitioners’ constitutional challenges to the legal status quo vis-à-vis the conduct of elections. Furthermore, even if the party satisfied the requirements of Rule 2327, it is difficult to imagine that the Senate Republican Caucus would fail to represent their interests entirely, and the state GOP offers no theories in that connection. The party enjoys no law-making prerogatives whatsoever; it lacks even an elector’s vote. Its injury is political, not legal, and is secondary to the constitutional questions presented. In implicitly determining that the Republican Party’s interests in this case satisfy Rule 2327, this Court invites a host of other circumstances in which interest groups can claim the right to intervene based solely on their concern about the secondary effects of a given lawsuit’s outcome. Accordingly, I dissent. [133 MM 2020] - 4	01-04-2023	09-03-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624968/	AHG INVESTMENTS, LLC, ALAN GINSBURG, A PARTNER OTHER THAN THE TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentAHG Invs., LLC v. Comm'rDocket No. 3745-09.United States Tax Court140 T.C. 73; 2013 U.S. Tax Ct. LEXIS 7; 140 T.C. No. 7; March 14, 2013, Filed7 An appropriate order will be issued denying petitioner's motion for partial summary judgment.R issued a notice of final partnership administrative adjustment (FPAA) determining adjustments to income on multiple grounds. The FPAA also determined an I.R.C. sec. 6662 40% gross valuation misstatement penalty, as well as other penalties. P conceded the adjustments to income on grounds other than valuation or basis in an attempt to avoid the gross valuation misstatement penalty and filed a motion for partial summary judgment that this penalty does not apply as a matter of law.Held: A taxpayer may not avoid application of the gross valuation misstatement penalty merely by conceding on grounds unrelated to valuation or basis. We will deny P's motion for partial summary judgment.Thomas A. Cullinan, for petitioner.George W. Bezold, for respondent.THORNTON, HALPERN, FOLEY, VASQUEZ, GALE, MARVEL, WHERRY, KROUPA, HOLMES, PARIS, KERRIGAN, and LAUBER, JJ., agree with this opinion of the Court. GUSTAFSON, MORRISON, and BUCH, JJ., did not participate in the consideration of this opinion.73 GOEKE, Judge: This case is before the Court on petitioner's motion for partial summary judgment filed pursuant to 8 Rule 121,1 to which respondent objects. Respondent issued a notice of final partnership administrative adjustment (FPAA) to petitioner, a partner other than the tax matters partner (TMP) of AHG Investments, LLC (AHG Investments). The major adjustment in the FPAA was to disallow $10,069,505 in losses allocated to petitioner for taxable years 2001 and 2002. Petitioner conceded on grounds other than valuation or basis that the FPAA adjustments were correct in an attempt to avoid application of the 40% gross valuation misstatement penalty and has filed a motion for partial summary judgment that this penalty does not apply as a matter of law. For the reasons stated herein, we will deny petitioner's motion.74 BackgroundThe relevant facts are not in dispute. During the years at issue petitioner was a partner other than the TMP of AHG Investments. At the time the petition was filed he resided in Florida. Also during the years at issue AHG Investments' TMP was Helios Trading, LLC. At the time the petition 9 was filed the mailing address for Helios Trading, LLC, was in Illinois. It was not established where AHG Investments' principal place of business was or whether AHG Investments had been dissolved at the time the petition was filed.Respondent's FPAA enumerated 14 alternative grounds in support of the adjustments and asserted 40% accuracy-related penalties under section 6662(a) for the portions of the underpayments of tax resulting from adjustments of partnership items attributable to a gross valuation misstatement.210 In the petition, petitioner conceded the FPAA adjustments were correct on the ground that petitioner was not at risk under section 465 and thus was not entitled to deduct certain attributed losses. In an amendment to the petition, petitioner also conceded that the FPAA adjustments were correct on the ground that the transaction at issue did not have substantial economic effect under section 1.704-1(b), Income Tax Regs. Both section 465 and section 1.704-1(b), Income Tax Regs., were among the grounds on which respondent supported the adjustments made in the FPAA.Petitioner filed a motion for partial summary judgment regarding the 40% gross valuation misstatement penalty, arguing that this penalty does not apply as a matter of law because petitioner conceded the correctness of adjustments proposed in the FPAA on grounds unrelated to valuation or basis. Respondent contests petitioner's motion for partial summary judgment.75 DiscussionI. Summary JudgmentRule 121(a) provides that either party may move for summary judgment upon all or any part of the legal issues in controversy. Full or partial summary judgment may be granted only if it is demonstrated that no genuine dispute exists as to any material fact and that the issues presented by the motion may be decided as a matter of law. SeeRule 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). We conclude that there is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law.II. Gross Valuation Misstatement PenaltyUnder 11 section 6662(h), a taxpayer may be liable for a 40% penalty on any portion of an underpayment of tax attributable to a gross valuation misstatement. A gross valuation misstatement exists if the value or adjusted basis of any property claimed on a tax return is 400% or more of the amount determined to be the correct amount of such value or adjusted basis. Sec. 6662(h)(2)(A). Whether there is a gross valuation misstatement in the partnership context is determined at the partnership level. Sec. 1.6662-5(h)(1), Income Tax Regs.We have previously held that when the Commissioner asserts a ground unrelated to value or basis of property for totally disallowing a deduction or credit and a taxpayer concedes the deduction or credit on that ground, any underpayment resulting from the concession is not attributable to a gross valuation misstatement.312 Bergmann v. Commissioner, 137 T.C. 136">137 T.C. 136, 145 (2011) (citing McCrary v. Commissioner, 92 T.C. 827">92 T.C. 827, 851-856 (1989)). Today we depart from this holding, instead ruling that a taxpayer may not avoid the gross valuation misstatement penalty merely by conceding 76 a deduction or credit on a ground unrelated to value or basis of property.A. McCrary and Todd CasesIn McCrary v. Commissioner, 92 T.C. 827">92 T.C. 827 (1989), the taxpayers entered into a purported lease of a master recording and claimed resulting investment tax credits. Before trial they conceded that they were not entitled to the claimed investment tax credit because the agreement was not a lease. They did not contest the fair market value of the master recording at trial, although other issues were addressed. We held that the gross valuation misstatement penalty was inapplicable as a result of their concession. In disagreeing with the Commissioner's argument that a taxpayer cannot selectively concede a ground for disallowance in order to avoid an addition to tax, we relied on the logic of a prior Tax Court case, Todd v. Commissioner, 89 T.C. 912">89 T.C. 912 (1987)13 (Todd I), aff'd, 862 F.2d 540">862 F.2d 540 (5th Cir. 1988) (Todd II). We also extensively discussed and relied upon the Court of Appeals for the Fifth Circuit's affirmation of Todd I in Todd II.The facts in Todd I were similar to those in McCrary; however, the taxpayers in Todd I did not make a concession on a ground other than valuation or basis as in McCrary.4 Rather, in Todd I we had already disallowed claimed deductions and credits on a ground other than valuation or basis after a trial. Noonan v. Commissioner, T.C. Memo 1986-449">T.C. Memo. 1986-449, aff'd without published opinion sub nom., Hillendahl v. Commissioner, 976 F.2d 737">976 F.2d 737 (9th Cir. 2012).In analyzing the gross valuation misstatement penalty statute (section 6659 at the time), the Court of Appeals for the Fifth Circuit in 14 Todd II stated that "Unfortunately, none of the formal legislative history provides a method for calculating whether a given tax underpayment is attributable to a valuation overstatement." Todd II, 862 F.2d at 542. The Court of Appeals proceeded to adopt the same formula we applied in Todd I, stating:77 Such a formula is found, however, in the General Explanation of the Economic Recovery Tax Act of 1981, or "blue book," prepared by the staff of the Joint Committee on Taxation. Though not technically legislative history, the Supreme Court relied on a similar blue book in construing part of the Tax Reform Act of 1969, calling the document a "compelling contemporary indication" of the intended effect of the statute. The committee staff explained § 6659's operation as follows:"The portion of a tax underpayment that is attributable to a valuation overstatement will be determined after taking into account any other proper adjustments to tax liability. Thus, the underpayment resulting from a valuation overstatement will be determined by comparing the taxpayer's (1) actual tax liability (i.e., the tax liability that results from a proper valuation and which takes into account any other proper 15 adjustments) with (2) actual tax liability as reduced by taking into account the valuation overstatement. The difference between these two amounts will be the underpayment that is attributable to the valuation overstatement."******Applying this formula, the Tax Court determined that no portion of the Todds' tax underpayment was attributable to their valuation overstatements. The Todds' actual tax liability, * * did not differ from their actual tax liability adjusted for the valuation overstatements. In other words * * * the Todds' valuation of the property supposedly generating the tax benefits had no impact whatsoever on the amount of tax actually owed. Since the legislative history of § 6659 provides no alternative method of applying the statute, we are persuaded that the formula contained in the committee staff's explanation evidences congressional intent with respect to calculating underpayments subject to the penalty.Id. at 542-543 (fn. refs. omitted) (quoting Staff of the Joint Committee on Taxation, General Explanation of the Economic Recovery Tax Act of 1981, at 333 (J. Comm. Print 1981) (Blue Book)) . The Court of Appeals in Todd II also quoted an example from the Blue 16 Book which states:"The determination of the portion of a tax underpayment that is attributable to a valuation overstatement may be illustrated by the following example. Assume that in 1982 an individual files a joint return showing taxable income of $40,000 and tax liability of $9,195. Assume, further, that a $30,000 deduction which was claimed by the taxpayer as the result of a valuation overstatement is adjusted down to $10,000, and that another deduction of $20,000 is disallowed totally for reasons apart from the valuation overstatement. These adjustments result in correct taxable income of $80,000 and correct tax liability of $27,505. Accordingly, the underpayment due to the valuation overstatement is the difference between the tax on $80,000 ($27,505) and the tax on $60,000 ($17,505) (i.e., actual tax liability reduced by taking into account the deductions disallowed because of the valuation overstatement), or $9,800 78 [sic]."Todd II, 862 F.2d at 543 (alteration in original) (fn. ref. omitted) (quoting Blue Book at 333 n.2). The Court of Appeals concluded that "Congress intended * * * [the Blue Book] formula to be applied in determining liability for the" gross valuation misstatement 17 penalty. Id.The Court in Todd II reasoned that other considerations supported its holding, stating that "Congress may not have wanted to burden the Tax Court with deciding difficult valuation issues where a case could be easily decided on other grounds"518 and that "Congress may have wanted to moderate the application of the section 6659 penalty so that it would not be imposed on taxpayers whose overvaluation was irrelevant to the determination of their actual tax liability." Id. at 544. The Court of Appeals additionally stated that its holding would not lead to anomalous results, that the effects of its holding "may not be as inequitable as" the Commissioner claimed, and that "the fear that taxpayers will deny profit motivation to avoid section 6659 penalties, is unimpressive." Id. at 545. In McCrary, we quoted extensively portions of Todd II relating to these considerations, finding the argument persuasive and adopting the rule in the case. McCrary v. Commissioner, 92 T.C. at 853-854 ("Following this language, we feel compelled * * * to apply the formula referred to by the Court of Appeals and in our Todd opinion[.]").B. Cases Following McCrary and ToddIn addition to the Tax Court, the Court of Appeals for the Ninth Circuit has also adopted the reasoning of and holding in Todd II.6See Gainer v. Commissioner, 893 F.2d 225">893 F.2d 225, 227 (9th Cir. 1990) ("We agree with the reasoning employed by the Fifth Circuit in Todd."), aff'gT.C. Memo. 1988-416. 79 However, many other Courts of Appeals have rejectedTodd II as an incorrect interpretation of the Blue Book formula.In Fid. Int'l Currency Advisor A Fund, LLC v. United States, 667">661 F.3d 667 (1st Cir. 2011) (Fidelity International), the Court of Appeals for the First Circuit encountered 19 facts similar to those in Todd I. In Fidelity International, 661 F.3d at 673-674, the Court of Appeals reviewed Todd II and concluded that "Todd rests on a misunderstanding of the sources relied on" and noted that "the Ninth Circuit followed Todd's misreading in Gainer". The Court of Appeals for the First Circuit noted that Todd II and Gainer represented a minority view, in opposition to "the dominant view of the circuits that have addressed this issue." Id. at 674. Regarding the Blue Book formula relied on in Todd II, the Court of Appeals in Fidelity International, 661 F.3d at 674, stated:In our view, * * * [the Blue Book formula] is designed to avoid attributing to a basis or value misstatement an upward adjustment of taxes that is unrelated to the overstatement but due solely to some other tax reporting error * * . This is surely what the quoted language means in excluding from the overstatement penalty increased taxes due to "any other proper adjustments." This is quite different from excusing an overstatement because it is one of two independent, rather than the sole, cause of the same underreporting error.In Alpha I, L.P. v. United States, 682 F.3d 1009 (Fed. Cir. 2012), the 20 Court of Appeals for the Federal Circuit reversed a Court of Federal Claims ruling that the gross valuation misstatement penalty did not apply when a taxpayer conceded the Commissioner's adjustments on grounds other than basis or valuation. The Court of Appeals noted that "The Court of Federal Claims cited several cases to support its decision to defer to the terms of the partnerships' concession without further scrutiny, two of which it found particularly persuasive:" Todd II and Gainer. Id. at 1027-1028. The Court of Appeals in Alpha I proceeded to reject "the legal analysis employed in Todd and Gainer, finding it flawed in material respects." Id. at 1028. Reviewing the Blue Book formula and example relied on in Todd II, the Court of Appeals in Alpha I stated thatThe Blue Book, in sum, offers the unremarkable proposition that, when the IRS disallows two different deductions, but only one disallowance is based on a valuation misstatement, the valuation misstatement penalty should apply only to the deduction taken on the valuation 80 misstatement, not the other deduction, which is unrelated to valuation misstatement.The court in Todd mistakenly applied that simple rule to a situation 21 in which the same deduction is disallowed based on both valuation misstatement- and non-valuation-misstatement theories.* * Id. at 1029. The Court of Appeals concluded that "the flaws in the analysis employed in Todd and Gainer" were "apparent". Id.In Gustashaw v. Commissioner, 696 F.3d 1124 (11th Cir. 2012), aff'gT.C. Memo. 2011-195, the Court of Appeals for the Eleventh Circuit affirmed a Tax Court case which held the taxpayers liable for the gross valuation misstatement penalty.7 On appeal the taxpayers contended that because the transaction lacked economic substance there was no value or basis to misstate and therefore nothing to trigger the valuation misstatement penalties. The taxpayers also attempted to concede their position generally after losing in the Tax Court.Regarding the concession, the Court of Appeals in Gustashaw stated that the taxpayer "did not raise this argument before the Tax Court, and we therefore decline to consider it for 22 the first time on appeal. * * * Even if we were to consider this argument, it is substantially intertwined with and relies on a minority line of cases whose reasoning we reject infra." Id. at 1135 n.5. The Court of Appeals rejected the reasoning in Todd II and Gainer, stating that the Court of Appeals in Todd II "misapplied" the Blue Book guidance and echoed the previously quoted language of the Court of Appeals for the First Circuit in Fidelity International. See supra p. 11.Even the Courts of Appeals for the Fifth and Ninth Circuits have strongly suggested that Todd II and Gainer are erroneous, although both courts continue to follow the holdings of those cases on the basis of stare decisis. In Keller v. Commissioner, 556 F.3d 1056">556 F.3d 1056, 1061 (9th Cir. 2009), aff'g in part, rev'g in partT.C. Memo. 2006-131, the Court of Appeals for the Ninth Circuit recognized "that many other circuits have" rejected the logic of Gainer and that those circuits' 81 "sensible method of resolving overvaluation cases cuts off at the pass what might seem to be an anomalous result--allowing a party to avoid tax penalties by engaging in behavior one might suppose would implicate more tax penalties, not fewer." 23 However, the Court of Appeals declined to follow the majority rule, stating: "Nonetheless, in this circuit we are constrained by Gainer." Id.In Bemont Invs., L.L.C. v. United States, 679 F.3d 339">679 F.3d 339 (5th Cir. 2012), a three-judge panel of the Court of Appeals for the Fifth Circuit again applied Todd II in rejecting application of the gross valuation misstatement penalty. However, all three judges joined a special concurrence by Judge Prado which questioned the logic of Todd II. After noting that the court's "hands * * * [were] tied" because the court was "precedent-bound to follow" the Todd II rule, Judge Prado discussed the Blue Book guidance, stating: "The Blue Book's formula and example are expressing a straightforward principle in mathematical terms: Do not apply the valuation overstatement penalty to a tax infraction, such as an improper charitable deduction, that is unrelated to (i.e., incapable of being attributed to) the valuation overstatement." Id. at 351-352, 354 (Prado, J., concurring). Judge Prado opined that "the Todd court misread the Blue Book's elementary guidance" and noted that opposition to Todd II is "near-unanimous." Id. at 352, 354 (citing cases from the Courts 24 of Appeals for the First, Second, Third, Fourth, Sixth, and Eighth Circuits).8 Judge Prado finally disagreed with Todd II on policy grounds, stating that the case "frustrates the purpose of the valuation-misstatement penalty" by "creating * * [a] perverse incentive structure" whereby taxpayers are encouraged to not solely misstate the value of assets, but to create even more "extreme scheme[s]" so that they may concede a case on grounds other than basis or valuation if found out. Id. at 355.82 C. Appellate JurisdictionIt is not clear to which Court of Appeals an appeal of this case would lie. Section 7482(b)(1)(E) provides that generally 25 a Tax Court decision following a petition under section 6226 (i.e., a petition resulting from issuance of an FPAA) shall be appealable to the U.S. Court of Appeals for the circuit in which "the principal place of business of the partnership" is located.9 However, section 7482(b)(1) provides that if section 7482(b)(1)(E) does not apply then "such decisions may be reviewed by the Court of Appeals for the District of Columbia." In addition, section 7482(b)(2) provides that "Notwithstanding the provisions of * * * [section 7482(b)(1)], such decisions may be reviewed by any United States Court of Appeals which may be designated by the Secretary and the taxpayer by stipulation in writing."Not only have the parties not established where AHG Investment's principal place of business was at the time the petition under section 6226 was filed; it was not established whether AHG Investments had a principal place of business at that time. See, e.g., Peat Oil & Gas Assocs. v. Commissioner, T.C. Memo. 1993-130, 1993 Tax Ct. Memo LEXIS 130">1993 Tax Ct. Memo LEXIS 130, at 1726 (parties failed to establish whether partnerships at issue "had no principal place of business so that venue for appeal is the Court of Appeals for the District of Columbia"). In addition, the parties have not stipulated (or otherwise agreed) to appeal the case to a specific U.S. Court of Appeals. Seesec. 7482(b)(2).On the basis of the record before us, it appears that an appeal of this case would lie to the Court of Appeals for the D.C. Circuit,10 which has not ruled on the gross valuation misstatement penalty issue. There is no evidence that an appeal would lie to the Court of Appeals for the Fifth or Ninth Circuit.83 D. Stare Decisis and Departure From Todd and McCraryIn Vasquez v. Hillery, 474 U.S. 254">474 U.S. 254, 265-266, 106 S. Ct. 617">106 S. Ct. 617, 88 L. Ed. 2d 598">88 L. Ed. 2d 598 (1986), the Supreme Court stated:[T]he important doctrine of stare decisis [is] the means by which we ensure that the law will not merely change erratically, but will develop in a principled and intelligible fashion. * * While stare decisis is not an inexorable command, the careful observer will discern 27 that any detours from the straight path of stare decisis in our past have occurred for articulable reasons, and only when the Court has felt obliged "to bring its opinions into agreement with experience and with facts newly ascertained." Burnet v. Coronado Oil & Gas Co., 285 U.S. 393">285 U.S. 393, 412, 52 S. Ct. 443">52 S. Ct. 443, 76 L. Ed. 815">76 L. Ed. 815, 1932 C.B. 265">1932 C.B. 265, 1 C.B. 265">1932-1 C.B. 265 (1932) (Brandeis, J., dissenting).Our history does not impose any rigid formula to constrain the Court in the disposition of cases. Rather, its lesson is that every successful proponent of overruling precedent has borne the heavy burden of persuading the Court that changes in society or in the law dictate that the values served by stare decisis yield in favor of a greater objective. * We have stated that stare decisis "generally requires that we follow the holding of a previously decided case, absent special justification. This doctrine is of particular importance when the antecedent case involves statutory construction." Sec. State Bank v. Commissioner, 111 T.C. 210">111 T.C. 210, 213-214 (1998), aff'd, 214 F.3d 1254">214 F.3d 1254 (10th Cir. 2000); see also Hesselink v. Commissioner, 97 T.C. 94">97 T.C. 94, 99-100 (1991); BLAK Invs. v. Commissioner, T.C. Memo. 2012-273, at 10. "Therefore, respondent bears the heavy burden of persuading 28 us that we should overrule our established precedent." BLAK Invs. v. Commissioner, at 10.We find that respondent has met his burden to persuade us to overrule our precedent established byTodd I and McCrary. In those cases we reasoned that if another ground besides valuation overstatement supports a deficiency, that deficiency cannot be attributable to a valuation overstatement. However, the alternative view has been adopted by the majority of the U.S. Courts of Appeals. These Courts of Appeals have reached the same result as the dissent in McCrary. See McCrary v. Commissioner, 92 T.C. at 860-866 (Gerber, J., dissenting). Even the Courts of Appeals for the Fifth and Ninth Circuits (which continue to follow the minority rule) have strongly suggested that the majority rule is the correct one.84 Today we depart from our precedent following the minority rule and side with the majority rule. By doing so we recognize that an underpayment of tax may be attributable to a valuation misstatement even when the Commissioner's determination of an underpayment of tax may also be sustained on a ground unrelated to basis or valuation. We agree with Judge Prado of the Court of Appeals for the Fifth Circuit 29 that the Blue Book's formula and example merely express "a straightforward principle in mathematical terms: Do not apply the valuation overstatement penalty to a tax infraction, such as an improper charitable deduction, that is unrelated to (i.e., incapable of being attributed to) the valuation overstatement."11Bemont Invs., L.L.C., 679 F.3d at 352 (Prado, J., concurring).In reaching our holding we have considered factors other than those relating to the Blue Book formula and example. The most prominent of these secondary factors regards judicial economy. In McCrary we supported our decision in part by noting that it would encourage taxpayers to settle cases involving the valuation misstatement penalty and thus avoid trials on difficult valuation 30 issues. See McCrary v. Commissioner, 92 T.C. at 853-854.Although our ruling today may reduce the number of cases conceded by taxpayers attempting to avoid gross valuation misstatement penalties,12 concerns relating to judicial economy are not a sufficient reason to disregard or continue to incorrectly apply the clear formula and example in the Blue Book. See id. at 863 (Gerber, J., dissenting) ("Judicial economy should apply to situations where alternative grounds are available to support the same determination."). Indeed, our ruling today may improve judicial economy in the long term by discouraging taxpayers from engaging in tax-avoidance practices. See Gustashaw v. Commissioner, 696 85 F.3d at 1136-1137; Alpha I, L.P., 682 F.3d at 1030 ("An interpretation of the statute that allows imposition of a valuation misstatement penalty even when other grounds are asserted furthers the congressional policy of deterring abusive tax avoidance practices."); Bemont Invs., L.L.C., 679 F.3d at 355 (Prado, J., concurring) ("As a policy matter, the Todd * * * rule could incentivize improper tax behavior."); Fidelity International, 667">661 F.3d at 673 (although "alternative grounds with lower or no penalties 31 existed for disallowing the same claimed losses," such a fact "hardly detracts from the need to penalize and discourage the gross value misstatements.")In addition, we find the other factors mentioned in McCrary in support of its ruling (regarding equitable considerations and moderation of penalties) to be similarly unconvincing. Over the years certain taxpayers have purposefully used the holdings in Todd I and McCrary to avoid gross valuation misstatement penalties which would otherwise apply to them. See Bemont Invs., L.L.C., 679 F.3d at 355 (Prado, J., concurring) (under the Todd II rule, "by crafting a more extreme scheme and generating a deduction that is improper not only due to a basis misstatement, but also for some other reason" taxpayers have increased their "chance[s] of avoiding the valuation-misstatement penalty"). We believe that over the years the actions taken by such taxpayers have "frustrate[d] the purpose of the valuation-misstatement penalty". Id.For the foregoing reasons, we conclude that a taxpayer may not avoid application of the gross valuation misstatement penalty merely 32 by conceding on grounds unrelated to valuation or basis.III. ConclusionWe hold that petitioner's concessions under section 465 and section 1.704-1(b), Income Tax Regs., do not prevent application of the gross valuation misstatement penalty to the underpayments of tax as a matter of law. Therefore, we will deny petitioner's motion for partial summary judgment under Rule 121. In reaching our holding, we have considered all arguments made, and, to the extent not mentioned above, we conclude they are moot, irrelevant, or without merit.86 To reflect the foregoing,An appropriate order will be issued denying petitioner's motion for partial summary judgment.Footnotes1. Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and Procedure, and all section references are to the Internal Revenue Code in effect for the years in issue.↩2. Respondent also determined 20% accuracy-related penalties applied to the portion of each underpayment resulting from adjustments of partnership items attributable to negligence or disregard of the rules or regulations, a substantial understatement of income tax, or a substantial valuation misstatement.3. In addition, we have extended that holding to situations where the taxpayer does not state the specific ground upon which the concession of the deduction or credit is based so long as the Commissioner has asserted some ground other than value or basis for totally disallowing the relevant deduction or credit. Bergmann v. Commissioner, 137 T.C. 136">137 T.C. 136, 145 (2011) (citing Rogers v. Commissioner, T.C. Memo. 1990-619, and Schachter v. Commissioner, T.C. Memo. 1994-273↩).4. In Todd v. Commissioner, 89 T.C. 912">89 T.C. 912, 919 (1987) (Todd I), aff'd, 862 F.2d 540 (5th Cir. 1988) (Todd II↩), we recognized the potential for a taxpayer to concede on a ground other than valuation or basis, posing a rhetorical question: ["I]f a taxpayer were to concede that an asset was not placed in service and that no deductions or credits are allowable in order to avoid an addition to tax, could that concession reasonably be refused?"5. The Court of Appeals further stated that Congress saw the gross valuation misstatement penalty "as a measure to help the Tax Court control its docket." Todd II, 862 F.2d at 544↩ (citing H.R. Conf. Rept. No. 98-861, at 985 (1984), 1984-3 C.B. (Vol. 2) 1, 239).6. The Supreme Court has not ruled on the issue addressed in Todd II, but the U.S. Government has recently filed a petition for a writ of certiorari as a result of the Court of Appeals for the Fifth Circuit's ruling for the taxpayer on a closely related issue in Woods v. United States, 471 Fed. Appx. 320">471 Fed. Appx. 320↩ (5th Cir. 2012). The Supreme Court has not yet granted or denied the Government's petition.7. The Tax Court case did not address Todd I or Todd II and distinguished Gainer v. Commissioner, 893 F.2d 225">893 F.2d 225 (9th Cir. 1990). See Gustashaw v. Commissioner, T.C. Memo. 2011-195, 2011 Tax Ct. Memo LEXIS 191 at 24, aff'd, 696 F.3d 1124↩ (11th Cir. 2012).8. The cited opinions were: Fid. Int'l Currency Advisor A Fund, LLC v. United States, 661 F.3d 667">661 F.3d 667, 673-674 (1st Cir. 2011); Merino v. Commissioner, 196 F.3d 147">196 F.3d 147, 158 (3d Cir. 1999), aff'gT.C. Memo. 1997-385; Zfass v. Commissioner, 118 F.3d 184">118 F.3d 184, 191 (4th Cir. 1997), aff'gT.C. Memo. 1996-167; Illes v. Commissioner, 982 F.2d 163">982 F.2d 163, 167 (6th Cir. 1992), aff'gT.C. Memo. 1991-449; Gilman v. Commissioner, 933 F.2d 143">933 F.2d 143, 151 (2d Cir. 1991), aff'gT.C. Memo. 1989-684; and Massengill v. Commissioner, 876 F.2d 616">876 F.2d 616, 619-620 (8th Cir. 1989), aff'gT.C. Memo. 1988-427↩.9. For purposes of sec. 7482(b)(1), a partnership's principal place of business shall be determined as of the time the petition under sec. 6226↩ was filed with the Tax Court.10. While it appears AHG Investments was dissolved at some point after 2001, the status of AHG Investments was not conclusively established for purposes of petitioner's motion.↩11. We agree with McCrary v. Commissioner, 92 T.C. 827">92 T.C. 827 (1989), andTodd I↩ that the Blue Book formula and example represent the correct method of calculating the portion of an underpayment of tax to which the gross valuation misstatement penalty may be applied (i.e., that the formula represents how Congress intended the penalty to be applied). However we rule today that the formula yields a different result than the result reached in those cases.12. We acknowledge that our ruling today might lead to more trials on questions of valuation.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624969/	Four Twelve West Sixth Company, Petitioner, v. Commissioner of Internal Revenue, RespondentFour Twelve West Sixth Co. v. CommissionerDocket Nos. 1692, 3946United States Tax Court7 T.C. 26; 1946 U.S. Tax Ct. LEXIS 164; June 6, 1946, Promulgated 164 Decision will be entered under Rule 50. Pursuant to a plan of reorganization, petitioner acquired from a bondholders' protective committee certain depreciable and other assets of an insolvent corporation in exchange for 49 per cent of its common capital stock. Petitioner's remaining common stock and its outstanding preferred stock were sold for cash to outside interests. Held, petitioner's basis for depreciation is cost, which is measured by the fair market value of the stock issued for assets and the amount of liabilities assumed. J. Marion Wright, Esq., for the petitioner.B. H. Neblett, Esq., and T. M. Mather, Esq., for the respondent. Arnold, Judge. ARNOLD 26 OPINION.These proceedings involve income and excess profits taxes as follows:IncomeExcessDocket No.Yeartaxprofits tax16921939$ 506.66394619361,683.3919371,538.15$ 271.601938551.97The principal issue is the basis to be used for depreciation purposes, i. e., whether cost or fair market value. The other issue is whether petitioner realized additional income for the taxable years by virtue of collections on certain accounts and notes receivable which had no cost basis on petitioner's books. A third error, relating to the taxable year 1939, was apparently abandoned, as the allegations were not pressed.The stipulated facts are adopted as our findings of fact. The pertinent portions thereof are herein summarized.Petitioner is a California corporation, incorporated February 4, 1935. Its principal office is at San Francisco. Its business consists 27 of the ownership under lease and the operation of an office building and equipment therein, located at 412 West Sixth Street, 166 Los Angeles, California. It kept its books and filed its tax returns on the accrual basis. Its tax returns were filed in the first collection district of California.In May 1933 the Detwiler Corporation, a California corporation, hereinafter referred to as Detwiler, was in default on $ 294,000 face amount of its bonds. The bonds were a portion of an authorized issue of $ 500,000 first closed mortgage 6 1/2 per cent sinking fund gold bonds under a trust indenture executed in September 1923. They were secured by the unexpired term of a 99-year lease executed in 1912, a 14-story class A office building erected by the first lessee in 1914, the equipment, furniture, and fixtures therein, and certain notes and accounts receivable covering uncollected rent. Detwiler valued the building, machinery, and furniture on its books as follows: building, $ 1,433,575.47; machinery and equipment, $ 206,848.21; and furniture and fixtures, $ 3,734.34.The bondholders of Detwiler formed a bondholders' protective committee, hereinafter referred to as the committee, under an agreement dated May 25, 1933, for the purpose of attempting to save the lease, or, if not, to salvage as much as possible for167 the bondholders. Pursuant to the terms of the bondholders' protective agreement, the holders of $ 260,500 face value of the $ 294,000 of bonds outstanding deposited their bonds with the committee.After various negotiations the committee and S. Waldo Coleman, representing certain San Francisco interests experienced in building management and operation, developed a plan. Under date of September 5, 1934, the committee advised the bondholders of the plan and urged its adoption. Briefly, the plan provided for the formation of a new California corporation, all of the preferred stock and 51 percent of the common stock of which would be acquired by the Coleman interests, and 49 per cent of the common would be acquired by the bondholders of Detwiler. The committee was to cause foreclosure under the trust indenture, bid in the Detwiler properties at the foreclosure sale, and transfer them to the new company for 49 per cent of its common stock. The Coleman interests were to purchase from the new company all of its preferred and 51 per cent of its authorized shares of common stock for a sum not in excess of $ 100,000. Such sum was to be used by the new company to meet the following estimated168 expenses and liabilities: unpaid and delinquent taxes, $ 23,108.47; trustee's fees, advances by trustee, costs, and expenses of foreclosure, pro rata distribution to dissenting bondholders, etc. $ 21,922.95; the committee's expenses, $ 5,000; the title company's fee, $ 822; costs of incorporation, alterations and improvements, $ 25,000 28 to $ 35,000; and cash working fund, $ 10,000. If less than $ 100,000 was needed the number of shares of common stock was to remain undiminished and a smaller number of preferred shares issued. The preferred stock was entitled to 7 per cent dividends, cumulative after the first five years, was callable at not in excess of 5 per cent, was convertible into common at two for one, had equal voting rights with common, and was entitled to the benefit of a sinking fund until all preferred shares were purchased or redeemed.On October 3, 1934, the committee notified the Metropolitan Trust Co., Los Angeles, successor trustee under the trust indenture of September 1, 1923, that it had adopted the plan aforementioned and proposed to carry it out and make it effective. Notice of default by Detwiler was duly given and request and demand was made on the169 trustee to sell under the trust indenture and carry out the escrow instructions given therewith.On February 11, 1935, the trustee offered the leasehold properties mentioned above for sale at public auction to the highest bidder for cash. Representatives of the committee bid for the entire properties the sum of $ 44,000 in cash, which was the only bid made at the sale and was, therefore, accepted by the trustee. Payment of the bid price was made with $ 17,754.94 in cash and the application of $ 260,500 principal amount of deposited bonds, together with the appurtenant interest coupons in payment of the balance of $ 26,245.06. The trustee applied the cash in payment of preferred claims as follows:Cash advanced by Bank of America, trustee$ 9,504.51Interest thereon to Feb. 11, 19351,867.26Trustee's fee to Feb. 11, 1935191.67Trustee's foreclosure fee2,250.00Expenses of sale522.40Revenue stamps44.00Payments to nonassenting bondholders3,375.10Total17,754.94The $ 17,754.94 in cash was advanced by the Coleman interests, as the new company (the petitioner herein) was not, on the date of sale, authorized to issue its capital stock.The nonassenting170 bondholders held bonds in the principal amount of $ 33,500, so that the $ 3,375.10 paid them was equal to 10.0749 of the face amount of their bonds, which is precisely the ratio of value assigned to the $ 260,500 face amount of bonds applied to the purchase price of $ 44,000 for the leasehold assets.Pursuant to the plan, petitioner issued 521 shares of its no par common stock to the committee for assets, and 542 shares of no par common and 600 shares of preferred to the Coleman interests for cash. Later in 1935 petitioner issued 260 more shares of preferred to the Coleman 29 interests for $ 26,000. During the taxable year petitioner redeemed and retired 530 shares of preferred stock at 105.The opening entries on petitioner's books show that the Coleman interests, represented by North American Investment Co., and California Properties, Inc., assignees of S. Waldo Coleman and in no way related to or connected with Detwiler, invested $ 60,000 in petitioner's capital stock. North American invested $ 15,000, which was represented by 150 shares of preferred and 135 1/2 shares of common; California Properties invested $ 45,000, which was represented by 450 shares of preferred 171 and 406 1/2 shares of common. The entire $ 60,000 was allocated to preferred on the books and no part thereof was allocated to the 542 shares of common acquired with the 600 shares of preferred. The 521 shares issued to the bondholders were set up on the books at a value of $ 22,924.25, and the same value was shown for the total number of shares of common stock outstanding, namely, 1063 shares.Petitioner's books show the cost of the Detwiler properties to it as 521 shares of common capital stock and $ 66,174.78 of obligations assumed and paid. The 521 shares of common stock were valued on the books at $ 22,924.25, or a total cost per books of $ 89,099.03. The valuation for the common stock was explained with the statement that a "valuation of $ 17,526.14 was placed on all assets, other than cash in the sum of $ 5,398.11, acquired in exchange for the above stock by appropriate resolution of the Board of Directors of the Four Twelve West Sixth Co., on March 31, 1935, as per the minutes of their meeting of that date."The office building, machinery and equipment, and furniture and fixtures were set up on petitioner's books originally at $ 75,000. Adjusting journal entries dated 172 December 31, 1935, allocated this sum as follows: building, $ 63,862.64; machinery, $ 11,026.09; and furniture, $ 111.27. During 1936 an independent appraisal fixed the fair market value of these assets at $ 150,000 as of February 11, 1935. By entries dated December 31, 1936, petitioner increased the book value of each of the above assets by 100 per cent.In addition to the depreciable assets aforementioned, petitioner acquired from the bondholders' committee prepaid insurance premiums in the amount of $ 3,846.59 and prepaid taxes in the amount of $ 5,094.93.Subsequent to the taxable years a revenue agent fixed the value of the unexpired term of the lease at $ 67,468.94 as of February 11, 1935. By journal entries dated June 30, 1940, petitioner set up this value for its leasehold upon its books of account.The fair market value of the depreciable properties at the time acquired in 1935 was: buildings, $ 127,725.28; equipment, furniture and fixtures, $ 22,274.72; unexpired portion of lease, $ 67,468.98. 30 Accounts and notes receivable acquired in 1935 with the depreciable assets had a fair market value equal to recoveries thereon in subsequent years, which recoveries amounted173 to $ 9,342.82 in 1935; $ 4,544.86 in 1936; $ 1,779.48 in 1937; $ 374.88 in 1938; $ 51.25 in 1939; or a total of $ 16,093.29. Petitioner set up receivables on its books totaling $ 93,716.19 and offset them by reserves in the same amounts.Petitioner's income tax return for 1935 showed depreciable assets as follows:Buildings$ 63,862.64Machinery and equipment11,026.09Furniture and fixtures201.02Other depreciable assets28,183.04In its income tax returns for the taxable years petitioner used the fair market values of the building, machinery, and fixtures as the basis for depreciation.The deficiency notices show that respondent increased petitioner's income by the amounts recovered in each taxable year, as above set forth, and disallowed the following amounts from the depreciation deduction claimed by petitioner in each year: 1936, $ 4,798.91; 1937, $ 4,797.53; 1938, $ 4,808.78; 1939, $ 4,808.78. Respondent explained his depreciation adjustment as follows (Docket No. 1692):The basis used in your return and in the report of examination was the fair market value of the assets, whereas, under section 113 (a) of the Revenue Act of 1934, since none of the exceptions174 therein apply, the correct basis is the cost of the assets to you, even though acquired at a bargain price. The cost is measured by the liabilities assumed and the fair market value of the common stock issued therefor, which value is held to be not more than the $ 22,924.25 originally assigned at incorporation, eliminating the paid in surplus later set up. The concurrent issue of 542 shares of common stock with 600 shares preferred, for $ 60,000.00 cash, all of which was assigned as value of the preferred stock, would preclude any claim for an increased value for the common stock issued for other assets.The first issue is the basis to be used for depreciation purposes. In its 1935 return petitioner used the book value as its basis for depreciation. For the taxable years 1936, 1937, 1938, and 1939 petitioner used the fair market value as its basis, which represented a 100 per cent increase in the depreciable base for its building, its machinery and equipment, and its furniture and fixtures. The fair market values of the assets were fixed by an independent appraisal and are stipulated by the parties hereto to be the values of the assets acquired by petitioner as of February 11, 175 1935. In computing the deficiencies herein the respondent fixed petitioner's "cost basis" for depreciation purposes as $ 74,888.73. This sum is equal to the total of petitioner's book values for its building, machinery, and equipment assets as adjusted on December 31, 1935 (building, $ 63,862.64, and machinery, $ 11,026.09, = $ 74,888.73).31 Petitioner's first contention is that the transactions involved herein constitute a reorganization within the meaning of that term under section 112 (a), (b) (3), (4), (5), (g) (1) (B) and 113 (a) (7) and (8), Revenue Act of 1934, and that the basis of the property in its hands is the same as the basis of the property to Detwiler, which was in excess of the fair market value of the depreciable assets. Secondly, petitioner contends that the basis for depreciation is the fair market value of the property when acquired in exchange for its common stock.We agree that the present transactions come within the definition of a reorganization as that term is defined in section 112 (g) (1) (B) of the Revenue Act of 1934. The pertinent portion of the definition states: "The term 'reorganization' means * * (B) the acquisition by one corporation176 in exchange solely for * * part of its voting stock * * * of substantially all of the properties of another corporation * * ." Here, the bondholders of Detwiler, pursuant to the plan, exchanged all of its properties, which were acquired at the foreclosure sale, solely for a part of petitioner's voting stock, i. e., 49 per cent of the common stock. Under these facts a statutory reorganization occurred. , affirming . The indebtedness of Detwiler assumed by petitioner is to be disregarded under section 213 (g) (1), Revenue Act of 1939, amending section 112 (g) (1), Revenue Act of 1934.The general rule upon the sale or exchange of property is that the entire amount of the gain or loss shall be recognized. Sec. 112 (a), Revenue Act of 1934. The exceptions to this general rule are found in section 112 (b), subsections (1) to (5), inclusive. While petitioner refers to subsections (3) to (5), inclusive, in setting up its argument on brief, the emphasis is placed on subsection (3). This subsection prohibits recognition of gain or loss, in so far as177 here pertinent, if stock or securities in one corporation are exchanged solely for stock or securities in another corporation in pursuance of a plan of reorganization, each corporation being "a party to a reorganization" as defined in subsection 112 (g) (2). Petitioner's reliance upon this subsection is for the purpose of securing its transferor's basis for depreciation, unadjusted by any recognized gain or loss on the transaction as provided in section 113 (a) (7) of the Revenue Act of 1934. 1178 32 Assuming, arguendo, that the transfer here comes within subsection 112 (b) (3), we are, nevertheless, of the opinion that petitioner can not qualify under section 113 (a) (7). That section relates to transfers to corporations where control of the property remains in the same persons. It is an exception to the general rule that the basis of property shall be the cost of such property. Sec. 113 (a). The property in question was acquired by petitioner after December 31, 1917, in connection with a reorganization. But an interest or control in such property of 50 per cent or more did not remain immediately after the transfer in the same persons or any of them. The stockholders of Detwiler and Detwiler were eliminated under the plan of reorganization. The only persons interested in the property transferred who continued to have an interest therein after the reorganization were the bondholders. ;. After the reorganization the bondholders of Detwiler held only 49 per cent of the common stock. 179 The Coleman interests upon completion of the plan of reorganization held 51 per cent of the common and all outstanding preferred stock, which had equal voting rights with common. It can not be said, therefore, that the same persons or any of them held an interest or control in the property of 50 per cent or more. .Petitioner attempts to capitalize on the failure of the books to record the issuance of stock to the Coleman interests immediately after the transfer of the property. But the plan of reorganization clearly provided that the Coleman interests should have at least 51 per cent of the voting stock, and it is the situation upon completion of the plan, rather than any failure to immediately issue the stock, that is determinative of whether petitioner qualified under section 113 (a) (7). It is perfectly clear from our findings that all of petitioner's preferred stock and 542 out of 1,063 shares of its common stock were held by the Coleman interests. It is equally clear that the Coleman interests were outsiders, who bought a majority interest in petitioner's stock for cash.Section 113 (a) (8) of the 1934 Act180 is also inapplicable, since (A) thereof relates to a transaction described in section 112 (b) (5) and (B) relates to property acquired as paid-in surplus or as a contribution to capital. Section 112 (b) (5) deals with transfers to a corporation controlled by the transferor, a situation not here involved. The property here was acquired by petitioner by issuance of its stock and not as a contribution to capital or as paid-in surplus.In view of our determination that petitioner is not entitled to the basis of the transferor under section 113 (a) (7) or (8) of the Revenue Act of 1934, as provided in section 113 (a) (16) of the Revenue Acts 33 of 1936 and 1938, we must determine petitioner's basis under the general rule provided in section 113 (a) of the Revenue Acts of 1936 and 1938, which is the cost of such property. The facts show that petitioner issued 521 shares of its common stock and assumed $ 66,000 of liabilities in order to acquire properties having an admitted fair market value of over $ 247,000. 2 The value originally set up on petitioner's books for the 521 shares of stock was $ 22,924.25. Petitioner contends that the basis of the property acquired was "cost," 181 measured by the value of the stock exchanged therefor plus the cash paid and the liabilities assumed. It is further contended that the value of the stock must be determined by the fair market value of the assets acquired, citing numerous authorities.Respondent agrees that the cost of the property acquired by a corporation for its stock is the fair market value of the stock on the date issued. ; affd., , and cases there cited. But it is contended that the fair market value of the property turned in only becomes important when that is the only measure of the cost of the stock. It is contended that here the preferred stock182 and 51 per cent of the common stock were sold for cash and there is no evidence that the $ 22,924.25 allocated to 521 shares of common is not the fair market value of the shares issued for the property.It is apparent from the book entries that the original amount set up on petitioner's books for the common stock did not, nor was it intended to, represent the value thereof. The entries with respect to the preferred and common stock issued to the Coleman interests and the treatment of the preferred stock issue show that the preferred stock represented the cash investment and the common stock evidenced the control of petitioner secured by the Coleman interests. Petitioner's allocation of the cash paid in to its preferred and the redemption of 530 shares during the taxable years, together with the convertible rights and the noncumulative provisions of the stock for the first five years, indicate that the preferred stock was regarded more as a loan arrangement than an ordinary corporate preferred issue. It is not surprising therefore that the original amount set up on petitioner's books for 521 shares of common continued to be the book value for 1,063 shares, since the 521 shares represented183 the assets acquired and the 542 shares represented the management, operation, and control of the acquired assets. It seems obvious that the bondholders of Detwiler desired operation of the properties by the Coleman interests and that they accepted the plan of reorganization here consummated with 34 full knowledge that control of the properties passed out of their hands and into the hands of the Coleman interests.The circumstances under which the petitioner's stock was sold to the Coleman interests were not therefore determinative of the fair market value of petitioner's common stock. 3 There was in fact no market for such stock. The only parties interested therein were the bondholders and the Coleman interests. The considerations that moved them to acquire the stock were entirely foreign to conditions prevailing in a market created by buyers and sellers. Under these facts we think the value of the stock must be deemed equivalent in value to the property for which issued. . Since the parties have stipulated the values of the depreciable assets acquired, we hold that petitioner is entitled to use those 184 values as its bases for depreciation.Respondent's determination that collections during the taxable years on accounts and notes receivable acquired in exchange for common stock constituted income is approved, as such assets had a zero basis, being offset by reserves. , affirming .Decision will be entered under Rule 50. Footnotes1. (7) Transfers to corporation where control of property remains in same persons. -- If the property was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 50 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made. * * *↩2. This total, as shown by our findings, consists of building, $ 127,725.28; equipment, furniture and fixtures, $ 22,274.72; unexpired portion of lease, $ 67,468.98; accounts and notes receivable, $ 16,093.29; cash, $ 5,398.11; prepaid taxes, $ 5,094.93; and paid-up insurance, $ 3,846.59.↩3. .↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624972/	William M. Wilson and Dorothy Gwynne Wilson v. Commissioner.Wilson v. CommissionerDocket No. 24987.United States Tax Court1953 Tax Ct. Memo LEXIS 45; 12 T.C.M. (CCH) 1349; T.C.M. (RIA) 53377; November 30, 195345 Held, the petitioners have failed to show that they incurred a loss in 1944 on the sale of residential property within the meaning of Sec. 23 (e) (2) of the Internal Revenue Code. William M. Wilson, Esq., R.F.D. #3, Sumter, S.C., pro se. A. F. Barone, Esq., for the respondent. TIETJENSMemorandum Findings of Fact and Opinion TIETJENS, Judge: The respondent determined a deficiency in income tax of $703.40 against the petitioners, husband and wife, for the calendar year 1944. The question presented is whether an allowable loss was realized by petitioners from the sale of residential property within the meaning of section 23 (e) (2) of the Internal Revenue Code46 . Findings of Fact William M. Wilson (hereinafter referred to as the petitioner) and Dorothy Gwynne Wilson are husband and wife and reside in Sumter, South Carolina. Their joint income tax return for the calendar year 1944 was filed with the collector of internal revenue at Columbia, South Carolina. In 1924 the petitioners bought a house and lot in Rock Hill, South Carolina, for use as their personal residence. They subsequently acquired an adjoining lot. Between 1924 and 1929 the petitioners resided on the property, and after they moved away in 1929 the property was rented in 1930 and 1931. In the latter year the petitioner's sister lived on the property for a short period of time. In 1938 the petitioners entered into a contract to sell the property for $5,000 to the nephew of William M. Wilson. As payment of the purchase price the nephew was to assume the obligation of three mortgages on the property and to execute a promissory note for the remainder of the purchase price. Although the nephew resided on the property, he made none of the agreed payments for its purchase until 1943 or 1944, at which time he made full payment and received a deed to the property from the petitioner. 47 At the same time he resold the property for a net amount of between $7,000 and $7,300. In their return for the calendar year 1944 the petitioners claimed a loss on the sale of $2,208, based on a fair market value for the house and lot of $8,000 less depreciation of $687.50. Opinion The Internal Revenue Code provides that in computing net income an individual may deduct any uncompensated loss incurred in a transaction entered into for profit, even though the transaction was not connected with the individual's trade or business. Section 23 (e) (2). Where the loss is on the sale of a residential property purchased by the taxpayer for use as his personal residence, the Treasury regulations require that in order for the transaction to be considered as one entered into for profit the property must prior to sale be rented or otherwise appropriated to income-producing purposes and be used for such purposes up to the time of the sale. The allowable loss deduction in such a transaction may not exceed "the excess of the value of the property at the time it was appropriated to income-producing purposes (with proper adjustment for depreciation) over the amount realized from the sale". Regulations48 111, section 29.23 (e)-1. We think the respondent's determination to disallow the claimed deduction must be sustained for a number of reasons, but primarily because the petitioners have failed to carry their burden of proof in showing the determination to be erroneous. First, in order to be deductible, the loss must be shown to have been incurred in a transaction entered into for profit. In this respect the petitioner testified that in his opinion the property was worth $8,000 in 1938. Nevertheless, in that year, he entered into a contract to sell the property for $5,000 to his nephew. This he explained, testifying in his own behalf, by saying: "I think the property, I could have gotten had I tried to sell to an outsider, which I definitely would not do, I believe I could have gotten $8,000 for it at the time". He further stated, "The transaction took place in the family. I sold it to my nephew. In my opinion the property was well worth $8,000 when I turned it over to my nephew at $5,000…". Also, the petitioner said: "Now frankly I did not get out and try to sell the place * * * My nephew was pretty hard up at the time". This testimony, in our opinion, effectively negates a transaction49 entered into for profit, and if the transaction was not one for profit no loss is allowable. Second, we are faced with deficiencies in proof as to the time the property was "appropriated to income-producing purposes". In his petition it is alleged that "In the year 1939, petitioners converted their former residence to business property and rented the same from that year until 1944 * ." At the hearing the petitioner testified the property was first rented in 1930, and that in 1931 his sister lived in the house. From 1931 to 1938 when the contract of sale to the nephew was signed the record is nebulous as to the use to which the property was put. On this point we have only the following colloquy with the petitioner: "Q. When was this converted into income producing property? "A. I am afraid the Judge will have to say that. When I moved out, as well as I remember, it was rented sporadically, not to the family alone, first to Mr. and Mrs. Oakley. "THE COURT: What year was that? "THE WITNESS: 1930 and 1931, then it was vacant and then my sister lived there. I don't know how long, probably six months or a year. "THE COURT: Did she pay any rent to you? "THE WITNESS: As well50 as I remember she did not. I think she kept up some of the buildings as payment and they, thinking she was going to buy it, whether there was a contract or not, spent money on it. * * " Proof of this character falls far short of establishing that the property was being used for business purposes up to the time of the sale. Third, the petitioner has wholly failed to convince us that the respondent's determination that the property had a fair value of $5,000 at the time it was converted to business use is in error. In this respect his testimony was that he bought the property from his mother in 1924 for $2,750. He stated that he spent $9,000 on improvements between 1924 and 1929. Thereafter he made no improvements though he testified his sister also made some improvements while she lived in the house. The record nowhere gives any indication of the character of the improvements and the petitioner's testimony rests on no other basis than his own assertion. The only evidence of value introduced on behalf of the petitioner was his own opinion and that of his nephew to the effect that the fair value of the property in 1938 was $8,000. Neither the petitioner nor his nephew possessed any51 expert knowledge of real estate values. The record contains no more than a passing reference to sales of comparative property in the vicinity and we can find no factual support for the opinion of either the petitioner or his nephew as to the property's fair market value. We have carefully considered the entire record in this case and after giving sympathetic attention to the petitioner's testimony and that of his nephew, can only conclude that the burden of showing that the valuation placed on the property in question by the respondent was incorrect has not been sustained. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624973/	Peyton G. Nevitt and Anna M. Nevitt, His Wife, Petitioners, v. Commissioner of Internal Revenue, RespondentNevitt v. CommissionerDocket No. 37624United States Tax Court20 T.C. 318; 1953 U.S. Tax Ct. LEXIS 165; May 13, 1953, Promulgated 165 Decision will be entered for the respondent. 1. Petitioners received distributions in the amount of $ 3,802.50 in 1946, representing accumulated dividends on preferred stock pursuant to a "Plan of Recapitalization." Held, the $ 3,802.50 is taxable as ordinary income under section 115 (a), Internal Revenue Code, since the distributing corporation had sufficient earnings or profits.2. The $ 3,802.50 was reported on an enclosure to petitioners' 1946 tax return as a return of capital and was not included as income. Held, for the purpose of determining whether petitioners omitted 25 per cent of the gross income to make the 5-year statute of limitations applicable under section 275 (c), this $ 3,802.50 constitutes omitted income. Estate of C. P. Hale, 121">1 T. C. 121, followed. Peyton G. Nevitt, for the petitioners.A. Russell Beazley, Jr., Esq., for the respondent. Black, Judge. BLACK 319 The Commissioner has determined a deficiency in petitioners' income tax of $ 1,020.51 for the calendar year 1946, which is explained as follows:1. $ 3,802.50-Dividends from American Woolen Company preferred stock. A taxpayer, on the cash basis of accounting, is required to report income for the taxable year in which received. You omitted this item from your dividend income reported on line 3, page 1, Form 1040, and referred to your enclosure # 4 in which you stated the payment was received and "not listed for income tax purposes." The available references in this office indicate the said cash dividend constituted a taxable dividend in the opinion of counsel167 for the corporation itself and has therefore been added to your taxable income for 1946. The Statute of Limitations with respect to deficiency tax liability for 1946 is extended to five years because of the "omission" of this income and Section 275 (c), Internal Revenue Code, is quoted as follows. * * 3. $ 468.83-Loss on wash sales of securities. Section 118, Internal Revenue Code, deals with losses from wash sales of stock or securities * ** * * It cannot be recognized that you were a dealer in securities during 1946 for this purpose since a dealer in securities has been defined as a merchant of securities with an established place of business regularly engaged in the purchase of securities and their re-sale to customers, that is one who as a merchant buys securities and sells them to customers, with a view to the gains and profits that may be derived therefrom. Taxpayers who buy and sell or hold securities for investment or speculation, irrespective of whether such buying or selling constitutes the carrying on of a trade or business, are not dealers in securities (Section 29.22 (c) (5), Regulations 111, Internal Revenue Code).Petitioners contest the above adjustments168 and assert that the 3-year statute of limitations is applicable and bars the deficiency. The other adjustments are not contested.FINDINGS OF FACT.The facts have been stipulated and are found accordingly.Peyton G. and Anna M. Nevitt, petitioners herein, filed a joint Federal income tax return for the calendar year 1946 with the collector of internal revenue for the district of Maryland at Baltimore.On December 31, 1945, the petitioners were the owners of 65 shares of 7 per cent cumulative preferred stock of the American Woolen Company, New York, New York. The American Woolen Company during the year 1946 effected a Plan of Recapitalization which provided for the voluntary exchange of the 7 per cent cumulative preferred stock for 1 1/2 shares of a newly created $ 4 cumulative convertible prior preference stock and $ 8.50 in cash, and the 7 per cent cumulative preferred stockholders who did not voluntarily participate 320 in the exchange would be paid the accumulated and unpaid dividends upon the 7 per cent cumulative preferred stock not so exchanged. The Plan of Recapitalization of the American Woolen Company sets forth exchange requirements as follows:The Company is offering169 for a limited period after the effective date of the Registration Statement, to holders of its outstanding shares of 7% (Cumulative) Preferred Stock (hereinafter sometimes referred to as the "Preferred Stock") pursuant to the Plan of Recapitalization dated April 30, 1946, the privilege of voluntarily exchanging such Preferred Stock, if and when the Plan shall be declared effective, for Prior Preference Stock and cash on the basis of 1 1/2 shares of Prior Preference Stock and $ 8.50 in cash for each share of Preferred Stock, including all rights to dividends accumulated and unpaid in respect of the Preferred Stock so exchanged. The Plan will become effective, if 80% or more of the outstanding Preferred Stock shall have been deposited for exchange by the close of business on October 2, 1946 or such later date as shall be specified in accordance with the Plan, and may become effective upon deposit of a lesser percentage in the discretion of the Board of Directors of the Company. If the Plan is consummated without the assent of the holders of all the Preferred Stock, the accumulated and unpaid dividends upon the Preferred Stock not so exchanged will be paid promptly in cash in full. 170 * * The earnings and profits of the American Woolen Company as of December 31, 1945, accumulated since January 1, 1941, amounted to $ 20,239,187.23, including a $ 9,000,000 reserve for war contingencies. The income of the American Woolen Company for the year ended December 31, 1946, amounted to $ 23,098,178.13, including a $ 3,000,000 provision for general contingencies. The combined sums of earnings and profits accumulated by the American Woolen Company as of December 31, 1945, and the income of the American Woolen Company as of the year ended December 31, 1946, amounted to $ 43,337,365.36, including a $ 3,000,000 provision for general contingencies. Total distributions of the American Woolen Company to all stockholders of all classes of stock during the year 1946 amounted to $ 23,602,665.66.In a letter addressed to the preferred stockholders the American Woolen Company stated, under the heading of "Tax Considerations," the following:It is the opinion of Counsel that on the other hand, under present laws, if and to the extent accrued dividends on the 7% Preferred stock are paid in cash, all of such dividends will constitute taxable income.The petitioners did not exchange171 their 7 per cent cumulative preferred stock for 1 1/2 shares of new $ 4 prior preference stock plus $ 8.50 in cash as was provided in said plan, but elected to receive payment in cash for accrued dividends on the 7 per cent cumulative preferred stock amounting to $ 58.50 per share. The petitioners received during the year 1946 a sum of $ 3,802.50 as a distribution on the 7 321 per cent cumulative preferred stock of the American Woolen Company. The petitioners on their joint income tax return for 1946 reported the said sum of $ 3,802.50 as follows:Payments received and not listed for income tax purposes -- 19461. Accumulated dividends on 65 shares American Woolen Co., preferred stock -- Distribution of Capital -- Immediately reinvested therein $ 3,802.50Petitioners also received dividends from other sources in the amount of $ 689.55 which was reported as income in 1946. On their joint income tax return for 1946, the petitioners reported gross income in the total amount of $ 5,283.68, consisting of $ 4,590 received as a United States army officer, $ 689.55 dividends, and $ 4.13 interest.OPINION.Petitioners received the sum of $ 3,802.50 in 1946 from the American172 Woolen Company which represented $ 58.50 for each of their 65 shares of 7 per cent cumulative preferred stock. The respondent determined that the $ 3,802.50 was payment to petitioners of accumulated dividends and was taxable as ordinary income. The petitioners contend that since the company effected a Plan of Recapitalization in 1946, the payment to them of the accumulated unpaid dividends on their 7 per cent cumulative preferred stock was made out of capital of the company and was not taxable. Petitioners did not participate in the exchange of their 7 per cent cumulative preferred stock but chose to retain their stock and collect the accumulated and unpaid dividends. Section 115 (a) defines a dividend as follows:SEC. 115. DISTRIBUTIONS BY CORPORATIONS.(a) Definition of Dividend. -- The term "dividend" when used in this chapter * * * means any distribution made by a corporation to its shareholders, whether in money or in other property, (1) out of its earnings or profits accumulated after February 26, 1913, or (2) out of the earnings or profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the173 taxable year), without regard to the amount of the earnings and profits at the time the distribution was made.Under section 115 (a) of the Code, when distributions are made from the earnings and profits of the distributing corporation accumulated after February 28, 1913, or from the current year's earnings or profits, they are classified as dividends and are fully taxable. Bazley v. Commissioner, 331 U.S. 737">331 U.S. 737. The American Woolen Company as of December 31, 1945, had earnings and profits accumulated since January 1, 1941, amounting to $ 20,239,187.23. The earnings and profits of the company for the year ended December 31, 1946, amounted to $ 23,098,178.13. The total accumulated earnings and profits of the American Woolen Company as of December 31, 1946, amounted to $ 43,337,365.36 before diminution by any distributions made by the 322 company during the year 1946. The total amount of distributions made by the company to all stockholders of all classes of stock during the year 1946 amounted to $ 23,602,665.66. The sum of $ 3,802.50 received by the petitioners in 1946 from the American Woolen Company is a taxable dividend within the broad174 scope of the definition of a dividend as defined by section 115 (a) of the Internal Revenue Code.The Commissioner determined that since the petitioners did not include the sum of $ 3,802.50 received from the American Woolen Company during the taxable year 1946 in their gross income on their income tax return, the deficiency in the tax could be assessed and collected within 5 years from the date the return was filed as provided by section 275 (c) of the Code. The petitioners contend that the 5-year statute of limitations is not applicable as they reported the receipt of the $ 3,802.50 on an enclosure to their 1946 return. In reporting gross income on their 1946 income tax return, the petitioners reported $ 5,283.68, 25 per cent of which is $ 1,320.42. The amount of income omitted from gross income in dispute here is the $ 3,802.50 received from the American Woolen Company. The fact that the petitioners attached a schedule to their return stating that they had received this amount but that such amount was not taxable does not relieve them from the effect of having omitted this amount from their gross income. In Estate of C. P. Hale, 121">1 T. C. 121, 175 the receipt of a certain amount was omitted from gross income on the return and reported in a separate schedule attached to the return and defined as a capital receipt. The Court in holding that the 5-year statute of limitations under section 275 (c) was applicable said at page 124:The amount was treated as a capital receipt. It was reported as such and not as income received. Failure to report it as income received was an omission resulting in an understatement of gross income in the return. The effect of such designation and failure to report as income was in substance the same as though the items had not been set forth in the return at all. * * See also Katharine C. Ketcham, 2 T. C. 159, affd. 142 F.2d 996">142 F. 2d 996. Therefore, since the petitioners omitted from gross income an amount in excess of 25 per cent of the gross income disclosed on their return, the income tax for the year 1946 is assessable and collectible within 5 years from the date the return was filed.The respondent disallowed losses claimed on petitioners' tax return of $ 468.83 representing losses on wash sales of securities. Respondent contends that176 no loss is allowable under section 23 (e) (2), Internal Revenue Code, and a deduction is allowable under 23 (f) only for dealers in securities, but petitioners are not dealers. Neither evidence nor argument was presented by petitioners who have the burden of proof and respondent's determination is therefore sustained.Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624974/	Arthur William Peterson and Dorothy E. Peterson v. Commissioner.Peterson v. CommissionerDocket No. 885-67.United States Tax CourtT.C. Memo 1970-181; 1970 Tax Ct. Memo LEXIS 180; 29 T.C.M. (CCH) 802; T.C.M. (RIA) 70181; June 29, 1970, Filed George Constable, Seattle First Nat'l Bank Bldg., Seattle, Wash., for the petitioners. Millard D. Lesch, for the respondent. FORRESTERMemorandum Findings of Fact and Opinion FORRESTER, Judge: Respondent has determined deficiencies in petitioners' income tax for the years 1962, 1963 and 1964, in the amounts of $3,445.41, $157.50, and $7,020.84, respectively. Respondent also has determined a penalty tax for each year under section 6653(a) 1 of the Internal Revenue Code of 1954 in the amount of $172.27, $7.88, and $351.04, respectively. Concessions having been made by the parties, the remaining issues are: (1) Whether petitioners were engaged either in the business of logging or grass farming, or both, on their property located at Stehekin, Washington, and are therefore entitled to a business expense deduction under section 162 for expenses that are properly substantiated as relating to either or both operations. (2) In the years 1963 and 1964, whether any expenses attributable to the operation of the above-mentioned property that182 are held not to be deductible as a business expense under section 162 are deductible under section 182 as "land clearing expenses"; and if so, whether petitioners have properly elected to take a deduction for those expenses pursuant to the election provisions of section 182. (3) Whether petitioners have substantiated the amount of certain expenses, incurred in the operation of their apple orchard business at Manson, Washington, as deductible business expenses under section 162. (4) Whether petitioners are entitled to a depreciation deduction under section 167 for buildings and other assets utilized in the operation of their Stehekin, Washington, property. (5) Whether petitioners are entitled to depreciation deductions under section 167 for certain buildings utilized in the operation of their apple orchard business at 803 Manson, Washington, and for the apple trees. (6) Whether petitioners were negligent (section 6653(a)) in computing their income tax for 1962, 1963, and 1964 and therefore subject to a penalty tax. General Findings of Fact Applicable to All Issues Some of the facts have been stipulated and are so found. The stipulations and exhibits attached thereto183 are incorporated herein by this reference. Petitioners are Arthur W. Peterson (hereinafter sometimes referred to as Arthur) and his wife, Dorothy E. Peterson (hereinafter sometimes referred to as Dorothy), both presently residing at Manson, Washington. Their joint income tax returns were filed for the calendar years 1962, 1963, and 1964 with the district director of internal revenue at Tacoma, Washington. Petitioners are cash basis taxpayers. During the years in issue, petitioners owned and operated a commercial apple orchard at Manson, Washington, that had produced its first commercial crop in 1945. The orchard consisted of two separate parcels of land, totaling 35 acres, with 48 trees per acre. Also located on the property are six buildings which are used in connection with the orchard operation. These include four buildings that house employees, a community building used for bathing, laundry and storage, and a large workshop building. The operation of the orchard is a yearround affair, requiring the permanent employment of five people and the hiring of at least twelve additional men during the harvest season, which extends from about September 25 to November 1 of each year. 184 During the years in issue the laborers received hourly wages and, in addition, were provided with living quarters, electric power, and firewood as further compensation. Both Arthur and his son, Dale Peterson (hereinafter sometimes referred to as Dale), managed the orchard. Dale was almost entirely in charge of the orchard business and paid most of its expenses during the spring, summer and fall of each year, when Arthur was away managing the operation of his other property at Stehekin, Washington. In addition, part of the business expenses of the orchard each year was paid by the Lake Chelan Fruit Growers Association, a co-operative organization which sold petitioners' apple crop. During the years in issue petitioners received the following income, actually or constructively, from their orchard operation: Calendar YearAmount1962$45,522.77196365,745.72196447,392.53In 1962, 1963, and 1964, respectively, $17,019.24, $13,421.71, and $16,336.54 in orchard expenses were paid by Dale and $11,930.55, $26,731.73, and $21,745.35 in orchard expenses were paid by the Lake Chelan Fruit Growers Association. Respondent now agrees that those amounts are fully185 deductible business expenses of the orchard for the years in issue. As noted above, during significant periods of the years in issue Arthur was not present at the orchard. At such times he was at petitioners' property at Stehekin, Washington, a 110 acre tract of land which was purchased in 1943 for $3,700. The property is approximately 45 miles from Manson, at the northwest end of Lake Chelan, borders on the Stehekin River, and is accessible only by boat or airplane. When the property was purchased, all but eight to ten acres were covered with timber. Arthur began cutting the timber in 1945 and continued to do so up to and including the years in issue. In 1945 Arthur also began construction of a sawmill on the Stehekin property that commenced operation in 1947 but was not entirely completed till 1948. Electricity for the operation of the mill and for other electrical needs at Stehekin was supplied by a hydroelectric generating plant. During the years in issue, the plant consisted of two hydroelectric generators (one installed in 1945 and the other in 1955), and the attendant foundations, footings and water transmission facilities. When the timber was cut, it was either processed186 into lumber in the sawmill and sold, or stored on the property for future processing. Timber was cut during the years in issue, but none was processed at the sawmill because of a lack of available power from the generating plant. The reason for this was that Arthur had entered into a contract with the local public utility district of Stehekin allowing the district to use the generating plant to supply electricity for the area in 1962 and 1963. Though the contract provided that Arthur was to receive power for the Stehekin property during these two years, the district refused to make it available. A dispute over the contract continued into 1964 which 804 prevented the supply of electricity to the mill in that year. Despite his inability to process the timber, Arthur continued to cut and store it during this period with the intention to resume the mill operation as soon as the electric power was restored. Approximately 200,000 board feet of timber was cut during this period when the mill was not in operation. During the years in issue and prior thereto, tree stumps were blasted and removed from the soil; the holes filled in with soil from the surrounding area and grass seed planted187 at the Stehekin property. Arthur's primary purpose for planting the grass seed was to enrich the soil. He also intended to produce and market both bluegrass seed and the stalks of bluegrass as hay, however, he never sold any hay because the grass crop was too dense for his mowing equipment. He did not sell any grass seed because its weed seed content had not yet been reduced to a level which met the requirements for sale of Washington State's Agricultural Department. Other than timber cutting and clearing and grass planting, the only activities carried on at Stehekin during the years in issue were river protection work to prevent erosion and flooding of the land which consisted primarily of diversion of water routes; brush burning to comply with forestry regulations; mowing grass and "repairing" equipment. By the time of trial herein, 60 acres of the Stehekin property had been cleared, and about 50 acres were planted in bluegrass. The cleared land, however, is not sufficiently extensive to justify the costs of a farming operator, which is Arthur's intent once sufficient land has been cleared. An underground sprinkler system is installed on the entire acreage, installation of which188 occurred prior to the years in issue, though some minor finishing work was done in 1962. Also located on the Stehekin property are two powerhouse buildings which house the hydro-electric generators, a planer building and a brick house. The buildings were built after 1946 and are presently used in connection with the logging and other activities. Among the equipment utilized at Stehekin is a sea mule barge which was purchased in either 1947 or 1948, and a flail mower, purchased on May 16, 1963, for $318.80. From November 20 to April 15 for each of the years in issue, no employees work at the Stehekin property other than a caretaker, Mike Carragher (hereinafter sometimes referred to as Mike), because of the deep snows which make operations at the property impossible. Arthur usually leaves for Stehekin about April 15 and returns around November 20, though he does make some trips to Manson in this period. In their income tax returns for 1962, 1963, and 1964, petitioners deducted various expenditures as expenses of their "business" at Stehekin and Manson without segregating the expenditures at either place. At trial, they sought to prove the amount of their expenditures, the allocation189 between Stehekin and Manson, and the relationship of the expenditures to various activities on their properties through their own testimony and the introduction of innumerable checks. Since the legal contentions with regard to the deductibility of these expenses involve the same issues under sections 162 and 182, we shall at the outset deal with them and thereafter present our findings of fact as to the amounts and allocations of specific expenses, as well as certain subsidiary legal issues which relate to specific expenses. Other major issues concerning claimed depreciation and the negligence penalty will be treated subsequent thereto. Issue 1. Deductibility of Expenses at Stehekin and Manson Petitioners deducted numerous expenses relating to the operation of their properties at Stehekin and Manson, Washington. They argue that they were engaged in two businesses on the Stehekin property during the years in issue, that of logging and sawmilling (hereinafter sometimes referred to as logging) and grass seed farming (hereinafter sometimes referred to as grass farming); and that therefore, their expenses relating to such activities are deductible business expenses under section 162(a). 190 2 Moreover, petitioners contend that any Stehekin expenditures which are not deductible as business expenditures are 805 capital expenditures for clearing the land to farm and deductible for the years 1963 and 1964 under section 182. 3191 Respondent, on the other hand, argues that all expenses relating to the Stehekin property are nondeductible personal expenditures because petitioners were not engaged in any trade or business there. Alternatively, respondent contends that the expenditures were nondeductible capital expenditures. Moreover, respondent argues that the expenditures are not deductible under section 182 in 1963 and 1964 because petitioners have not properly elected to take advantage of that section's provisions, under section 1.182-6, Income Tax Regs., 4 and because they were not "engaged in the business of farming" under that section's provisions. 192 A. Deductibility of Expenses under Section 162A taxpayer may be engaged in more than one business simultaneously. M. A. Paul, 806 18 T.C. 601">18 T.C. 601 (1952); John E. Good, 16 T.C. 906">16 T.C. 906 (1951). Petitioners, therefore, may have been engaged in both a logging and a grass farming business at Stehekin while, concededly, they were engaged in an apple farming business at Manson. For almost 20 years, petitioners were engaged in cutting timber and sawmilling the timber into lumber at Stehekin. They built a sawmill, employed laborers to cut and process timber and sold timber. During the years in issue, over 200,000 board feet of timber was cut. Though no timber was processed into lumber in 1962, 1963, or 1964, petitioners intended to process their timber and sell it as lumber as soon as they regained electric power to run their sawmill. We hold this activity, carried on for such an extensive length of time, is a trade or business and the expenses which are substantiated as relating thereto are deductible. To be sure, the expenses would not only produce a benefit from the193 profits of the sale of timber, but also a long-term benefit in that the land became partially cleared for farming. But the latter benefit, which required many more steps before its fruition - namely, blasting of the stumps, enriching the soil, etc. - does not detract from the fact that petitioners were independently engaged in a trade or business and the expenses attributable thereto, paid in the operation of that business, were deductible. Since petitioners were cash basis taxpayers they are entitled to a deduction for those expenses substantiated as relating to logging in the years in which the expenses were paid. The activities, other than the logging, conducted on the Stehekin property, such as grass planting, stump blasting, brush clearing and river protection, are a different matter. We do not believe that petitioners' intent in engaging in these activities was to grass farm and reap a profit therefrom. Rather, the primary purpose was to replenish the soil in order to bring it into a productive capacity for the eventual operation of the property as a farm. No seed was ever sold, nor any attempt made to get approval for its sale from Washington State's Agricultural Department. 194 This aspect of the operation at Stehekin was not a trade or business but rather preparation of the land for future farming. The entire benefit from the expenditures in these activities is to accrue in the future when the property is farmed. As such these are capital expenditures. Cf. H. L. McBride, 23 T.C. 901">23 T.C. 901 (1955); J.H. Sanford, 2 B.T.A. 181">2 B.T.A. 181 (1925). Thus these expenditures are nondeductible unless some other provision of the Internal Revenue Code allows a deduction. B. Deductibility of Expenses under Section 182 Petitioners contend that any expenses in the years 1963 and 1964, which are not deductible under section 162, may be deducted pursuant to section 182. This section provides that a person who is engaged in the business of farming may elect to deduct land-clearing expenses, incurred for the purpose of making land suitable for use in farming, in the lesser amount of $5,000 or 25 percent of his taxable income from farming during the taxable year. Respondent contends first that petitioners were not engaged in a trade or business of farming at Stehekin195 and, therefore, that section 182 is not applicable. However, section 182's requirement that the taxpayer must be engaged in the business of farming makes no indication that the farming operation must be part of or contiguous to the very property which is being prepared for farming, nor do the committee reports indicate that this is the case. (Cf. S. Rept. No. 1881, 3 C.B. 703">1962-3 C.B. 703,832-833.) In the absence of any contrary language in the statute or the legislative history, we give the ordinary meaning to this requirement, and construe the section's provision that the taxpayer be engaged in farming to mean that he may be so engaged on any property. Petitioners also meet the requirement that their purpose be to make the land suitable for farming. Their intent was to farm once a sufficient acreage on the land was clear. Their preparation activity was to enrich soil, clear brush and otherwise put the land in a suitable condition so that it could be farmed. While it is true that they were engaging in their activity over an extended period of time, the section places no time limit within which the property must be ready for farming. Finally, it is clear that many of the196 expenses, such as stump blasting, grass planting, and river protection, are "land clearing" expenses. We think it unnecessary to consider this point in detail at this time. We merely quote the applicable regulation which defines this term to show that many 807 of the petitioners' activities fall within its terms. Sec. 1.182-3 Definition, exceptions, etc., relating to deductible expenditures. (a) "Clearing of land." (1) For purposes of section 182, the term "clearing of land" includes (but is not limited to) - (i) The removal of rocks, stones, trees, stumps, brush or other natural impediments to the use of the land in farming through blasting, cutting, burning, bulldozing, plowing, or in any other way; (ii) The treatment or moving of earth, including the construction, repair or removal of nondepreciable earthen structures, such as dikes or levies, if the purpose of such treatment or moving of earth is to protect, level, contour, terrace, or condition the land so as to permit its use as farming land; and (iii) The diversion of streams and watercourses, including the construction197 of nondepreciable drainage facilities, provided that the purpose is to remove or divert water from the land so as to make it available for use in farming. * * * (b) Expenditures not allowed as a deduction under section 182. (1) Section 182 applies only to expenditures for nondepreciable items. Accordingly, a taxpayer may not deduct expenditures for the purchase, construction, installation, or improvement of structures, appliances, or facilities which are of a character which is subject to the allowance for depreciation under section 167 and the regulations thereunder. Expenditures in respect of such depreciable property include those for materials, supplies, wages, fuel, freight, and the moving of earth, paid or incurred with respect to tanks, reservoirs, pipes, conduits, canals, dams, wells, or pumps constructed of masonry, concrete, tile, metal, wood, or other nonearthen material. The deductibility of these expenses depends on the election requirements of section 182. Respondent contends that section 1.182-6, Income Tax Regs., adopted on January 25, 1965, has retroactive effect for 1963 and since petitioners did not elect according to its terms in198 their 1963 income tax returns, they are not entitled to the deduction in that year. As for 1964, respondent also contends that noncompliance with the provision of this regulation precludes qualification for that year. Petitioners argue that for 1963 no election according to this regulation was required because the regulation was not promulgated until after the income tax return filing deadline for that year had passed. As we construe this argument, petitioners seem to contend (1) that in 1963 they may elect to take advantage of section 182 by merely returning the expense, and (2) that the regulation should be construed to be prospective only. As for 1964, petitioners point out that the government pamphlet, "Federal Income Tax Forms for 1964" states on its last page (unnumbered): INSTRUCTIONS FOR SCHEDULE F (FORM 1040)-1964 * * EXPENSES AND OTHER DEDUCTIONS * * * Other farm expenses - * * * You may deduct expenditures in clearing land to make it suitable for farming. This deduction is limited to 25% of taxable income from farming, or $5,000 whichever is lesser. Petitioners contend that they should not be precluded from taking the deduction for 1964 because this form affirmatively199 mislead them into believing that no set form of election was required. According to section 7805(b): SEC. 7805 * * (b) Retroactivity of Regulations or Rulings. - The Secretary or his delegate may prescrible the extent, if any, to which any ruling or regulation, relating to the internal revenue laws, shall be applied without retroactive effect. Respondent argues that by virtue of the above-quoted section, all regulations are retroactive unless prescribed by the Commissioner to be otherwise and hence section 1.182-6, Income Tax Regs., must be given retroactive effect. We think that section 1.182-6, Income Tax Regs., while not explicity stated to be prospective, is implicitly so in application. The regulation states that the manner of election must be made by means of a statement filed "not later than the time prescribed by law for filing the income tax return (including extensions thereof) for the taxable year for which the election is to apply." If this regulation is meant to have retroactive effect for the year 1963, it is tantamount200 to requiring that a taxpayer have the foresight in preparing his 1963 returns to know and specifically follow a manner of election that the Commissioner would state almost a year later. An election could not be made after the filing deadline. In effect, to construe the regulations to be 808 retroactive would preclude any deduction in 1963 under section 182, because no taxpayer, except by the most improbable chance, would have elected in his 1963 returns in the manner prescribed by the regulation. We cannot give such an unreasonable interpretation to the regulation. We hold that this regulation was meant to apply only to taxable years after 1963, i.e., that its application is prospective only. In the absence of a regulation as to election under section 182 for the year 1963, we think that a taxpayer was entitled to take advantage of this provision by means of any reasonable manner of election. Petitioners, in this instance, merely took the deduction and did not state that they were taking advantage of section 182 or segregate expenses on their returns. Nevertheless, we think that this is sufficient for 1963. In the absence of any regulation, the term "election" denotes to us that201 the taxpayer must make a choice and manifest that choice in some overt manner. By actually taking the deduction on the 1963 return, we hold that petitioners exhibited such a manifestation. Accordingly, petitioners are entitled to section 182 treatment for any expenses substantiated as clearing expenses in that year. Cf. James River Apartments, Inc., 54 T.C. 618">54 T.C. 618(March 25, 1970). The question of election for 1964 poses an entirely different situation. The regulation was adopted before the deadline for filing a return for that year. Petitioners, in fact, did not file their return until April 9, almost three months after the promulgation of the regulation. We do not think the 1964 government pamphlet prescribing no particular manner of election for 1964 precludes the Commissioner from asserting that an election must be made according to this regulation. There was a ready means for petitioners to become aware of the new regulation by reference to its publication in the Federal Register. They must be held to know that the pamphlet "Federal Income Tax Forms" does not give the full details of the applicability of a particular deduction or section. For a full explanation the202 sections and regulations must be referred to, as well as additions and modifications thereto which are published in the Federal Register. If statements made in the "Federal Income Tax Forms" publication were binding on the Commissioner from an estoppel standpoint (which is in essence what petitioners argue) and publication in the Federal Register of changes or additions were not sufficient, then after the publication of the pamphlet there would be no way for the Commissioner to change or add to his position unless he mailed an adequate, timely notice to every taxpayer in the country. This is untenable. We hold that the regulation applies to 1964 and since petitioners did not elect according to the regulation's provisions, no deduction under section 182 is allowed for that year. See Adler v. Commissioner, 330 F. 2d 91 (C.A. 9, 1964), affirming a Memorandum Opinion of this Court. At this point it is necessary to deal separately with the expenses in light of the foregoing holdings, in order to indicate the extent to which these expenses have been substantiated by petitioners as allowable and to present our findings of fact with respect thereto. In many instances we have203 found a sufficient basis in the record to approximate the amounts under the rationale of Cohan v. Commissioner, 39 F. 2d 540, 544 (C.A. 2, 1930). It is also clear that any expense herein allocated to Manson is a deductible orchard expense under section 162(a), since concededly petitioners were engaged in a business there. Other subsidiary issues as to specific expenses will be treated under the heading for such expense. Labor Expenses 51. Harold Clapp Harold Clapp, a mechanic, worked at both Stehekin and the orchard during the periods from approximately April 15 to November 15, of the issue years, spending nearly equal amounts of time at both places. When at Stehekin, he principally felled timber. Petitioners paid him the following amounts for204 his services at the orchard and at Stehekin: Date of CheckAmount5-11-62$100.006- 1-62100.006-18-6250.007-10-62100.007-17-62100.00 8-25-62$ 24.00* 9- 8-62100.00* 9-29-62100.00* 11-16-6250.005-15-63100.00* 6-25-63125.007- 8-6350.007-13-6375.008-13-63150.00 * 8-27-6350.008-30-63100.009-16-6350.00* 5-14-6425.00* 6- 4-6425.00* 6-20-6410.00* 6-30-64150.007- 3-6450.00* 7-23-6425.00* 8- 1-6420.00* 8- 7-6410.00* 8-10-6475.00* 8-10-6475.00* 9- 8-6425.009- 8-64100.00Harold Clapp also received a check, dated April 5, 1962, in the amount of $50, which was cashed at Stehekin and written at the time of the year in which no operations at Stehekin were under way. For the years 1962, 1963, and 1964, respectively, we find and hold that $360, $350, and $290 of the above listed labor expenses of Harold Clapp are orchard expenses, deductible under section 162. The remaining amounts are attributable to the Stehekin operation and of that allocation205 $180 in 1962, $175 in 1963, and $140 in 1964 are logging expenses, deductible under section 162. Clapp was principally engaged in felling timber while at Stehekin. We further find that in 1963, the labor expense of Harold Clapp which is attributable to Stehekin and not deductible pursuant to section 162 as a logging expense, is an expense of clearing land and is deductible, when added to the other allowable land clearing expenses, to the extent permitted under section 182(b). 6We also find that the amount of the check written to Harold Clapp for $50, dated April 5, 1962, is a deductible orchard expense in 1962 under section 162, since it written at a time during which no work was being done at Stehekin. 2. J. W. Levick J. W. Levick worked at both Stehekin and the orchard during the periods from approximately April 15 to November 15, when Stehekin was actively in operation. He spent equal amounts of time at both places. The following payments were received by him for his services from petitioners at those times during206 each year in which he may have worked either at the orchard or Stehekin: Date of CheckAmount5-21-62$ 50.00* 9-18-6425.00* 6- 6-62 50.00* 7-16-62 50.00** 5- 1-64 20.00* 5-14-64 25.005-22-64 50.00* 6- 4-64 25.006-23-64 25.00* 7- 1-64 20.00* 7- 6-64 25.00* 7- 6-64 75.00* 7-13-64 125.00* 8- 1-64 20.00* 8- 6-64 10.00* 8-13-64 100.008-28-64 100.00 For the years 1962 and 1964, respectively, we find and hold that $75 and $322.50 of the above labor expenses are orchard expenses, deductible under section 162. In both years the remaining amounts paid Levick are attributable to the Stehekin operation and of those amounts, $10 in 1962, and $30 in 1964 are logging expenses, deductible under section 162. 3. Bill Baker Bill Baker worked at both Stehekin and the orchard during the periods from approximately April 15 to November 15, when Stehekin was actively in operation. He was the orchard irrigator and worked at Stehekin mostly in the spring, helping in brush burning and river protection. 207 During 1962 and 1963, he received the following amounts for his services from petitioners: Date or Year of CheckAmount4-27-62$ 62.50 7-28-6210.001963 (10 checks, 4-26-63 to * 9-26-63)305,00 (total)In the year 1962, we hold that the two checks to Bill Baker are for Stehekin labor. Most of his work at Stehekin was done in the early months after the Stehekin 810 operation commenced and these checks were written during such period. Petitioners' burden of proving that this expense was a fully deductible orchard expense has not been met. Bill Baker did river protection work and brush burning at Stehekin and there is no indication that he engaged in logging. Therefore, this expense is nondeductible in 1962. In 1963, we find and hold that the labor expenses of Bill Baker are all Stehekin expenses. We think it significant that not a single check was cashed other than at Stehekin. If any orchard labor costs were involved, the probability would be great that at least one check would have been cashed at a place other than Stehekin. Petitioners208 have not carried their burden of substantiating this expense as a fully deductible orchard expense. They relate solely to the river protection and brush burning work of Bill Baker, two "land clearing" activities. As such, the expenses (in the amount of $305) are deductible under (and within the limitations of) section 182 since they were incurred in 1963. 4. Bill Burns Bill Burns worked at both Stehekin and the orchard during the same period when Stehekin was actively in operation. When at Stehekin he helped principally in river protection and also did some logging. During 1962 he received twenty checks, dated from May 15, 1962 to October 5, 1962, in the total amount of $570. All the checks were cashed at Stehekin Landing. We find and hold that the expenses for Bill Burns' labor in 1962 are attributable entirely to the Stehekin operation. Every check was cashed at Stehekin Landing. We cannot believe that if part of these checks was for orchard costs, all would have been cashed at Stehekin. We find and hold that $60 is attributable to 1962 logging and deductible under section 162. 5. Mike Carragher Petitioners paid the following amounts for the year-round labor performed209 by the caretaker, Mike, who protected the Stehekin property from vandalism and also helped in river protection in the fall and brush burning in the spring: YearTotal1962 (23 checks, dated 2-13-62 to 12-16-62)$5501963 (24 checks, dated 1- 3-63 to 11-25-63)5001964 (25 checks, dated 4-14-64 to 12-19-64)400In 1964 additional compensation was received by Mike from petitioners in the form of their payment of his debt to Joel Finley in the amount of $12, and the purchase of clothes for him from Sears Roebuck & Company by a check to that company in the amount of $36.70. In 1962, 1963, and 1964, respectively, we hold that $55, $50, and $45, respectively, of Mike's labor expenses are attributable to the logging operation at Stehekin and hence deductible under section 162. He took care of buildings utilized in the logging operation and protected the land from vandalism, which would obviously include protection of cut timber, prevention of pirating of timber, and guarding of machinery utilized in the logging business. In 1962 and 1964, the remainder of his labor expense is nondeductible. In 1963, we find and hold that the remaining amount of $450 for Mike's210 labor is a "land clearing" expense, deductible pursuant to section 182 and within its limitations. 6. I. E. Cottrell I. E. Cottrell, a laborer who worked solely at Stehekin, received the following amounts for his labor by check: Date of CheckAmount9- 2-63$50.008-24-6350.008-29-6310.00There is no indication in the record what sort of labor was done, other than the fact that it was not for "repair" of machinery. It may have been labor of the logging operation, deductible under section 162, or land clearing, deductible under section 182, since all the expense was incurred in 1963. Since the section 182 deduction is limited by section 182(b), an allocation of the entire amount to land clearing expenses will produce a deduction (unquestioned as to amount) to which petitioners are entitled. Accordingly, we hold that $110 is deductible as a land clearing expense under section 182. 7. Otis Sykes, Bob Zimmerman and Glen Clausen Otis Sykes, Bob Zimmerman and Glen Clausen worked solely at Stehekin. The expenses for their labor and the dates of the checks in payment thereof are as follows: NameDateAmountOtis Sykes4-26-63$ 75.00Bob Zimmerman4-24-63100.00Bob Zimmerman12-18-6450.00Glen Clausen5-29-6440.00211 811 Arthur testified that their labor was for the "repair" of equipment at Stehekin. But this is not sufficiently definitive, for such "repair" may have extended the useful life of the equipment rather than merely kept it in normal operation. Nothing in the record furnishes facts from which we can ascertain whether this labor was a capital expenditure, or a deductible maintenance expense under established criteria. Petitioners have failed to meet their burden of proof to establish any part of this expense as a section 162 business expenditure of the logging operation, rather than a capital expenditure to equipment. Some of these expenses were incurred in 1963, namely those of Bob Zimmerman and Otis Sykes. Under section 182(d)(2) depreciation on equipment utilized in the land clearing operation is allowed in an amount which would be allowable under section 167, if the equipment were used in a trade or business. Petitioners make no contention that the "repair" expenses should be added to the bases of the equipment for purpose of depreciation under section 182's provisions and indeed, there are no facts in the record upon which we could make such a determination. Accordingly, 212 no deduction is allowed under section 182 in 1963. 8. Miscellaneous Labor Petitioners paid Gene West $6 by a check dated November 11, 1963, for "cleanup work." We hold this to be a "land clearing" expense deductible pursuant to section 182. Groceries 1. Fae's Grocery and Camp Stehekin Groceries for the laborers at Stehekin, as well as for Arthur, were purchased, in part, from Fae's Grocery. The total amount of checks in payment for these groceries and the applicable year in issue are as follows: YearTotal1962 (7 checks, dated 2-26-62 to 11-12-62)$1,586.771963 (10 checks, dated 2-15-63 to 12-7-63)1,486.931964 (9 checks, dated 1-9-64 to 12-10-64)1,093.47A check dated August 9, 1962, to Camp Stehekin in the amount of $15 also was for groceries for the laborers at Stehekin. Clearly the expense of meals, given to laborers while engaged in the logging operation, is deductible. As for Arthur's meal expenses, we also consider those deductible under section 162, insofar as attributable to his supervision of the logging operation. We have held that Arthur was engaged in the business of logging and, concededly, he also was engaged in apple-orchard213 farming. We further hold that his principal place of business and his "home" for the purposes of section 162(a)(2) was Manson, Washington. He had a residence, received significant earnings of a permanent character from his orchard farm and resided with his family there. Expenses for meals of a person at his second place of business while away from a "home," which is his principal place of business, are deductible. Joseph H. Sherman, Jr., 16 T.C. 332">16 T.C. 332 (1951). We hold that in 1962, 1963, and 1964, respectively, $160, $150, and $110 of the Fae's Grocery expenses are attributable to both the laborers' logging work and to Arthur's logging supervision and are allowable in each of these years as a section 162 business expense. Two dollars of the Camp Stehekin expense in 1962 is also allowed as a business expense. In the year 1963, $1,050 of the Fae's Grocery expense is deductible under section 182 as a land clearing expense to the extent allowable under section 182. Other than for logging, the activities of most of the laborers were all "land clearing" in nature, and Arthur's supervision related to this also. However, the expense of the work of Otis Sykes and Bob Zimmerman214 has been held to be nondeductible in 1963 and any grocery expense that relates to them in that year is nondeductible under section 182. Taking this latter factor in consideration, we have arrived at the above figure. 2. Stehekin Landing and Curt Courtney Checks to Stehekin Landing were written by Arthur in each year in issue in the following total amounts: YearTotal1962 (7 checks, dated 7-10-62 to 11-30-62)$110.001963 (16 checks, dated 4-27-63 to 10-19-63)265.001964 (14 checks, dated 5-29-64 to 11-27-64) 250.00These checks paid for beer for the employees' Saturday night outings, money orders, miscellaneous Stehekin equipment that arrived C.O.D. and other groceries. Three checks for the same purposes as 812 those written to Stehekin Landing were written in 1962 to Curt Courtney in the total amount of $35 (dated June 8, 1962, July 8, 1962 and August 27, 1962). The expenditures incurred at Stehekin Landing were for various items - with the main part of the expenditure for beer for Stehekin laborers on Saturday night. We hold that215 $6, $13, and $12 are attributable to beer and groceries relating to the logging operation in 1962, 1963, and 1964, respectively, and therefore deductible as a business expense. This was a form of compensation to the laborers. In 1963, we hold that $95 is a beer and grocery expenditure, deductible pursuant to section 182. Most of the laborers' activities, other than logging, were entirely "land clearing" in nature and therefore the grocery and beer expenditures for them were additional compensation for such activities in that year. As with the Fae's Grocery expense, we have taken into consideration that Otis Sykes' and Bob Zimmerman's groceries and beer are nondeductible. Of the expenditures at Stehekin Landing in each year for other items, i.e., equipment and money orders, we have no means of knowing the nature of these expenditures. These may have been capital or noncapital expenditures which may relate to either logging or land clearing. Petitioners have not met their burden to prove an allocable deduction and hence the remainder of the Stehekin Landing expense in each year is not deductible. The expense in 1962 for the items bought from Curt Courtney is deductible in the total216 amount of $2, as a business expense under section 162. Travel Expense During the years in issue, petitioners paid Lake Chelan Boat Company, for the transportation of employees and Arthur, from the Manson orchard to the Stehekin property and back in the following amounts: YearTotal1962 (14 checks, dated 3-27-62 to 11-14-62)$149.981963 (9 checks, dated 4-18-63 to 11-18-63)189.001964 (7 checks, dated 4-27-64 to 12-15-64)157.50A check written to Bill Baker, a laborer, in the amount of $10, dated April 22, 1963, was for transportation to Stehekin in that year. In 1962, 1963, and 1964, we hold that $15, $20, and $17, respectively, of the travel expenditures to Stehekin Landing in each year are deductible as a business expense of logging under section 162(a). We attribute this amount as a travel expense to laborers engaged in logging and to Arthur's supervision of the logging activity. Arthur's portion is deductible as a "traveling expense" pursuant to section 162(a)(2). 7In 1963, of the remaining amount of the travel expense, 217 $140 is a deductible "land clearing expense" under section 182, Aside from logging, all work of both Peterson and his laborers relates to "land clearing," and travel expenses allocated to this portion would be deductible under section 182. However, the expense of the work of Otis Sykes and Bob Zimmerman has been held to be nondeductible in 1963. We have again considered this factor in our approximations. Stehekin Expenditures - Miscellaneous Various other expenses were incurred in the operation of the Stehekin property. These expenses, the "purpose" of their incurrence and the date of payment for them by check are listed in the following table: 813 0 TablePayeePurposeDateAmount1. Chelan Auto ElectricPurchase of Electrical7-16-62$23.35Parts for Equipment2. Chelan HardwareMiscellaneous Supplies6-4-6231.667-1-6369.193. Columbia TractorPurchase of Parts for2-26-62136.10Tractors and Other4-17-62 195.21Equipment4. Department ofPayments for Irrigation12-28-6217.00Conservationand Drinking Water2-18-6421.5512-20-6417.005. Deputy Auditor ofPayment for License for5-4-629.00Chelan, WashingtonStehekin Jeep6. H. R. Spinner Co.Purchase of Blasting11-26-6222.88Powder and Caps8-10-64116.907-13-6456.167. Oleson Motor SupplyExpenditures for Batteries7-1-6334.68and Electrical Parts10-10-6421.638. Ramsey & PittsPurchase of Parts for4-5-625.10Equipment and Welding Rods6-4-6224.757-14-6290.9412-28-6248.136-27-6333.458-12-636.6712-20-6423.219. Tilly Equipment Co.Parts for Tractor6-8-6413.5810. Valley Tractor &Expenditures for Parts8-12-63100.00Implement Co.for Equipment5-14-64218.6511. Vaughan's Seed Co.Purchase of Grass Seed4-16-62100.006-4-62100.006-23-62100.0011-13-62100.007-20-63100.005-14-64100.0012. Wells and WadePurchase of Rakes, Shovels7-18-6311.44or Similar Small Tools13. Wenatchee Oxygen ServicePayments for Welding Gas4-17-6210.35and Welding Rods6-11-62 20.351-14-6396.66218 814 Of the expenditures set out in the Table, those which represent the expense for purchase of parts for equipment (numbers 1, 3, 7, 8, 9 and 10) are nondeductible in the years of purchase. We do not have any evidence in the record from which we may ascertain whether these parts prolonged the useful life of the equipment. As to the reason for nondeductibility under section 182 of any of these expenses which were incurred in 1963, see our discussion of the labor expenses of Otis Sykes, Bob Zimmerman and Glen Clausen. Our holdings with respect to the other items listed in the table are as follows: 1. Chelan Hardware The expenditure for miscellaneous supplies incurred at Chelan Hardware in 1962 and 1963 (Table, No. 2) is nondeductible. We have no evidence as to what sort of supplies they were or for what operations or whether they may be of a capital or noncapital expenditure. 2. Department of Conservation The expense for irrigation and drinking water (Table, No. 4) in 1962 and 1964 is nondeductible. A major portion of this expense is for irrigation type purposes219 which is a nondeductible land clearing expense. 3. Deputy Auditor The expenditure for the jeep license in 1962 (Table, No. 5), is nondeductible. We do not know in which operation at Stehekin this jeep was utilized. Petitioners did not meet their burden of proof. 4. H. R. Spinner The expense incurred at H. R. Spinner Company in 1964 (Table, No. 6) is a nondeductible land clearing expense, since the blasting caps and powder were obviously utilized in stump removal. 5. Vaughan's Seed Co. The expense incurred at Vaughan's Seed Co. in 1962 and 1964 (Table, No. 11) for seeds is clearly nondeductible in these years as a land clearing expenditure. The 1963 expenditure is deductible pursuant to section 182. 6. Wells and Wade The expenditure incurred at Wells and Wade for small tools (Table, No. 12) in 1963 is deductible under section 182. Such small tools as hand shovels or the like are not capital expenditures. Cf. section 1.162-12, Income Tax Regs. These tools may have been utilized for logging, but we are assured that an allocation to "land clearing" will allow the deduction in no greater an amount than is permitted. See our similar discussion220 under the labor expenses of I. E. Cottrell. 7. Wenatchee Oxygen The expense incurred at Wenatchee Oxygen (Table, No. 13) Service is nondeductible. We have no idea what the welding gas and rods were utilized for at Stehekin. These expenses may relate to the pipeline in which case it could be a capital expenditure, or it may relate to equipment utilized in logging or seeding and be a capital expenditure because it prolongs the equipment's life. Petitioners fail on their burden of proof. Manson and Stehekin Expenses 1. Webb Tractor Co. Petitioners wrote the following checks to Webb Tractor Company for parts and equipment for tractors that operated at both places in the amounts 8 and on dates as follows: DateAmount6- 4-62$ 45.788-19-6239.588-12-6324.117-22-6454.3310-12-6445.0412-20-6474.35The expenses incurred at Webb Tractor Co. to the extent not already allowed are nondeductible. There is no evidence to ascertain whether these expenses were for 815 capital expenditures on, or noncapital repairs to equipment. 221 2. Peterson Freight Petitioners paid by a check, dated April 23, 1962, $112.89 to Peterson Freight for the repair of a chain saw used in either the orchard or in logging at Stehekin. Since there is no evidence to show whether this expense was for capital expenditures, or noncapital repairs to the saws, the expense is nondeductible. 3. Chelan Bank Interest payments on loans used for equipment purchases and other operational expenses at the orchard and Stehekin, were made to the Chelan Branch, Seattle-First National Bank, Chelan, Washington, on the following dates and in the following amounts: DateAmount6-22-62$241.116-27-63350.008- 4-64368.33The interest on the loans from the Chelan Bank is nondeductible. We have no information as to what these loans were used for, i.e., for equipment, payment of wages, etc. In the absence of such information, there is no way to allocate any amount of the deduction and accordingly, since petitioners have the burden of proof, the amount is disallowed as a business deduction. 9222 4. FICA Two checks were written by petitioners to the Internal Revenue Service in the payment of FICA taxes on wages of employees working at both places in 1964, in the amounts of $49 and $581.03, dated May 16, 1964 and May 18, 1964, respectively. The payments for FICA taxes are deductible business expenses to the extent of $150 as relating to employment of laborers at Manson. Of the remaining amount, $50 is a deductible business expense as attributable to the labor of the workers at the Stehekin logging operation. Manson Expenses - Miscellaneous 1. P.U.D. Petitioners wrote checks to the Chelan County Public Utility District #1 on the following dates and in the following amounts: 10DateAmount6- 4-62$25.502-11-6352.004- 5-6344.0010-12-6347.003-25-6430.008-17-6424.0010- 9-6444.00Fifty percent of these expenditures is claimed as a deductible business expense for the orchard. Of the remaining 50 percent, one-half is claimed223 as a deductible business expense for utilization of petitioners' home as an office. As to the contention relating to the amount claimed as an office expense, petitioners' only evidence is the statement of Dorothy at trial that one-fourth of these expenses are allocable to use of their home as an office. There was no proof of any room specifically utilized as an office or any other indication of the extent to which the Manson farm was operated from the home. We find and hold that petitioners have not substantiated this percentage of the expense as a business deduction. Petitioners' claim to a 50-percent deduction of the Public Utility District's expenses as an orchard expense is based on the assertion that these checks went for electricity for the various buildings that housed their harvest crew, as well as for their home, and an estimate that during the slackest period of their orchard operations 50 percent of each electricity bill was attributable to their home. In light of the facts in the record, we consider a 50-percent allocation of this bill to the various other buildings at Manson justifiable and hold that the expenses, other than the October 9, 1964, check, are 50 percent224 deductible. As for the check of October 9, 1964, Dorothy testified that this was purely a home electricity expense and, accordingly, it is not deductible as an orchard expense on this ground. L. E. Radley A check, dated November 27, 1963, was written to L. E. Radley in the amount of $121.64 for home insurance. Petitioners also claim this amount to be one-fourth deductible because the home was utilized as an office. For the same reasons as 816 given with regard to the Chelan Public Utility District expense, this is disallowed. Issue 2. Depreciation - Stehekin Assets Petitioners have claimed depreciation under section 16711 for four buildings on the Stehekin property, as well as for the sea mule barge, the hydro-electric generating plant, and the flail mower. 225 1. Buildings As to the four buildings - the two powerhouse enclosures, a planer building and a brick house - petitioners claim a bases for depreciation of $5,000 per building. This figure was arrived at by Arthur's estimate that the total cost of twelve buildings on both his operations at Stehekin and Manson was $60,000. He thereafter divided by twelve to reach $5,000 for each. We hold that such an approximation falls far short of the necessary amount of proof to substantiate a basis from which depreciation may be determined and accordingly no depreciation is allowed for these buildings in any of the three years. 2. Generating Plants The depreciation deduction for the two hydro-electric generating plants is also disallowed for lack of substantiation as to basis. Petitioners claim a total basis of $23,500, which was gained from various estimates and approximations of Arthur as to money expended at various states of developing the system as far back as the forties. Petitioners have not met their burden of proof. 3. Sea Mule Barge The depreciation for the sea mule barge is disallowed. Arthur could only testify that he bought it in 1947 or 1948 at army surplus for "approximately226 three thousand some hundred." This falls far short of substantiating the figure. 4. Flail Mower The cost of the mower is substantiated; however, since it was not utilized in the logging operation but rather in land clearing operations, which do not constitute a trade or business, section 167 requirements are not met and accordingly the depreciation is disallowed. The issue of depreciation for 1963 under the provisions of section 182 has not been raised. Issue 3. Depreciation - Manson Petitioners claim a depreciation deduction under section 167 for the six buildings at Manson, based on a $5,000 cost basis. We disallow such depreciation for lack of substantiation, based on the same reasons enumerated concerning the disallowance of depreciation on their Stehekin buildings. Petitioners also claim a depreciation deduction of $1,050 for their apple acreage based on a cost of $1,000 per acre. It is established that it is customary to cut and replant an orchard after 30 years. The basis for the figure is derived from the following trial testimony of Dorothy: Q. Do you know approximately what that orchard cost to build? A. We undervalued it at a thousand dollars an acre but227 that is what we placed it as. Q. What do you mean you placed it as? A. We considered it cost that much to produce it with my husband's hard work. Q. How much money did you spend to build it? A. A thousand dollars an acre. Aside from the fact that this figure may have been arrived at by a valuation of Arthur's labor, which clearly has no place in a computation of basis, the figure lacks sufficient substantiation. Petitioners have failed their burden, accordingly, we disallow the depreciation. Issue 4. Negligence Penalty Respondent contends for this penalty under section 6653(a)12 for each of the three years in issue. The burden is on the taxpayer. David Courtney, 28 T.C. 658">28 T.C. 658 (1957); Gibbs & Hudson, Inc.35 B.T.A. 205">35 B.T.A. 205 (1936). 228 817 Although farmers are not required to keep books and records prescribed for other businessmen, they are required "to keep such records as will enable the District Director to determine the correct amount of income subject to tax." Income Tax Regs., section 1.6001-1(b). Petitioners in the instant case did not keep records of their expenses, nor segregate them as between Manson and Stehekin, or between the various operations on the Stehekin property. While they claim that they were prudent in doing so because respondent had never challenged their expenditures, such an assertion carries little weight. If taxpayers were permitted to utilize this argument, respondent would be under a virtual obligation to check every return every year to assure himself that deductions which "on the surface" appear legitimate, are not. In any event, we think that a prudent farmer would keep records of some sort despite no challenge. Such failure to maintain records is negligence. Cf. Carroll F. Schroeder, 40 T.C. 30">40 T.C. 30, 34 (1963); Joseph Marcello, Jr. 43 T.C. 168">43 T.C. 168, 182 (1964).229 Accordingly, we hold for respondent on this issue. Decision will be entered under Rule 50. Footnotes1. All references are to the Internal Revenue Code of 1954.↩2. 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; (2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; and (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. ↩3. SEC. 182. EXPENDITURES BY FARMERS FOR CLEARING LAND. (a) In General. - A taxpayer engaged in the business of farming may elect to treat expenditures which are paid or incurred by him during the taxable year in the clearing of land for the purpose of making such land suitable for use in farming as expenses which are not chargeable to capital account. The expenditures so treas so treated shall be allowed as a deduction. (b) Limitation. - The amount deductible under subsection (a) for any taxable year shall not exceed whichever of the following amounts is the lesser: (1) $5,000,or (2) 25 percent of the taxable income derived from farming during the taxable year. For purposes of paragraph (2), the term "taxable income derived from farming" means the gross income derived from farming reduced by the deductions allowed by this chapter (other than by this section) which are attributable to the business of farming. (c) Definitions. - For purposes of subsection (a) - (1) The term "clearing of land" includes (but is not limited to) the eradication of trees, stumps, and brush, the treatment or moving of earth, and the diversion of streams and watercourses. (2) The term "land suitable for use in farming" means land which as a result of the activities described in paragraph (1) is suitable for use by the taxpayer or his tenant for the production of crops, fruits, or other agricultural products or for the sustenance of livestock. (d) Exceptions, etc. - (1) Exceptions. - The expenditures to which subsection (a) applies shall not include - (A) the purchase, construction, installation, or improvement of structures, appliances, or facilities which are of a character which is subject to the allowance for depreciation provided in section 167, or (B) any amount paid or incurred which is allowable as a deduction without regard to this section. (2) Certain Property Used in the Clearing of Land. - (A) Allowance for Depreciation. - The expenditures to which subsection (a) applies shall include a reasonable allowance for depreciation with respect to property of the taxpayer which is used in the clearing of land for the purpose of making such land suitable for use in farming and which, if used in a trade or business, would be property subject to the allowance for depreciation provided by section 167. (B) Treatment as Depreciation Deduction. - For purposes of this chapter, any expenditure described in subparagraph (A) shall, to the extent allowed as a deduction under subsection (a), be treated as an amount allowed under section 167 for exhaustion, wear and tear, or obsolescence of the property which is used in the clearing of land. (e) Election. - The election under subsection (a) for any taxable year shall be made within the time prescribed by law (including extensions thereof) for filing the return for such taxable year. Such election shall be made in such manner as the Secretary or his delegate may by regulations prescribe. Such election may not be revoked except with the consent of the Secretary or his delegate.↩4. Sec. 1.182-6 Election to deduct land clearing expenditures. (a) Manner of making election. The election to deduct expenditures for land clearing provided by section 182(a) shall be made by means of a statement attached to the taxpayer's income tax return for the taxable year for which such election is to apply. The statement shall include the name and address of the taxpayer, shall be signed by the taxpayer (or his duly authorized representative), and shall be filed not later than the time prescribed by law for filing the income tax return (including extensions thereof) for the taxable year for which the election is to apply. The statement shall also set forth the amount and description of the expenditures for land clearing claimed as a deduction under section 182, and shall include a computation of "taxable income derived from farming", if the amount of such income is not the same as the net income from farming shown on Schedule F of Form 1040, increased by the amount of the deduction claimed under section 182. (b) Scope of election. An election under section 182(a) shall apply only to the taxable year for which made. However, once made, an election applies to all expenditures described in § 1.182-3 paid or incurred during the taxable year, and is binding for such taxable year unless the district director consents to a revocation of such election. Requests for consent to revoke an election under section 182↩ shall be made by means of a letter to the district director for the district in which the taxpayer is required to file his return, setting forth the taxpayer's name, address and identification number, the year for which it is desired to revoke the election, and the reasons therefor. However, consent will not be granted where the only reason therefor is a change in tax consequences.5. In dealing with these labor expenses, we do not deem the fact that some checks were cashed at Stehekin to be probative as to whether that single check was for Stehekin work. It could have been a check written at Stehekin for orchard work of the laborer, for Stehekin work, or for both; or it could have been a check for orchard work, written at the orchard but cashed at Stehekin, etc. The possibilities are endless.↩. Stars by a check or group of laborers' checks represent that such were cashed at Stehekin Landing.↩6. A computation will be necessary to ascertain the maximum amount of the land clearing deduction under section 182(b)↩. This can be done under Rule 50.. Stars by a check or group of laborers' checks represent that such were cashed at Stehekin Landing. ↩. Date of payment of check by bank.↩. Stars by a check or group of laborers' checks represent that such were cashed at Stehekin Landing.↩. One check in this group in the amount of $20 is undated but was paid by the bank on September 14, 1964.↩7. See our findings under the Fae's Grocery Expense with regard to the deductibility of Arthur's business expenses.↩. The year is ascertained from date of payment of check by the bank. ↩**. Date of payment by bank.↩8. Half of these expenses have already been allowed by respondent as attributable to the orchard operation.↩9. These interest items are not claimed as deductions under sec. 163 since petitioners have been allowed the standard deduction in each year, and agree that such method is to their advantage.↩10. Questions as to whether several other checks payable to P.U.D. are deductible, in whole or in part, have been resolved by the parties so that only the checks listed are still in contention.↩11. SEC. 167. DEPRECIATION. (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, or (2) of property held for the production of income.↩12. SEC. 6653. FAILURE TO PAY TAX. (a) Negligence or Intentional Disregard of Rules and Regulations With Respect to Income or Gift Taxes. - If any part of any underpayment (as defined in subsection (c)(1) of any tax imposed by subtitle A or by chapter 12 of subtitle B (relating to income taxes and gift taxes) is due to negligence or intentional disregard of rules and regulations (but without intent to defraud), there shall be added to the tax an amount equal to 5 percent of the underpayment.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624977/	GERALD D. HANDKE AND SYLVIA F. HANDKE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentHandke v. CommissionerDocket No. 24380-86United States Tax CourtT.C. Memo 1990-273; 1990 Tax Ct. Memo LEXIS 291; 59 T.C.M. (CCH) 766; T.C.M. (RIA) 90273; May 31, 1990, Filed 291 Decision will be entered under Rule 155. Patrick Murray, for the petitioners. Gail K. Gibson and Mary E. Pierce, for the respondent. CLAPP, Judge. CLAPPMEMORANDUM FINDINGS OF FACT AND OPINION Respondent determined the following deficiencies in and additions to petitioners' Federal income taxes: Additions to tax under sectionYearDeficiency6653(a)(1)6653(a)(2)6653(b)66611978$ 65,654----$ 32,827--197917,114----8,557--198022,104----11,052--198151,264----27,309--1982576,171$ 28,809-- $ 57,617After mutual concessions, the issues are petitioners' liability for Federal income taxes resulting from alleged improper treatment of items of income and expense by petitioner's wholly owned subchapter S corporation for the years 1978 through 1982, and petitioners' liability for the fraud additions under section 6653(b) for the years 1978 through 1981. All section references are to the Internal Revenue Code for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. FINDINGS OF FACT We incorporate by reference the stipulation of facts and attached exhibits. Petitioners resided in St. Paul, Minnesota292 when they filed their petition. All references to petitioner in the singular are to Gerald D. Handke. Petitioner has a bachelor's degree in business and economics from Hamline University. He is the president, chief executive officer, and sole shareholder of Handke Grain Service, Inc. (the corporation), a subchapter S corporation incorporated in June 1967. The corporation is an accrual basis taxpayer whose taxable year ends on June 30. The corporation buys and sells grain and charcoal, provides hauling services with its own trailers, and until late 1980 operated a grain elevator. Sylvia Handke (Mrs. Handke) is the corporate secretary. Starting in 1973, the corporation employed petitioners' daughter, Jerri Lynn O'Dell, as the corporate bookkeeper. Her duties included writing corporate checks and maintaining the corporate journals. Petitioner was an alcoholic during the years in issue. However, he went to the office most mornings and spent approximately 5 hours there. He also spent 15 to 20 hours per week meeting with customers at their places of business. Petitioner determined the account in the corporate journal to which most expenses were to be posted. Petitioner knew that 293 for tax purposes the income of the corporation was the excess of receipts over expenses. The corporate and personal returns for the years in issue were prepared by Paul Beecroft (Beecroft), a licensed public accountant. The corporation provided Beecroft with the corporate journals, a copy of the corporate checks, the corporate bank statements, and the deposit forms. Beecroft did not see the invoices, receipts, or other records associated with the expenses entered in the corporate journals. Beecroft would check the accuracy of the journal by matching the checks and deposits with journal entries and would record any charges, such as bank charges and interest payments. Beecroft prepared the returns from the information in the corporate journals. Based on the records that he saw, Beecroft thought the corporate records were prepared adequately. Beecroft prepared petitioners' personal returns from tax forms, such as Schedules 1099 and K-1, and from a questionnaire that he sent to petitioners. Beecroft did not see petitioners' checkbooks, receipts, or other personal records. In the notice of deficiency, respondent determined that the corporation had paid many of petitioners' personal 294 expenses during the corporate years ending in 1978 through 1981. As a result, he increased petitioners' dividend income due to constructive dividends from the corporation. He also adjusted the corporation's taxable income and undistributed taxable income. As adjusted, the corporation's taxable income ranged from a low of $ 88,531.30 in the taxable year ending in 1979 to a high of $ 253,880.91 in the taxable year ending in 1981. The adjustments made by respondent are too numerous to mention in full but were based in part upon the following facts. Petitioner endorsed and personally negotiated certain checks made payable to the corporation. The corporation paid a number of personal expenses that were posted to various accounts in the corporate journal and deducted on the corporate returns. The corporation posted to its grain purchases account its purchases of a snowmobile, a pool table kept at petitioner's home, a stock option, and municipal bonds and the interest incurred to purchase them. The corporation posted to its grain elevator expenses account the cost of remodeling work on petitioners' residence. The corporation posted to its utilities account the cost of electrical and 295 gas service to petitioners' residence. The corporation posted to its taxes account the taxes assessed on petitioners' home, some of which were also deducted on petitioners' individual return. The corporation posted to its insurance account the insurance on motor vehicles owned by petitioners. The corporation posted to its repair and maintenance account the cost of crystal chandeliers in petitioners' home and the cost of remodeling petitioners' home. The corporation posted to its depreciation account the depreciation on petitioners' automobiles and motor home. The corporation deducted payments on life insurance policies that petitioners had on each other. In addition, certain invoices and receipts falsely indicated that personal expenditures made by the corporation were for corporate items. At petitioner's request, a contractor who did room expansion and miscellaneous carpentry at petitioners' house completed certain invoices to show that the work was "Maintenance and repair on buildings." At petitioner's request, the same contractor falsely stated at an October 1983 deposition that some of his work was done at the business. In addition, various receipts from a hardware store 296 that sold home furnishing items were placed in evidence. One receipt was for a "Control Unit for Semi Trailer Refer," an item which the hardware store did not sell. On one corporate check for home improvements, petitioner typed "Bldg. Repairs." On another corporate check for home improvements was written the notation "paint grain elevator." On a charge card bill, petitioner indicated that a charge for a shower enclosure was for "steel-bolts & plywood to repair van trailer." On other charge card bills, petitioner had noted that charges for chandeliers were "Bldg. Repair -- Grain Elevator -- Security Light & Bulbs," and "For dust probe light fixtures for Grain Elevator." In November 1981, petitioner falsely told the revenue agent conducting the audit that an invoice for bathroom labor and materials at his home was for the bathroom at the grain elevator. In the notice of deficiency for the 1982 tax year, respondent determined that the corporation had unreported income of over $ 1 million. Respondent now agrees that petitioners' deficiency for 1982 was substantially less than determined in the notice of deficiency. During 1982, the corporation paid and deducted expenses similar to those 297 in 1978 through 1981. Petitioners were first audited in late 1981. In June 1985, petitioner was indicted on counts of tax evasion under section 7201 for his 1979 and 1980 tax years. In October 1985, petitioner pled guilty to the count of tax evasion for the 1980 year. As a part of the plea bargain, the tax evasion charge for 1979 was dismissed. OPINION The issues are petitioners' liability for Federal income taxes resulting from alleged improper treatment of items of income and expense by petitioner's wholly owned subchapter S corporation for the years 1978 through 1982, and petitioners' liability for the fraud additions under section 6653(b) for the years 1978 through 1981. I. Liability for taxPetitioners bear the burden of proof. Rule 142(a). Accordingly, we consider as conceded the many items which they have not addressed on brief. We will briefly discuss some of petitioners' arguments regarding the remaining items. Petitioners state that the record is devoid of any evidence that the corporation failed to report the income represented by the checks that were made payable to the corporation but deposited or cashed by petitioner. This argument does not help petitioners because 298 they bear the burden of presenting evidence that they did report the income. Petitioners also argue that they may take a deduction for the snowmobile purchased in January 1978 because petitioner used the snowmobile after a heavy snow to get to his trailers and sweep off snow before the snowplow arrived. We do not find this explanation to be plausible, in part because petitioner presented no evidence that would support it. We conclude that petitioner used the snowmobile for recreation. Another of petitioners' arguments is that various expenditures, such as the pool table and chandeliers, were deductible because they were part of a home office. Petitioner may at times have done some work at home, and he testified that his home was his "corporate headquarters." However, there is no evidence that petitioner had a home office which was exclusively used on a regular basis as his principal place of business. See section 280A(c)(1)(A). In addition, even if petitioner did have a home office, we question whether items such as a pool table and chandeliers could rightfully be considered to be part of the home office. The corporation purchased certain municipal bonds during the years in issue. 299 Petitioner says the corporation held the bonds as collateral for an open line of credit for margin calls. However, petitioner did not introduce a single document which indicated that the bonds were so used. So far as we can tell from the record, the bonds were personal investments. In addition, petitioner has not explained why the corporation would be entitled to deduct the cost of a capital asset such as a bond. The corporation also took certain deductions relating to automobile expenses. Respondent has disallowed a portion of these deductions. Petitioners have offered no evidence, other than their unsubstantiated testimony, to support deductions greater than those allowed by respondent. Petitioners assert that the corporation should be able to deduct as business expenses the cost of the alcohol petitioner purchased for himself and his business colleagues. This is an interesting argument since petitioner also argues that his actions were not fraudulent because his alcoholism impaired his cognition and memory, and prevented him from keeping adequate records. Thus, petitioner seeks to take a business deduction for expenditures which, he asserts, harmed his ability to manage 300 his business. We reject this argument. Petitioners also assert that the corporation should be able to deduct interest expenses relating to its purchase of municipal bonds in 1978 through 1980. However, interest is not deductible when it is incurred to purchase tax-free bonds. Sec. 265(2). Petitioners additionally assert that the corporation should be able to deduct $ 5,679 interest expense incurred in 1981. Respondent in the notice of deficiency determined that this $ 5,679 amount was not expended for the purpose designated. Petitioners have introduced no evidence on this issue, so this deduction is disallowed. Petitioners discuss numerous other deductions. We have considered each of those deductions and have determined that none is supported in the record. Accordingly, petitioners have failed to carry their burden of proof with respect to all items for the years 1978 through 1981, and with respect to all items for 1982 after adjustments for respondent's concessions. We next discuss petitioners' contention that a subchapter S corporation cannot make constructive dividends, and thus that they could not have received dividend income from the corporate expenditures. Petitioners 301 apparently make this argument because they believe that a dollar of disallowed deductions on the corporate level will cause them to realize both one dollar of constructive dividend income and one dollar of income passed through from the corporation as undistributed taxable income. However, undistributed taxable income is reduced by one dollar for every dollar of dividends paid. Sec. 1373(c). Accordingly, the disallowance of a dollar of deductions on the corporate level will cause petitioners to realize only one additional dollar of taxable income. However, petitioners' argument that a subchapter S corporation cannot make constructive dividends has implications for the timing of their tax liability. Because the corporation has a June 30 taxable year, any undistributed taxable income allocable to the second half of a calendar year would not be passed through to petitioners until the following calendar year. However, any constructive dividend would be realized by petitioners at the time the corporation paid their personal expenses. Thus, petitioners' tax liability will be delayed if a subchapter S corporation cannot make constructive dividends. Petitioners' argument might appear to 302 be supported by several cases that held that the constructive receipt doctrine does not apply to subchapter S corporations. See McKelvy v. United States, 201 Ct. Cl. 557">201 Ct. Cl. 557, 478 F.2d 1217">478 F.2d 1217 (1973); Attebury v. United States, 430 F.2d 1162">430 F.2d 1162, 1168 (5th Cir. 1970); Estate of McWhorter v. Commissioner, 69 T.C. 650">69 T.C. 650, 659-660 (1978), affd. 590 F.2d 340">590 F.2d 340 (8th Cir. 1978). However, the issue in these cases was whether the shareholders had constructive receipt of dividend income prior to the time when their subchapter S corporation actually made a distribution. The constructive receipt of income is described in section 1.451-2(a), Income Tax Regs: (a) General rule. Income although not actually reduced to a taxpayer's possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions. * Unlike the cited cases, which 303 involved the possible constructive receipt of a dividend distribution that would occur in the future, the instant case involves a completed distribution. The corporation actually paid petitioners' obligations, and petitioners actually were relieved of a liability. The only issue is whether the treatment given a direct cash distribution should extend to an indirect distribution accomplished by the corporation's payment of petitioners' liabilities. This is very different from the issue addressed in the cited cases, and accordingly those cases are inapplicable to the instant case. We conclude that petitioners did receive constructive dividends because the substance of the corporate payments was essentially the same as if there had been direct cash distributions. We should note that Attebury v. Commissioner , supra at 1168, says -- In our opinion, the phrase "amount of money distributed * * * during the taxable year" [in section 1373(c)] means actual cash distributions to shareholders before the end of the corporate year.If only a direct cash distribution is an "actual cash distribution," Attebury would imply there was no constructive dividend in the instant case because there was 304 no actual cash distribution to the shareholders that would have caused a reduction in undistributed taxable income under section 1373(c). However, actual cash distributions are not limited to direct cash distributions. Accordingly, the reference in section 1373(c) to the "amount of money distributed" applies both to a direct cash distribution to shareholders and to a distribution accomplished through the payment of the shareholders' personal obligations. The Attebury court also discusses the language of section 1.1373-1(f), Income Tax Regs., and concludes that "a distribution is deemed to occur only when it is actually paid by the corporation." Attebury v. Commissioner, supra at 1168. This conclusion is consistent with our analysis because in the instant case the corporation actually paid the distribution when it paid petitioners' personal expenses. Accordingly, the distribution occurred at that time. II. FraudRespondent determined that petitioners are liable for additions to tax under section 6653(b) for the years 1978 to 1981. We will uphold respondent's determination if he shows by clear and convincing evidence that petitioners intended to evade taxes known to be owing by 305 conduct intended to conceal, mislead, or otherwise prevent the collection of taxes. Rowlee v. Commissioner, 80 T.C. 1111">80 T.C. 1111 (1983); Rule 142(b). As a result of pleading guilty to violating section 7201 for 1981, petitioner is collaterally estopped from denying that a part of the deficiency in that year was due to fraud. Arctic Ice Cream Co. v. Commissioner, 43 T.C. 68">43 T.C. 68, 74-75 (1964).In addition, petitioner's actions necessarily lead to the conclusion that he intended to evade taxes during 1978 through 1981. Petitioner is a college graduate who knew that his corporation owed taxes on the difference between its revenues and expenses. Yet he had the corporation pay numerous personal expenditures which were posted to the corporate books and deducted on the corporate returns as corporate expenses. Petitioner methodically committed his fraud. Every corporate payment of petitioners' insurance was posted to the corporate insurance account, every corporate payment of petitioners' taxes was posted to the corporate taxes account, and every corporate payment of petitioners' utilities was posted to the corporate utilities account. Petitioner asked some suppliers to falsify records, and petitioner 306 himself wrote false explanations on some documents. During the years 1978 through 1981, petitioner's efforts to shift personal expenses to the corporation were so careful, meticulous, consistent, and repetitive that we cannot possibly find that they were occasional oversights or innocent mistakes. The entire pattern of petitioner's actions shows a clear intent to evade tax and to conceal his actions. We have no doubt that he knew what he was doing and why he was doing it. Petitioner makes various defenses to the fraud charges. One is that he did not intend to evade tax because he relied upon his accountant's judgment and just signed the tax returns. However, petitioner did not tell his accountant that he was providing false information, so his accountant did not know that the returns were false. Thus, petitioner hardly could rely upon his accountant's judgment regarding the adequacy of the returns. Petitioner also says that his accountant gave him an unqualified opinion about his books, and that he relied on the opinion. However, the accountant testified that he never checked the accuracy of any of the information provided him. In addition, an accountant's failure to detect 307 fraud hardly absolves the person who created the fraud. Petitioner also asserts that he considered his home to be his office and, thus, thought that any expenditures incurred there could be paid by the corporation and deducted on the corporate return. We find it hard to believe, however, that a college graduate would believe that an expenditure on items such as a pool table and chandeliers could be deducted as corporate expenditures. Petitioner's argument also is inconsistent with his actions. If he honestly believed that the expenditures were deductible, he would not have tried to hide the expenditures on the corporate books, nor would he have falsified various documents and asked the contractor to lie at the deposition. We also note that petitioner testified that he charged only about half of the home improvements to the corporation. If petitioner had honestly believed that such expenses were deductible by the corporation, we are confident he would have charged all of them to the corporation. Petitioners also point out that they were first audited in late 1981, and they argue that under these circumstances it is inconceivable that they would have subsequently signed their 1981 308 tax return specifically intending to evade payment of tax. However, petitioner's fraudulent bookkeeping continued during 1981, and there is no evidence that petitioner took any steps to undo his fraud before he filed his 1981 return. Finally, petitioner argues that his alcoholism seriously impaired his cognition and memory, preventing him from forming the requisite intent to evade taxes. His actions, however, are inconsistent with this theory. This is not the case of someone who was so incapacitated that he did not know that he was posting personal expenditures to corporate accounts. Instead, petitioner methodically falsified the books. We do not mean to downplay the severity of petitioner's drinking problem, but we note that petitioner testified that even some of his drinking pals did not know he was an alcoholic. This is confirmed by a revenue agent's testimony that at a November 1983 interview petitioner was very knowledgeable about corporate affairs and had a good command over procedures and records. Further confirmation of petitioner's ability to function normally is his testimony that during the years at issue he reviewed information such as newspapers and stock reports 309 that he used to make decisions regarding investments in his personal brokerage account. We also note that in the taxable year ending in 1981 the corporation had taxable income of $ 253,880.91, which was higher than in any of the three previous years. Accordingly, petitioner's drinking problem did not cause his business to deteriorate during the 1978 through 1981 period. An expert on alcoholism, Faruk Abuzzahab, M.D. (Abuzzahab), testified for petitioner. Abuzzahab had never seen petitioner before he examined petitioner for about an hour in June 1988 and concluded that he suffered from chronic alcoholism. Abuzzahab conducted his exam after petitioner had stopped drinking and was not familiar with petitioner's business activities or tax situation. In addition, Abuzzahab did not verify any information furnished by petitioner and did not even ask petitioner if he had a personal physician. Abuzzahab concluded that petitioner's alcoholism prevented him from keeping adequate records. Petitioner argues that for this reason he should not be liable for the fraud additions. However, it is clear that petitioner did a very good job of keeping records. His problem was not inadequate records 310 but false records. Abuzzahab also said petitioner would have had difficulty remembering what he did during a year when he filed a tax return on April 15 of the next year. However, the evidence indicates that the false records were created contemporaneously during the year and were due to a desire to evade tax, not to poor memory. We conclude that petitioner is liable for the fraud additions for the tax years 1978 through 1981, because in all those years he posted personal expenses to the corporate accounts with the intention that these expenses would be deducted on the corporate returns. Mrs. Handke is not liable for the fraud additions because respondent has not shown that some part of the underpayment was due to her fraud. Sec. 6653(b). Petitioners' brief does not address the additions under sections 6653(a) and 6661 for 1982. Those additions have not been conceded by respondent, so they are considered to be conceded by petitioners. Decision will be entered under Rule 155. Footnotes. 50 percent of the interest due on the deficiency.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624979/	W. E. GUILD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. H. A. MILLER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. H. M. FINKBINE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. W. T. SHEPHERD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. G. W. THOMAS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. ESTATE OF K. E. JEWETT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. AUGUSTA FINKBINE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. ADDIE H. FINKBINE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. EMELIE B. STAPP, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. MARIE G. STAPP, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. ROBERT H. FINKBINE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. E. C. FINKBINE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.DOROTHY FINKBINE SAUERS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. FLORENCE S. FINKBINE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. W. O. FINKBINE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. MRS. K. E. JEWETT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. R. G. BERRY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Guild v. CommissionerDocket Nos. 6020, 8120, 18117, 18130, 18134, 18171-18180, 18182, 18227, 19661, 27021.United States Board of Tax Appeals19 B.T.A. 1186; 1930 BTA LEXIS 2242; May 28, 1930, Promulgated 2242 1. INCOME - DIVIDENDS - DISTRIBUTION IN LIQUIDATION. - Amounts received by petitioners in 1921 and 1922 from a corporation of which they were stockholders, and representing distributions of earnings accumulated by the corporation subsequent to February 28, 1913, held to be income to them exempt from normal tax and subject to surtax under the Revenue Act of 1921, whether normal dividends or distributions in liquidation. 2. Id. - Upon the proof, held that similar distributions made by the corporation to these petitioners in 1919 and 1920 were not made in liquidation of the corporation within the meaning of section 201(c) of the Revenue Act of 1918 and were under the provisions of that act income to petitioners, exempt from normal tax and subject to surtax. J. G. Korner, Jr., Esq., and C. B. Stiver, Esq., for the petitioners. J. E. Marshall, Esq., and M. Parshall, Esq., for the respondent. TRUSSELL 1187 These proceedings, consolidated for hearing and decision, are appeals from deficiencies in income taxes determined by respondent in respect to the several petitioners for years and in amounts as follows: Docket No.YearsAmounts60201919, 1920, 1921, 1922$34,459.7081201919, 1920, 1921, 19222,972.32181171919, 1920, 1921, 19227,727.24181301919, 1920, 1921, 19222,534.24181341919, 1920, 1921, 19222,040.10181711919, 19225,664.45196611920, 19218,201.72181721920, 1921, 192215.50181731919, 1920, 1921, 1922100,073.10181741920, 1921, 1922135.89181751920, 1921, 1922$68.14181761919, 1920, 1921, 192210,884.31181771919, 1920, 1921, 192283,010.67181781919, 1920, 1921, 1922935.24181791919, 1920, 1921, 1922993.25181801920, 1921, 192229,817.792702119199,456.49181821919, 1920, 1921, 19227,716.31182271919, 1920, 1921, 19227,137.962243 1188 These deficiencies all arise from similar action taken by respondent in respect to each petitioner by including in taxable income for these years, for purposes of surtax, the several amounts received by each in those years as dividends from a corporation of which they were stockholders. This action is the only error assigned in each proceeding, the petitioners contending that all of these payments constituted liquidating dividends and should be treated under the Revenue Acts of 1918 and 1921, as made in exchange for stock, and the total being in each case less than the March 1, 1913, value or cost of the respective stockholdings, no portion represented taxable income. FINDINGS OF FACT. The petitioners were, during the taxable years involved in the several proceedings, stockholders in the Finkbine Lumber Co., an Iowa corporation owning large tracts of timberlands in Mississippi and having lumber mills and offices at Wiggins and D'Lo, Miss. This corporation was organized in 1901 by E. C. Finkbine, W. O. Finkbine, W. E. Guild, and K. E. Jewett, who were close business and personal friends and who had, for many years, been associated together in the timber business2244 in the west, as owners of the Green Bay Lumber Co. Early in 1901 these parties obtained an option upon a tract of timberland of between 50,000 and 60,000 acres at Wiggins, Miss., on the east side of the Gulf & Ship Island Railroad, containing between 200,000,000 and 300,000,000 feet of timber, and an option upon a much larger tract on the same railroad about 100 miles distant at D'Lo, Miss., containing approximately 573,000,000 feet of timber. Thereupon, they organized the said Finkbine Lumber Co., hereinafter referred to as "the corporation," with an authorized and issued capital stock of $400,000 par value, associating with themselves as stockholders certain individuals who had been connected with the Green Bay Lumber Co. as stockholders and certain other parties who were old employees of that company and whose services they wished to retain for the rew company. Upon organization the corporation acquired these two tracts under the options. The tract at Wiggins had on it a small mill. The D'Lo tract was undeveloped. The tract acquired at D'lo the corporation had purchased as a speculation, its plans not contemplating the cutting of the timber, but the resale of the tract at2245 a profit which would be used in furthering its operations at Wiggins. With this idea in view it placed this tract in the hands of brokers for sale. In 1904 the corporation acquired another large tract of land at Wiggins on the west side of the Gulf & Ship Island Railroad, known as the "Moore Tract" and containing approximately 200,000,000 feet of timber. 1189 Between 1902 and 1913 the corporation in its operations completely exhausted the timber on the tract first acquired at Wiggins. In these operations the corporation had met numerous reverses which had been quite expensive. In logging this tract it had been necessary to build and equip a railroad 28 miles long. In order to obtain a return of at least some of this expense and with the view of obtaining permanent railroad facilities for this section and make it possible to dispose of the cut-over land for farming purposes, it negotiated contracts with one Jones, then owner and president of the Gulf & Ship Island Railroad, under which the latter agreed to purchase the railroad built by the corporation for $250,000, payable in installments, and to take possession of and operate this road as a part of the Gulf & Ship2246 Island Railroad at the conclusion of the use of it by the corporation. In order to effect this arrangement with Jones, the corporation constructed this road in a manner more permanent and at more expense than it otherwise would have done, with grades, bridges, and steel of specifications usual in a permanent branch line railroad but not called for where operation would only be temporary for purposes of logging operations. The cost of this railroad to the corporation was between $365,000 and $375,000. In this arrangement with Jones it was further contemplated that this railroad would be extended by the Gulf & Ship Island Railroad to connect with the Mobile, Jackson & Kansas City Railroad, and this extension would be made through a large body of hardwood timber of some one billion feet lying just beyond the corporation's then present holdings, and plans were entertained by the corporation of acquiring and logging this tract if that were done. On June 24, 1914, Jones notified the corporation that he would not take over its railroad as agreed, but it might retain the road and the payments already made by him and which then amounted to $150,000. The corporation brought suit for specific2247 performance and for damages and was unsuccessful in this litigation and finally was forced to salvage the road, obtaining about $60,000 from this salvage. The refusal of Jones to carry out his contracts resulted in a great deal of damage to the corporation aside from the item of agreed consideration not received. This was due to its having, in anticipation of a permanent, operating railroad, organized a corporation known as the Mississippi Farms Co., all the stock of which was owned by the corporation and through which it was engaged in developing its cut-over lands into farming land and disposing of them. In doing this it advanced considerable sums to this company which established and operated a large experimental farm, and 1190 offices in several cities for colonizing the lands. These lands, about 60,000 acres, were transferred to the Mississippi Farms Co. The corporation had also organized the American Pickle & Canning Co., which constructed a modern plant at Wiggins to provide a market for the farm products of the tract. The success of these two subsidiary companies and of the whole development of the cut-over lands depended upon the obtaining of railroad transportation, 2248 and, as a result of the breach of his contracts by Jones, these two companies were liquidated with a large loss and the corporation was confronted with, and finally had to compromise, a number of suits brought by individuals who had purchased farms in the tract on assurance of an operating railroad and then had been forced to abandon them on failure of the railroad project to materialize. The corporation had also during this period suffered loss from other causes, a tropical hurricane in 1906 having blown down approximately 100,000,000 feet of timber, causing it a loss estimated to be about $500,000, and many vexing and expensive actions had been brought against it by the State of Mississippi. Certain of its lands consisted of "school sections," the title to which was in the State and held under 99-year leases by the parties conveying to the corporation. Such leases had been sold and traded in for many years and were understood to entitle the leaseholder to cut the timber. However, the State now took the position that these leases only permitted the removal of the timber to clear the land, and not for sale, and this position was upheld by its Supreme Court and the corporation2249 was thereby required to again purchase and pay the State for the timber. The State also prosecuted the corporation and various of its employees for alleged violations of its so-called "blue laws," among these prosecutions being ones for working on Sunday in keeping fires under the boilers of its engines and in clearing away railroad wrecks. It also brought a proceeding against the corporation seeking to forfeit its property under an old statute which forbade the owning of more than $1,000,000 of property in the State by a foreign corporation. This action was successfully defended by the corporation. The corporation made numerous efforts prior to 1915 to dispose of the D'Lo tract. At one time it effected an arrangement with the Goodyear Lumber Co. for sale to it of the property, and that company deposited $25,000 as a guarantee, but just as the matter was being closed the failure of a bank which was the financial backer of the Goodyear Co. made it impossible for the latter to complete the deal, and it forfeited the deposit. Subsequently, the corporation negotiated a deal for sale of this tract to another large company and 1191 within a few days of its being finally closed2250 the proceeding by the State to forfeit the property of the corporation was filed and the prospective purchaser in consequence refused to take the property. During these years of operation the market for the greater part of the corporation's product was Germany and Belgium. In 1914, following the assassination at Sarajevo of the Archduke of Austria, the buying by these markets suddenly ceased. Then in August of that year the European War opened and the corporation's foreign markets were entirely cut off. Large amounts of timber, cut in special size for this market, had accumulated, for which the corporation was forced to construct storage facilities, and a domestic market for this was finally secured at a sacrifice of a portion of its normal value. By 1915 the officers of the corporation were discouraged and sceptical as to what the future might hold. Certain of the smaller stockholders who had been employees of the old Green Bay Co. and who had borrowed the money with which they had purchased their stock in the corporation, and were paying interest on these loans, were alarmed and were finding it difficult to carry their investments, as the corporation in 1914 had made no2251 profit but had sustained a net loss of $14,510.16. Certain of these small stockholders who were employees of the company were further embarrassed financially in having to accept 20 per cent reductions in salary from the corporation, a general reduction in this percentage having been voluntarily agreed upon by all officers and employees of the corporation because of the condition of the market and the great decrease in company business. This was the situation confronting the corporation when it held its annual stockholders' meeting in January, 1915. At this meeting a report was read and filed by the general manager of the corporation, detailing the difficulties which the corporation was meeting, its trouble in marketing its lumber and in securing the necessary funds for operation and development. He urged that steps be taken to find a purchaser without delay for the D'Lo tract so as to realize the capital there tied up and use this in the operation of the plant and development of the property at Wiggins. At this time the original Wiggins tract on the east side of the Gulf & Ship Island Railroad had been completely cut over and logging operations had been begun on the Moore tract2252 on the west side of that railroad. The timber on this tract, it was estimated, would take from 10 to 12 years to cut. At this time there had been no development at all of the D'Lo tract. As of March 1, 1913, the timber on the Moore tract was 197,871,600 feet and on the D'Lo tract 565,759,700 feet. 1192 After hearing the report of the general manager there was a general discussion among the stockholders, all of them being present either in person or by proxy, at this and all other times during the life of the corporation, the stockholders being few in number and consisting of the original stockholders, or members of their families who had received original stockholdings by gift, inheritance, or purchase. After a discussion lasting the better part of two days, a resolution was presented, agreed upon, and passed by the stockholders, that the corporation from that time forward should not acquire additional timber holdings but should occupy itself with the logging, manufacture, and disposal of the timber then owned by it, and to liquidate and close up the affairs of the corporation as soon as it could be done economically, and charging the directors elected at this meeting2253 with the carrying out of this program. This resolution was not entered upon the minutes of the meeting. In authorizing and directing this program to be carried out it was understood that the D'Lo tract, which up to that time had been held for resale, would be developed and the timber logged and manufactured and that to do this would require large additional financing and the construction of a large plant at D'Lo. Immediately following this meeting of the stockholders the directors held a meeting to perfect plans to carry out the program directed and it was agreed that the individual property and credit of E. C. Finkbine, K. E. Jewett, W. E. Guild and the Green Bay Lumber Co. should be pledged as security for loans necessary to be obtained to finance the new operation agreed upon. This was done, and with this guarantee a line of credit of $400,000 was obtained from the Continental and Commercial Bank of Chicago and additional amounts borrowed by the corporation from other banks upon its notes endorsed by these individuals. Steps were thereupon taken to develop the D'Lo tract and certain of the officers traveled over the country inspecting the large mills and their construction, 2254 equipment and methods of operation and with the aid of the information thus gathered a plant was erected at D'Lo, consisting of a large concrete and steel mill equipped with the most modern type of machinery, an ice plant, electric plant, sheds, homes for the workmen and their families, etc. The amount expended on construction of this plant during the year 1916 was in excess of $1,000,000. During 1916 the lumber market strengthened and the corporation's financial condition began to improve. Early in 1917 this Government entered the World War and the demand became very great for lumber. The Government was building camps and cantonments 1193 and the corporation had no trouble in disposing of its product and its earnings increased in consequence and it carried forward continuously its operations at both the Wiggins and D'Lo plants. The net earnings of the corporation for each year from March 1, 1913, through the taxable years here involved were as follows: 1913 (income after Mar. 1, 1913)$108,268.741914 (net loss)- 14,510.16191543,008.381916156,701.361917197,296.761918347,612.781919605,952.681920804,474.691921205,405.241922570,120.77Total net income3,024,331.242255 The corporation's earnings during 1915, 1916, and 1917 were used to pay off its indebtedness, and not until 1918 did it find itself with cash available for distribution to its stockholders. On July 19, 1918, the directors passed the following resolution: Thereupon, a motion was made by H. F. Graefe, seconded by W. O. Finkbine, and unanimously carried, instructing W. E. Guild, as Treasurer, to declare and pay monthly cash dividends in liquidation at such times and amounts as the cash proceeds will permit, and directing him, when such distributions are made, to charge same against the surplus account on a basis of valuing timber at Six Dollars ($6.00) per M.B.M., and One Dollar for naval stores, and March 1, 1913, as the basic date; also directing him when such distribution was made to notify the stockholders that the dividend is paid in accordance with their instructions to liquidate the assets of the corporation, and that upon advice of counsel the distribution is free from tax until further advised. Beginning in 1918 the corporation made the following distributions to its stockholders: 1918$80,0001919480,0001920480,0001921460,0001922480,000Total1,980,0002256 The net earnings of the corporation from March 1, 1913, through the calendar years here in question were in excess of the distributions made to its stockholders during that period. The total of the distributions made to each of these petitioners during the calendar years 1918 to 1922, inclusive, were less than the total of the March 1, 1913, value of his or her respective stockholdings acquired prior to that date and the cost of such stockholdings as were acquired subsequent thereto. The following is a summary of the corporation's surplus accumulations and distributions made therefrom from March 1, 1913, to December 31, 1922. 1194 Surplus on Mar. 1, 1913$718,312.41Undivided profits earned subsequent toMar. 1, 1913, over and above the current realizations of values as of3/1/13: Additional profits earned in 1913$107,629.64Less charge termed "premium on stock purchased"18,119.37Remainder Dec. 31, 191389,510.27Deduct deficit of 1914$15,791.82Deduct dividend of 191424,000.0039,791.82Remainder Dec. 31, 191449,718.45Additional profits earned in 191542,585.06Additional profits earned in 1916155,485.71Additional profits earned in 1917193,369.61Total Dec. 31, 1917441,158.83Additional profits earned in 1918316,959.13Subtotal758,117.96Deduct dividend of 191880,000.00Remainder Dec. 31, 1918678,117.96Additional profits earned in 1919467,496.98Subtotal1,145,614.94Deduct dividends of 1919480,000.00Remainder Dec. 31, 1919665,614.94Addittonal profits earned in 1920654,243.01Subtotal1,319,857.95Deduct dividends of 1920480,000.00Remainder Dec. 31, 1920839,857.95Deduct deficit of 1921$39,048.47Deduct dividends of 1921460,000.00499,048.47Remainder Dec. 31, 1921340,809.48Additional profits of 1922513,143.48Subtotal853,952.96Deduct dividends of 1922480,000.00Remainder Dec. 31, 1922373,952.96373,952.96Credit to surplus in 1918 termed "premium on capital stock"22,575.00Total surplus and undivided profits asof Dec. 28, 19221,114,840.372257 The following are condensed balance sheets of the corporation as of December 31, 1914, a date just prior to the stockholders' meeting of January, 1915, and December 31, 1922, the close of the last taxable year involved in these proceedings: 1195 Dec. 31, 1914Dec. 31, 1922AssetsCurrent assets$392,353.19$1,263,164.47Mill plant and miscellaneous assets (at cost)1,056,645.892,212,804.4Land and timber (at cost)1,761,970.943,058,071.82Land and timber (appreciation, Mar. 1, 1913)3,278,431.181,705,168.79Total6,489,401.208,239,209.48Liabilities, reserves, and capitalCurrent liabilities1,190,042.23818,803.20Reserve for depreciation of plant and equipment309,303.511,083,311.99Reserve for depletion on cost of land and timber442,091.731,437,321.05Reserve for depletion on appreciation of land and timber106,501.691,679,764.08Surplus from operations768,030.861,114,840.37Surplus from appreciation3,278,431.181,705,168.79Capital stock395,000.00400,000.00Total6,489,401.208,239,209.48The corporation carried on its active operations from 1915 through the taxable years here2258 involved and subsequent to that period and completed the development, logging, manufacture, and sale of timber upon the Wiggins and D'Lo tracts. During the years 1915 to 1922, inclusive, it made the following additions to the plants at D'Lo and Wiggins: YearAdditions to D'Lo Additions toplantWiggins plant1915$20,755.1619161 $1,012,413,699,246.761917129,825.2213,843.29191854,051.5312,245.171919$18,660.04$22,943.82192071,339.1719,525.82192118,091.325,210.15192280,487.049,835.21In January, 1923, one unit of the Wiggins plant was destroyed by fire. Insurance of $140,000 was collected and the unit was rebuilt at a cost of $200,000. At that time there was much timber yet to be cut on the Moore tract at Wiggins and it was more economical to rebuild the plant at this cost than to ship the logs by rail to the D'Lo plant for manufacture. Subsequent to March 1, 1913, the following acquisitions of timberlands were made by the corporation: Additions to Moore tractAdditions to D'Lo tractYearFeetCostFeetCost1913 (10 months)107,662$309.32470,000$520.001914812,1143,321.35410,000875.001915727,6022,611.926,725,00026,542.5019161,130,3514,628.497,405,67123,416.1219173,292,30616,303.5149,863,149193,173.06191838,605,000278,675.001,572,0002,703.001919480,0002,580.002,319,2987,180.8719208,945,000303,765.64990,0005,502.621921685.0002,067.40192254,525,000469,187.001,567,0004,285.002259 1196 All of the lands above shown, acquired subsequent to the stockholders' meeting of January, 1915, were lands necessary to be acquired to economically log the areas already owned by the corporation on that date. In some cases the tracts acquired cut into the holdings of the corporation, making it more expensive to work around them than to acquire them. In other cases the lands blocked the corporation from reaching portions of its owned tract. In other cases the lands acquired, although not blocking the operations of the corporation by their location, were owned by the same interests which owned lands which did block those operations, and these interests required the corporation to take these lands as a condition of its agreement to sell the other lands, which the corporation was forced by necessity to acquire. In 1918 the corporation acquired a tract of 45,663 acres of cut-over pine lands. This tract was the original Wiggins tract on the east side of the Gulf & Ship Island Railroad which the corporation had conveyed to the Mississippi Farms Co., and which was reconveyed to the corporation after the collapse of that company, the stated consideration being $143,953.25, 2260 which represented the indebtedness of the defunct company to the corporation.On September 25, 1921, the charter of the corporation expired by limitation and the stockholders took the necessary action and secured a renewal of it for an additional period of 20 years. The minutes of the corporation show the following action taken by the directors on January 19, 1925: DIRECTORS' MEETING, FINKBINE LUMBER CO., Des Moines, Iowa, January 19, 1925.Meeting called to order by the President, the following directors being present: E. C. Finkbine W. O. Finkbine W. E. Guild C. E. Klumb Jacob Klumb H. M. Finkbine R. G. Berry * * On motion of W. O. Finkbine, seconded by R. G. Berry, the following Resolution was unanimously adopted: WHEREAS, "Jacob Klumb and Associates" are equipped for drilling and have for several months last past been drilling a tract of land acquired by it, north of D'Lo, Simpson County, Mississippi, for the purpose of determining whether or not there is oil in that locality, and are now down more than thirty-five hundred feet and have expended for machinery, supplies, labor. etc., approximately eighty thousand dollars and have now practically2261 exhausted all of their funds, and WHEREAS it may be of great benefit to the Finkbine Lumber Company, as the owner of a large tract of land in that locality, that said drilling be continued, to the end that the territory may be more fully exploited for the purpose of determining whether there is oil in that locality, and said exploitation can be more cheaply accomplished by the said Jacob Klumb and Associates, with their machinery, equipment and employees now assembled, 1197 NOW, THEREFORE, BE IT RESOLVED that the Treasurer of the Finkbine Lumber Company be and he is hereby authorized, empowered and directed to advance to the said Jacob Klumb and Associates, as it may be needed, a sum not to exceed forty thousand (40,000) dollars, in installments as needed, to continue the drilling upon the lands held by said Jacob Klumb and Associates. In event oil in paying quantities is discovered by Jacob Klumb and Associates, the said money shall be repaid by said Jacob Klumb and Associates to the Finkbine Lumber Company, with interest at six per cent annum from date of advancement, out of the first proceeds received by Jacob Klumb and Associates, from oil found. In event no oil2262 is found by said Jacob Klumb and Associates, or not in sufficient paying quantities, said Jacob Klumb and Associates shall not be bound to return any of the said money so advanced by the Finkbine Lumber Company, but the same shall be charged by the Finkbine Lumber Company to "expense account" as money paid out for exploitation and discovery as if upon its own lands. PROVIDED HOWEVER, that the Finkbine Lumber Company shall not be or be made liable or in any manner obligated for any of the obligations or undertakings of said Jacob Klumb and Associates. There being no further business to be transacted, a motion to adjourn was sustained. /S/ E. C. FINKBINE, President.ATTESTED: /S/ C. E. KLUMB, Assistant Secretary.About the year 1925 some of the parties most largely interested in the corporation organized a Delaware corporation, the Finkbine-Guild Lumber Co., with a capital of $2,000,000. About the same time the corporation had caused to be organized a corporation known as the Finkbine-Guild Transportation Co., all of whose stock it owned. The first-named company arranged with the corporation to acquire and take over its D'lo plant for a stated consideration. 2263 The Finkbine-Guild Transportation Co. acquired five steamships from the United States Shipping Board, the deferred payments on the purchase price of which amounted to $500,000, payable in ten annual installments of $50,000 each, the last one falling due in 1935. The corporation endorsed and guaranteed the payments for the Finkbine-Guild Transportation Co. It was also agreed that the Finkbine-Guild Lumber Co. should acquire the D'Lo plant of the corporation for a stated consideration which was arranged to be liquidated by that company shipping logs from a tract it owned and was operating in California, on vessels of the Finkbine-Guild Transportation Co. through the Panama Canal, for delivery to the corporation at D'Lo and for the corporation to manufacture these logs into lumber and market same, the cost of such manufacture to be charged against the proceeds and the Finkbine-Guild Lumber Co. to assume all risk of shrinkage or loss in operation of the plant and to pay 5 per cent interest on any deferred payments of the purchase price of same. 1198 Under this arrangement logs were shipped to and manufactured by the corporation subsequent to 1925. At the same time the corporation2264 was also engaged in completing the logging of its pine timber on the D'Lo tract. On September 14, 1926, the directors of the corporation adopted a resolution approving a guarantee by the corporation of a line of credit of $500,000 to the Finkbine-Guild Lumber Co. by a Chicago bank. Following the date of the annual stockholders' meeting in 1915, the corporation carried on active operations continuously to a date several years subsequent to the last taxable year here involved. During all of this period it continued to hold its regular annual stockholders' meetings and elect its directors. In each of these years corporate officers were regularly elected and, together with the directors, managed and directed the operations of the company, which were during this time the active logging of its timber holdings, the manufacture of lumber in its mills and the marketing of this lumber through its sales organization. On January 17, 1928, the stockholders met and passed the following resolution: WHEREAS, At the annual meeting held January 18, 1915, it was the unanimous opinion and consent of the stockholders assembled, the requisite number being present in person or by proxy to lawfully2265 transact any business in accordance with the laws of Iowa and our Articles of Incorporation, that the assets of the Finkbine Lumber Company be placed in liquid form, liabilities quieted, and the excess be distributed to the stockholders under such plan as may be determined upon by the Directors, and to terminate the corporate existence; and WHEREAS, The same stockholders, directors and officers are present here today, excepting Messrs. K. E. Jewett and H. F. Graefe, who have departed this life, now, therefore BE IT RESOLVED, That a record now be made ratifying, confirming and acknowledging the action taken by the stockholders in meeting assembled January 18th, 1915, at Des Moines, which meeting unanimously agreed to liquidate the company assets, satisfy all liabilities existing or incurred in liquidating, to distribute the excess to the stockholders, and dissolve the corporate existence; and BE IT FURTHER RESOLVED, That in accordance with the foregoing resolution and the action of the stockholders in meeting assembled January 18, 1915, the time is now arrived when it is deemed prudent to terminate the corporate existence and the directors are authorized and empowered to prepare2266 the necessary instruments, or to procure counsel or obtain other means, whereby the corporate life of this corporation may be dissolved and extinguished in accordance with the statutes of Iowa and its Articles of Incorporation; and RESOLVED FURTHER, That the dissolution herein be made as of this date and the President and Assistant Secretary of this company be and they are hereby authorized, empowered and directed to sign, acknowledge, record, publish, and do any and all things which are by law required, to execute, complete and carry into effect the above and foregoing resolutions. (R. 369-70.) 1199 The amounts in question distributed to the several petitioners in each year, the amount of stock of the corporation held by each in the several years, the March 1, 1913, value of such of this stock as was acquired prior to that time and the cost of such of the stock as was acquired subsequent thereto, are not in dispute, the parties hereto having filed a formal stipulation in each case setting out these facts. OPINION. TRUSSELL: The only issue here presented is the character of certain distributions made to these petitioners during the taxable years in question, as stockholders2267 of the Finkbine Lumber Co., petitioners contending that such distributions were made by the corporation in the course of liquidation, and under the Revenue Acts of 1918 and 1921 must be considered as a return of capital, and the total in each case being less than the March 1, 1913, value or the cost of the stock, no portion represented taxable gain. Respondent contends that the Finkbine Lumber Co. was not in liquidation during these years, or the payments were not made in liquidating that corporation, and that they represented normal corporate dividends and were income to petitioners subject to surtax. In so far as the distributions here in question made in the calendar years 1921 and 1922 are concerned, little discussion is necessary, as the liability of such distributions to surtax is covered by the provisions of the Revenue Act of 1921, which includes "dividends" in income subject to such tax, and provides: SEC. 201. (a) That the term "dividend" when used in this title (except in paragraph (10) of subdivision (a) of section 234 and paragraph (4) of subdivision (a) of section 245) means any distribution made by a corporation to its shareholders or members, whether in cash or2268 in other property, out of its earnings or profits accumulated since February 28, 1913, except a distribution made by a personal service corporation out of earnings or profits accumulated since December 31, 1917, and prior to January 1, 1922. (b) For the purposes of this Act every distribution is made out of earnings or profits, and from the most recently accumulated earnings or profits, to the extent of such earnings or profits accumulated since February 28, 1913; but any earnings or profits accumulated or increase in value of property accrued prior to March 1, 1913, may be distributed exempt from the tax, after the earnings and profits accumulated since February 28, 1913, have been distributed. * * In Frank D. Darrow,8 B.T.A. 276">8 B.T.A. 276, we held that dividends as defined in section 201 above quoted, include distributions in liquidation to the extent of earnings or profits accumulated since February 28, 1913, such earnings when distributed in liquidation being subject to the surtax and exempt from normal tax. See also 2269 Philetus W. Gates,9 B.T.A. 1133">9 B.T.A. 1133, and Eric A. Pearson et al.,16 B.T.A. 1405">16 B.T.A. 1405. 1200 In the present case it is shown that the distributions made from March 1, 1913, through the taxable years here involved were in each case less than the earnings on hand accumulated since that date, and on authority of the decisions cited, those made in 1921 and 1922 represent income to the distributees subject to surtax even if the petitioners are correct in their contention that they were made in liquidation of the corporation. As to the distributions made to these petitioners in 1919 and 1920, a different situation exists. The taxability of these distributions is to be determined under the Revenue Act of 1918, the provisions of which, in respect to taxable income represented by corporate distributions differ from those of the later act above quoted by including in section 201(c) the provision that: Amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for stock or shares, and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits. It follows that the distributions2270 in question made to these petitioners in 1919 and 1920, if in fact made in effecting the liquidation of the corporation, in the sense in which that term is used in the section quoted, they must be considered as a return of capital to the extent of the undistributed March 1, 1913, value of the stock, or cost thereof if acquired subsequent to that date. There is no dispute as to the March 1, 1913, value of the stock or the cost of those shares subsequently acquired and, it being shown that the total distributions in the case of each petitioner are less than these cost bases, and no part of the several amounts distributed represents taxable income, if the petitioners are correct in their contention as to the character of the distributions. Petitioners contend that the corporation was in process of liquidation at all times and continuously from January, 1915; that the stockholders by proper resolution at that time voted for liquidation and dissolution and authorized the directors then elected to carry out this direction, and that following this all of the activities of the corporation had as their primary object the turning of the corporate assets into money, the payments of corporate2271 debts and the distribution of any remaining balance among the stockholders and the dissolution of the corporation. In support of their contention petitioners point out that following this resolution by the stockholders the corporation acquired no more timber properties except such as were necessary to economically develop and carry on the logging, manufacture and disposal of the timber owned by it on that date. They insist that under existing conditions liquidation of the assets of the corporation to the best advantage could only be accomplished by operation, as there was a market for the manufactured product, but a sale could have been 1201 effected of the timber holdings, if at all, only at a sacrifice of a large part of their real value. They insist that no act is shown on the part of the corporation which is inconsistent with a program of liquidation in process of being carried out. It is respondent's contention that whether or not the stockholders of the corporation resolved on liquidation and intended that the corporation be liquidated, the fact as to whether or not it actually went into liquidation immediately following that resolution and occupied such status2272 during the taxable years in question here, and whether the distributions in question were actually made in effecting such liquidation, is to be determined from its activities subsequent to the adopting of the resolution, considered in the light of conditions existing during the period of such activities, and considering the circumstances under which the distributions in question were made and what they, in fact, represented. In support of his contention that the corporation was not in liquidation during the period in which these distributions were made, respondent points out that following the adoption of this resolution, and as a result of it, the activities of the corporation in the purposes for which organized, instead of showing a decrease indicating a winding up or cessation of business, were enormously increased; timber which the corporation had up to that time not intended to manufacture but to sell en bloc was added to its logging area, more than one million dollars was borrowed and expended for increased facilities for operation and a program was definitely entered upon which meant necessarily more than ten years of future operation of larger volume and more intensive2273 character than the corporation had ever before been engaged in during the time when it was admittedly a going concern not engaged in winding up its business. Respondent insists that the corporation was not from that time forward, and during the years here in question, engaged in liquidating the business, as the contrary must be presumed from the fact that it was operating actively and prosperously in doing all those things for which it was created and was doing nothing which indicated liquidation, but on the other hand many of its activities were inconsistent with those of a corporation in process of being wound up and dissolved, among these being its organization in 1925 of a subsidiary corporation engaged in transportation and endorsing the latter's obligations falling due in the future as late as 1935, the renewal of its charter by the stockholders upon its expiration in 1921, its guarantee of a line of credit of $500,000 extended by a Chicago bank to another corporation organized by certain of its stockholders, and its advance of $40,000 to one of its directors to use in exploration for oil upon adjacent property not belonging to it, with the understanding that it be repaid only2274 in the event that oil in paying quantities was found. 1202 Petitioners' counsel in their brief contend that, this being an Iowa corporation, the decisions of the Supreme Court of that State are binding upon us in determining whether the corporation was in liquidation during the taxable years 1919 to 1922, inclusive, in the sense in which that term is used in section 201(c) of the Revenue Act of 1918. With this we do not agree. The decision of that question involves the construing of no statute of that State, it being shown that not until long after the period here in question did the directors proceed for the dissolution of the corporation in accordance with the Iowa statute and initiate the process of winding up of the corporation provided for thereby. Section 721, Revised Statutes provides: The laws of the several States, except where the Constitution, treaties, or statutes of the United States otherwise require or provide, shall be regarded as rules of decision in trials at common law, in the courts of the United States, in cases where they apply. The word "laws" as used in this section, to quote the language of the court in 2275 Swift v. Tyson,16 Pet. 1, refers to: * * * The positive statutes of the state and the construction thereof adopted by the local tribunals, and to rights and titles to things having a permanent locality, such as the rights and titles to real estate, and other matters immovable and intra-territorial in their nature and character. This rule has been recognized and applied repeately. Kuhn v. Fairmont Coal Co;,215 U.S. 349">215 U.S. 349; Black & White Taxicab Co. v. Brown & Yellow Taxicab Co.,276 U.S. 518">276 U.S. 518. In the present case, however, the question to be determined is not the construction of a state statute, but is in fact a question of the meaning to attach to the words "amounts distributed in liquidation of a corporation" as used in a Federal statute. We are not to ascertain what the courts of Iowa have determined as a status of liquidation, but what that status was as Congress viewed it in using that term in the taxing act. In resolving this question we are not bound by either state laws or the construction placed thereon by state courts, as is illustrated in 2276 Burk-Waggoner Oil Association v. Hopkins,269 U.S. 110">269 U.S. 110, where it was held that a business organization might be a partnership under a state law and yet be considered for purposes of taxation as an association under the Revenue Acts of the United States. Compare also Weiss v. Wiener,279 U.S. 333">279 U.S. 333. The word "liquidation" when applied to a partnership or company has a general meaning, well recognized by textwriters and courts, as the operation of winding up of its affairs by realizing its assets, paying its debts and appropriating the amount of profit or loss. 37 Corpus Juris 1265; Assets Realization Co. v. Howard,127 N.Y.S. 798">127 N.Y.S. 798; Gibson v. American Rwy. Express Co.,195 Iowa 1126">195 Iowa 1126; 193 N.W. 274">193 N.W. 274; Rohr v. Stanton Trust & Savings Bank,76 Mont. 248">76 Mont. 248; 245 Pac. 947; 1203 Gilna v. Barker,78 Mont. 357">78 Mont. 357; 254 Pac. 174; Lafayette Trust Co. v. Beggs,213 N.Y. 280">213 N.Y. 280; 2277 107 N.E. 644">107 N.E. 644; In Re Union Bank of Brooklyn,161 N.Y.S. 29">161 N.Y.S. 29. We have been able to find no case in which the question submitted for decision by the court was the status of a corporation during a period of years following a resolution by its stockholders authorizing liquidation, and during which it was actively engaged in normal operation, doing those things for which it was created, deriving a profit and making distributions only of such profits to its stockholders. The cases cited by counsel in which the courts have held corporations to be in liquidation are ones in which there have been definite and affirmative acts consistent only with liquidation and in themselves necessarily effecting a winding up and cessation of the corporate business, such as actual cessation of corporate activities, a sale of all corporate assets and business, or legal dissolution. These decisions are not in point. Although the particular question here involved does not appear to have been passed upon, the courts have recognized that a status of liquidation exists only where the activities of the corporation are for the purpose of winding up the affairs of the company. In2278 Assets Realization Co. v. Howard, supra, cited by petitioners, the court said: "The very meaning of the word 'liquidation' implies the winding up of the affairs of the company," and the status of liquidation appears by the decisions to be recognized as the opposite of or at least as distinguished from that of a "going concern." So in Hellmich v. Hellman,276 U.S. 233">276 U.S. 233, in discussing section 201(a) and (c) of the Revenue Act of 1918, here involved, the court held that Treasury Regulations 45 (articles 1541 and 1548) "correctly interpreted the Act as making section 201(a) applicable to a distribution made by a going corporation to its stockholders in the ordinary course of business and section 201(c) applicable to a distribution made to stockholders in liquidation." The court, in discussing Regulations 45, uses the following language: Treasury Regulations 45, which were promulgated under the Act, stated on the one hand, in Art. 1541, that for the purpose of the statute "dividends" comprise distributions made by a corporation to its stockholders "in the ordinary course of business, even though extraordinary in amount;" and, on the other2279 hand, in Art. 1548, that: "So-called liquidation or dissolution dividends are not dividends within the meaning of the statute, and amounts so distributed, whether or not including any surplus earned since February 28, 1913, are to be regarded as payments for the stock of the dissolved corporation. Any excess so received over the cost of his stock to the stockholder, or over its fair market value as of March 1, 1913, if acquired prior thereto, is a taxable profit. A distribution in liquidation of the assets and business of a corporation, which is a return to the stockholder of the value of his stock upon a surrender of his interest in the corporation, is distinguishable from a dividend paid by a1204 going corporation out of current earnings or accumulated surplus when declared by the directors in their discretion, which is in the nature of a recurrent return upon the stock." These Regulations, with a change made in 1921 as to the second sentence of Art. 1548, are still in effect so far as distributions in liquidation under the Act are concerned. It appears to us that the question here presented is whether the corporation, following the resolution of January, 2280 1915, continued its business through the taxable years in question as a going concern and the distributions in question were made from current earnings or accumulated surplus from such operations or whether upon the passage of that resolution it ceased to be a going concern and its activities had as their object not the purposes for which the corporation was organized but merely the object of winding up its business by converting its assets, paying its debts and distributing any remaining balance to its stockholders. This question we must determine from a consideration of the acts of the corporation throughout the years in question. Questions of taxation must be determined by viewing what was actually done, rather than the declared purpose of the participants; and when applying the provisions of the Sixteenth Amendment and income laws enacted thereunder we must regard matters of substance and not mere form.Weiss v. Stearn,265 U.S. 242">265 U.S. 242, 254. We can not presume liquidation to be in process merely because a resolution of the stockholders authorized the directors to take such action. Liquidation is not a technical status which can be assumed2281 or discarded at will by a corporation by the adoption of a resolution by its stockholders, but an existing condition brought about by affirmative action, the normal and necessary result of which is the winding up of the corporate business. The resolution of the stockholders of January, 1915, authorized the directors elected at that meeting to liquidate the corporation "as soon as it could be done economically" and we must judge by what was subsequently done whether such action was taken prior to the taxable years here involved and, if so, whether the distributions in question were incidents of such action. On this question the record shows that in passing this resolution the stockholders knew and had agreed upon a program of active future operation. Prior to that time the operations in progress were the logging and manufacture of the timber from a tract of less than 197,000,000 feet at Wiggins, which operation with the facilities then owned would occupy some 10 years. In addition to this the corporation owned at D'Lo, Miss., 100 miles away, a large undeveloped tract of approximately 573,000,000 feet of timber which its plans of operation did not contemplate that the corporation2282 would ever log and manufacture. This tract had been purchased as a speculation, it 1205 being intended to sell it at a profit. The program of operation agreed upon for the corporation by the stockholders, at the meeting of January, 1915, changed the plans of the corporation in respect to this D'Lo tract, it being agreed to add it to the area which the corporation would log and manufacture, thus increasing from approximately 197,000,000 to nearly 800,000,000 feet the timber contemplated to be logged, manufactured and disposed of by active and diligent operation. In authorizing this action it was clearly understood that the corporate activities would be greatly expanded and would necessarily be carried on actively in increased volume for more than 10 years, and that large sums would have to be borrowed to secure facilities for the increased operation, and additional tracts of timber would have to be purchased to consolidate present holdings. The record further shows that these things contemplated in January, 1915, to be done in respect to expansion of activities, were done; that the corporation borrowed and expended in the year 1916 more than a million dollars for a modern2283 plant at D'Lo, and entered upon the most active period of operations in its entire history. These operations were profitable and were continued to a time subsequent to the taxable years here in question. During this period the corporation purchased additional tracts of timber, in consolidating its two large tracts for operation, amounting in all to 178,832,377 feet and for which it paid $1,342,622.19, the logging and manufacture of which was done as a part of the active operations which followed the resolution of January, 1915.In respect to petitioners' contention that it was necessary to manufacture its timber in order to realize its value and the realization of such value was a necessary incident of liquidation and therefore such operation can not be considered as inconsistent with a status of liquidation, it may be said that such operation is also consistent with a going concern, the generally accepted definition of which is "some enterprise which is being carried on as a whole, and with some particular object in view." Oliver v. Lansing,59 Nebr. 219; 2284 80 N.W. 829">80 N.W. 829. When we consider merely the fact that these operations, carried on in the usual and normal way, in addition to realizing the value of the corporate assets, returned large profits for each year, the piture presented is wholly consistent with the attaining of the object for which the corporation was created, even though it might be said to be not inconsistent with a program of liquidation. But when we consider further that the individuals elected as directors in 1915 did not take over and administer the assets of the corporation in the usual and customary manner of a liquidating committee, but the corporation continued to function following that time as in the past, with its stockholders participating in its general scheme of management, 1206 holding their regular annual meetings and electing each year a new board of directors, which elected officers and actively carried on and directed the corporate activities, the picture presented is, in our opinion, one of a going concern. Considering these things alone it would be difficult to conclude that during this period the corporation was engaged in liquidation - in winding up its affars, even though its2285 stockholders might have agreed upon a program which contemplated liquidation and dissolution. When, however, we consider that the directors during this period not only took no steps toward dissolution, although under section 8392 of the Iowa Code the corporation in that event would have been continued with authority to do all things necessary to wind up its business, but on the other hand actually renewed the corporate charter for an additional period of 20 years; that the corporation's plans of operation necessarily included the acquisition of additional properties which it actually, during that period, purchased at a cost of approximately $1,343,000; that during this time, of more than 10 years of active, prosperous operation, its capital was not only never impaired by distributions to its stockholders, but was consistently kept intact by the maintenance of the necessary reserves for that purpose, we can not avoid the conclusion that the corporation was not in liquidation and the distributions in question were not distributions in liquidation in the sense in which that term is used in section 201(c) of the Revenue Act of 1918. The distributions as made, considering the2286 circumstances of the corporation, assuredly did not effect or tend to effect a winding up of the business. They were distributions which left the capital of the corporation unimpaired. They were made during a period of active operation from the net earnings of that period and there is nothing to indicate that they would not have been made even had there been no determination on the part of the stockholders or directors to liquidate the corporation. We can not hold them to be distributions in liquidation merely because they were so characterized in the resolution of the directors authorizing their payment. Weiss v. Stearn, supra.The fact that they represented the profits accruing from a liquidation of assets of the corporation does not stamp them as liquidating distributions. Nearly all profits of a manufacturing corporation are of such character, and especially corporations such as this, whose normal operations entail the depleting and exhausting of their timber, or in other words, the liquidating of such assets. In 2287 E. G. Perry,9 B.T.A. 796">9 B.T.A. 796, we had for consideration a situation in some respects similar to the one here presented, it being there contended that accumulated profits distributed by a corporation to its stockholders after a determination to dissolve and liquidate, but which were distributed before such dissolution, were distributions 1207 in liquidation under section 201(c) of the Revenue Act of 1918. In this case, although the earnings in question were not accumulated subsequent to the determination to dissolve, and although the dissolution and actual winding up of the corporate business was effected immediately following the distribution in question and immediately following the date liquidation was determined upon, we held the distributions not to have been made in liquidation in contemplation of that section. In that case we said: At the time the dividends were declared the corporation was not in dissolution and there was no retirement of the capital stock in whole or in part, nor was there any impairment of the capital of the corporation.The dividends were declared wholly from surplus and earnings. Even if it be conceded, as the respondent apparently2288 contends, that the declaration of the dividend was in anticipation of the dissolution of the corporation and a step taken preliminary thereto, it is our opinion that the dividend would not fall within section 201(c) as made "in liquidation of a corporation." A dividend in liquidation of a corporation implies that there has been either an impairment of its capital by a distribution thereof to its stockholders or a retirement of the capital stock in whole or in part. It will be noted that section 201(c) provides that liquidating dividends "shall be treated as payments in exchange for stock of shares." While by no means conclusive, the language is indicative of an intention to confine the use of the term to those distributions which affect the stock or shares of the corporation. The dividend here in question distributed profits only without in any way affecting the capital of the corporation. The corporation might or might not liquidate later, but in either event the dividend would remain as an indebtedness to the stockholders. We are of the opinion that whether or not there was an intention on June 30, 1919, to later dissolve the corporation, no liquidation took place on that day2289 and that the character of the dividend then declared would not be changed by subsequently carrying out any intention to dissolve which might then have existed. We can see in the resolution of January, 1915, no more than the adoption by the stockholders, for the corporation, of a general program of operation, with authority to the directors to wind up the affairs of the corporation and liquidate at such times as, in their judgment, that action could be taken economically, and we can see in the actions of the stockholders and directors and the activities of the corporation after 1915 and through the years here involved nothing more than the carrying out of that program of operation to the end that the affairs of the corporation might be so arranged that the liquidation authorized, if and when entered upon, could be economically effected. We do not hold that any one of the individual and enumerated acts of the corporation, or conditions existing in the taxable years here in question, if considered alone, would be impossible to reconcile with a status of liquidation. Our conclusion is that, considering all of those acts of the corporation in the light of existing conditions as shown2290 by the record of this proceeding, it can not be considered that *1208 it was then engaged in liquidation, or that the distributions of earnings during those years were in liquidation in the sense in which that term is used in section 201(c) of the Revenue Act of 1918. Reviewed by the Board. Judgment will be entered for the respondent.Footnotes1. Original expenditure. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624981/	CLEO STEPHENS DENISON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentDenison v. CommissionerDocket No. 25057-82.United States Tax CourtT.C. Memo 1984-219; 1984 Tax Ct. Memo LEXIS 457; 47 T.C.M. (CCH) 1695; T.C.M. (RIA) 84219; April 25, 1984. Cleo Stephens Denison, pro se. Paula M. Jung, for the respondent. FEATHERSTONMEMORANDUM FINDINGS OF FACT AND OPINION FEATHERSTON, Judge: Respondent determined the following deficiencies in petitioner's Federal income taxes and additions to tax for 1978, 1979 and 1980: Additions to TaxSec. 6651(a)Sec. 6653(a)Sec. 6654YearDeficiencyI.R.C. 1954I.R.C. 1954I.R.C. 19541978$4,694.96$1,173.74$234.75$149.8719795,013.031,253.26250.65208.5419805,601.831,400.46280.09366.52The issues for decision are as follows: (1) Whether petitioner had gross income which he did not report for 1978, 1979 and 1980; and (2) Whether petitioner is liable for additions to tax under sections 6651(a), 1459 6653(a), and 6654 in each of the 3 years in controversy. FINDINGS OF FACT On the date the petition was filed, petitioner was a resident of the State of Arkansas and, at the times relevant to this proceeding, was married to Ivalene Denison. Petitioner's wife filed Forms 1040 for 1978, 1979, and 1980 with the Internal Revenue Service (IRS) in which she reported income as a married person filing separately; on her returns, she claimed the zero bracket amount (standard deduction) and one personal exemption in computing the tax. Petitioner filed no income tax returns for the 3 years here in controversy. During 1978, 1979 and 1980, petitioner was a self-employed brickmason. He received the amounts of $11,521.40, $9,970.10 and $6,531.92 from Sheets Materials Company in the calendar years 1978, 1979 and 1980, respectively, as payments for contract masonry work. The record includes copies of each of the checks issued to petitioner totalling those amounts. Under the terms of this contract work, Sheets Materials Company furnished all construction materials and supplies460 required for the masonry work done by petitioner, and petitioner supplied the labor. 2Petitioner also performed personal services as a brickmason for persons other than Sheets Materials Company in each of the years 1978, 1979 and 1980. Petitioner was not an employer, and did not withhold any tax on wages of employees or file any partnership or employer's returns for 1978 through 1980. Petitioner maintained no records of any kind and supplied no information to the IRS with respect to either his income or his deductions. Respondent, therefore, reconstructed petitioner's income and determined that petitioner received unreported income from his brickmasonry work in the following amounts: 1978$16,011.84197917,333.68198018,639.92461 This determination was based on statistics of the Bureau of Labor Statistics (BLS), United States Department of Labor, for average weekly earnings of masonry, stonework and plastering construction workers on payrolls of sample establishments in each of the years 1978, 1979 and 1980 as follows: Construction SIC 174 - Masonry, Stonework and Plastering Worker Average Weekly Earnings 197819791980$307.82$333.34$358.46OPINION Petitioner is a staunch tax protester who did not file income tax returns for any one of the 3 years 1978, 1979 and 1980 and who refused to maintain, or supply to the IRS any records or other information with respect to his income or expenses. Yet the notice of deficiency shows that the Commissioner had specific information demonstrating that petitioner was engaged in a lucrative brickmasonry contracting business and received precise amounts of income in each of the years in controversy from Sheets Materials Company. At the trial, petitioner admitted that he performed services for, and received income from, other persons as well. 462 When a taxpayer fails to file a return, and fails to maintain sufficient books and records, the IRS is entitled to reconstruct the taxpayer's income by any reasonable method. Mallette Bros. Construction Co. Inc. v. United States,695 F.2d 145">695 F.2d 145, 148 (5th Cir. 1983); Cupp v. Commissioner,65 T.C. 68">65 T.C. 68, 82 (1975), affd. 559 F.2d 1207">559 F.2d 1207 (3d Cir. 1977). The courts have long recognized that, in reconstructing a taxpayer's income in such circumstances, estimates may be used. E.g., Holland v. United States,348 U.S. 121">348 U.S. 121, 125 (1954) (living costs as an element of the net worth and cash expenditures method); Hallabrin v. Commissioner,325 F.2d 298">325 F.2d 298, 302-305 (6th Cir. 1963), affg. a Memorandum Opinion of this Court ("reasonable estimates"). We think the use of the Bureau of Labor Statistics as a basis for estimating petitioner's brickmason income was reasonable.3 While petitioner may have had more or less earnings than the average earnings of brickmasons, he was given a full opportunity to show that he had less than the463 average amount.Such a determination, moreover, casts no greater burden on a taxpayer than the statutes themselves. 4464 Once respondent reconstructs a taxpayer's income and determines a deficiency in income tax, the burden is on the taxpayer to demonstrate that respondent's determination is erroneous. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure.Failure to carry that burden compels the Court to sustain the determined deficiency. Petitioner failed to demonstrate that respondent's determination is erroneous. At the trial, petitioner declined to be sworn as a witness and "take the stand in my defense." Instead, he argued that he "owes no such duty to the state since he receives nothing therefrom" and that "his rights are such as exist by the law of the land long antecedent to the organization of the state * * ." He denied that Congress has the power to impose a tax "on a private individual that is employed in a common law right" or to compel him to disclose the amount of his income. In essence, he argues that he is not taxable on the income from his labor. Upon being called as a witness by respondent, petitioner freely admitted that465 he did not file income tax returns, did not keep or submit to the IRS any records with respect to his income, was not an employer, and received compensation for his services to Sheets Materials Company and others in each of the years 1978, 1979 and 1980. Petitioner's argument that compensation for services is not income is, of course, frivolous. Section 61 expressly includes compensation for services as an item of gross income. The law books are replete with court decisions holding that compensation for labor is income; that neither the Fifth nor any other Amendment to the Constitution relieves an individual of the statutory obligation to file an income tax return, disclose the amounts of his income and pay a tax thereon; and that blanket assertions of the Fifth Amendment self-incrimination privilege may not be used to evade taxes. See, e.g., Rockwell v. Commissioner,512 F.2d 882">512 F.2d 882, 887 (9th Cir. 1975), affg. a Memorandum Opinion of this Court; Steinbrecher v. Commissioner,712 F.2d 195">712 F.2d 195, 197 (5th Cir. 1983), affg. a Memorandum Opinion of this Court; 466 Edwards v. Commissioner,680 F.2d 1268">680 F.2d 1268, 1270 (9th Cir. 1982), affg. a Memorandum Opinion of this Court; United States v. Francisco,614 F.2d 617">614 F.2d 617, 619 (8th Cir. 1980); Ginter v. Southern,611 F.2d 1226">611 F.2d 1226 (8th Cir. 1979); Lively v. Commissioner,705 F.2d 1017">705 F.2d 1017 (8th Cir. 1983), affg. a Memorandum Opinion of this Court; Rechtzigel v. Commissioner,79 T.C. 132">79 T.C. 132 (1982), affd. 703 F.2d 1063">703 F.2d 1063 (8th Cir. 1983); Rowlee v. Commissioner,80 T.C. 1111">80 T.C. 1111 (1983). In view of respondent's reconstruction of petitioner's income, which we have found to be reasonable under the circumstances, and in view of petitioner's failure to offer any evidence which would indicate that his income was less than the amounts determined by respondent, we sustain respondent's deficiency determinations. There remain the additions to tax. Section 6651(a)5 directs the imposition of an addition to tax, in the absence of reasonable cause, for failure to file a timely income tax return. Petitioner has not shown reasonable cause for his failure to file returns for the years before the Court. Section 6653(a)467 6 provides that there shall be imposed a 5-percent addition to tax if any part of the underpayment of tax is due to negligence or intentional disregard of the rules and regulations. Petitioner's basic argument is that he is entitled to disregard the tax laws enacted by Congress, and it is, therefore, clear that the underpayment here is due to intentional disregard of the revenue laws. Section 6654 provides for an addition to tax for underpayment of estimated taxes. Petitioner has offered nothing to show that this addition to tax does not apply. 468 In view of the frivolous nature of petitioner's arguments in the light of almost universal knowledge that compensation for services is taxable, consideration has been given to the imposition of damages under section 6673. We have decided not to do so in the circumstances of this case. We do call to the attention of petitioner, however, the recent revision of that section, 7 applicable to any action or proceedings in the Tax Court commenced after December 31, 1982, which authorizes the imposition of damages of as much as $5,000 whenever it appears to the Tax Court that the taxpayer's position in such proceedings is "frivolous or groundless." It is difficult to imagine an argument that more clearly fits that description than petitioner's position that Congress lacks power to impose a tax on his income. 8469 To reflect the foregoing, Decision will be entered for the respondent.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩2. Referring specifically to these payments from Sheets Materials Company, respondent made an alternative determination of deficiencies based on taxing petitioner only on such payments as follows: ↩Sec. 6651(a)Sec. 6653(a)Sec. 6654YearDeficiencyAdditionsAdditionsAdditions1978$2,857.23$714.31$142.86$91.4319792,174.58543.65108.7390.6419801,555.08288.7757.7574.463. Since the tax protesters movement was initiated, the courts have repeatedly approved determinations based on projecting a taxpayer's income in prior years into the current years in comformance with the Consumer Price Index. Edwards v. Commissioner,680 F.2d 1268">680 F.2d 1268, 1270 (9th Cir. 1982), affg. a Memorandum Opinion of this Court; Moore v. Commissioner,722 F.2d 193">722 F.2d 193 (5th Cir. 1984), affg. a Memorandum Opinion of this Court.The courts have also approved the use of Bureau of Labor Statistics cost-of-living statistics as a basis for deficiency determinations. Giddio v. Commissioner,54 T.C. 1530">54 T.C. 1530, 1533 (1970); Kindred v. Commissioner,T.C. Memo 1979-457">T.C. Memo. 1979-457, affd. 669 F.2d 400">669 F.2d 400 (6th Cir. 1982); see also Funk v. Commissioner,T.C. Memo 1979-426">T.C. Memo. 1979-426, affd. 672 F.2d 922">672 F.2d 922 (9th Cir. 1982); Howarth v. Commissioner,T.C. Memo. 1981-393; Denson v. Commissioner,T.C. Memo. 1982-360; Wheeling v. Commissioner,T.C. Memo 1982-246">T.C. Memo. 1982-246, affd. 709 F.2d 1512">709 F.2d 1512↩ (6th Cir. 1983). 4. Every taxpayer must maintain records which enable him to file a correct tax return. Sec. 6001; sec. 1.446-1(a)(4), Income Tax Regs.; under sec. 7602↩, the IRS is authorized to "examine any books, papers, records, or other data which may be relevant or material" to the determination of liability. Compliance with these statutes would have permitted the establishment of the exact amount of his income.5. SEC. 6651. FAILURE TO FILE TAX RETURN. (a) Addition to the Tax.--In case of failure-- (1) to file any return required under authority of subchapter A of chapter 61 (other than part III thereof), of subchapter A of chapter 51 (relating to distilled spirits, wines, and beer), or of subchapter A of chapter 52 (relating to tobacco, cigars, cigarettes, and cigarette papers and tubes), or of subchapter A of chapter 53 (relating to machine guns and certain other firearms), on the date prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount required to be shown as tax on such return 5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate. ↩6. SEC 6653. FAILURE TO PAY TAX. (a) Negligence or Intentional Disregard of Rules and Regulations with Respect to Income or Gift Taxes.--If any part of any underpayment (as defined in subsection (c)(1)) of any tax imposed by subtitle A or by chapter 12 of subtitle B (relating to income taxes and gift taxes), is due to negligence or intentional disregard of rules and regulations (but without intent to defraud), there shall be added to the tax an amount equal to 5 percent of the underpayment.↩7. 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 Tax Court in its decision. Damages so awarded shall be assessed at the same time as the deficiency and shall be paid upon notice and demand from the Secretary and shall be collected as a part of the tax. ↩8. Petitioner is no stranger to this Court. See Denison v. Commissioner,T.C. Memo. 1984-185↩, where petitioner made similar frivolous arguments involving his 1977 income tax liability.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624982/	Fritzinger Company, Inc. v. Commissioner.Fritzinger Co. v. CommissionerDocket No. 110379.United States Tax Court1943 Tax Ct. Memo LEXIS 452; 1 T.C.M. (CCH) 588; T.C.M. (RIA) 43076; February 12, 1943452 Emanuel M. Siegel, C.P.A.,B. & B. Bldg., Allentown, Pa., for the petitioner. Paul E. Waring, Esq., for the respondent. HILL Memorandum Findings of Fact and Opinion HILL, Judge: This proceeding is for the redetermination of deficiencies in income and excess-profits taxes as follows: DeficiencyIncomeExcess-YearTaxProfits Tax1936$2,170.85$407.0819371,911.39286.0919381,258.85477.1319391,323.08575.73The sole issue for decision is whether or not respondent erred in disallowing, as deductions from gross income, a portion of the amounts paid by petitioner in each taxable year to its officers and certain employees as compensation for personal services rendered. Findings of Fact Petitioner is a Pennsylvania corporation organized on February 28, 1932, and during the years 1932 to 1939, inclusive, was engaged in the manufacture of bakery products and ice cream, and in the operation of a garage. During the years 1936 to 1939, inclusive, petitioner employed between 20 and 25 persons. James Fritzinger, father of Fred Fritzinger, Oliver Fritzinger and Minnie Hoats, owned and operated a bakery business in Walnutport up to the time of his death 453 on September 14, 1931. After the death of James Fritzinger, his wife became the owner of the business and assets of the bakery, and gave those assets to her three children, Fred, Oliver and Minnie, who transferred them to petitioner corporation in exchange for its capital stock. The garage owned by petitioner was operated separately from the bakery and employed one mechanic and one helper. Petitioner's trucks were repaired and serviced at the garage, and petitioner paid the same charges to the garage as it would have paid elsewhere. The garage also repaired and serviced cars for others than petitioner, sold gasoline and oil, accessories, and new Buick automobiles and second-hand cars. During the year 1932 only three or four Buicks were sold by the garage; business was poor and the garage lost money during some years. During the years 1936 to 1939, inclusive, petitioner's outstanding common stock consisted of 750 shares of the par value of $100 per share, and Fred Fritzinger, Oliver Fritzinger and Minnie Hoats each owned one-third or 250 shares thereof. Fred Fritzinger was president of the corporation, Minnie Hoats was vicepresident and secretary, and Oliver Fritzinger was treasurer. 454 The gross sales, salaries paid to officers, wages paid to employees and the net loss or net income of petitioner for the years 1932 to 1939, inclusive, were as follows: GrossSalariesWagesNetNetYearSalesOfficersEmployeesLossIncome1932$ 95,737.85$ 2,620.00$22,366.13$5,029.11193399,769.484,180.0021,375.162,560.651934131,164.934,160.0023,800.621,047.941935155,943.826,500.0028,486.95$1,164.551936151,350.9518,600.0027,757.40352.301937179,122.0418,400.0030,812.82467.511938153,054.5317,097.7634,045.72248.141939149,546.4418,400.0032,229.98578.78Fred Fritzinger has been in the bakery business since 1902 when he was about 15 years of age. In 1932 he was 45 years of age when elected president of petitioner corporation, and during the taxable years devoted his entire time to the business of the corporation. He was responsible for the purchase of bakery equipment, negotiation of bank loans, and exercised general supervision over the operations of the bakery business. Oliver Fritzinger was 49 years old in 1932 at the time he was elected treasurer of petitioner corporation. During455 the taxable years he operated a garage owned by petitioner, and bought all automobiles, new and used parts, accessories, and all other purchases for the garage. He was also consulted by the other officers in regard to policies of the company. He had general supervision over the garage and devoted his entire time to the business. Minnie Hoats was the sister of Fred and Oliver Fritzinger, and in 1932 was 50 years old. She was a college graduate and worked in the bakery on Friday of each week. Also, she was frequently consulted on the business as a whole. Asa Hoats was the husband of Minnie, and he worked in the bakery every Friday. He worked for the company about two or three days each week. Thelma Fritzinger was the daughter-in-law of Fred Fritzinger, wife of his son James, and was employed by petitioner as bookkeeper. In 1932 she was approximately 23 years old. James Fritzinger was about 24 years old in 1932, and during the taxable years drove a truck for petitioner. He also made up the production sheets on Sunday and performed other duties. He worked from 55 to 60 hours a week. The amounts deducted by petitioner in its returns for the taxable years as compensation of officers 456 and certain employees, and the amounts allowed and disallowed by respondent were as follows: DeductionRespondentYearOfficer or EmployeeClaimedAllowedDisallowed1936Fred Fritzinger$ 8,000$ 3,900$ 4,100Oliver Fritzinger5,1502,6002,550Minnie (and Asa) Hoats5,4502,6002,850Thelma Fritzinger2,4001,3601,040$21,000$10,460$10,5401937Fred Fritzinger$ 8,000$ 3,900$ 4,100Oliver Fritzinger5,2002,6002,600Minnie and Asa Hoats5,2002,6002,600$18,400$ 9,100$ 9,3001938Fred Fritzinger$ 8,000.00$ 3,900$ 4,100.00Oliver Fritzinger3,797.962,6001,197.96Minnie Hoats5,200.002,6002,600.00James Fritzinger2,340.001,3001,040.00Thelma Fritzinger2,340.001,3001,040.00$21,677.96$11,700$ 9,977.961939Fred Fritzinger$ 8,000$ 3,900$ 4,100Oliver Fritzinger5,2002,6002,600Minnie Hoats5,2002,6002,600James Fritzinger2,5001,3001,200$20,900$10,400$10,500During the years 1932 to 1935, inclusive, the mortgage indebtedness of petitioner was as follows: at December 31, 1932, $13,000; at December 31, 1933, $10,000; at December457 31, 1934, $2,000; at December 31, 1935, none. Opinion Petitioner contends that because of the long hours devoted to its business by the officers and two employees above referred to, and the rather extraordinary services rendered, which obviated the necessity of employing additional help, the compensation paid and deducted in petitioner's returns for the taxable years was reasonable. On the other hand, respondent argues that the salaries paid during the taxable years were unreasonable and excessive, and were not paid as compensation for services actually rendered. Section 23 (a) of the Revenue Acts of 1936 and 1938 and of the Internal Revenue Code provides that in computing net income there shall be allowed deductions for certain business expenses, including "a reasonable allowance for salaries or other compensation for personal services actually rendered." Whether or not the salaries paid in the instant case constituted reasonable compensation for personal services actually rendered, we must determine in the light of the facts and circumstances disclosed by the record. A significant point which challenges attention at the outset is the fact that petitioner was a closely held family458 corporation, all of its common capital stock being owned in equal shares by Fred and Oliver Fritzinger and Minnie Hoats, brothers and sister, who were the only officers of petitioner corporation, and the salaries which respondent has determined were excessive were paid to these officerstockholders and to James Fritzinger (son of Fred Fritzinger) and his wife, Thelma. During the taxable years, petitioner had some 20 to 25 employees and the total salaries paid to such employees far exceeded the salaries here in controversy, but respondent found no objection to the reasonableness of the wages paid to any of the employees of petitioner other than its officer-stockholders and to the son and daughter-in-law of Fred Fritzinger. In 1932, the first year of the corporation's existence, its gross sales amounted to $95,737.85; it paid total salaries to its officers of $2,620, and had a net operating loss of $5,029.11. For the taxable year 1939 petitioner's gross sales amounted to $149,546.44, it paid officer's salaries of $18,400, and reported net taxable income of $578.78. Petitioner argues that it paid low salaries to its officers in 1932-1934 because of the fact that it was paying off its 459 outstanding mortgage indebtedness which, in 1932, amounted to $13,000. However, at December 31, 1934, this indebtedness had been reduced to $2,000 and was fully paid off prior to the end of 1935. In 1935 petitioner had gross sales of $155,943.82, paid to its officers total salaries of $6,500 and reported taxable net income of $1,164.55. For 1936, the first taxable year before us, the amount paid for officers' salaries jumped from $6,500 paid in the prior year to $18,600, while gross sales were $151,350.95, and it reported taxable income of only $352.30. Yet the services performed by the three officerstockholders and the two employees mentioned were substantially the same in all years, so far as the record discloses, and it had no outstanding mortgage indebtedness after 1935. Fred Fritzinger supervised purchases of all bakery equipment, finances and general operations of the business, devoting his entire time to petitioner's affairs. In each of the taxable years he received a salary of $8,000. Minnie Hoats worked in the bakery only on Fridays, and was consulted more or less frequently on matters of general policy. Her husband worked two or three days a week in the bakery and yet she*460 received for the services of herself and husband $5,450 in 1936, and $5.200 in each of the three remaining taxable years. Respondent has determined that the salaries paid and deducted from gross income were excessive to the extent disallowed, and the burden is upon petitioner to prove that such amounts were in fact reasonable compensation for the services actually rendered. This is especially true where the salaries were paid to the sole stockholders of the corporation and to immediate members of their families. Wagegro Corporation, 38 B.T.A. 1225">38 B.T.A. 1225, 1230. We have carefully considered all of the evidence in the record before us, and we are not convinced that it so clearly establishes error as to require us to disturb respondent's determination. Decision will be entered for respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624984/	ABCO OIL CORP., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentABCO Oil Corp. v. CommissionerDocket No. 20356-84United States Tax CourtT.C. Memo 1990-40; 1990 Tax Ct. Memo LEXIS 40; 58 T.C.M. (CCH) 1280; T.C.M. (RIA) 90040; January 23, 1990Barry H. Frank and Luther E. Weaver, III, for the petitioner. James P. Clancy, for the respondent. JACOBSMEMORANDUM FINDINGS OF FACT AND OPINION JACOBS, Judge: Respondent determined deficiencies in petitioner's Federal income tax for 1980 and 1981 in the amounts of $ 19,774 and $ 29,948, respectively. The issues for decision are: (1) whether petitioner, a fuel oil distributor, is entitled to amortize customer lists acquired in connection with the purchase of various assets of two competitors; and (2) whether petitioner may deduct the remaining amount owed under two covenants not to compete (acquired in connection with the purchase of the business of one of said competitors) upon the deaths of the covenantors.41 FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference. Petitioner, a Pennsylvania corporation having at all material times (including the date of filing the petition herein) its principal place of business in Norristown, Pennsylvania, is engaged in the business of selling and delivering fuel oil to residential and commercial customers in the Norristown area. It is a full service distributor which not only sells fuel oil on credit but also installs, repairs and services oil heating equipment. Prior to May, 1980, petitioner operated under the name Norristown Heat & Fuel Co. At all relevant times, Robert Gosin (Gosin) was petitioner's sole shareholder and president. Michael S. Panczak (Panczak) was a competitor of petitioner. In the late summer of 1979, Panczak contacted Gosin offering to sell his fuel oil business to petitioner. Panczak's offer was accepted, and on October 18, 1979, the parties entered into a written agreement pursuant to which petitioner agreed to purchase certain assets used in Panczak's business, including his customer list, a tank42 truck, and his inventory. Panczak's customer list was in the form of cards, one for each customer. The cards contained information as to the customer's name, address, home and work phone numbers, the size and location of the oil tank, information about filling the tanks, the customer's oil burning needs, whether the oil was used for hot water as well as heat, the specific burning rate of the burner, whether the customer was covered by a service contract, and whether the sale of the oil to the customer was subject to sales tax. The amount set forth in the agreement for the customer list was $ 120,000, which was paid to Panczak at settlement. Panczak's customer list consisted of 783 customers. As of December 31, 1982, 60 percent of the customers obtained from Panczak no longer did business with petitioner. Panczak agreed to relinquish the use of the name "Michael S. Panczak Fuel" as well as the use of the name "Panczak" in connection with the word "fuel." The agreement required Panczak to cooperate in having his phone number transferred to petitioner and to assist petitioner in retaining Panczak's customers up to and including the date of settlement. Flad Fuel Company, Inc.43 (Flad) was also a competitor of petitioner. In late 1979, Robert G. Flad, president of Flad Oil Company (Flad), contacted Gosin and the former offered to sell Flad's business to petitioner. Flad's offer was accepted and on October 20, 1979, the parties entered into a written agreement pursuant to which petitioner purchased certain assets used in Flad's business, including its customer list. The amount set forth in the agreement for the Flad customer list was $ 185,000, payable in installments over a five year period. The customer list acquired from Flad (also in the form of cards containing information similar to that set forth in the cards obtained from Panczak) consisted of 981 customers. As of December 31, 1982, 62 percent of the customers obtained from Flad no longer did business with petitioner. The Flad agreement was similar to the Panczak agreement in that petitioner acquired the right to use the name "Flad Fuel Company, Inc." Further, Flad agreed to cooperate in having its phone number transferred to petitioner and to assist petitioner in retaining its customers up to and including the date of settlement. Neither the Panczak nor Flad agreement provided for the transfer44 of goodwill, nor did either allocate any value to goodwill. Prior to purchasing Panczak's and Flad's businesses, Gosin reviewed the information on the Panczak and Flad customer cards with respect to the quantity of fuel which during the past year had been sold to customers. The amount petitioner paid for both customer lists was based on an industry standard, which was an amount equal to 80 percent of the aggregate price paid by customers for fuel oil less the distributor's cost for the oil. After selling their fuel oil supply businesses to petitioner, both Flad and Panczak remained in the area, performing sales, installation, and service for heating and air conditioning equipment. They remained in their old locations and used the same business signs that they had used before the sale. Petitioner wrote each of the persons named on the lists acquired and informed them of the transfer. It kept the Panczak and Flad phone numbers and listed them in the phone book. Petitioner never used the names of either Flad or Panczak on signs outside its location. Petitioner had the delivery trucks purchased from both Flad and Panczak repainted in its own colors and logo before placing them45 into service. When a customer received a delivery of oil, he was given a delivery ticket that bore petitioner's name. When bills were sent to customers, petitioner's address was given as the return address and was printed on an enclosed return envelope. Petitioner hired one of the deliverymen previously employed by Flad and two of the deliverymen previously employed by Panczak. These new employees were given petitioner's uniforms to wear which differed colorwise from the Panczak and Flad uniforms. Petitioner leased a part of Flad's storage facility for a brief period following the sale but conducted no other business on Flad or Panczak property. In 1980, the fuel oil business was extremely competitive in the Norristown geographical area. There were at least 40 other companies vying for petitioner's customers. As the price of oil and gas rose in the 1970s, customers became primarily interested in the price charged for the fuel rather than the quality of service. Fuel oil discounters, who offered few or no services, obtained an increasing share of the market. During the early 1980s, in the geographical area serviced by petitioner, the average annual customer turnover rate was46 20 percent. As part of the Flad agreement, petitioner obtained covenants not to compete from Flad, Robert Flad, Marion Flad, and Gregory Flad (the Flad covenants). Robert and Marion Flad were married; Gregory Flad was their son. Both Robert and Marion Flad were officers of Flad, and as of the time of sale, both had been involved in the retail fuel oil supply business for many years. Gregory Flad, on the other hand, had been working in the fuel oil supply business for less than a year. Each covenant was for a five year period. The stated consideration for the Flad covenants was $ 25,000 which was paid to the three Flad individuals (and not to the company) as follows: Robert Flad$ 12,000Marion Flad$ 12,000Gregory Flad$ 1,000TOTAL$ 25,000Each noncompetition agreement provided that the rights and duties contained therein would be binding upon, and would inure to the benefit of, the personal representatives and heirs of the covenantors. Payments by petitioner for such covenants were to be made in five equal annual installments of $ 2,400 to Robert Flad, $ 2,400 to Marion Flad, and $ 200 to Gregory Flad, beginning in 1980. The required47 payments to the Flads were made in 1980 and 1981. Robert and Marion Flad both died in the latter part of 1981. Petitioner continued to make payments to Robert and Marion Flad until January, 1985, in accordance with the 5-year payment schedule. The checks were made payable to Robert and Marion Flad (even though they were deceased) pursuant to the instructions of the attorneys representing their estates. Petitioner maintained its books, and filed its tax returns, using the accrual method of accounting. On its 1981 return, petitioner deducted $ 5,000 for amortization of the Flad covenants and deducted the remaining $ 15,000 payable for the Flad covenants. Petitioner also claimed deductions for amortization of the Panczak and Flad customer lists on its 1980 and 1981 tax returns. Respondent disallowed these deductions. OPINION The first issue to be decided is whether petitioner is entitled to amortize the Panczak and Flad customer lists. A customer list is an intangible asset which may be amortized if it has a useful business life of limited duration, the length of which can be estimated48 with reasonable accuracy. Goodwill, on the other hand, does not have a limited useful business life and thus is not amortizable. Section 1.167(a)-3, Income Tax Regs.Respondent claims that petitioner is not entitled to amortize either the Panczak or Flad customer lists, contending that (a) the lists do not have an ascertainable value separate and apart from that of goodwill, and (b) the lists do not have a limited business life ascertainable with reasonable certainty. The determination as to whether a customer list has value independent of goodwill and, if so, the amount of that value, is a question of fact. Houston Chronicle Publishing Co. v. United States, 481 F.2d 1240">481 F.2d 1240, 1245 (5th Cir. 1973), cert. denied 414 U.S. 1129">414 U.S. 1129 (1974); Citizens and Southern Corp. v. Commissioner, 91 T.C. 463">91 T.C. 463, 479 (1988). The record herein clearly supports a finding, and we so find, that both the Panczak and Flad customer lists have independent value. Indeed, respondent's expert conceded such on the stand. Petitioner's agreements49 with Panczak and Flad contained no reference to the transfer of goodwill. Petitioner claims it did not want to acquire Panczak's and Flad's goodwill; to the contrary, petitioner claims it wanted to disassociate itself from the Panczak and Flad operations. By way of disassociating itself from the Panczak and Flad operations, petitioner states it (1) repainted and put its name on the trucks acquired from Panczak and Flad, (2) required the drivers formerly employed by Panczak and Flad to wear petitioner's uniforms which colorwise differed from the Panczak and Flad uniforms; and (3) placed its name on all delivery slips, invoices, service orders, and invoice return envelopes. Notwithstanding these acts, we believe petitioner, to a limited extent, desired to preserve Panczak and Flad customer continuity. It would be naive for us to believe that petitioner did not attempt to preserve the patronage of the former customers of Panczak and Flad when it notified the former customers of Panczak and Flad that it had acquired the latter's businesses and when it kept the Panczak and Flad phone numbers and listed them in the phone book. These actions obviously were taken to maintain for petitioner50 the patronage of the Panczak and Flad customers -- and continued customer patronage is the essence of goodwill. Accordingly, we believe a portion of the amounts putatively paid for the customer lists must be allocated to goodwill. Although a specific allocation in the purchase agreement, or in the negotiations leading thereto, may be the best evidence in determining the cost basis of an asset, if such evidence is not available, then we must make such an allocation on other available evidence. Citizens and Southern Corp. v. Commissioner, supra at 495. As is frequently the case, here the record is less than desirable. Nonetheless, we are satisifed that we can make an allocation between the customer lists and goodwill. See Manhattan Co. of Virginia, Inc. v. Commissioner, 50 T.C. 78">50 T.C. 78 (1968). Based on the record before us, we conclude that 25 percent of the stated amount for the customer lists is properly allocable to goodwill and the remaining 75 percent of the stated amount is properly allocable to the customer lists. Dollarwise, we find the following amounts to be the respective cost bases for the customer lists and goodwill: Customer ListGoodwillPanczak$ 90,000$ 30,000Flad138,75046,25051 Having ascertained the cost bases for the customer lists, we now turn to whether such lists have a limited business life. We find that they do. In determining whether an intangible, such as a customer list, has a limited business life, we consider a number of factors, including: testimony of expert witnesses, experience in the industry, testimony of officers, relationship of geographic area and the customers involved, turnover of customers (both before and after the acquisition of the list), and other pertinent factors. See Holden Fuel Oil Co. v. Commissioner, 479 F.2d 613 (6th Cir. 1973), affirming T.C. Memo. 1972-45; Houston Chronicle Publishing Co. v. United States, 481 F.2d 1240">481 F.2d 1240 (5th Cir. 1973), cert. denied 414 U.S. 1129">414 U.S. 1129 (1974); Manhattan Co. of Virginia, Inc. v. Commissioner, 50 T.C. 78">50 T.C. 78 (1968). Gosin and Samuel Borenkind (Borenkind) were credible witnesses. Gosin had 16 years' experience in the fuel oil business at the time the Panczak and Flad customer lists were acquired. He was thoroughly familiar52 with the territories in which Panczak and Flad operated. Testifying from his own actual experience in the Norristown area, he said the annual customer turnover rate was 20 percent. Borenkind, an individual with over 50 years' experience in the fuel oil business, corroborated Gosin's testimony. Borenkind stated that in 1979 the average life of a residential fuel oil account was seven years; however, in the Norristown area (because of its economic condition) the average account life was only five years. In Banc One Corp. v. Commissioner, 84 T.C. 476">84 T.C. 476, 499 (1985), affd. without published opinion, 815 F.2d 75">815 F.2d 75 (6th Cir., 1987), we said: A taxpayer may establish the useful life of an asset for depreciation based upon his own experience with similar property or, if his own experience is inadequate, based upon the general experience in the industry. The taxpayer need only determine a "reasonable approximation" for depreciation; absolute certainty is not required. As the Supreme Court noted in Massey Motors, Inc. v. United States, 364 U.S. 92">364 U.S. 92, 105 (1960):53 "prediction is the very essence of depreciation accounting." This Court and others have repeatedly stated, however, that the determination of the useful life of an asset and the other estimates utilized in computing depreciation must be based upon facts existing as of the close of the taxable year in issue. (Emphasis added; citations omitted.) From 1980 to 1983, petitioner actually experienced customer turnover of 20 percent per year with respect to those customers obtained from the Panczak and Flad customer lists. Such subsequent experience further corroborates petitioner's projection. Respondent failed to produce any meaningful evidence to contradict the testimony of Gosin and Borenkind. Accordingly, we find that the Panczak and Flad customer lists each had a limited useful life of five years. The second issue to be decided is whether petitioner may write-off in 1981 the remaining amount owed Robert and Marion Flad pursuant to their covenants not to compete as a result of their deaths. 1 We conclude it may not. 154 Petitioner contends that upon the deaths of Robert and Marion Flad their covenants not to compete became worthless. It seeks sustenance from section 1.167(a)-8(a)(3), Income Tax Regs. That section, in pertinent part, provides: Where an asset is permanently retired from use in the trade or business * * * loss will be recognized [and will be] measured by the excess of the adjusted basis of the asset at the time of retirement over * * * the fair market value at the time of such retirement * * * As a general rule, a loss incurred with respect to an asset used in one's trade or business is recognized only upon sale or other disposition. Section 1.167(a)-8(a)(3) of the regulations is an exception to this rule. It allows a loss for the retirement of depreciable property without actual disposition. A covenant not to compete is an intangible asset which is amortizable over the life of the covenant even if the period over which payments are made is not coterminous with55 the duration of the covenant. Cf. Warsaw Photographic Associates v. Commissioner, 84 T.C. 21">84 T.C. 21, 48-49 (1985). In our opinion, within the context of section 1.167(a)-8(a)(3), Income Tax Regs., a covenant not to compete is not an asset which can be "permanently retired from use in the trade or business" upon the death of the covenantor; thus, we believe said regulation is not applicable in resolving the issue before us. Here, petitioner bargained for a five year period of noncompetition from Robert and Marion Flad. The covenantors' deaths did not prevent petitioner from receiving the benefit of its bargain. The covenantors' deaths did not result in a shortening of the duration of the noncompetition period; to the contrary, their deaths extended forever the duration of noncompetition and assured petitioner that Robert and Marion Flad would never be a deleterious competitive force. Hence, petitioner suffered no loss upon the covenantors' death. Deductions are a matter of legislative grace. They are allowable only if there is clear statutory authority providing therefor. New Colonial Ice Co. v. Commissioner, 292 U.S. 435">292 U.S. 435, 440 (1934).56 Petitioner cites no authority for the write-off of the Flad covenants other than section 1.167(a)-8(a)(3), Income Tax Regs., which, as we have stated, is not applicable to the situation involved herein. Petitioner has failed to prove that it suffered a loss as a result of the deaths of Robert and Marion Flad. Accordingly, we hold that petitioner is not entitled to the claimed write-off. To reflect the foregoing, Decision will be entered under Rule 155. Footnotes1. Petitioner wrote-off the remaining amount owed to Gregory Flad; such a write-off was clearly erroneous inasmuch as Gregory Flad was alive in 1981.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624986/	RETREAT IN MOTION, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentRetreat in Motion, Inc. v. CommissionerDocket No. 25167-81X.United States Tax CourtT.C. Memo 1984-315; 1984 Tax Ct. Memo LEXIS 354; 48 T.C.M. (CCH) 334; T.C.M. (RIA) 84315; June 21, 1984. James R. Wine (an officer), for the petitioner. Reid M. Huey, for the respondent. BUCKLEYMEMORANDUM OPINION BUCKLEY, Special Trial Judge: This is an action for declaratory judgment under section 7428 of the Code. 1 It has been decided pursuant to the provisions of section 7456(d) and Rule 218(a). Consideration of this case was based upon the administrative record as defined in Rule 210(b)(11). The decision, therefore, is based upon the assumption that the facts as represented in the administrative record are true. Rule 217(b). The burden of proof rests upon the petitioner, both as to jurisdictional requirements which are met here, 2 as well as the grounds set forth in the notice of determination. Rule 217(c)(2). 356 Petitioner was incorporated on October 2, 1979, pursuant to the provisions of the Indiana Not-for-Profit Corporation Act of 1971. At the time of filing its petition herein its principal office was in Fort Wayne, Indiana. Petitioner's board of directors was composed of 15 persons, each of whom was a member of one of three Methodist churches in Fort Wayne. Petitioner's purpose, as stated in its by-laws, is as follows: Retreat-in-Motion is a not-for-profit corporation organized to develop opportunities to relate Jesus Christ to youth and adults through a unique traveling ministry--a "retreat in motion." A retreat in motion is a total program of which transportation is only a means of moving youth or adults to an environment (a place apart) which is more conducive to the sharing of Jesus Christ through a satisfying and fulfilling adventure. In order to achieve its purposes, petitioner acquired an "over-the-road" bus which it rebuilt inside in order to provide in-bus sleeping facilities. Title to the bus is in petitioner's name. Petitioner's program consists of taking church-related groups on three-to five-day trips and providing an environment which is more conducive to the357 sharing of the Christian faith. These activities are conducted by the staff of petitioner, some of whom are employees and others who are volunteers. The bus trips constitute the entire program of petitioner, with the only other activities ancillary such as fund raising, administration and bus maintenance. Petitioner had two main itineraries. One was a trip from the Fort Wayne area to the Smoky Mountains, southeast beaches and Disney World in Florida; the other was to the Smokies and Washington, D.C. The groups which participated in these trips were mainly youth groups, but church choirs and clubs of all ages also had the opportunity to participate. Petitioner described a typical trip as follows: To begin to describe a trip, 3 the group would be picked up at approximately 8:00 p.m. with four staff people who will lead the group in the different activities for the next few days. The first stop in the trip is usually the Smokey [sic] Mountains. At this stop, the group will climb a mountain known as the Chimneys, prepare lunch at a campground, and sight-see in the city of Gatlinburg. Later that night, while travelling, the staff will talk with the group about the climb358 up the mountain, using it as a metaphor of life. Time will be spent with the group in devotions and just talking. Another stop for the trip may be Washington, D.C., the capitol of our nation. The day will be spent with friends, sight-seeing in the Mall. Among the places visited would be the Washington, Jefferson, and Lincoln Monuments, the Capitol Building, the Smithsonian Institute, and the White House. The next day might be spent touring the home of President George Washington, Mount Vernon, and then viewing the changing of the guard at Arlington National Cemetary [sic]. Again devotions will be shared, possibly at Arlington National Cemetary [sic], bringing to mind all of the sites from the two days and tying them together with the Christian life. Petitioner's brochures emphasize that its purpose is to develop opportunities to relate Jesus Christ to youths and adults through a traveling ministry. The stated goal for the trips is spiritual growth and Christian fellowship. Its trips are designed for church related359 organizations and religious groups. In response to respondent's specific question, petitioner stated that its time expended on various activities was approximately as follows: Social activities20 percentRecreational activities45 percentSightseeing15 percentShopping trips0 percentReligious20 percentEach trip is accompanied by a trained program coordinator who will lead the group in singing, faith exploration discussion and worship. The premise of petitioner's devotional program is that religious conversation and study are encouraged at any time. Additionally, there are formal devotions on a daily basis. Petitioner estimates that formal devotions are about one hour daily, religious singing two to four hours daily, faith explanations anywhere from 30 minutes to several hours daily depending upon individual needs, and worship services 35 to 50 minutes on Sunday or the last day of the trip. All of the formal worship activities are attended by all of the trip participants; the informal periods of sharing normally include everyone on the trip. Petitioner largely financed the acquisition and renovation of the bus by means of five-year bonds totaling360 $20,000 and bank borrowings of $16,500 secured by the bus. Fees are charged to the participants in the trips in an amount sufficient to cover operating costs, the interest on the bonds and bank notes, and amortization of bond and note principal. The average cost per person for the trips has been $85. A trust fund, formed by an initial contribution of $10,000, has been set up to provide scholarships for the trips for needy youth who would otherwise be unable to participate in the experience. Respondent determined that petitioner did not qualify for exemption under section 501(c)(3); petitioner duly protested that determination and respondent issued its final adverse determination as to petitioner's exempt status as follows: The extensive amount of time, energy, and other resources which are devoted to the conduct of social and recreational activities, together with the manner in which such activities are scheduled in relation to religious programs, demonstrate that your conduct of such social and recreational activities serves substantial independent purposes of a noncharitable nature. Thereupon, petitioner timely filed its petitioner for declaratory judgment with this Court361 pursuant to the provisions of section 7428. Section 501(a) provides that those organizations listed in subsection (c) shall be exempt from taxation; subsection (c), in relevant part, lists "Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes * * * no part of the net earnings of which inures to the benefit of any private shareholder or individual." Respondent's position is that petitioner fails the statutory requirement that the organization must be organized and operated exclusively for an exempt purpose. The term "exclusively" has not been construed to mean "solely" or "absolutely without exception." An organization which engages in nonexempt activities can obtain and maintain exempt status so long as such activities are only incidental and less than substantial. National Association of American Churches v. Commissioner,82 T.C. 18">82 T.C. 18, 28-29 (1984). Church in Boston v. Commissioner,71 T.C. 102">71 T.C. 102, 107 (1978);362 Butter Business Bureau of Washington, D.C., Inc. v. United States,326 U.S. 279">326 U.S. 279 (1945); Income Tax Regs., sec. 1.501(c)(3)-1(c)(1). Accordingly, we limit our consideration to the basis of respondent's determination herein, viz., to the nature and extent of petitioner's nonexempt activities. As we understand petitioner, it takes the position that it has no nonexempt activities--that all of its activities are religious in nature. Petitioner on brief has attempted to argue certain matters not contained in the administrative record herein. We have not considered such matters. As we stated in Church in Boston v. Commissioner,supra at 105-106: Our function with respect to declaratory judgment proceedings is to review respondent's administrative determination. Correspondingly, respondent's determination must be based upon all the material facts contained in the administrative record. Houston Lawyer Referral Service v. Commissioner,69 T.C. 570">69 T.C. 570, 573 (1978). To allow petitioner to include without363 good cause, additional facts * * * would render the administrative procedure meaningless and expand the declaratory judgment proceeding to a trial de novo, an intent and indicated in the legislative history of section 7428. Houston Lawyer Referral Service,supra at 577. We have previously considered a case with facts somewhat similar to those at bar. In Schoger Foundation v. Commissioner,76 T.C. 380">76 T.C. 380 (1981), the petitioner operated Christ Haven Lodge in Colorado. The facility viewed itself as existing primarily to provide a place for Christian families "to rest and become reacquainted." 76 T.C. at 382. It provided lodging, meals, recreational activities and various religious activities. The latter generally revolved around individual prayer and contemplation. The religious, recreational and social aspects of the lodge were left to the individual desires of the guests. There was no set program of activities. We held that petitioner had failed in its burden to show that the recreational facilities were not used extensively and were not used in more than an insubstantial manner. We went on to state at 389: In a proper factual case, the364 operation of a lodge as a religious retreat facility would no doubt constitute an exempt religious purpose under section 501(c)(3), and the presence of some incidental recreational or social activities might even be found to be activities to further or accomplish that exempt purpose. Our consideration, then, must be whether the bus ministry here represents the "proper factual case" we referred to in Schoger,supra. In support of petitioner's position it is clear that the group on the bus trips did participate in religious activities. They were both riding and sleeping on the bus, in a contained space, and some of the religious activities took place on the bus. However, we do not believe that this is enough for petitioner to prevail. The recreational activities here, with days at Disney World, at the beach, in the Smokies and sight-seeing in Washington, D.C., appear so extensive that we cannot consider them insubstantial and incidental to the religious purpose of the trips. We arrive at this conclusion even though we consider that petitioner has shown that the religious component of the trips is substantial and that it acts as an overlay on a great portion of the recreational365 activities. We have held that activities can be carried on for more than one purpose. B.S.W. Group, Inc. v. Commissioner,70 T.C. 352">70 T.C. 352 (1978). See also Canada v. Commissioner, 82 T.C. (June 18, 1984). Petitioner's by-laws state that "transportation is only a means of moving youth or adults to an environment (a place apart) which is more conducive to the sharing of Jesus Christ through a satisfying and fulfilling adventure." 4 This same thought is set out in petitioner's pamphlets advertising their program. Petitioner's activities had two purposes: one religious, the other recreational. Our recent decision in366 Alive Fellowship of Harmonious Living v. Commissioner,T.C. Memo 1984-87">T.C. Memo. 1984-87, does not compel a different result here. In Alive Fellowship, we noted that it was not the nature of the organization's activities, but rather the purpose towards which they are directed which determines whether the operational test is satisfied. We found that the petitioner's activities were all directed towards their purpose which respondent had conceded to be religious in nature. Alive Fellowship concerned an organization which offered courses in "polarity health education." The courses at Orcas Island were advertised as residential programs in a setting which respondent argues was similar to those of "summer camps, recreational lodges, health spas." This Court, however, held that, in contrast to Schoger,supra, petitioner "succeeded in demonstrating that its members devoted their time on Orcas Island and at the outreach centers to a structured program devoted to instruction in petitioner's concededly religious doctrines and that those aspects of the programs which can be characterized367 as social or recreational were merely incidental to the programs' purpose. Here, we have no difficulty in accepting petitioner's religious purpose. We are, however, still left with the need to determine whether the social and recreational aspect of its activities was merely an incident to the religious activities and insubstantial in nature. We are unable to so find. As we have stated, the determination of the primary purpose of petitioner's activities is one of fact, as to which petitioner bears the burden of proof. Rule 217(c)(2). We are unable, under the facts set forth in the administrative record, to conclude that the substantial time devoted during petitioner's trips to secular sight-seeing activities, to beach-going and mountain climbing, was in furtherance of petitioner's primary purpose of providing Christian fellowship and teachings. The recreational aspect of each trip was so substantial in relation to any time available for religious instruction that we are not able to classify it as insubstantial in nature. Days spent on the Florida beaches, at Disney World and in Washington, D.C., sight-seeing, while undoubtedly pleasurable and educational by their very nature*368 represented time unavailable for petitioner's stated ministering purposes. 5 We are presented here with a factual situation akin to any trip for sight-seeing and recreational purposes where the group members are compatible in nature. The fact that the element of compatibility might be religious-oriented and therefore related to exempt activities cannot serve to provide a gloss of exemption over that which is recreational in nature. Decision will be entered for the respondent.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated. Rule references are to the Tax Court Rules of Practice and Procedure.↩2. The prerequisites for declaratory judgment have been met: petitioner is the organization whose qualification is at issue, sec. 7428(b)(1); petitioner exhausted all its administrative remedies, sec. 7428(b)(2); petitioner timely filed its petition with this Court, sec. 7428(b)(3).↩3. Petitioner's other trip would be southerly, where a day would be spent on the beach in Florida, a day at Disney World and the last day traveling home.↩4. Petitioner states, in regard to the bus ministry, that it provides "new and exciting experiences in the fellowship of a Christian atmosphere. Many non-Christians have the sadly mistaken notion that Christianity is for a bunch of fuddy-duddys, and the R.I.M. bus trips, whether to Florida/Disneyworld or Washington, D.C., give non-Christians (and fledgling Christians) the opportunity to see that such a belief is far from the truth. Young people share in a variety of fun experiences on a R.I.M. trip in addition to the spiritual times."↩5. We arrive at this conclusion without accepting respondent's attempts at quantitatively arguing that petitioner's broad estimate of 20 percent of time spent in religious or devotional time must of necessity be "insubstantial." As we pointed out in Church in Boston v. Commissioner,71 T.C. 102">71 T.C. 102, 108↩ (1978), "we do not set forth a percentage test which can be relied upon for future reference with respect to nonexempt activities of an organization. Each case must be decided upon its own unique facts or circumstances."	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624987/	Litton Industries of Maryland, Incorporated, Petitioner, v. Renegotiation Board, RespondentLitton Industries of Maryland, Inc. v. Renegotiation BoardDocket No. 977-RUnited States Tax Court36 T.C. 431; 1961 U.S. Tax Ct. LEXIS 136; May 26, 1961, Filed 136 Decision will be entered for the respondent. Renegotiation -- Jurisdiction -- Sec. 106(a)(6), Renegotiation Act of 1951. -- The extent of the jurisdiction of the Tax Court in renegotiation cases is set forth in section 108 of the Renegotiation Act of 1951, but that jurisdiction is expressly limited by section 106(a)(6) so that it does not include a review or redetermination of a determination of the Renegotiation Board that a contract is or is not exempt under section 106(a), or a review or redetermination of regulations prescribed by the Board under section 106(a)(6). John P. Crilly, Esq., for the petitioner.William E. Nelson, Esq., and Harland F. Leathers, 137 Esq., for the respondent. Murdock, Judge. MURDOCK431 OPINION.The Renegotiation Board made a unilateral determination on February 5, 1958, that Maryland Electronic Manufacturing 432 Corporation had excessive profits for 1953 in the amount of $ 450,000. Litton Industries of Maryland, Incorporated, the petitioner herein, is successor in interest to Maryland Electronic Manufacturing Corporation. The parties have filed a stipulation which is adopted as the findings of fact.The Renegotiation Board determined that Contract No. Cca 29098, on which the petitioner sustained a loss in excess of $ 100,000 in 1953, was exempt from renegotiation pursuant to section 106(a)(6) of the Renegotiation Act of 1951 and Renegotiation Board regulation 1453.5(b)(7).Section 106(a)(6) of the Renegotiation Act of 1951 states that the provisions of the Act shall not apply to any contract which the Board determines does not have a direct and immediate connection with the national defense; the Board shall prescribe regulations designating those classes and types of contracts which shall be exempt under this paragraph; and the Board shall, in accordance with such regulations, exempt any individual138 contract if it determines that the contract does not have a direct and immediate connection with national defense. It also contains the following language:Notwithstanding section 108 of this title, regulations prescribed by the Board under this paragraph, and any determination of the Board that a contract is or is not exempt under this paragraph, shall not be reviewed or redetermined by the Tax Court or by any other court or agency.The regulations prescribed by the Board under the above paragraph exempted, inter alia, all contracts of the Civil Aeronautics Board and of the Civil Aeronautics Administration of the Department of Commerce, except those entered into at the request of the Department of Defense, Department of the Army, Department of the Navy, or Department of the Air Force. The contract in question was entered into on January 23, 1951, with the Civil Aeronautics Administration, an agency of the United States Government and a part of the Department of Commerce, but not at the request of any of the named departments. The Renegotiation Board determined that the contract was exempt from renegotiation.The petitioner contends that the portion of the regulation referred139 to originated in an amendment on September 30, 1953, and the Board had no jurisdiction to promulgate such a regulation having a retroactive effect, thereby to cause the petitioner to suffer damages; it is directly contrary to another regulation, R.B.R. 1451.2; 1 and if this Court holds that it operates retroactively, section 106(a)(6) is unconstitutional. The respondent contends that the statute is as clear, specific, and unambiguous as Congress could make it to indicate that the discretion of the Renegotiation Board as to exemption of contracts from renegotiation is not subject to review; section 106(a) was obviously 433 intended to confer a benefit upon Government contractors, but the petitioner is in the unfortunate position of having the Board's action result in injury since it lost money during the renegotiation year on the exempted contract; nevertheless, the Tax Court has no jurisdiction to review this determination by the Renegotiation Board.Section 108 of the140 Renegotiation Act of 1951 gave the Tax Court such jurisdiction as it has to review determinations of the Renegotiation Board. Section 106(a)(6) expressly provides that, notwithstanding section 108, the Tax Court shall not have any jurisdiction to review or redetermine any determination of the Renegotiation Board that a contract is or is not exempt under subsection (a) of section 106 or to review or redetermine the regulations prescribed by the Board under section 106(a)(6). It seems clear that the Tax Court has no jurisdiction to take any of the actions sought by the petitioner in this case, and it must leave the parties as it found them. Cf. Nathan Cohen v. Secretary of War, 7 T.C. 1002">7 T.C. 1002."If the Court decides adversely to petitioner's claim, it is stipulated that it may enter an order determining excessive profits for the fiscal year ended December 31, 1953 in the amount previously determined, namely, $ 450,000."Decision will be entered for the respondent. Footnotes1. Apparently referring to R.B.R. 1451.5.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624988/	MILDRED LANKFORD, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentLANKFORD v. COMMISSIONERDocket No. 7904-77.United States Tax CourtT.C. Memo 1980-169; 1980 Tax Ct. Memo LEXIS 415; 40 T.C.M. (CCH) 331; T.C.M. (RIA) 80169; May 12, 1980, Filed 415 Petitioner did not establish that in signing the joint income tax return for 1973 she did not know of, and had no reason to know of, the omission of income received by her husband from the sale of stolen metal. Sec. 6013(e), I.R.C. 1954, is therefore not available to relieve petitioner from liability for the tax attributable to such omitted income. William Henry Agee, for the petitioner. Thomas R. Thomas, for the respondent. DRENNENMEMORANDUM FINDINGS OF FACT AND OPINION DRENNEN, Judge: Respondent416 determined a deficiency in Charles G. Lankford's and Mildred Lankford's 1973 income tax in the amount of $4,954.10 and a section 6653(b), I.R.C. 1954, 1 addition to tax in the amount of $2,477.05. The instant case involves a petition by Mildred Lankford alone for a redetermination of the deficiency and addition to tax. 2 Due to concessions by both parties, including respondent's concession that Mildred Lankford is not liable for the section 6653(b) addition to tax, the only issue for our decision is whether Mildred Lankford qualifies as an "innocent spouse" under the provisions of section 6013(e) so as to be relieved of liability for the deficiency in tax. 417 FINDINGS OF FACT Some of the facts were stipulated and they are so found. The stipulation of facts, supplemental stipulation of facts, and the exhibits attached thereto are incorporated herein by this reference. Mildred Lankford (hereinafter petitioner) resided in Anniston, Ala., at the time of the filing of her petition herein. Petitioner and her former husband, Charles G. Lankford (hereinafter Lankford), filed a joint Federal income tax return for the calendar year 1973 with the Internal Revenue Service, Chamblee, Ga. Petitioner and Lankford were married in December 1972 and divorced in November 1974. During 1973 Lankford was employed by Republic Steel Corp. (hereinafter Republic) in Gasden, Ala., from which employment he received compensation of $15,897. Petitioner was not employed during 1973 and she had no other source of income. The compensation received by Lankford from Republic was reported on the joint return filed by Lankford and petitioner for 1973. The only other income reported was a State income tax refund of $22. Lankford's signature on the return is followed by the date "2-12-74." No date appears after petitioner's signature. The return is stamped418 as having been prepared by Accounting Systems International, Inc., Gasden, Ala., followed by the date "2-8-74." There is no evidence indicating when the return was received and filed by the Internal Revenue Service. During 1973 Lankford illegally took scrap copper from Republic. He sold the copper to Oxford Scrap Metals Co. (hereinafter Oxford), for which he received $17,743.82, and to Albertville Scrap Materials Co. (hereinafter Albertville), for which he received $333.45. 3 These amounts were not reported on the Lankford's joint income tax return for 1973. 4 The amounts received by Lankford from the sale of the copper were properly includable in income, they were attributable to Lankford, and they were in excess of 25 percent of the amount of gross income stated in the joint return. 5419 Lankford removed the copper from the premises of Republic by placing it in the trunk of his car. He would then usually drive directly to the business premises of the purchaser. Lankford engaged in this activity throughout 1973 and until July 1974, when a security guard at Republic discovered Lankford collecting copper. 6Republic discharged Lankford on July 29, 1974. When Lankford sold the copper during 1973 he usually received a check, only occasionally receiving cash. Lankford received 48 checks from Oxford during 1973. Lankford did not have a standard procedure for disposing of the checks received, some were cashed and some were deposited in various bank accounts. Of the 48 checks received from Oxford, petitioner's signature appears on 4 checks as an endorser following Lankford's endorsement. 7 Petitioner also took other checks received from Oxford and endorsed by Lankford and deposited them in bank accounts. 8 Petitioner did not question420 Lankford in any way concerning the checks from Oxford. The proceeds from the copper sales were commingled with petitioner's and Lankford's other funds. Evidence was not introduced concerning how Lankford was paid for his scrap copper sales in 1974 or how he disposed of the amounts received. Prior to July 1974 Lankford never specifically told petitioner that he was taking scrap copper from Republic. It was only after he was caught by the security guard that Lankford revealed to petitioner what he had been doing. On a few occasions prior to that time petitioner accompanied Lankford when he delivered the copper for sale. On those occasions petitioner did not question Lankford concerning what he was doing and Lankford did not volunteer any information. Neither the exact dates nor the exact number of the times petitioner421 accompanied Lankford can be stated with certainty, although it is reasonable to believe that petitioner did not accompany Lankford until sometime in 1974. Following their marriage in December 1972, Lankford provided the sole support for petitioner and himself. 9 Lankford also took responsibility for making bank deposits, writing checks, and paying bills. To the extent petitioner was involved in any of these activities during her marriage to Lankford, it was usually at Lankford's direction. During their marriage petitioner and Lankford lived in a residence which petitioner had acquired prior to her marriage to Lankford. The mortgage on the residence was payable at $80 per month and it was satisifed in January 1974. We cannot determine, however, how much was paid during 1973. 10 Petitioner and Lankford lived modestly during 1973. The only purchases of note were: (a) A 1971 Buick Riviera automobile, purchased on credit; (b) the installation of a new roof for the home at a cost of422 approximately $1,500, for which a loan was obtained; and (c) a stereo system costing approximately $300. Lankford had been married prior to his marriage to petitioner, this prior marriage terminating by divorce in August 1972. As a result of that divorce, during 1973 Lankford made monthly child support payments of $215 and monthly first-mortgage payments of $84.07 on the residence occupied by his former wife. 11 In addition, Lankford also made various payments during 1973 to: (a) His former wife's attorney in the divorce proceedings; (b) his attorney in the divorce proceedings; (c) the holder of a second mortgage on the residence occupied by his former spouse; (d) the DeKalb Bank on a loan for an automobile which the former wife retained; and (e) various banks in repayment of loans incurred during 1972 to pay debts of the prior marriage. The exact amount of these various payments cannot be ascertained from the record. Lankford's compensation from Republic, 423 however, was not sufficient to make the above payments and to support petitioner and Lankford. Prior to 1973 petitioner has a checking account in the First National Bank of Anniston, Ala. This account became the joint account of petitioner and Lankford during April-May 1973. During 1973 and 1974 this account had the following balances on the following dates (the closing date for the monthly bank statements): DateBalanceDec. 27, 1972$ 51.26Jan. 26, 197367.11Feb. 26, 1973215.34Mar. 26, 1973177.31Apr. 25, 1973316.64May 23, 1973365.64June 25, 19731,921.83July 25, 1973419.22Aug. , [illegible] 1973267.54Sept. 26, 1973874.28Oct. 24, 19732,051.22Nov. 25, 19734,124.36Dec. 28, 19735,480.73Jan. 24, 19745,923.69Feb. 26, 19747,338.60Mar. 27, 19747,009.49Apr. 25, 19748,272.80May 23, 197410,360.35No bank statement for June 1974July 24, 197412,279.71Aug. 23, 197412,135.92Sept. 23, 1974216.45424 Total deposits to this account during 1973 and 1974 equaled $10,071.82 and $12,617.82, respectively. In February 1974 petitioner and Lankford opened a joint checking account in the First City National Bank, Oxford, Ala. During 1974 (the last being on July 24, 1974), total deposits to this account amounted to $9,732.59. Petitioner, however, never made a deposite or wrote a check on this account. Petitioner and Lankford also had a checking account, which account Lankford apparently opened prior to his marriage to petitioner, with the DeKalb Bank, Crossville, Ala.During 1973 and 1974 total deposits to this account equaled $7,069.03 and $1,730, respectively. An outstanding loan from that bank was also reduced during 1973 and 1974 by the amounts of $2,625 and $2,429, respectively. Petitioner's involvement with this account was, at most, minimal. In August 1974 the amounts of $11,800 and $5,710, respectively, were withdrawn from petitioner's and Lankford's accounts in the First National Bank of Anniston and the First City National Bank of Oxford. These amounts were withdrawn because of a fear that Republic would attempt to recover from Lankford for the scrap copper he took. 425 Republic apparently made no such attempt. On or about October 29, 1974, the above funds, together with a $1,638 check from petitioner's daughter, 12 were used to purchase a $10,000 certificate of deposit from the First National Bank of Anniston. The remaining funds, approximately $9,148, were placed in a safe deposit box jointly held by petitioner and Lankford. On or about November 11, 1974, petitioner acquired her own safe deposit box into which she placed the approximately $9,000 in cash and the certificate of deposit which she had removed from the jointly held safe deposit box. It was during this period that petitioner and Lankford were having marital difficulties. On November 15, 1974, the above-mentioned $10,000 certificate of Deposit was cashed. A $10,000 check was issued to petitioner and Lankford jointly. The cash and check were then divided by petitioner and Lankford as part of their divorce settlement. Petitioner used the approximately $9,100 she received to purchase a $7,000 certificate of deposit.426 She deposited the balance in a savings account. Petitioner also received the 1971 Buick Riviera automobile and the household furnishings acquired during the marriage, with the exception of the stereo. OPINION Section 6013(e) provides that in certain circumstances an "innocent spouse" who filed a joint return may be relieved of liability for taxes otherwise due. The statutory provision provides in pertinent part: (1) In general.--Under regulations prescribed by the Secretary or his delegate, if-- (A) a joint return has been made under this section for a taxable year and on such return there was omitted from gross income an amount properly includable therein which is attributable to one spouse and which is in excess of 25 percent of the amount of gross income stated in the return, (B) the other spouse establishes that in signing the return he or she did not know of, and had no reason to know of, such omission, and (C) taking into account whether or not the other spouse significantly benefited directly or indirectly from the items omitted from gross income and taking into account all other facts and circumstances, it is inequitable to hold the other spouse liable for the427 deficiency in tax for such taxable year attributable to such omission, then the other spouse shall be relieved of liability for tax (including interest, penalties, and other amounts) for such taxable year to the extent that such liability is attributable to such omission from gross income. Petitioner bears the burden of proving that each of the conditions set forth in subparagraphs (A), (B), and (C) of the statute have been satisfied. Fox v. Commissioner, 61 T.C. 704">61 T.C. 704, 716 (1974); Adams v. Commissioner, 60 T.C. 300">60 T.C. 300, 303 (1973); Sonnenborn v. Commissioner, 57 T.C. 373">57 T.C. 373, 381 (1971). There is no issue as to the satisfaction of subparagraphs (A), the parties having stipulated that this condition has been satisfied. The question is whether the conditions imposed by section 6013(e)(1)(B) and (C) have been satisfied. Respondent contends that the requirements of neither subparagraph have been met. Petitioner, of course, argues to the contrary. We agree with respondent that section 6013(e)(1)(B) has not been satisfied. Section 6013(e)(1)(B) requires petitioner to establish that at the time she signed the return, she neither knew nor428 had reason to know of the omission from the return of the income from the scrap sales. Respondent contends that petitioner knew or had reason to know of the omitted income because: (A) She endorsed checks made out by Oxford which were received by Lankford from the sale of scrap metal; (B) she made bank deposits with other checks which were similarly received; (C) she saw her bank account increase; (D) she accompanied Lankford when he sold some of the scrap metal; and (E) no income from Oxford was reported on the 1973 joint return which she signed. Petitioner asserts that the first time she knew of Lankford's activities was when he told her in July 1974. Whether petitioner knew or had reason to know of the omitted income is a factual question. In determining whether petitioner had reason to know, the standard to be applied is whether a reasonable person under the circumstances of the taxpayer at the time of the signing of the return could be expected to know of the omission from income. Sanders v. United States, 509 F. 2d 162 (5th Cir. 1975), Terzian v. Commissioner, 72 T.C. 1164">72 T.C. 1164, 1170 (1979). The question whether petitioner knew or had reason429 to know of the omissions from income must be answered as of the time petitioner signed the joint income tax return for 1973. Although no date appears after petitioner's signature on the return and no other evidence was introduced at trial concerning when petitioner signed the return, it is a reasonable inference that petitioner signed the return on February 12, 1974, the date Lankford signed the return. 13 This is the same date as that alleged in the indictment as being (on or about) the date on which Lankford committed the section 7201 offense for which he was convicted. The evidence introduced to support petitioner's contention tat she did not know of Lankford's activities and the omission from income until July 1974 was the testimony of petitioner, her daughter, and Lankford. We realize that it is difficult to prove a negative, i.e., that petitioner did not know or have reason to know of the omitted income. Nonetheless, based on the evidence presented, we are not convinced that petitioner did not know or have reason to know of the omitted income. In the instant case, petitioner endorsed four checks, 430 which totaled in excess of $1,000, payable to Lankford from Oxford. Petitioner's testimony that she "mechanically" endorsed these checks at Lankford's direction without taking note of any particulars on the check is difficult to believe. Surely petitioner knew that Lankford was employed by Republic. It must have caused her to wonder why Oxford was making payments to Lankford. In addition to the checks which she endorsed, petitioner also made trips to the bank and deposited other checks received by Lankford from Oxford. We cannot believe that petitioner never noticed what she was depositing. Nevertheless, petitioner testified that she did not examine the 1973 return to determine whether any income was reported as having been received by Oxford. In addition to requiring the absence of actual knowledge, section 6013(a)(1)(B) also contains an objective standard. A spouse cannot close her eyes to "facts that might give her reason to know of the unreported income." Terzian v. Commissioner, supra at 1170; Mysse v. Commissioner, 57 T.C. 680">57 T.C. 680, 699 (1972). We believe that a reasonably prudent taxpayer who was expised to the facts that petitioner431 was would have reason to know of the omitted income. In addition to our belief that petitioner's handling of the checks from Oxford gave her reason to know, if not actual knowledge of, the omitted income, we are not convinced that petitioner's and Lankford's standard of living should not have caused petitioner to know that Lankford had a source of income in addition to his employment at Republic. We recognize that there were not the "unusual or lavish" expenditures during 1973 which courts have considered in determining whether a spouse had reason to know of the omitted income, Mysse v. Commissioner, supra at 698, and that expenses for ordinary support will not ordinarily put a spouse on notice of omitted income. Sanders v. United States, supra at 168. Nevertheless, in this case, the joint bank account which had originally been in petitioner's name increased by over $5,000 during 1973. Furthermore, Lankford had rather heavy obligations resulting from his prior marriage of which petitioner must have been aware. Lankford admitted that his compensation from Republic was not sufficient alone both to support petitioner and himself as he did432 and to satisfy his financial obligations from his prior marriage. Furthermore, the omitted income was in excess of Lankford's earnings from Republic. We have no evidence as to whether petitioner knew what Lankford was earning or about his financial obligations. Petitioner had the burden of introducing such evidence. Knowledge of these facts, even if only in a general way, would give a prudent taxpayer reason to know of the omitted items. Other evidence also makes it difficult to believe that petitioner did not have reason to know of the omitted income when she signed the return. Both petitioner and Lankford testified that petitioner accompanied Lankford on occasions when he delivered scrap copper to the purchasers thereof. Although both testified that such occurrences took place in 1974, such testimony was not so definitive as to rule out the possibility that one such trip may have taken place prior to February 12, 1974. That petitioner may not have asked Lankford the reason for the trip or that she did not get out of the car does not diminish the inference that she had reason to know. Furthermore, the apparent frequency of the trips Lankford made to sell scrap makes it difficult433 to believe that petitioner did not have reason to know. While it appears that Lankford did not volunteer information to petitioner, considering that he had her endorse checks from Oxford, he did not seem overly concerned with keeping his activities a secret from her. Accordingly, we conclude that petitioner has failed to satisfy the requirements of section 6013(e)(1)(B). Having reached this conclusion, it is not necessary to resolve whether the requirements of section 6013(e)(1)(C) were satisfied. But despite the absence of evidence that the Lankford's made "unusual or lavish" expenditures during 1973, we believe petitioner benefitted from the omitted income. Two joint bank accounts to which petitioner had access grew considerably during 1973 and petitioner received one-half of the balances in two joint accounts when she and Lankford were divorced in November of 1974. A new roof was placed on petitioner's house in 1973 to which she apparently retained title after the divorce. And petitioner also received a Buick automobile which was acquired in 1973. Such benefits may not meet the standard of "significant" benefits required by section 6013(e)(1)(C), S. Rept. No. 91-1537, 91st434 Cong., 2d Sess. (1970), 3-4, 1 C.B. 606">1971-1 C.B. 606, 607-608, and Sanders v. United States, supra at 170, and perhaps the circumstances might make it inequitable to hold petitioner liable, compare Terzian v. Commissioner, supra, but such circumstances do not negate petitioner's failure to satisfy section 6013(e)(1)(B). Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect for the taxable year in issue, unless otherwise noted. ↩2. Charles Lankford has previously filed a petition in the United States Tax Court (T.C. docket No. 7824-77) requesting a redetermination of the deficiency and addition to tax for 1973. On Nov. 15, 1978, this Court entered a decision, based upon the agreement of the parties, that Charles Lankford owed the deficiency and addition to tax as determined by respondent and set forth above.↩3. The parties stipulated as to the amounts received by Lankford from the sale of scrap metal solely for purposes of litigating whether petitioner was an "innocent spouse" under sec. 6013(e)↩. 4. On Feb. 8, 1977, an indictment was filed against Lankford charging him with willfully and knowingly attempting to evade and defeat a large portion of income tax due and owing by him and petitioner for the calendar year 1973, and by him alone for the calendar year 1974, by filing false and fraudulent income tax returns for those years in violation of sec. 7201. For 1973 the indictment charged that the offense occurred on or about Feb. 12, 1974. Based on his plea of guilty, Lankford was convicted of the charges set forth in the indictment by the United States District Court for the Northern District of Alabama on Mar. 17, 1977. Petitioner was not indicted. ↩5. The parties stipulated to these facts solely for purposes of litigating whether petitioner was an "innocent spouse" under sec. 6013(e)↩.6. The parties did not introduce any direct evidence as to the amount of income Lankford derived from sales of scrap copper in 1974. The indictment charged, however, that he understated taxable income for 1974 by $33,398.↩7. The dates and amounts of the 4 checks are as follows: ↩DateAmountAug. 8$265.80Aug. 16257.40Oct. 20383.16Oct. 22377.588. Because the majority of the copper sales were made to Oxford, the parties focused on those sales and did not introduce any evidence concerning the disposition of the proceeds of the sales to Albertville.↩9. No evidence was introduced concerning how petitioner supported herself prior to her marriage to Lankford, although it does appear that petitioner was married at some point prior thereto.↩10. The original mortgage was payable in 72 monthly payments of $80 each, payments to begin on May 1, 1964. No evidence was introduced concerning why the mortgage was not satisfied in accordance with its original terms.↩11. The joint return filed by Lankford and petitioner also contained an itemized deduction of $1,300 for alimony payments. No evidence was presented, however, concerning the items included in this amount.↩12. During 1974 petitioner's daughter lived with Lankford and petitioner. The check repaid Lankford for living expense he had previously paid for the daughter.↩13. See Biller v. Commissioner, T.C. Memo. 1976-97↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624989/	J. GORDON S. and DONNA R. HARRIS, ET AL., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentHarris v. CommissionerDocket Nos. 19617-80, 26682-81United States Tax CourtT.C. Memo 1983-774; 1983 Tax Ct. Memo LEXIS 10; 47 T.C.M. (CCH) 760; T.C.M. (RIA) 83774; December 27, 1983. 10 Petitioner acquired 82 subdivided lots in North Dallas between 1973 and 1978. During the same period he sold 48 of these lots, 22 of them being sold with either a "speculative" home on it or with a contract for construction of a home by petitioner, and 26 being sold outright with no improvements built thereon by petitioner. Petitioner sold 19 lots outright during the years in issue, including 10 in 1976, 3 in 1977, and 6 in 1978. Held: Gains on the sale of the 19 lots sold outright were taxable as ordinary income. J. Gordon S. Harris, pro se. Gary A. Benford, for respondent. DRENNENMEMORANDUM FINDINGS OF FACT AND OPINION DRENNEN, Judge: These cases were consolidated for trial pursuant to the provisions of Rule 141(a). 1Respondent determined deficiencies in petitioners' Federal income tax as follows: Taxable Year Ended Dec. 31Deficiency1976$8,083.7019774,340.5019787,406.00After concessions by the parties, the issue remaining for decision is whether for each of the taxable years in issue the gain recognized from the sale of lots is reportable as capital gain or ordinary income. 2FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. The stipulation of facts and exhibits12 attached thereto are incorporated by this reference. Petitioners J. Gordon S. Harris and Donna R. Harris, husband and wife, resided in Richardson, Texas, at the time of filing the petition herein. They filed their joint Federal income tax returns for each of the taxable years in issue with the Internal Revenue Service, Austin, Texas. Donna R. Harris is a party herein solely by virtue of having filed a joint return with J. Gordon S. Harris (hereinafter petitionere. Petitioner, a certified public accountant, worked in the accounting profession from 1959 until August 1971. Sometime in late 1971 or early 1972, petitioner developed an interest in the real estate business. A friend of petitioner who built residential homes encouraged petitioner to become a home builder. After studying his friend's business, petitioner decided to follow his advice. Petitioner began his business in 1972 by purchasing two subdivided, improved lots in North Dallas. Petitioner built a house on each lot and sold the houses and lots in 1972. Petitioner financed the purchase of the lots and the construction of the houses with loans from a local savings and loan association. Buoyed by the sale of13 these two homes, petitioner began to expand his business in 1973. Between 1973 and 1978, petitioner purchased 82 lots. Each of these lots had similar characteristics: they were located in the North Dallas area; they were suitable only for residential home building; they were "improved" lots (i.e., houses could immediately be built upon them). Most of them were "prime" lots. Petitioner immediately started selling these lots. Petitioner would sell a lot in one of three ways: he would build a speculative home 3 on the lot and then sell the home and the lot together; or he would sell the lot and build a home on the lot to the purchaser's specifications; or he would sell the lot outright to another builder or individual. Occasionally petitioner built a speculative home on a less valuable lot in a development in order to increase the value of his other lots in the development. At the time petitioner purchased a lot he did not know whether it would be sold outright or whether he would build a house on it.The lots were not purchased for a specific14 purpose; nor were they initially segregated as to intended use on petitioner's books and records. Petitioner did not report a lot as inventory for income tax purposes until he commenced construction of a house thereon. Petitioner was willing to sell any lot -- with or without a house or a contract to build a house on it -- at any time provided the offer was a reasonable one. Lots sold during the years in issue were held by petitioner for an average of 25 months. As of December 31, 1978, the disposition of the 82 lots purchased between 1973 and 1978 were as follows: 22 lots had been sold with either a speculative home or with a contract for the future construction of a home by petitioner; 26 lots had been sold outright; 34 lots were still owned by petitioner. During the years in issue, petitioner sold 19 lots outright, including 10 in 1976, 3 in 1977, and 6 in 1978. Petitioner reported gross sales from his home building business of $407,637 for 1976, $770,906 for 1977, and $930,804 for 1978. Petitioner reported net losses from his home building business of $25,187 for 1976, $5,160 for 1977, and $27,878 for 1978. Petitioner deducted all of the costs associated with a lot, 15 including interest expense, real estate taxes and maintenance expenses, whether the lot was used by petitioner to construct a home thereon or was sold outright, as business expenses on Schedule C of his returns. Petitioner did not use the services of a real estate agent to sell any of the lots nor did he advertise any of the lots as being "for sale." However, petitioner did place business signs on the lots which listed petitioner's name, phone number, the fact that he built custom homes, and that he was a member of the National Association of Homebuilders. Petitioner also advertised in magazines and newspapers to promote himself as a builder, and to publicize particular homes. During the years in issue, petitioner reported as ordinary income the gain he received from the sale of lots with homes (whether existing houses or houses to be custom built). During the years in issue, petitioner reported the amounts received for the sale of the 19 lots outright as capital gain. The amounts reported as capital gains (exclusive of the section 1202 4 deduction) were $66,951, $31,607, and $80,143 for the years 1976, 1977, and 1978, respectively. 16 In his statutory notice of deficiency, respondent determined that the gain realized in respect of each of these 19 lots was ordinary income. There is no dispute between the parties concerning the sale of the lots with houses, or on the amount of gain realized on the sale of the 19 lots; only the character of the gain realized on the 19 lots is in issue. OPINION Petitioner's position is that the 19 lots were held for investment and not for sale to customers in the ordinary course of a trade or business. To support his position, petitioner relies on a variety of factors; for example, the lots were never represented as being for sale, bare lots were not included as inventory on his books and records, he purchased far more lots than he could build homes on, and he did not improve the lots in order to resell them for a profit. Respondent, on the other hand, argues that in addition to selling lots with houses, petitioner was also engaged in the business of selling lots outright. Petitioner is entitled to capital gains treatment on the income derived from his lot sales only if such lots were "capital assets." See section 1222. Generally, section 1221 defines a capital asset17 as any property held by a taxpayer, whether or not connected with the taxpayer's trade or business. This definition is subject to certain exceptions, including "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business." Section 1221(1).The purpose of this exception is to "differentiate between gain derived from the everyday operations of a business and gain derived from assets that have appreciated in value over a substantial period of time." , affd. . Further, the word "primarily," as used in section 1221(1) means "of first importance" or "principally." . Whether property is excluded from capital asset status by virtue of section 1221(1) is a question of fact. , affg. . While many factors have been considered by the courts in determining whether real property was held primarily for sale to customers in the ordinary course of a trade or business, see18 , the circumstances in each case are of prime concern. Although the purpose for which the property was acquired, and the taxpayer's intent with respect thereto, is one factor to be considered, the taxpayer's actions with respect to the property while he owns it and the purpose for which he is holding it at the time of sale may be of even greater importance. , [appeal dismissed per stipulation (7th Cir. 1962)]; , cert. den. . For several reasons we think the lots sold by petitioner outright, being those here involved, were acquired and held by petitioner primarily for sale to customers in the ordinary course of his business. Petitioner claims his business was homebuilding but the evidence indicates he was also in the business of selling lots outright. None of the lots petitioner acquired were bought to be used for a specific purpose, except all were bought for resale. This was accomplished by either building a home on a lot and selling19 both house and lot, or by selling a lot to a buyer together with a contract to build a house on it to the buyer's specifications, or by selling a lot outright with no house or contract to build a house on it. On course, petitioner would choose the lot upon which he would build a "speculative" house, but the buyers chose the lots upon which a house was to be built or which the buyer bought for reasons and purposes of his own. Petitioner was willing to sell any lot he had on hand at any time the price was right with no conditions as to what it was to be used for. It was not until petitioner received an offer to buy a particular lot that there was a differentiation between the lots on petitioner's books. It was only when construction was started on a lot that that lot was placed in inventory. But placing a lot in inventory did not change the character of the lot; it simply meant that that lot was no longer available for sale. The remaining lots were still available for sale in the ordinary course of petitioner's business. It may be that petitioner hoped the value of the unsold lots would increase with time but no particular lots were selected for that purpose -- none were specifically20 set aside as investment vehicles. Although petitioner did not advertise lots as being "for sale" or use the services of real estate brokers, petitioner did advertise that he was a homebuilder and that he owned lots. We believe that this advertising led to alerting others that petitioner did own lots and that petitioner was willing to sell them outright. Also, petitioner points to the fact that he did not improve or subdivide the lots that he sold.However, the lots were ready to have houses built upon them when they were purchased by petitioner; there was no "improving" to be done. 5Finally, and most importantly, the sales were frequent and substantial. 6 Between 1973 and 1978, of the 48 lots petitioner sold, 26 were sold outright. During the years in issue, petitioner sold 10 lots in 1976, 3 lots in 1977, and 6 in 1978, and reported capital gains from those lots of $66,951, $31,607, and $80,143, respectively. These facts establish that petitioner was21 engaged in selling lots to customers in the ordinary course of a trade or business. , (amounts received from just over three sales per year over a ten-year period determined to be ordinary income), cert. denied ; (amounts received from ten sales during two-year period constituted ordinary income). In sum, whether we consider petitioner to have been engaged in one business with two segments, selling lots with houses and selling lots outright, or in two businesses, one selling lots with houses and, two selling lots outright, makes no difference. In either case, petitioner was selling real estate to22 customers in the ordinary course of his trade of business. Accordingly, respondent must be sustained on this issue. 7Because of concessions by the parties Decision will be entered under Rule 155.Footnotes1. All references to "Rules" shall refer to the Tax Court Rules of Practice and Procedure.↩2. In his original brief respondent conceded that losses incurred by petitioner in 1977 upon the expiration of cocoa and sugar options were ordinary losses, as claimed by petitioner, rather than capital losses, as determined by respondent in the notice of deficiency.↩3. A "speculative house" is a house constructed for no one particular buyer, but with the hope that it will be sold upon completion.↩4. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩5. Petitioner did occasionally build speculative homes on certain lots to increase the desirability and value of the surrounding lots. In this sense, petitioner did "develop" his lots for increased sales and profit.↩6. This Court and others have held that the frequency and substantiality of sales is the most important factor in determining whether the sale of real estate occurs in a trade or business. See, e.g., , cert. denied ; .↩7. We do not mean to imply that a "home builder" cannot acquire unimproved property and hold if for investment purposes. However, if he wants to realize capital gains on the sale of such property he should clearly differentiate the property he buys and holds for investment and the property he buys for home building purposes. This is particularly true if he holds the investment property for relatively short periods of time and his sales of that property are frequent. The sale of 19 lots over a three year span can constitute a business for a home builder just as it could constitute a business for some one engaged in an unrelated business.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624991/	APPEAL OF INDEPENDENT ELECTRIC MACHINERY CO.Independent Electric Machinery Co. v. CommissionerDocket No. 2742.United States Board of Tax Appeals3 B.T.A. 1116; 1926 BTA LEXIS 2488; March 31, 1926, Decided Submitted December 12, 1925. 2488 Salary and bonus authorized by directors held to be proper deduction as ordinary and necessary expenses. Phil D. Morelock and Dudley Doolittle, Esqs., for the taxpayer. Robert A. Littleton, Esq., for the Commissioner. LANSDON 1116 Before STERNHAGEN, LANSDON, and ARUNDELL. This appeal is from the determination of a deficiency in income and profits taxes for the years 1919, 1920, and 1921, in the amount of $1,350.99. The deficiency letter covers the three years above enumerated, but no additional tax liability is asserted, except for the year 1920. The only issue involved is the taxpayer's contention that the Commissioner erroneously disallowed deductions for salaries alleged to have been credited and paid to officers during the years in question as ordinary and necessary expenses. 1117 FINDINGS OF FACT. The taxpayer is a Missouri corporation with its principal office at Kansas City. It was incorporated prior to the year 1909, with an authorized capitalization in an amount of $10,000, divided into 100 shares of the par value of $100 each. J. E. Launder acquired 51 shares of the stock in 1909, 10 shares in 1912, 2489 and 10 shares in 1915, and the remaining 29 shares in 1920. Since that date, except for three qualifying shares, he has been the owner of all the outstanding stock of the taxpayer, which has been a close corporation since its organization. In 1917 and 1918, the directors fixed the annual compensation of the president of the taxpayer at $6,000, plus a bonus of 20 per cent of the net profits. Without further corporate action, the president fixed his own salary for the years 1920 and 1921 at $11,000 and $10,400, respectively, and such amounts were accrued on the books and credited to the personal account of the president, together with other items representing bonus, in the form of commissions on sales, all in the total amounts of $13,317.75 and $10,400, respectively. During the years 1920 and 1921, the president withdrew the respective amounts of $16,076.62 and $6,800.78, which were charged against his personal account. In his personal income-tax returns for the years 1920 and 1921, he included the amounts of $13,317.75 and $10,400 in his gross income for the respective years. In its income and profits-tax returns for 1920 and 1921, the taxpayer deducted from its gross income2490 the amounts of $14,133.33 and $10,400, accrued on its books for compensation of officers in such years, as ordinary and necessary expenses. Upon audit of such returns by the Commissioner several minor adjustments, not now in question, were made, and the deductions on account of the president's compensation were reduced in the amounts of $5,000 and $4,400 for the respective years, which amounts were added to the taxpayer's income. After the addition to income of the amounts disallowed for compensation of officers, the taxpayer's net income for the years 1920 and 1921 was $14,488.77 and $24,703.21, respectively. OPINION. LANSDON: The issue in this appeal is whether the Commissioner erred in adding the amounts of $5,000 and $4,400 to the taxpayer's taxable income for the years 1920 and 1921, respectively. The petitioner asserts that such amounts were accrued on its books as compensation of its president, and were either drawn by such officer or available for his withdrawal and use during the taxable years 1118 involved. The Commissioner contends that the amounts in question were never authorized as compensation and were not received by the president, either actually2491 or constructively, during such years. The reasonableness of the compensation is not in question. The parties agree that the compensation of the president for the years 1917 and 1918 was fixed by the taxpayer's directors at $6,000 per annum, with a bonus of 20 per cent of the net earnings. No subsequent corporate action is asserted by the taxpayer which concedes that the amounts of $11,000 and $10,400, accrued on its books as compensation of its president for the years 1920 and 1921, were determined by the president without any action by the directors, and that the only record of such action is the accrual on its books of the amounts so determined. The president testified that the matter of his compensation was never considered by the directors after the year 1918, and that, as he was the owner of substantially all the stock, he believed himself to be within his rights in fixing and paying his own compensation without conferring with the other directors. The hearing was held in Kansas City, where the principal office of the taxpayer is located, but no minutes of any meeting of stockholders or directors or any books of account were offered in evidence. The Board is of the opinion2492 that the taxpayer was entitled to deduct the amount of $6,000 as salary paid to its president for each of the years 1920 and 1921, as an ordinary and necessary expense, and to an additional deduction of 20 per cent of $14,448.77 from its gross income for 1920, and of 20 per cent of $24,703.21 from its gross income for 1921, on account of the bonus voted by the directors to its president in 1918. Order of redetermination will be entered on 20 days' notice, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624992/	STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentState Farm Mut. Auto. Ins. Co. v. Comm'rNo. 1859-01 United States Tax Court126 T.C. 28; 2006 U.S. Tax Ct. LEXIS 2; 126 T.C. No. 2; January 17, 2006, Filed State Farm Mut. Auto. Ins. Co. v. Commissioner, 105 Fed. Appx. 67">105 Fed. Appx. 67, 2004 U.S. App. LEXIS 13600">2004 U.S. App. LEXIS 13600 (2004)2 P filed a Motion Pursuant to Rule 261 to Redetermine Interest on Overpayment. The issue raised in P's motion is whether accrued interest on P's overpayment as of Dec. 31, 1994, is subject to the regular rate of interest or the lower rate of interest provided by sec. 6621(a)(1), I.R.C., beginning on Jan. 1, 1995 (the GATT rate). R's position that the GATT rate applies was previously sustained by the Court of Federal Claims and the Court of Appeals for the Federal Circuit in GE v United States, 384 F.3d 1307">384 F.3d 1307 (Fed. Cir. 2004), affg. in part and remanding in part 56 Fed. Cl. 488">56 Fed. Cl. 488 (2003). See also Exxon Mobil Corp. v. Commissioner, 126 T.C. __, 2006 U.S. Tax Ct. LEXIS 3 (2006). The parties also dispute whether any portion of the overpayment remains subject to the $ 10,000 threshold as provided in sec. 6621(a)(1), I.R.C. Held: We hold that the GATT rate applies to the accrued interest owed P as of Dec. 31, 1994. Held, further, the entire overpayment of tax remaining is subject to the GATT rate since3 an amount in excess of the $ 10,000 threshold was refunded to P on the due date of P's return for the taxable year in question. Jerome B. Libin, James V. Heffernan, and Mary E. Monahan, for petitioner.Robert Morrison and Jan E. Lamartine, for respondent. Goeke, Joseph RobertJOSEPH ROBERT GOEKE28 OPINIONGOEKE, Judge: Before us is petitioner's motion under Rule 2611 seeking a higher rate of interest on petitioner's overpayment. The difference between petitioner's interest computation method and respondent's method stems from a difference of view regarding the effect of a 1994 amendment to section 6621(a)(1), the so-called GATT amendment. That 29 amendment reduced the rate of overpayment interest applicable to that portion of a corporate tax overpayment that exceeds $ 10,000 for purposes of determining interest after December 31, 1994. Because we hold that the reduced rate of interest effective after December 31, 1994, applies to interest accrued on petitioner's overpayment as of that date, petitioner's motion will be denied.4 BackgroundRespondent issued a notice of deficiency with respect to petitioner's 1987 taxable year. Petitioner filed a petition and alleged that it had made an overpayment of tax for 1987 in the amount of $ 56,900,746. On December 19, 2002, this Court held that petitioner had made such an overpayment for 1987. State Farm Mut. Auto. Ins. Co. v. Commissioner, 119 T.C. 342">119 T.C. 342 (2002), affd. 105 Fed. Appx. 67">105 Fed. Appx. 67 (7th Cir. 2004). The Court of Appeals for the Seventh Circuit affirmed this Court's decision on June 29, 2004. No petition for certiorari was filed by or on behalf of petitioner, and the decision of this Court became final on September 27, 2004. See sec. 7481(a)(2)(A).On December 15, 2004, respondent issued two checks aggregating $ 113,418,286.92 payable to petitioner. The checks ostensibly covered the amount of petitioner's overpayment plus statutory interest thereon. Petitioner was furnished with a copy of respondent's computations supporting the total amount of the checks. In its motion, petitioner takes issue with respondent's computation of the overpayment interest payable to petitioner because respondent computes interest using a reduced rate set forth5 in section 6621(a)(1), which is commonly referred to as the GATT rate after 1994 in compounding the interest that had accrued prior to 1995. 2 Petitioner asserts the regular rate of interest should continue to apply to the previously accrued interest after January 1, 1995.As computed by petitioner, the overpayment interest that should have been paid to petitioner is $ 65,288,523.47, which 30 is $ 4,375,689.66 greater than the $ 60,912,833.81 computed by respondent as the interest payable.Respondent's position, which was successfully asserted in GE v. United States, 384 F.3d 1307">384 F.3d 1307 (Fed. Cir. 2004), affg. in part and6 remanding in part 56 Fed. Cl. 488">56 Fed. Cl. 488 (2003), is that the lower GATT rate should be applied as of January 1, 1995, in calculating the compound interest on any previously accrued interest attributable to that portion of an overpayment in excess of $ 10,000. Such interest would have been compounded at the regular corporate overpayment rate up to that date.Petitioner timely filed a motion pursuant to section 7481(c) and Rule 261 for a redetermination of the interest owed to it on the overpayment of tax previously determined by this Court with respect to its taxable year 1987, and the parties have filed memoranda on the issue raised.Petitioner also disputes that $ 10,000 of the overpayment due on the effective date should receive the regular rate of interest rather than the GATT rate. Respondent counters that the refunding of more than $ 10,000 of the original overpayment on the due date of petitioner's return relieves the need for any further application of the $ 10,000 threshold in section 6621(a)(1).DiscussionInterest on overpayments is authorized by section 6611(a) at the rate established in section 6621. Section 6622(a) requires that the overpayment interest be compounded7 daily. The issue before us concerns whether the GATT rate change in corporate overpayment interest applies in computing interest on the interest accrued before the effective date. This change results in 1.5 percent less interest after December 31, 1994. The following sentence was added to section 6621(a)(1) by the Uruguay Round Agreements Act, Pub. L. 103-465, sec. 713(a), 108 Stat. 5001">108 Stat. 5001 (1994): To the extent that an overpayment of tax by a corporation for any taxable period (as defined in subsection (c)(3)) exceeds $ 10,000, subparagraph (B) shall be applied by substituting "0.5 percentage point" for "2 percentage points."The effective date of this change is described in the Uruguay Round Agreements Act, sec. 713(b), 108 Stat. 5002">108 Stat. 5002: 31 (b) Effective Date. -- The amendment made by this section shall apply for purposes of determining interest for periods after December 31, 1994.Section 6621(a)(1), effective after December 31, 1994, provides as follows: SEC. 6621. DETERMINATION OF RATE OF INTEREST. (a) General Rule. -- (1) Overpayment rate. -- The overpayment rate established8 under this section shall be the sum of (A) the Federal short-term rate determined under subsection (b), plus (B) 3 percentage points (2 percentage points in the case of a corporation) To the extent that an overpayment of tax by a corporation for any taxable period (as defined in subsection (c)(3), applied by substituting "overpayment" for "underpayment") exceeds $ 10,000, subparagraph (B) shall be applied by substituting "0.5 percentage point" for "2 percentage points".By virtue of its placement in section 6621 and the effective date description, this was a change in the rate of interest. Petitioner maintains the scope of this change was limited to the overpayment itself, not the interest on accrued interest. In addressing this question, we first examine the precedent in the Court of Appeals for the Federal Circuit.The General Electric CaseIn Gen. Elec. Co. v. United States, supra, the entire amount of the taxpayer's (General Electric's) 1978 overpayment of $ 15.5 million had been refunded or credited in 1988, 9 but $ 810,000 of accrued interest on the 1978 overpayment was not credited and remained unpaid until 2002. The taxpayer's position was that the unpaid interest should continue to be compounded at the regular rate until paid. The United States argued that as of January 1, 1995, the GATT rate replaced the regular rate for purposes of compounding interest. The Court of Federal Claims held that the full amount of General Electric's pre-1995 accrued interest was subject to the GATT rate as of January 1, 1995. Gen. Elec. Co. v. United States, 56 Fed. Ct. 488 (2003). The Court of Appeals for the Federal Circuit affirmed the primary holding, but remanded the case for a determination whether the taxpayer was entitled to any additional interest at the regular rate after January 1, 1995, on the interest that had accrued 32 prior to January 1, 1995, on the first $ 10,000 of its overpayment. Gen. Elec. Co. v. United States, 384 F.3d at 1313.The Court of Appeals for the Federal Circuit initially addressed the meaning of the term "overpayment" as follows: We agree with GE and the trial court that the term "overpayment," as used in the Internal Revenue Code, does10 not ordinarily include interest that is earned on the overpayment. We do not agree with GE, however, that the statutory provision that preserves the regular interest rate for small corporate overpayments of $ 10,000 or less should be interpreted to mean that the interest on very large overpayments should accrue interest at the rate Congress reserved for small overpayments. We think it highly unlikely that Congress intended the exception to the GATT rate for small overpayments to have such dramatic potential consequences for overpayments vastly larger than the modest overpayments of $ 10,000 or less that are eligible for the regular rate. [Emphasis supplied.]Id. at 1310-1311.After noting that section 6611 "authorizes the allowance of interest on any 'overpayment'" and that section 6611 "dictates that interest shall be paid 'at the overpayment rate established under section 6621'", id. at 1308, the Court of Appeals for the Federal Circuit stated that because sections 6611 and 6621 are "integrally related * * * the term 'overpayment' must mean the same thing in11 the two sections." Gen. Elec. Co. v. United States, supra at 1311. This led the court to conclude that "section 6611 requires us to reject GE's theory of the case". Id. at 1311-1312.As we shall discuss, petitioner believes this analysis by the Court of Appeals for the Federal Circuit is flawed because "overpayment" does not include interest compounded under section 6622.Petitioner challenges the holding of the Court of Appeals for the Federal Circuit by arguing that the phrase "overpayment of tax" in section 6621(a) limits the scope of the change in corporate interest rates to the overpayment itself, thus allowing accrued interest on the overpayment to continue to receive the regular interest rate, which is always 1.5 percent higher.The role of the phrase "overpayment of tax" is central to this dispute. We find the phrase in question is a device to describe the occasion when the GATT rate is triggered for all interest computational purposes including compounding under section 6622. We do not read the phrase "overpayment of tax" as a limitation on the scope of the applicability of the 33 changed rate once triggered. Given the role of section 6621 in the12 statutory scheme for interest, we must reject petitioner's construction.The role of section 6621 is to set interest rates which are not constant but may change quarterly. Sec. 6621(b); sec. 301.6621-1(a)(3), Proced. & Admin. Regs. The GATT rate change is described in public law as a change for purposes of determining interest after December 31, 1994. Uruguay Round Agreements Act, sec. 713, 108 Stat. 5001. This change from the regular rate applies on its face to all applications of interest after December 31, 1994, in situations when the GATT rate is triggered. The language added to section 6621(a) triggers a change in interest rate.Sections 6611, 6621, and 6622 constitute the statutory scheme to authorize interest on overpayments, set the rate of interest, and provide for the method of computation, respectively. Each section has a distinct role in an integrated scheme for overpayment interest.Petitioner would read the sections in isolation to separate the overpayment from the accrued interest. This reading would have section 6621 accomplish more than simply set the interest rate. We do not interpret the change to section 6621 to bifurcate the interest rate for compounding from13 the overpayment interest rate. Further, the legislative history of the change and the description of the effective date in section 713(b) of the Uruguay Round Agreements Act do not support petitioner's interpretation. Both the legislative history accompanying the 1994 amendment and the effective date language discuss a change in the rate of interest without distinguishing between the rate paid on an overpayment and the rate compounded.3 The legislative history does not state that the rate was meant to be bifurcated between interest on the overpayment itself and interest on accrued interest. We find that the importance of such a distinction leads to the conclusion that the omission was intentional. This conclusion is supported by Exxon Mobil Corp. v. Commissioner, 126 T.C. __, 126 T.C. 36">126 T.C. 36, 2006 U.S. Tax Ct. LEXIS 3">2006 U.S. Tax Ct. LEXIS 3 at 14 (2006) (slip op. at 12), filed today, finding that a "bifurcation in the 34 interest to be paid on the tax overpayment itself and the interest to be paid on interest is not found in the statute."14 Petitioner further challenges the Court of Appeals for the Federal Circuit's position that section 6611 authorizes the payment of interest by explaining that only simple interest was paid before section 6622 became law. Interest on interest is a function of the compounding provided by section 6622; however, the interest that is compounded originates as the interest authorized by section 6611 on an overpayment, and the rate of both is set by section 6621. One common component of the interest rate applicable to all overpayments is the Federal short-term rate. Sec. 6621(a)(1)(A). The Federal short-term rate used in section 6621(a)(1)(A) is redetermined on a quarterly basis. Sec. 6621(b). A fluctuation in the Federal short-term rate affects the rate applicable to corporate overpayments under both sections 6611 and 6622. Similarly, there is no logical reason that requires a different result regarding the GATT rate change, effective after December 31, 1994.Petitioner points to the refund estimates prepared for Congress at the time the GATT rate was adopted to support its position. Petitioner asserts that in these estimates accrued interest was not subject to the lower GATT rate. Petitioner15 also argues that respondent initially applied the GATT rate only to the overpayment, not the accrued interest, and now respondent has changed his practice. While both these circumstances may evidence confusion about how the change would be implemented, we do not find that either point overcomes the logical meaning of the statutory language itself.The remaining issue is whether the $ 10,000 threshold is to be applied to the highest total overpayment that previously existed or the amount at the effective date of the statutory change.Much of the controversy in Gen. Elec. Co. v. United States, 384 F.3d 1307 (Fed. Cir. 2004) centered on the question whether the term "overpayment" as used in section 6621(a)(1) referred to a single, cumulative amount for a particular taxable year (the amount by which the tax paid for the year exceeded the tax liability for the year before any credits or refunds) or referred instead to the amount owed to the taxpayer at a particular point in time (e. g., the amount of any excess tax paid for a year that remained unrefunded 35 and uncredited on January 1, 1995). Although the two amounts could be the same in any given case, the issue was important16 in Gen. Elec. Co. because the "single, cumulative amount" of its 1978 overpayment had been fully refunded or credited before January 1, 1995, and the only "amount owed" to it on that date was previously accrued interest, which the parties agreed was not part of the "overpayment" as that term is used in section 6621(a)(1) for purposes of defining the $ 10,000 threshold. The taxpayer argued since there was no "overpayment" on January 1, 1995, its overpayment was less than $ 10,000, and the regular rate applied under section 6621(a)(1). The Court of Appeals for the Federal Circuit agreed with the Court of Federal Claims that the term "overpayment" as used in section 6621(a)(1) refers to a single, cumulative amount, not to whatever amount of overpayment may be owed to the taxpayer at a particular point in time. 4 This point is important in the present case regarding the second issue raised by petitioner's motion, whether, despite the prior refund, $ 10,000 of the overpayment due on the effective date should receive the regular rate of interest rather than the GATT rate.17 We agree with the analysis of the Court of Appeals for the Federal Circuit which requires that the threshold is met based on the cumulative overpayment amount for the taxable year, not the specific amount remaining at the effective date after credits had been previously provided. Gen. Elec. Co. v. United States, 384 F. 3d at 1308-1309. 5 Accordingly, we will deny both aspects of petitioner's motion.To reflect the foregoing,An appropriate order will be issued. Footnotes1. 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.↩2. The GATT amendment was enacted by the Uruguay Round Agreements Act, Pub. L. 103-465, sec. 713, 108 Stat. 4809">108 Stat. 4809, 5001↩ (1994). The amendment was adopted as a revenue raiser in connection with the General Agreement on Tariffs and Trade (GATT). Interest computed pursuant to the amendment is generally referred to as GATT interest and the revised interest rate as the GATT rate.3. See S. Rept. 103-412, at 11 (1994) (" The outlay reductions in Title VII derive from * * reducing the interest rate * * * with respect to large corporate tax overpayments." (Emphasis added.)). The language in the effective date was discussed previously.↩4. The Court of Appeals for the Federal Circuit stated that "we agree with the trial court's analysis" that the amount of a tax overpayment once established is "fixed" and "does not vary as the government makes refunds or credits." Gen. Elec. Co. v. United States, 384 F.3d 1307, 1308-1309 (Fed. Cir. 2004), affg. in part and remanding in part 56 Fed. Cl. 488 (2003)↩.5. Since there was never any accrued interest on the first $ 10,000 of petitioner's overpayment, we are not faced with the allocation issue that required a remand by the Court of Appeals for the Federal Circuit in Gen. Elec. Co. v. United States, supra.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624993/	MORRIS MYERS and PEGGY MYERS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentMyers v. CommissionerDocket No. 2557-77.United States Tax CourtT.C. Memo 1980-437; 1980 Tax Ct. Memo LEXIS 149; 41 T.C.M. (CCH) 83; T.C.M. (RIA) 80437; September 29, 1980, Filed Morris Myers, pro se. Stewart C. Walz, for the respondent. SCOTT MEMORANDUM FINDINGS OF FACT AND OPINION SCOTT, Judge: Respondent deficiencies in petitioners' income tax for the calendar years 1969, 1970, 1971 and 1972 in the respective amounts of $4,168.67, $3,015.23, $43,253.02, and $11,131.09, and additions to tax under section 6653(b), I.R.C. 1954, 1 for150 these respective years in the amounts of $2,084.33, $1,507.61, $21,626.51, and $5,565.54. By amendment to answer, respondent pleaded in the alternative that if he were not sustained with respect to the additions to tax under section 6653(b) then there was due from petitioners an addition to tax under section 6653(a) for each of the years 1969, 1970, 1971 and 1972 because of negligence, and an addition to tax under section 6651(a) for each of these years because of petitioners' failure to timely file their return. The issues for decision in this case are: (1) The proper amount of petitioners' taxable income for each of the years here in issue computed under a net worth method. 2151 (2) Whether any part of the deficiencies in income tax for each of the years here involved is due to fraud. (3) In the alternative, whether any part of the deficiencies in income tax for each of the years here involved is due to negligence and whether petitioners filed delinquent income tax returns for each of the years here involved without reasonable cause so that the addition to tax under section 6651(a) is applicable. (4) Whether petitioner Peggy Myers is an innocent spouse within the meaning of section 6013(e). FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Petitioners, husband and wife, who resided in Salt Lake City, Utah, at the time of the filing of their petition in this case, filed joint Federal income tax returns for the calendar years 1969, 1970, 1971, and 1972 on February 28, 1972, February 28, 1972, June 19, 1972, and June 19, 1973, respectively. Morris Myers (petitioner) began the practice of law in Aberdeen, South Dakota, in 1957 and was a practicing attorney in Aberdeen throughout the years here in issue. Peggy Myers' father was Mr. Ed Gorder, who was the founder and principal owner of a real estate business152 which had been in existence for a number of years. Mrs. Myers' brother, R.F. Gorder, also had some interest in the business and worked for the business. Petitioners had a number of business transactions with Mr. Ed Gorder and Gorder, Inc. In addition, petitioner encouraged his mother and father and other relatives to invest money in Gorder, Inc. Petitioner's father was a retired minister of the Congregation Church and his mother a schoolteacher. However, they were quite frugal and for a number of years had made investments in Gorder Company or Gorder, Inc., Mr. Ed Gorder's real estate businesses. In certain transactions between petitioners and Gorder Company or Gorder, Inc. property would be transferred from one to the other, but the property would be retained in the name of the transferee for various purposes such as collection on notes or avoiding assumption of mortgages. Petitioners also owned and operated during the years here in issue a number of rental properties held in their own name. Petitioner, in addition to his practice of law and ownership of rental property, had other business interests during the years here in issue. Petitioner in the course of his practice153 of law would arrange purchases of property for clients and at times arrange sales of property for clients and hold the note on the property sold in his law office for collection for the client. Prior to May 1970, the accounts in petitioner's law office were kept on daily ledger sheets in the name of each of petitioner's clients. In May 1970, Linda Aman began working for petitioner as secretary, bookkeeper and typist. Ms. Aman set up a cash receipts journal and a cash disbursements journal in addition to the individual account sheets in connection with petitioner's law practice. She would post receipts and disbursements to the journals and on individual account sheets. Ms. Aman devised the method of bookkeeping she used on her own initiative and was not instructed by petitioner as to how to keep the records. When Ms. Aman received money in the mail, such as legal fees due to petitioner, she would enter the transaction in the receipt book and later transfer the entry to the cash receipts journal. She would also note the transaction on the individual client's ledger sheet. Ms. Aman would deposit funds received through the mail to petitioner's bank account. Ms. Aman also posted154 collections on notes, rental payments, and other items to various records in the office. However, the records with respect to the various rental properties were in very poor order and were inaccurately kept. If a client paid a fee directly to petitioner, he, in most instances, would inform Ms. Aman of the transaction. However, if he overlooked giving Ms. Aman the proper information the fee would not be entered on the records since she would have no way of knowing about the fee. In the latter part of 1968, petitioner began to doubt the financial stability of Gorder Company and Gorder, Inc. and his father-in-law, Mr. Ed Gorder. He requested a financial statement from Mr. Gorder and received a statement showing a net worth of the Gorder interests of over $1 million. However, he doubted the validity of this statement and began to look into the worth of the Gorder interests. In the meantime, he became very concerned with respect to the investments his family had made in the Gorder Company. He felt personally responsible for seeing that they did not lose on these investments. One of the transactions which involved petitioner's family dealt with some property at Rapid City, South155 Dakota. This property had initially been owned by two of petitioner's aunts. At one juncture this property was put into petitioner's name for the purpose of management and later for sale, and receipts from this property were invested in Gorder Company on behalf of petitioner's relatives. At certain times petitioner considered that he owed his relatives varying amounts from collections from this property. The following schedule shows in total the value of assets both parties agree were owned by petitioners as of the dates indicated: 3Dec. 31,Dec. 31,Dec. 31,Dec. 31,Dec. 31,Assets19681969197019711972Total Cashon Hand$ 100.00$ 100.00$ 100.00$ 100.00 100.00Total Cashin Banks5,972.581,663.97(10.05)6,869.395,317.95Total Certificatesof Deposit4,200.004,200.004,900.00200.000Total Costsof Stocks02,572.503,152.472,689.971,879.97Agreed NotesReceivable17,940.1014,703.2012,099.7010,759.205,531.51Total Costs ofEquipment &Vehicles6,564.829,654.8211,562.6219,295.5716,445.57Agreed Cost Basisof Real Estateand RentalProperty110,007.06162,105.04172,261.25164,671.51155,571.51Agreed OtherAssets 0002,504.1934,327.00Total144,784.56$194,999.53$204,065.99$207,089.83$219,173.51156 * It is not clear from the stipulation whether the following is intended to be included in this category: Dec. 31Dec. 31Dec. 31Dec. 31Dec. 3119681969197019711972RentalEnterprises$139.95$168.56$7,775.00$7,744.38$5,367.00We have not included this asset as an asset the parties agree was held by petitioners. Petitioners had numerous accounts and notes payable at December 31 of each of the years 1968 through 1972. The agreed total amounts of such notes and accounts payable are: 4Dec. 31,Dec. 31,Dec. 31,Dec. 31,Dec. 31,19681969197019711972$146,379.22$169,891.97$165,797.75$123,452.49$87,770.89157 In 1971, Mr. Ed Gorder died. He was about 81 years old at the time of his death. After his death, the poor financial condition of his real estate businesses became public knowledge. His son, R.F. Gorder, was totally unable to manage the business. In 1972, the Gorder Company and Gorder, Inc. were declared involuntary bankrupts pursuant to a petition filed by creditors. In 1971, petitioner became concerned about the investment his relatives had in Gorder Company and Gorder, Inc. Petitioner and R. F. Gorder discussed this situation and investigated some of the properties held by Gorder Company to determine whether there were assets from which petitioner's relatives might be paid. It was highly questionable whether there were such assets. Mrs. Myers discussed the problem of the investment of petitioner's family in Gorder Company with Mrs. Gorder, her mother. Mrs. Gorder was approximately 80 years old at the time and not in the best of health. Mrs. Myers made an arrangement with her mother for the transfer of the property at 101 Elizabeth Drive, Aberdeen, South Dakota, which was her mother's home, either into Mr. Myers' name or into the name of Mr. and Mrs. Myers. It was the158 understanding that the property would be held by petitioners with Mrs. Gorder using the property as long as she lived or wanted to use the property. After Mrs. Gorder no longer wished to use the property or after her death, the property would be sold and petitioner's relatives reimbursed for any losses they may have sustained from investments in Gorder, Inc. Mrs. Gorder also transferred the personal property located in 101 Elizabeth Drive to petitioners with the same understanding. The deed to the property was signed by Mrs. Gorder at her home. Later the document was notarized by Ms. Linda Aman, who did not actually witness Mrs. Gorder's signature to the deed. No money whatsoever was paid by either petitioner to Mrs. Gorder in connection with the transfer of the property at 101 Elizabeth Drive. Some time following the year 1972, other children of Mrs. Gorder persuaded Mrs. Gorder that petitioners had used undue influence in obtaining her signature to the deed and that her daughter, Mrs. Myers, had kept for her own use moneys Mrs. Gorder had given her during the years to pay bills and other expenses for Mrs. Gorder who, because of physical infirmities, was unable to perform these159 services for herself. Mrs. Gorder then brought a suit for recision of the deed and for return of funds by Mrs. Myers which she alleged Mrs. Myers had misappropriated.This suit never went to trial, but was settled by petitioners transferring the property at 101 Elizabeth Drive back to Mrs. Gorder and Mrs. Gorder dropping the suit for return of funds by Mrs. Myers. The property at 419 North Congress Street was purchased by petitioner from the Gorders prior to 1969 on a contract of sale which was never recorded. In 1969, petitioner sold the property but got it back by foreclosure because of nonpayment of the purchase money note by the purchaser. The basis of petitioner in this property at 419 North Congress Street for each of the years 1968 through 1972 was $2,500. In 1972, R. F. Gorder, Mrs. Myers brother, owed a note in the amount of $9,566 to the Aberdeen National Bank, Aberdeen, South Dakota. The note was secured by the pledge of shares of common stock of Huck Finn Corporation, a Minnesota company. The Huck Finn stock was needed by the Gorder Company, R. F. Gorder, and Gorder Investment Corporation to pay three individuals who were threatening to file suit against the Gorder160 Company and R. F. Gorder. The final payment of about $9,500 was received on the Rapid City, South Dakota, property which was held in petitioner's name for the benefit of his relatives in 1972. This $9,500 was used to pay the note of R. F. Gorder at the Aberdeen National Bank in order to obtain the shares of Huck Finn common stock which was pledged as security for that loan. The Huck Finn stock was then sold to satisfy creditors of Gorder Company who were threatening to sue the company. No indebtedness of R. F. Gorder to petitioner resulted from this transaction. Prior to 1967, petitioner was representing a woman in a divorce proceeding and arranged with his father-in-law, Mr. Gorder, to sell her a house in Watertown on a land contract. Later the woman received an inheritance and paid on the contract and brought the payments current. She moved from the house in Watertown and petitioner arranged to sell the house for her to a Mr. James Thiery. In connection with the transaction, Mr. Thiery gave petitioner a note for $20,818.97 which petitioner held for collection for the woman who owned the house. The house was located at 109 Church Drive. While the payments on the house161 and collection on the note were handled through petitioner's office, he had no personal interest in the house or the note. In 1959, petitioner and his wife purchased a house at 1705 South 1st Street. They placed a Veterans' Administration mortgage on the house. In 1962 or 1963, petitioners purchased through Mrs. Myers' father, Mr. Gorder, a larger house on the north side of Aberdeen. They transferred the house at 1705 South 1st Street to Mr. Gorder as a downpayment on the larger house they acquired as their home and obtained a $20,000 loan from the Aberdeen Federal Savings and Loan to pay the balance on that house. Initially the house at 1705 South 1st Street which petitioners had transferred to Mr. Gorder was rented to Mr. L. E. McKay, and later Mr. and Mrs. McKay purchased the house. The sale to Mr. McKay was under a contract for deed and at least some of the payments on the note were used to pay the mortgage insured by the Veterans' Administration which petitioner and his wife had initially placed on the house. During all the years here in issue petitioner and Mr. Willis Wetzler engaged in various joint business transactions. In connection with one of these transactions, 162 they held a note jointly from Mr. Ben Kraft which had a total balance at December 31, 1971, of $3,730.56 and at December 31, 1972, of $3,796.04. Petitioner's interest in this note was one-half, or $1,865.28 at December 31, 1971, and $1,898.02 at December 31, 1972. Another transaction between petitioner and Mr. Wetzler involved the Capitol Lounge. Petitioner's interest in the note covering the sale of the Capitol Lounge was $1,000 as of December 31, 1969, $3,081.15 as of December 31, 1970, and $7,901.15 as of December 31, 1971. Petitioner held no notes receivable from R. F. Gorder or the Gorder Company during the years 1968 through 1972. In 1972, petitioner exchanged a 1968 Pontiac automobile which he owned for a diamond ring which had a value of $500. At December 31, 1968, petitioner owned an interest in a note receivable in the name of Bernard Riedl in the amount of $8,250. During the taxable year 1970, petitioner was handling a divorce action for Jeanette Zick.In connection with that action he held certain bonds that belonged to Mrs. Zick. Mrs. Zick accused petitioner of misappropriating her bonds and on August 3, 1970, petitioner paid Mrs. Zick $3,418.10, keeping163 $617.50 out as his fee. In 1972, petitioner was indicted for embezzlement with respect to this transaction. In connection with this indictment, petitioner was required to post a $5,000 bond. Petitioner borrowed the $5,000 to use for posting the bond from Nancy Brady. Subsequent to December 31, 1972, when the $5,000 posted as a bond was released, it was paid over to Nancy Brady in discharge of the loan. Petitioner in 1973 was tried by a jury and convicted on the embezzlement charge of misappropriating $4,035.60 of bonds belonging to Mrs. Zick. After his conviction, he was disbarred. During the later years here in issue petitioner began drinking heavily and was not often in his office. Petitioner employed a CPA firm to prepare his tax returns for the years 1969 through 1972. The firm was engaged to prepare the 1969 and 1970 returns sometime after those returns were due to have been filed. They were engaged to prepare those returns and began work on them around September 1971. The accountant assigned to the returns obtained petitioner's records from his secretary-bookkeeper, Ms. Aman. Ms. Aman furnished the accountant will all records he requested. However, the records164 with respect to petitioner's real estate transactions were in very poor shape. When the accountant could not determine the nature of some transactions from the records Ms. Aman had, he would make an appointment with petitioner. Petitioner was cooperative with the accountant and furnished the accountant with everything he requested.The accountant inquired of petitioner with respect to certain fees that did not appear directly on the books but otherwise assumed that all of petitioner's fees were shown on petitioner's books. In 1971, petitioner had handled a matter for the Gengerke Trust. He was due an attorney's fee for handling this which was to be paid to him by a bank. The bank drew the check to petitioner but did not actually give it to him, rather requiring that petitioner endorse the check to be applied on a loan that he had at the bank. The $4,500 attorney's fee did not get listed on petitioner's records and did not otherwise get included in the income reported on his tax return for 1971. In 1970, petitioner represented Mr. Willis Wetzler in a transaction that ultimately resulted in Mr. Wetzler's acquisition of the Lone Pine Trailer Court.The property was purchased165 by Mr. Wetzler for $36,000, but the owner of the property agreed to accept for the property the balance due on a contract. The difference between the $36,000 and the balance due on the contract was $5,750. This amount was considered by petitioner and Mr. Wetzler to represent petitioner's legal fee for work done by petitioner for Mr. Halverson who had been the prior owner of the trailer court. Petitioner throught that he and Mr. Wetzler had explained this transaction to petitioner's accountant when the accountant was working on petitioner's 1970 income tax return. Petitioner's accountant did not remember petitioner explaining the trailer court situation to him and was of the opinion that the fee petitioner received in connection with the trailer court transaction did not get included in petitioner's income as reported on his 1970 return. In 1969, petitioner received a 1967 Toyota from Kemp Drury in payment for a legal fee. Petitioner did not get a title to the Toyota and he did not consider it to have any value. However, in 1972 he did make an arrangement to trade the Toyota on a recreational vehicle. The value of the Toyota was not included in petitioner's income as reported166 for either 1969 or 1972. There were a number of properties or other type transactions in which petitioner received property or an interest in property as a fee. When petitioner's accountant asked petitioner about these transactions he received the information asked for. The accountant included all the amounts on the returns prepared for petitioners which he determined from petitioner's records and other information he received to constitute income of petitioners. Petitioner gave full information to his accountant regarding any items with respect to which the accountant requested information. Some information on petitioner's tax return was obtained by the accountant from prior returns, and some information with respect to property was obtained from the records kept by Ms. Aman. Certain amounts were improperly included in the returns as income to petitioners which were in fact amounts collected by petitioner for others. Depreciation on some properties which petitioner was holding and renting for other persons was deducted on some of petitioner's returns. Since the transaction with respect to 109 Church Drive was handled by petitioner in behalf of a client, the following notes167 payable are not properly includable in petitioners' liabilities in computing their net worth: Dec. 31,Dec. 31,Dec. 31,Dec. 31,Dec. 31,19681969197019711972Aberdeen FederalSavings & Loan#1983$8,977.16$8,795.21$8,301.70$ 0$ 0#1983-B303.65238.35122.4800#1983-C002,721.6900Gerald Harris007,358.3400Since petitioners were not the equitable owners of the property at 1705 South 1st Street, the following notes payable with respect to that property are not properly includable in their liabilities in computing their net worth: Dec. 31,Dec. 31,Dec. 31,Dec. 31,Dec. 31,19681969197019711972Gorder Co.#1565$ 2,150.32$ 1,850.32$1,702.02$1,564.50$1,564.50Veterans Admin.10,958.3810,606.389,991.479,552.639,090.21Mrs. Myers had no connection with petitioner's office and his practice of law. However, she did on occasion call petitioner's secretary to get money for household expenses. In addition to the home they owned in Aberdeen, petitioners had a small cottage on a lake. Mrs. Myers had a station wagon which she used personally168 and for transporting petitioners' five children to various places. Two of petitioners' five children were in school in 1969 and the others were preschool age. The family lived very frugally. Their living expenses, not counting any work done on their house, such as painting, or amounts which petitioners spent on such activities as drinking, were approximately $15,000 in 1969 and $16,000 in 1970, 1971, and 1972. When petitioner first became aware of the financial condition of the Gorder real estate interests in 1968 or 1969, he told his wife that he was going to call the notes due to members of his family. However, Mrs. Myers prevailed upon him not to do so. At about this time petitioner began to drink to such an extent that he neglected his law practice, and by 1972 petitioner had developed a serious drinking problem. This drinking problem continued after petitioner was indicted for embezzlement on October 2, 1972. Mrs. Myers did not examine the joint Federal income tax returns which were prepared by the accountant engaged by petitioner at the time she signed them. Respondent in his notice of deficiency computed petitioners' income on a net worth basis. ULTIMATE FINDINGS169 OF FACT 1.Petitioners did not have as assets a note from R. F. Gorder at December 31, 1972, in the amount of $9,566; a note from Mr. Thiery of $20,818.97 as of December 31, 1970; notes from Mr. McKay in the amounts of $13,084.09, $11,811.35, $10,446.94, $14,215.52, and $13,434.42 as of December 31, 1968, 1969, 1970, 1971, and 1972, respectively. Petitioners' interest in the Ben Kraft note at December 31, 1971 and 1972 was $1,865.28 and $1,898.02, respectively. 2. Petitioners had an interest in the Capitol Lounge in the amounts of $1,000, $3,081.15, and $7,901.15 at December 31, 1969, 1970, and 1971, respectively; and petitioners have failed to show that they did not have an interest in the Gas Lite Bar and Building in the amounts of $3,000, $8,565.84, $12,285.11 and $10,652.67 as of December 31, 1969, 1970, 1971, and 1972, respectively. 3. Petitioners did not own notes receivable from R. F. Gorder or the Gorder Company in the amount of $32,822.75 at December 31, 1968, 1969, 1970, 1971, or 1972.4. Petitioners did own a diamond ring with a basis of $500 at December 31, 1972. 5. Petitioners did not own property at 101 Elizabeth Drive at December 31, 1971 and 1972 of170 a value of $42,000, and did not own the property at 109 Church Drive at December 31, 1968 and December 31, 1969. 6.Petitioners owned property at 419 North Congress Street at December 31, 1968, 1969, 1970, 1971, and 1972 with a cost basis of $2,500. 7. Petitioners owned a note from a Mr. Lang in the amount of $3,981.08 at December 31, 1972, and an interest in a note from Bernard Riedl at December 31, 1968, in the amount of $8,250 rather than $16,500. 8. Petitioners did not own the $5,000 bail bond at December 31, 1972, since it was equitably owned by the person who put up the money for the bond. 9. Petitioners were not equitably obligated on the notes payable with respect to the property at 1705 South 1st Street or the property at 109 Church Drive at December 31 of any of the years here in issue. 10. Petitioners had total personal and family living expenses of $20,000 for the year 1969, $21,000 for each of the years 1970 and 1971, and $23,000 in 1972. 11. No part of the underpayment of tax by petitioners for any of the years here in issue was due to fraud. 12. A part of the underpayment of tax for each of the years here in issue was due to negligence. 171 13. Petitioners did not have reasonable cause for failure to timely file their tax returns for 1969 and 1970, but respondent has not established that petitioners' failure to timely file the 1972 and 1973 returns was not due to reasonable cause. 14. Petitioner Peggy Myers has failed to show that she did not know, or have reason to know, of the understatement of income on petitioners' joint returns. OPINION The issues in this case are purely factual. The record is clear that petitioners' books and records were totally inadequate and that their income could not reasonably be computed from their books. Since petitioners' position here has been primarily that there were errors in the net worth computation, they apparently do not contend that an adequate computation of their income could be made from their books and records. Most of petitioners' assets and liabilities have been stipulated.Of the contested items, we have found that petitioners were not the equitable owners of the property at 101 Elizabeth Drive in 1971 and 1972, that petitioners did not own a note from R. F. Gorder or a note from Mr. Thiery of Mr. McKay, and that they had only a half interest in the Ben Kraft172 note. We have also found that petitioner did not own any notes from R. F. Gorder or the Gorder Company in any of the years here in issue. However, apparently respondent has conceded the latter item. We have found that petitioner did not equitably own the $5,000 bond at December 31, 1972. If he technically owned this bond, it would be necessary to include in his liabilities the offsetting debt. Respondent conceded on brief that if petitioner owned the $5,000 bond his liabilities at December 31, 1972, should be increased by the $5,000 indebtedness to the person who advanced the money for the bond so that the item would be a "wash." Petitioner contends he did not own the Lang note with a value of $3,981.08 at December 31, 1972. However, we do not find factual support for this contention in the record. We have therefore concluded that petitioner has failed to establish that he did not own the Lang note at December 31, 1972. We have concluded that petitioner owned the property at 419 North Congress Drive at December 31 of each of the years 1968 through 1972 with a value of $2,500. We have considered all the items which were questioned by petitioners on the record. It may be173 that there are other items with which petitioners do not agree that are not covered by the stipulation of the parties, but if so we sustain respondent's inclusion of these items in petitioners' assets because petitioners have failed to establish to the contrary. We have accepted the liabilities as shown by respondent in the statutory notice except for the adjustments we have found may be necessary because petitioners were not the equitable obligors on the mortgage notes on properties they did not equitably own, and the adjustments necessary to depreciation reserves because petitioners did not own the properties at 109 Church Drive, 101 Elizabeth Drive, and 1705 South 1st Street. Petitioners contest the amount of personal living expenses determined by respondent. Respondent determined these personal living expenses by considering all checks from all petitioners' bank accounts that could not be placed as going for another purpose as being personal living expenses, and in addition added $7,360.45 in 1969, $9,406.41 in 1970, $12,238.53 in 1971, and $17,668.42 in 1972 of items which he listed as personal expenses charged to various accounts, interest on personal residence, contributions, 174 nondeductible promotional expenses, automobile expenses, depreciation, and loss on sale of automobile, and in the year 1972 an amount of 1971 income tax. In our view, the logical assumption is that a number of the expenses which respondent added to the total amount of checks which he could not identify as being for business purposes would have gone for the items respondent again added to petitioners' personal living expenses. Also, it is far from clear on this record that some of the funds from these checks were not used to pay business expenses. Becuase we conclude that respondent's method of computing petitioners' personal living expenses is subject to many inaccuracies, we have decided to accept the estimate made by Mrs. Myers of family living expenses of $15,000 in 1969 and $16,000 for each of the years 1970, 1971 and 1972. We recognize, as did Mrs. Myers, that certain items, such as the painting of their home in one of the years here in issue, were not included in this estimate of living expenses. However, it would appear that such items as interest on the mortgage on their home, utilities paid for their home, contributions and real estate taxes, and automobile expenses175 would be included in this estimate. Also, apparently Mrs. Myers' estimate did not include amounts expended by petitioner that she would consider to be outside the normal family living expenses. Such items would include amounts spent by petitioner on his drinking habit and other personal items paid by petitioner not connected with the household living costs. Considering this record as a whole, we have concluded that in addition to amounts estimated by Mrs. Myers as petitioners' personal living expenses, they expended on person living $5,000 in each of the years 1969, 1970, and 1971, and $7,000 in 1972. The $7,000 in 1972 includes the amount of 1971 income tax paid in that year. On this basis, we have determined that petitioners had personal living expenses of $20,000 for 1969, $21,000 for each of the years 1970 and 1971, and $23,000 for 1972. Since the issue of what assets petitioners owned is purely factual, we need add little to our findings of fact in support of the conclusions we have reached. However, it should be pointed out that respondent does not contend that petitioners paid anything to Mrs. Gorder for the transfer of 101 Elizabeth Drive. Respondent effectively argues176 that 101 Elizabeth Drive was property petitioners obtained by false pretenses. Respondent's argument is primarily based on the fact that Ms. Aman, when she notarized Mrs. Gorder's signature, did not actually see Mrs. Gorder sign the deed. However, the record is clear that Mrs. Gorder did sign the deed. Both Mrs. Myers and petitioner testified that this property was transferred to petitioners' names as a protection for indebtedness of Gorder, Inc. to members of petitioner's family and that in effect petitioners held this property in trust as long as Mrs. Gorder chose to live in the house. Mrs. Myers testified that she talked to her mother and made the arrangements for the transfer with this understanding. We have therefore concluded on the basis of the record that petitioners were not the equitable owners of 101 Elizabeth Drive at either December 31, 1971, or December 31, 1972. At approximately the time of the filing of his brief in this case, respondent filed a motion for leave to file an amendment to answer, alleging that as of December 31, 1968, petitioners' interest in a note made by Bernard Riedl was $8,250 rather than the $16,500 included by respondent in the net worth statement177 and claiming an increased deficiency for 1969 because of this adjustment. Petitioners objected to the granting of this motion, and we have delayed action on respondent's motion until consideration of the case. The record shows that petitioner testified that he owned only a one-half interest in the Bernard Riedl note. We therefore have granted respondent's motion to amend his answer, although it is not clear that the change in the value of this asset held by petitioners at December 31, 1968, will in fact result in any increased deficiency in petitioners' tax for the year 1969. Because there is no evidence to the contrary, we have accepted the nontaxable portion of long-term capital gains and the nontaxable items and itemized deductions and exemptions as determined by respondent in the notice of deficiency. However, if in fact any of the capital gains result from purported sales of items which we have held were not assets equitably owned by petitioners, a proper adjustment should of course be made. On this basis of this record, we conclude that respondent has failed to show that any part of any deficiency for any year here in issue was due to fraud. The record shows that petitioner's178 books were poorly kept and that petitioner was drinking excessively and not supervising the bookkeeping in his office as he should have during the years here in issue. In fact, the certified public accountant who prepared petitioners' tax returns referred to petitioner's records with respect to real estate transactions as a "nightmare." However, the record shows that petitioner turned over all records he had to the accountant who prepared his returns and gave any information to the accountant that the accountant requested. The record shows no attempt by petitioner to conceal records or information from the agent investigating his returns or from the Revenue Service. Respondent's primary argument in support of his fraud determination is that certain legal fees received by petitioner were not shown on his books and not included in his taxable income as reported. The record is far from clear that all these fees were not included in petitioner's reported income. In addition, the record is not clear that in some instances petitioner did not inform his accountant about the transactions resulting in the fees, so if the fees were not included as income it was because the account did not179 get a clear understanding that the fee was income to petitioner. Petitioner testified that since he believed he had given the accountant all his records, he merely accepted the returns as prepared by the accountant without carefully reviewing them. Petitioner testified that he did not personally check to see if all items of income were included. On the basis of this record, we conclude that respondent has failed to establish by clear and convincing evidence that any part of petitioners' underpayment of tax for any of the years here in issue was due to fraud. Our discussion with respect to the nature of petitioner's books and records in connection with disposition of the fraud issue makes it clear that in our opinion a part of petitioners' underpayment of tax in each of the years here in issue was due to negligence. Respondent in the alternative affirmatively alleged that petitioners were liable for the addition to tax under section 6653(a). Respondent has the burden of proof with respect to the addition to tax for negligence since this issue was raised by an affirmative allegation in his answer. However, the evidence here is ample to sustain respondent's burden with respect180 to the negligence addition to tax for each year here in issue. By affirmative allegation in the alternative, respondent also claimed the addition to tax under section 6651(a) for failure of petitioners to timely file their returns. Again, since this issue is raised by respondent in his answer, the burden of showing that the additions to tax are due is on him. Respondent has shown that the returns for each of the years 1969 and 1970 were filed on February 28, 1972. The record shows that petitioner did not even engage the certified public accountant to prepare these returns until after their due date. Petitioner's only explanation is his lack of attention to his business affairs resulting from his excessive drinking. In this state of the record we conclude that respondent has established that petitioners' return for each of the years 1969 and 1970 was untimely filed and that the untimely filing was not due to reasonable cause. The situation with respect to the 1971 and 1972 returns is different. The record shows that for each of these years the accountant was timely engaged to prepare the returns and applied for an automatic extension of time within which to file the returns181 to June 15. The accountant testified that he applied for such an extension for the 1971 return, and a copy of the application is attached to the copy of the return received in evidence. The accountant did not testify as to applying for an extension of time to file the 1972 return. However, the copy of the 1972 return received in evidence as a joint exhibit has a copy of an application for such an automatic extension attached to it. The 1971 return bears, next to the name of the certified public accountant, the date of June 12, 1972, and the 1972 return bears the date of May 31, 1973. No date appears next to the signature of either petitioner. It would appear that a document mailed from Aberdeen, South Dakota, on June 15 might well not be received at Ogden, Utah, until June 19. June 15, 1972, was a Thursday and June 15, 1973, was a Friday. The burden is not on petitioner here to show that the 4-day late filing was due to reasonable cause but rather on respondent to show that it was not. Under the facts here, we conclude that respondent has failed to show that the late filing of the 1971 and 1972 returns was not due to reasonable cause. 5182 The final issue is whether Mrs. Myers has shown that she should be relieved of tax under section 6013(e) as an innocent spouse. Mrs. Myers testified that she did not look over the returns but merely signed them. In fact, both petitioners testified that they relied on the accountant and did not really review the returns. While the record shows that Mrs. Myers took no part in petitioner's law practice, it is clear that she did participate in real estate transactions. The record shows that Mrs. Myers had discussions with her husband relative to many real estate transactions. In fact, she was the one who arranged with her mother to transfer the property at 101 Elizabeth Drive to petitioners to protect indebtednesses to certain of her husband's relatives. Mrs. Myers also testified that when her husband first became suspicious of the financial condition of Gorder, Inc., she had persuaded him not to bring any action against the company. The record shows that both petitioners were involved in transactions with the Gorder Company or Gorder, Inc. Considering this record as a whole, we conclude that Mrs. Myers has failed to show that she did not have reason to know of the omission of183 income from the returns. She had a duty to look at the returns before she signed them, and her testimony that she did not is insufficient to establish that she should not reasonably have known of the omissions. It is not clear from this record that in fact there was in each year here in issue an omission from gross income in excess of 25 percent of the amount of gross income shown on the return. An increase in tax liability because of disallowance of improper deductions does not cause the provisions of section 6013(e) to apply. Furthermore, the stipulated facts show that some of the assets included in the net worth computation on the basis of which petitioners' income was determined belonged to Mrs. Myers. Some of these assets were certificates of deposit, real estate and notes receivable. Such assets are the type which generate income. It is therefore not clear from this record that all the omitted gross income should necessarily be attributable to Mr. Myers. The inference from the record is to the contrary. On the basis of this record, we conclude that Mrs. Myers has failed to show that she is an innocent spouse within the provisions of section 6013(e). Decision will184 be entered under Rule 155. Footnotes1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended and in effect in the years in issue.↩2. Most of the assets and liabilities of petitioners as of December 31 of each of the years 1968, 1969, 1970, 1971 and 1972 were stipulated, leaving in issue only the following items: (1) Whether petitioners owned property at 109 Church Drive, Aberdeen, South Dakota, with a cost basis of $18,500 as of December 31, 1968, and December 31, 1969, and a note receivable from James Thiery in the amount of $20,818.97, in connection with the purchase of this property at December 31, 1970. (2) Whether petitioners owned a note receivable from L.E. McKay in the respective amounts of $13,084.09, $11,811.35, $10,446.94, $14,215.52, and $13,434.42 as of December 31, 1968, 1969, 1970, 1971, and 1972. This note is related to property at 1705 South 1st Street, which petitioners contend was sold to either the Gorder Company or Mr. Ed Gorder in connection with the purchase of the home in which petitioners lived throughout the years here involved and for a while thereafter. (3) Whether petitioners owned a note receivable in the name of Bernard Riedl in the amount of $8,250 or $16,500 as of December 31, 1968. (4) Whether petitioners owned a note receivable from Ben Kraft in the respective amounts of $3,730.56 and $3,796.04 as of December 31, 1971, and December 31, 1972, or in the amounts of $1,865.28 and $1,898.02 as of those respective dates. (5) Whether petitioners owned a note receivable from J.C. Brown and the Capitol Lounge in the respective amounts of $1,000, $3,081.15, and $7,901.15 as of December 31 of the years 1969, 1970, and 1971. (6) Whether petitioners owned a note referred to as the Lang note in the amount of $3,981.08 as of December 31, 1972. (7) Whether petitioners owned a note receivable from R.F. Gorder in the amount of $9,566 as of December 31, 1972. (8) Whether petitioners owned rental property at 419 North Congress, Aberdeen, South Dakota, with a cost basis of $2,750 as of December 31, 1970, or owned this property throughout the entire period here involved with a cost basis of $2,500. (9) Whether petitioners owned a diamond ring with a cost basis of $500 at December 31, 1972. (10) Whether petitioners owned a bail bond with a cost basis of $5,000 and, if so, was this asset offset by a note payable to Nancy Brady of $5,000 as of December 31, 1972. (11) Whether petitioners had an interest in the Gas Lite Bar and Building with a cost basis in the amounts of $3,000, $8,565.84, $12,285.11, and $10,652.67 as of December 31 of the years 1969, 1970, 1971, and 1972, respectively. (12) Whether petitioners owned real property at 101 Elizabeth Drive, Aberdeen, South Dakota, with a cost basis of $42,000 as of December 31, 1971 and 1972. (13) The amount of petitioners' personal living expenses for each of the years 1969, 1970, 1971, and 1972. Respondent, in the statutory notice, determined petitioners' total liabilities as follows: Dec. 31,Dec. 31,Dec. 31,Dec. 31,Dec. 31,19681969197019711972Accounts andnotespayable$189,304.03$217,900.33$233,306.86$177,473.32$171,542.10Reserve fordepreciation16,857.6923,875.9831,062.0936,491.7238,670,60It is not clear whether these accounts and notes payable include notes with respect to 109 Church Drive and 1705 South 1st Street. If so, these notes are not liabilities of petitioners if petitioners were not in fact the owners of these properties. Also, the reserve for depreciation would require adjustment for any rental properties respondent included in the net worth statement that are determined not to be owned by petitioners.↩3. The details of each asset making up the totals is contained in the stipulation of facts and, since we have found the facts as stipulated, is not repeated here.↩4. The details of these notes and accounts payable are stipulated and have therefore been found as fact since we found the facts as stipulated. The total of petitioner's liabilities for each of the years here in issue as set forth in the statutory notice of deficiency is greatly in excess of the amounts of these notes payable agreed to by both parties. See n. 2.There is no evidence explaining the difference in the liabilities as set forth in respondent's statutory notice and the total of the notes and accounts payable stipulated other than with respect to certain specific notes which will be discussed later.↩5. The 1971 return bears a stamp that it was received at Ogden, Utah, on June 19, 1972, and the 1972 return bears a stamp that it was received at Ogden, Utah, on June 19, 1973. Under section 7502, if petitioner had mailed the returns on June 15 they would have been timely filed if a postmark of June 15 showed on the envelope.Under these circumstances, the returns would have been deemed filed on June 15. However, the parties stipulated that the returns in each instance were filed on June 19. This stipulation might be intended to mean that the returns were not mailed by June 15. However, respondent does not discuss this proposition at all in his brief, merely stating that-- The 1971 return was prepared timely but not filed timely. The fault can be only petitioners. The 1972 return was prepared late, but petitioners offered no reason and did not attempt to shift blame to the accountant. Accordingly, respondent has satisfied his burden of proof as to the delinquency penalty for all years. Respondent's witness, petitioner's certified public accountant, testified that the 1971 return was prepared timely because there was an extension of time that year. He testified that he did not know why the 1972 return was not prepared timely. However, there is attached to the copy of the 1972 return filed with the Court a Form 4868, application for automatic extension of time to June 15, 1973, filled out and at the bottom checked as being filed by "A certified public accountant duly qualified to practice in * * * South Dakota." No signature appears on this application as did on the 1971 application. However, obviously the original application would have been in respondent's files and the copy attached to the return may well have been an unsigned copy. At least, respondent at the trial made no explanation with respect to the 1972 return and the accountant gave no explanation of why he would not have signed the return until May 31, 1973, if an automatic extension had not been requested.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624995/	Penn-Ohio Steel Corporation, et al. 1 v. Commissioner. Penn-Ohio Steel Corp. v. CommissionerDocket Nos. 84058-84060.United States Tax CourtT.C. Memo 1964-124; 1964 Tax Ct. Memo LEXIS 211; 23 T.C.M. (CCH) 719; T.C.M. (RIA) 64124; May 5, 1964211 Held: Respondent failed to prove by clear and convincing evidence that each petitioner filed a false or fraudulent return with intent to evade tax. Therefore, assessments of deficiencies are barred by the statute of limitations. Secs. 276(a), 1112, 1939 Code. David Brady, 120 Broadway, New York, N. Y., for the petitioners. Ira L. Tilzer, for the respondent. HARRON Memorandum Findings of Fact and Opinion HARRON, Judge: The respondent determined income tax deficiencies for the calendar year212 1949, and 50 percent additions thereto for fraud with intent to evade tax under section 293(b), 1939 Code, as follows: DocketNumbersTaxpayerDeficiencySec. 293(b)Total84058Penn-Ohio Steel$264,493.56$133,640.21$398,133.7784059J. B. Montgomery43,139.6021,569.9564,709.8584060S. E. Magid95,471.1647,735.58143,206.74Totals$403,104.62$202,945.74$606,050.36The main question is whether each of the petitioners filed a false or fraudulent return for 1949 with intent to evade tax. In each case, assessment and collection of deficiencies for 1949 are barred by the statute of limitations unless, under his burden of proof, the respondent established by clear and convincing evidence that the taxpayer filed a false or fraudulent return. Section 276(a), 1939 Code. Montgomery and Magid were stockholders of Penn-Ohio Steel Corporation. The corporation had a contract with Allis-Chalmers Manufacturing Company to furnish steel to the latter. Allis-Chalmers cancelled the contract in 1949 and made a demand for damages on Penn-Ohio. The resulting dispute was settled in 1949. Respondent determined that the settlement agreements constituted213 a tax evasion scheme. Whether or not each petitioner filed a false return involves the settlement agreements. Findings of Fact The stipulated facts are incorporated herein by this reference and are found as stipulated. The returns for 1949 were filed in 1950, as set forth hereinafter. Each statutory notice of deficiency was mailed by the respondent on September 2, 1959. None of the petitioners, prior to the expiration of the 3-year period of limitation upon the assessment and collection of tax prescribed by section 275(a), 1939 Code, executed a waiver consenting to the assessment of the tax after the expiration of such period of limitation. The returns for 1949 were filed on the following dates: The return of Penn-Ohio Steel Corporation was filed on April 14, 1950, with the collector of internal revenue for the first district of Pennsylvania. The joint return of Joseph B. Montgomery, Jr., and his wife, was filed on January 16, 1950, with the collector of internal revenue for the eighteenth district of Ohio. The joint return of Samuel E. Magid and his wife was filed on May 15, 1950, with the collector of internal revenue for the third district of New York. In the cases of214 the individual taxpayers, since the wives are not involved, Joseph B. Montgomery, Jr., and Samuel E. Magid are referred to hereinafter as the individual petitioners. Penn-Ohio Steel Corporation, hereinafter called Penn, is a Delaware corporation which was incorporated in January 1948 for the purpose of manufacturing and selling steel ingots. Joseph B. Montgomery, Jr., was its president; Samuel E. Magid was treasurer and chairman of the board of directors; and John G. Baker, hereinafter called Baker, was assistant to Montgomery. In 1948, there was a shortage of steel ingots, and there was great demand for them among those who used them in manufacturing steel products. Manufacturers were willing to pay premium prices for steel ingots. Montgomery has had a great deal of experience in the manufacture of steel. In May 1948, he and Magid located an idle open-hearth foundry at Birdsboro, Pennsylvania, formerly operated by the Birdsboro Steel Foundry & Machine Company, which was then controlled by the United States Navy Department as a national defense plant and industrial reserve facility. They made a proposal to the Navy Department to lease this Naval Industrial Reserve Plant at Birdsboro215 for the purpose of producing steel ingots. In June 1948, the Navy Department and Penn-Ohio Steel Corporation entered into a 5-year lease agreement under a Letter of Intent of the Navy Department which gave Penn the option to extend the term of the lease for two additional terms of 5 years, each. The Navy Department required, as a condition of the lease, that Penn must have control of working capital of at least $700,000 within 60 days after accepting the Letter of Intent. In 1948, the authorized capital of Penn consisted of 7,500 shares of no par value common stock, and 5,000 shares of 5 percent cumulative preferred stock of a par value of $100 per share. As of June 30, 1948, none of the preferred stock had been issued. The records of Penn indicate that the 7,500 shares of common stock were issued in equal amounts to three stockholders for the total paid-in amount of $205,000; i.e., 2,500 shares, each, were issued to Montgomery, Magid, and P. T. Baker. At some time in 1948 or 1949, the 2,500 shares owned by P. T. Baker were acquired by John G. Baker, referred to above. In the spring and early summer of 1948, Allis-Chalmers Manufacturing Company in Milwaukee, Wisconsin, hereinafter216 called Allis, was desperately in need of obtaining steel ingots. It entered into negotiations to obtain them from Penn under a supply contract. In the negotiations, Magid represented Penn, and Walter E. Hawkinson, who was then the secretary and treasurer of Allis, represented Allis. During the negotiations, Magid and Montgomery represented that Penn had just taken possession of the steel plant at Birdsboro under a lease from the Navy and that with proper financing Penn could increase its capital and construct an additional furnace, and that Penn could negotiate a contract with other companies. Magid also stated that he and the other stockholders of Penn had an opportunity at that time of selling part of their common stock for an immediate profit of $500,000. During the negotiations, the Executive Committee of Allis was aware of the then deficit in the supply of steel ingots which was available to Allis. Representatives of Allis urged Magid to agree to a supply contract between Penn and Allis and assured him that Allis would assist Penn in obtaining an additional furnace, which would increase Penn's production of steel, provided Allis receive a priority in such increased production. 217 On August 26, 1948, the Executive Committee of Allis adopted resolutions authorizing the officers of Allis to enter into a purchase agreement with Penn for 50,000 gross tons of steel ingots, and authorizing the purchase by Allis of all of the authorized preferred stock of Penn, 5,000 shares, at the par value of $100 per share, or $500,000, as part of the consideration for the proposed steel purchase agreement. The agreement of Allis to purchase the preferred stock of Penn for $500,000 assured Penn of working capital of $700,000, as required by the Navy Department. On August 26, 1948, a supply contract was entered into by Penn and Allis, and on August 27, 1948, Allis purchased 5,000 shares of Penn preferred stock for $500,000. Under a supplemental agreement the holders of the common stock of Penn agreed jointly and severally to guarantee the payment of dividends on the preferred stock and the maintenance of a sinking fund to retire the preferred stock; and they agreed that a nominee of Allis would be elected to the board of directors of Penn and would serve as long as any of the preferred stock was held by Allis. The supply contract of August 26, 1948, provided in material part218 as follows: As a result of our several discussions on the subject of producing basic open hearth steel ingots for you, it is agreed that we will produce and ship 50,000 gross tons at the rate of 3,000 G.T. in September, 1948 and 4,000 G.T. each month thereafter from ingot molds of the following sizes: 21inch X 48inch X 76inch; 22inch X 25 1/2inch X 78inch; 22inch X 24inch X 70inch; or other sizes to be agreed upon at a latter date. Our present estimated capacity is 7,500 G.T. per month and it is agreed that your orders shall be given priority over all other contracts for delivery of steel ingots. During the life of this contract for the production for you of ingots, we will give you the first refusal of any additional capacity created by installation of new furnaces which we may develop on terms mutually satisfactory. It is further agreed that the cost to you for this steel will be arrived at on a conversion basis substantially as follows: the average cost at Birdsboro, Pennsylvania of steel scrap, iron scrap and/or pig iron shall be determined each month from our records, subject to your audit, to which is added 10% plus $41.00 per G.T. For example, the iron and steel average219 may be $53.50; add 10%, or $5.35, plus $41.00, equals $99.85 per G.T. at Birdsboro. Should you elect to supply direct scrap, steel or iron, of suitable quality at prices lower than our buying prices for your account, we will, of course, process such scrap and reflect the reduced cost in the price you pay for conversion into ingots. Furthermore, if you should supply pig iron it would likewise assist in reducing the ingot cost since the current market pig iron price is lower than the price for best grades of iron scrap. The $41.00 figure in the conversion formula includes the recent increase in steel wages and said amount will remain unchanged unless further changes in wages or in items such as fuel oil, refractories, etc., are advanced or decreased so as to affect our conversion costs one percent or more. * Our discussions with your representatives indicate your requirements will be generally within the range of standard 1010 and 1015 basic open hearth rimmed steel or steel of other analysis to be agreed upon between the metallurgist of your company and ours. Our organization is composed of men who have for many years produced this type of steel and by working very closely220 with your purchasing and metallurgical departments I am confident we will produce for you very good quality ingots for rolling into flat products. We will give access to our property and records to your qualified representatives at any reasonable time. This agreement shall continue in force after the delivery of the 50,000 G.T. subject to termination by either party on 120 days' notice. This letter is submitted in duplicate and your acceptance on the carbon copy will constitute an agreement for the use of our conversion facilities. Under the contract Penn was to deliver 15,000 gross tons of ingots to Allis during the 4 months of September through December 1948, and 35,000 gross tons thereafter at the rate of 4,000 tons per month, so that the original term of the contract would have ended in September 1949. Allis was to have the first offer of any additional production capacity if Penn installed an extra furnace. The contract was to continue in force after the delivery of the first 50,000 gross tons, subject to termination by either party on 120 days' notice. On March 31, 1949, Allis gave Penn written notice that it would not continue the contract beyond the first 50,000 tons. 221 As of April 7, 1949, Allis had placed orders with Penn for the shipment of 27,051 tons of ingots. There remained unordered and undelivered 22,949 tons of the 50,000 tons for which Allis had contracted. On April 7, 1949, Allis terminated the contract, thereby cancelling the contract with respect to the unordered portion. The letter of cancellation of the contract, set forth below, charged Penn with breaches of contract, failure to carry out agreements relating to the preferred stock, and set forth a claim for damages of $1,230,000, as follows: Please be advised that due to the repeated breaches by you of your contract, dated August 26, 1948, with the undersigned Allis-Chalmers Manufacturing Company, we are hereby terminating said agreement, effective on the completion and shipment by you of the steel for which releases and shipping directions have heretofore been sent you, amounting in the aggregate of about 30,000 gross tons. You have breached said contract in many respects, such as, but not limited to the following: (1) You failed to deliver the requisite tonnage in the crucial months of September and October, 1948, at which time Allis-Chalmers was most desirous of receiving222 this steel; (2) Your failure to make up in December, 1948 and January, 1949 the shortages accruing in September and October, 1948, as per your promise. (3) Your failure to give Allis-Chalmers its priority on steel production over and above the amount stated in the contract during the period beginning September, 1948. (4) The non-compliance with the terms and provisions concerning the Cumulative Preferred Stock; (5) We seriously question the accuracy of the costs as charged to us and we will seek to determine the correctness thereof. We feel that by reason of the damages sustained by us because of your breaches of contract, as above set forth, the conversion charges on the above amount of steel shipped, amounting to about $1,230,000.00 should be paid to us as damages. There was a substantial basis for the claim of Allis that Penn had failed to fulfill all of its obligations under the supply contract and the agreement relating to the preferred stock purchased by Allis. Penn had shipped steel to Ford Motor Company instead of to Allis, which provided the ground for the claim that Allis had not been given the priority of Penn's steel production. There was noncompliance by Penn223 with the terms of the preferred stock agreement; dividends and sinking fund payments were in arrears; and a nominee of Allis had not been elected to the board of directors of Penn. The actions of Allis in terminating the contract and demanding Penn's payment of damages of $1,230,000, were undertaken upon careful consideration, in good faith, and from the viewpointof the greatest advantage and benefit to Allis. Penn was in serious breach of its contract with Allis. Moreover, in March 1949, the market for steel ingots had changed and improved so that conditions were more favorable for purchasers of ingots. By April 1949, steel ingots were in easier supply and prices were lower. Unbeknown to the officers and directors of Penn, Allis had reconsidered the terms of the supply contract with Penn and concluded that the contract prices had become unfavorable, costly, and disadvantageous to Allis. This reappraisal by Allis of the terms of the contract were not divulged to Magid or Montgomery or others connected with Penn at any time during the negotiations which ultimately were concluded in April and May 1949 by the execution of agreements. After the Allis cancellation of the contract, 224 there were extended negotiations under the supervision of the Executive Committee of Allis. It was the desire of the chief officers of Allis to avoid litigation. Allis gave Hawkinson full authorization to carry on negotiations, subject to the approval of the Executive Committee. In these negotiations, Magid served in a dual capacity. He represented the Penn corporation as the party to the cancelled contract. He also represented himself, Montgomery, and Baker, who made personal, individual claims against Allis. The first meeting between Hawkinson and Magid was on April 18, 1949. At this meeting Magid protested to and reminded Hawkinson that, as individuals, he, Baker, and Montgomery, before Penn and Allis had executed the 1948 contract, had given up an opportunity to sell some of their Penn common stock at a profit of $500,000, and that he had so advised Hawkinson before the execution of the steel contract between Allis and Penn. Magid reminded Hawkinson that he and his associates had given up that opportunity and, also, an opportunity to negotiate steel contracts for Penn with other concerns because of the assurances of Allis which had persuaded him and his associates to believe225 that in the long run it would be preferable to supply Allis with steel. Magid advised Hawkinson that, therefore, there were two separate and distinct problems to be negotiated: (1) The settlement on a fair basis of the Allis claim for the payment of damages by Penn to Allis. (2) The personal and individual claims which Montgomery, Baker, and himself would and did then make against Allis to compensate them, as individuals, for their reliance upon the assurances of Allis which had caused them to torego in 1948 an opportunity to make a profitable sale of part of their Penn stock. The individual losses asserted represented their losses as investors in the common stock of Penn which was adversely affected by the cancellation of the contract with Penn. It was clear at the beginning of the negotiations with Hawkinson that Magid would act as the representative of (1) Penn, against which Allis had made claims, and (2) the three individuals who made personal claims against Allis. Throughout the negotiations, Allis claimed, in addition to the payment of damages by Penn, that Penn must redeem all of the preferred stock at par, $500,000, and pay Allis the accrued and unpaid preferred stock dividends226 which amounted to $16,666.64. The Allis Executive Committee directed Hawkinson that it would be necessary to settle and "clean up" both the contract dispute with Penn and the personal claims of the individuals, so as to get rid of both problems; and that neither dispute could be settled unless the other was settled and Allis was released from all claims. Hawkinson prepared for his own use during his discussions with Magid several personal memoranda in which he made notations of what at the time seemed important to him, but he did not include in them notations of everything that was discussed with Magid, or about every meeting with Magid, because the memoranda were intended only for Hawkinson's personal use. These memoranda were not corporate records of Allis. In view of breaches of contract by Penn, it was not contemplated by the Executive Committee of Allis that Allis would pay any money to the Penn corporation by way of settlement of the contract cancellation dispute. The Executive Committee of Allis did not authorize Hawkinson to negotiate with respect to or agree to the payment of any money by Allis to the Penn corporation by way of settlement. The position of Allis was that227 the Penn corporation had committed breaches of contract for which Allis was entitled to receive payment of damages and that Allis was not obligated to pay anything to Penn because of Penn's breaches of contract. During the negotiations dealing with the contract problem, Hawkinson eventually arrived at a figure for damages to be paid by Penn to Allis on the basis of the maximum which Penn could afford to pay and not on the basis of how much Penn owed Allis. In the negotiations dealing with the claims of the individual stockholders of Penn against Allis, Magid emphasized that on the basis of assurances given by Allis, he had made commitments to Montgomery and Baker for purchasing from them part of their Penn common stock at a very substantial price, and at one stage of the negotiations Magid showed Hawkinson his written commitments. After extended negotiations by Hawkinson and Magid, Allis and Penn agreed to a basis for settling the steel contract dispute. Allis agreed to waive the unpaid dividends on the preferred stock, to accept $500,000 in redemption of the preferred stock, and to accept a payment by Penn of $270,000, which represented restitution of the amount of overcharges228 by Penn on steel shipped, which payment would be in lieu of all damages claimed by Allis. The sum of $270,000 represented a payment of $10 per ton on the approximately 27,000 tons of steel ingots which Penn had shipped to Allis. Allis believed it was entitled to receive restitution in the above amount, at least, by reason of overcharges by Penn on steel shipped, with reference to the price formula contained in the steel contract. On April 29, 1949, Allis and Penn executed an agreement incorporating the above settlement of the cancelled contract. Subsequently, an agreement was reached in settlement of the personal and individual claims of Magid, Montgomery, and Baker, which provided that Allis would purchase from them 1,500 shares of the common stock of Penn for $470,000, and a contract was prepared by Allis' counsel and executed. It provided that Allis would purchase 1,500 shares of Penn common stock from Magid and his associates for $470,000. The contract was executed before May 5, 1949. On May 5, 1949, the board of directors of Allis approved the two contracts above described, after Hawkinson reported that each settlement contract had been executed. On May 6, 1949, Magid suggested, 229 and it was agreed, that preferred and common stock of Tungsten Alloy Manufacturing Co., Inc., a New Jersey corporation, should be substituted for the 1,500 shares of Penn common stock in the agreement between Allis and Magid in settlement of the individual claims of Magid and his associates. The substitution of the Tungsten Alloy stock, in Hawkinson's opinion, did not represent any material change in the nature of the settlement of the individuals' claims, and he obtained the approval of Walter Geist, the president of Allis, and Louis Quarles, the general counsel of Allis, of the substitution of stock. Hawkinson noted in a memorandum to Geist, dated May 6, 1949, that the substitution of the Tungsten Alloy stock for Penn common stock probably would be preferable because of Hawkinson's assurance to Magid that Allis would assist Penn in Penn's effort to obtain termination of the Navy lease of the Birdsboro plant, and, therefore, it would be better if Allis did not become a stockholder of Penn. In view of the substitution of the Tungsten Alloy stock, the executed contract for the purchase of 1,500 shares of Penn common stock by Allis was destroyed. Before it was destroyed, it was used230 in the preparation of substitute contracts, which were prepared by counsel for Allis, and were executed. One contract, between Allis and Magid, dated May 11, 1949, provided that Allis would purchase 100 shares of Tungsten Alloy common stock from Magid for $450,000. Allis also entered into a contract dated May 10, 1949, with Tungsten Alloy Manufacturing Co. under which Allis agreed to purchase for $30,000, 1,200 shares of 6 percent preferred stock of Tungsten. Allis entered into a second contract with Tungsten Alloy dated May 11, 1949, relating to the possible purchase by Allis of tungsten carbide from Tungsten Alloy and possible services to be rendered by that corporation. These contracts were executed by Allis and Tungsten Alloy. Tungsten Alloy Corporation was not controlled by either Penn, Magid, Baker, or Montgomery. Each of the settlements, with Penn on the one hand, and with Magid for himself and his associates, on the other hand, were separate settlements. However, they were interdependent because the Allis Executive Committee had directed Hawkinson that no settlement of one dispute could be concluded unless the other dispute was also settled and both settlements resulted231 in a clean up of all of the disputes and respective claims, and releases of all claims were obtained. The settlement agreement between Allis and Penn dated April 29, 1949, was as follows: Under date of August 26, 1948, the parties hereto entered into a written contract for sale by the Steel Corporation to Allis-Chalmers of fifty thousand (50,000) gross tons of steel ingots, the delivery dates to be in accordance with the schedule set forth in said contract, at prices as specified in said contract; That from time to time said Steel Corporation failed to deliver the tonnage required to be delivered by it to Allis-Chalmers under the terms of said contract in substantial and material amounts. Said failure to deliver on the part of the Steel Corporation constituted a material and substantial breach of said contract which caused material and substantial damages to Allis-Chalmers; NOW, THEREFORE, in consideration of the mutual agreements herein contained, the parties do hereby agree as follows: 1. Within ten (10) days from the date of the execution of this contract, Steel Corporation hereby agrees to pay to Allis-Chalmers the sum of Seven Hundred Seventy Thousand Dollars ($770,000.00) 232 in full payment and discharge of the damages sustained by Allis-Chalmers by reason of the breach of the contract above referred to and in payment for the surrender of said Allis-Chalmers to Steel Corporation of the 5,000 shares of 5% Cumulative Preferred Stock of the Steel Corporation now owned by said Allis-Chalmers. Upon payment to it of said sum of money said Allis-Chalmers agrees to deliver to said Steel Corporation stock certificates for said 5,000 shares of Preferred Stock duly endorsed in blank. 2. The parties do hereby mutually cancel and terminate as of the close of business on April 30, 1949, said agreement of purchase as to the unshipped portion thereof, being 22,949 gross tons, and said Steel Corporation hereby releases Allis-Chalmers from all obligation to accept delivery of said unshipped steel, and Allis-Chalmers hereby releases said Steel Corporation from all obligation to ship all said unshipped steel, all without any right or claims by one party against the other. The May 10, 1949 agreement between Allis and Tungsten Alloy Manufacturing Co., Inc., provided: In consideration of the mutual agreements herein contained, the first party hereby agrees to sell to second233 party, and second party hereby agrees to buy from first party, twelve hundred (1200) shares of the $25 Par 6% Preferred Stock of Tungsten Allow Manufacturing Co., Inc., a New Jersey corporation, with its principal office in Newark, N.J., and to pay therefor upon delivery of said stock certificate the sum of Thirty Thousand Dollars ($30,000), said transaction to be completed promptly after the date of execution hereof. The May 11, 1949, agreement between Allis and the Tungsten Alloy Corporation provided: WHEREAS, Allis-Chalmers Manufacturing Company has by agreement dated this day agreed to buy from first party twelve hundred (1200) shares of 6% Preferred Stock of Tungsten Alloy Manufacturing Co., Inc., having a par value of $25.00 per share. NOW, THEREFORE, in consideration therefor said first party hereby agrees with and for the benefit of said Allis-Chalmers Manufacturing Company, as follows: 1. At any time within six (6) months from the date hereof, on written request of said Allis-Chalmers Manufacturing Company, the first party hereby agrees to secure for said Allis-Chalmers Manufacturing Company with a steel manufacturer reasonably acceptable to it, a good and binding234 contract for the manufacture, sale and delivery of anywhere up to 50,000 gross tons of steel ingots, to be delivered at the rate of not to exceed four thousand (4,000) gross tons per month, the price therefor to be the average cost of steel scrap, iron scrap and/or pig iron used in such production as determined from the records of said Steel Corporation, subject to audit by said purchaser, to which shall be added ten per cent (10%) plus $40.00 per gross ton. 2. At any time within six (6) months from the date hereof Allis-Chalmers Manufacturing Company shall have the right to require Tungsten Alloy Manufacturing Co., Inc. to enter into a contract to sell and deliver to said Allis-Chalmers Manufacturing Company up to one-half (1/2) of the first party's monthly capacity of tungsten carbide and "Speedaloy" at prices to be five percent (5%) less than the lowest prices paid to Tungsten Alloy Manufacturing Co., Inc. for similar materials. 3. In the event Allis-Chalmers Manufacturing Company elects to obtain either or both of said contracts it shall give written notice of such election not less than thirty (30) days prior to the expiration of said six-month period. 4. At any time within235 six (6) months from the date hereof, on written request of said Allis-Chalmers Manufacturing Company, the first party hereby agrees to sell to Allis-Chalmers Manufacturing Company up to one-fourth (1/4) of the first party's capacity of tungsten carbide and "Speedaloy" at prices to be five percent (5%) less than the lowest prices paid to it for similar materials. The May 11, 1949, agreement between Allis and Samuel E. Magid provided: In consideration of the mutual agreements herein contained, the first party hereby agrees to sell to second party, and second party hereby agrees to buy from first party, one hundred (100) shares of the Common Stock of Tungsten Alloy Manufacturing Co., Inc., a New Jersey corporation, with its principal office in Newark, N.J., being 33 1/3% of the total outstanding Common Stock of said corporation, and to pay therefor upon delivery of said stock certificate the sum of Four Hundred Fifty Thousand Dollars ($450,000). On May 11, 1949, Magid executed the following letter of indemnity to Allis: This will confirm our understanding and agreement that in consideration of one dollar ($1.00) and other good and valuable considerations receipt of which is hereby236 acknowledged, I hereby agree to hold you safe and harmless from any suits, claim or damage by or on behalf of P. T. Baker, J. G. Baker and/or Joseph B. Montgomery, Jr., arising out of any connection which you have or may have had with these parties, Penn-Ohio Steel Corporation and/or the undersigned. The agreement of April 29, 1949, between Allis and Penn was a complete agreement in itself. It was separate and apart from the agreements of May 10 and May 11, 1949, between Allis and Tungsten Alloy, and from the agreement of May 11, 1949, between Allis and Magid. Pursuant to the agreement of April 29, 1949, Penn paid Allis $270,000 in full payment and in lieu of damages sustained by Allis by reason of breaches of contract by Penn; and Penn redeemed the 5,000 shares of preferred stock at par and paid Allis therefor $500,000. The total sum paid by Penn was $770,000. The settlement with Penn and the written agreement of April 29, 1949, were bargained and negotiated at arm's length and in good faith by Allis and Penn through their respective representatives. The written agreement of April 29, 1949, was prepared by counsel for Allis; it was executed in good faith as a fair and appropriate237 disposition of the rights and interests of the parties; it set forth all of the terms to which Allis and Penn agreed; it was not a sham or fictitious agreement. Pursuant to the agreement of May 10, 1949, Allis paid Tungsten Alloy Manufacturing Co. $30,000, for which it received 1,200 shares of Tungsten Alloy preferred stock. There was no agreement that Allis would resell this stock. The purchase was a bona fide transaction. Allis had a right under the agreement of May 11, 1949, to purchase two products of Tungsten Alloy, tungsten carbide and "Speedaloy", a high speed tooled steel. Allis thought that these products might be used in the manufacture of some of the machinery it made, and put samples of these products through its research, shop, and production departments. Allis concluded that the products were fair but decided not to purchase any of them. Under the agreement of May 11, 1949, with Magid, Allis paid him $450,000 for 100 shares of common stock of Tungsten Alloy. The agreement of May 11, 1949, with Magid was negotiated and bargained at arm's length and in good faith; it was prepared by counsel for Allis; it was executed in good faith as a fair settlement of the individual238 claims of Magid, Montgomery, and Baker against Allis. There was no agreement that Allis would resell this stock. The Allis purchase of 100 shares of Tungsten Alloy common stock from Magid was a bona fide transaction. In a letter to Montgomery, dated January 25, 1949, Magid confirmed an agreement of Montgomery to give Magid the first refusal if Montgomery should decided to sell any or all of his Penn common stock; and Magid agreed that in such event, he would buy from Montgomery at any time within one year a minimum of 500 shares of such stock at a minimum price of $262.50 per share. In June 1949, Magid purchased 500 shares of Penn common stock from Montgomery for which he paid Montgomery $131,250, or $262.50 per share. In a letter to Baker dated January 25, 1949, Magid confirmed an agreement of Baker to give Magid the first refusal if Baker should decide to sell any or all of his Penn common stock; and Magid agreed that in such event, he would purchase from Baker at any time within one year a minimum of 300 shares of such stock at a minimum of $313.25 per share. In June 1949, Magid purchased 500 shares of Penn common stock from Baker for which he paid Baker $156,625, or $313.25239 per share. In its return for 1949, Penn deducted $270,000 as "damage claims settlement", and showed in the balance sheets, Schedule L of the return, that it had retired all of its preferred stock, 5,000 shares. The books and the return of Penn reflected all of the terms of the settlement agreement between Allis and Penn. In his return for 1949, Montgomery reported the sale of 500 shares of Penn common stock for $131,250, and a long-term capital gain from the sale. In his return for 1949, Magid reported capital transactions in 100 shares of Tungsten Alloy common stock, and in the 1,000 shares of Penn common stock which he had purchased from Montgomery and Baker for the total sum of $287,875. Ultimate Findings of Fact 1. Penn did not receive, constructively or otherwise, $200,000 from Allis in 1949, or any other amount. 2. Penn owed Allis $270,000 under the settlement of the claims of Allis for damages for breaches of the 1948 steel contract, and paid Allis $270,000 in 1949 in settlement of all of the claims of Allis and in lieu of all damages. 3. The deduction in Penn's return of $270,000 for damages paid to Allis was a proper and valid deduction; the deduction was not240 taken with a fraudulent intent to evade tax. 4. Penn did not file for 1949 a false or fraudulent return with intent to evade tax. The statute of limitations bars the assessment of a deficiency in the income tax liability of Penn for 1949. 5. The individual petitioners, Magid and Montgomery, did not receive any distribution from Penn in 1949, constructively or otherwise. 6. The respondent erred in determining that Magid received and failed to report a distribution from Penn in the amount of $182,125, representing dividend income from Penn in the amount of $165,167.45. 7. The respondent erred in determining that Montgomery received and failed to report a distribution from Penn in the amount of $131,250, representing dividend income from Penn in the amount of $119,029.39. 8. Respondent failed to prove by clear and convincing evidence that for 1949 Magid filed a false or fraudulent return with intent to evade tax. The statute of limitations bars the assessment of a deficiency in the income tax liability of Magid for 1949. 9. Respondent failed to prove by clear and convincing evidence that for 1949 Montgomery filed a false or fraudulent return with intent to evade tax. The statute241 of limitations bars the assessment of a deficiency in the income tax liability of Montgomery for 1949. Opinion In these cases assessments of deficiencies are barred by the statute of limitations unless it is established that each taxpayer filed a false or fraudulent return for 1949 with intent to evade tax. Unless the taxpayers filed fraudulent returns, all of respondent's determinations fall. Sections 275(a) and 276(a), 1939 Code. Under section 1112, the respondent had the burden of proving fraud. The taxpayers were not required to move forward to disprove fraud until they were confronted at the trial with proof of fraud. ; affirmed per curiam . Since the deficiencies were barred, unless fraudulent returns were filed, none of the respondent's determinations have the benefit of a presumption of correctness, and respondent had the burden of proving that there was a basis in fact for his theories which constituted the basis for his determinations of fraud and his related determinations which gave rise to the deficiencies. All of the record and respondent's contentions and argument have been given the242 fullest consideration. Since direct proof of fraud is often difficult, it is necessary to scrutinize the transactions and all of the surrounding circumstances. Fraud may be gathered from circumstances. It is recognized that the respondent relies on two broad principles of tax law; that the substance of transactions rather than their form is determinative of their tax consequences, and that if in fact various steps constitute a single transaction, it may not be broken up into separate ones for tax purposes. This Court is cognizant of these general principles and is not slow in applying them when satisfied that the evidence requires their application. However, each case stands upon its own particular record and proven facts. Petitioners recognize these principles, but they contend that the substance of each of the settlement agreements in question is accurately and entirely reflected by its terms and form. They argue that respondent's determinations are arbitrary, without foundation in fact, based upon suspicion, and represent a misconstruction of the bargaining and negotiating which took place between Allis and Penn, and between Allis and Magid for the individuals, Magid, Montgomery, 243 and Baker, (who is not before us), and of the resulting agreements. The ultimate question to be decided is whether each taxpayer filed a false or fraudulent return with intent to evade tax. In order to decide the ultimate question, it is necessary for this Court to determine whether the several agreements to which Allis was a party were what they purported to be, or whether they were sham agreements devised as a fraudulent tax evasion scheme of Magid, and a fictitious disguise to cover up some other actual agreement, as respondent contends. There is no real dispute about many of the facts. The controversy has its roots in sharply differing interpretations of the negotiations and bargaining carried on by Hawkinson for Allis, and Magid, who claims that he acted in a dual capacity, first as the representative of Penn and, second, as the representative of the three individuals who, it is alleged, made personal claims against Allis. There is a serious dispute about what were the real and true facts involved in the settlement of the disputes which resulted from the sudden cancellation by Allis of the steel contract with Penn. An exhaustive and painstaking analysis of the entire record244 has been made, having in mind that the first question is whether each taxpayer filed a false or fraudulent return with intent to evade tax. Since the statute of limitations issue is present, and respondent's determinations do not have the status of being prima facie correct, we do not reach several subsidiary questions unless the respondent proved by clear and convincing evidence that the settlement agreements were a sham and represented a fraudulent tax evasion scheme. However, all of the factors involved in respondent's theories have been considered; none has been overlooked. It is concluded and we find: (1) That there were two bona fide disputes, one between Penn and Allis about the steel contract; and the other, between Magid (representing Montgomery, Baker, and himself) and Allis about the failure of Allis to live up to its assurances in 1948 that it would deal with and help Penn in its undertaking to establish a business of producing and selling steel ingots and in increasing its productive capacity. (2) That Penn was in breach of its contract, and that Allis made a bona fide claim for damages. (3) That there were bona fide and arm's length negotiations and bargaining between245 Hawkinson and Magid (representing Allis and Penn, respectively) to settle the contract dispute. (4) That there was a bona fide agreement between Allis and Penn under which Penn acknowledged its obligation to restore to Allis $270,000, representing overcharges on steel previously shipped to Allis, which sum was paid by Penn to Allis, which Allis accepted in lieu of all damages. (5) That Penn was not entitled, under the settlement agreement of April 29, 1949, or any other agreement, to receive any moneys from Allis; that Allis did not pay any sum to Penn, constructively, or otherwise; and, in particular, that Allis did not pay $200,000 to Penn, constructively or otherwise. (6) That Penn was entitled to a deduction for the $270,000 paid to Allis; and that in its return, the income of Penn was not understated by either $200,000 or $470,000. (7) That there has not been presented by the respondent clear and convincing evidence that the agreement of April 29, 1949, between Penn and Allis was in fact a fraudulent scheme or part of a general fraudulent scheme for the evasion of taxes by either Penn, or Magid, or Montgomery, or by all of the petitioners. (8) That Penn did not file a false or246 fraudulent return for 1949 with intent to evade tax. (9) That $470,000 of Penn's earnings was not siphoned off through Allis, as a conduit, to Magid and distributed by him among the three common stock shareholders of Penn - Magid, Baker, and Montgomery. (10) That there is not clear and convincing evidence that the petitioners, Magid and Montgomery, received dividend income from Penn in 1949, which they failed to report, as the result of the negotiations with and the agreements of Allis; and that there is not clear and convincing evidence that either Magid or Montgomery filed a false or fraudulent return for 1949 with intent to evade tax. Whether or not each petitioner filed a false or fraudulent return with intent to evade tax depends upon whether the respondent established by clear and convincing evidence, under his burden of proof, that (a) Penn constructively received moneys from Allis; and that (b) the individual petitioners thereby received a constructive dividend from Penn. Under the findings and conclusions, the main issues presented are decided for petitioners; assessments of the deficiencies in these cases are barred by the statute of limitations. See .247 The foregoing is sufficient to dispose of these cases, but in view of the complexities of respondent's contentions and the seriousness of his determinations, it is advisable to state the following: This Court will not presume to renegotiate the disputes or rewrite the contracts which were executed, in the absence of clear and convincing evidence that the written contracts do not represent the true and complete agreements of the parties and that the negotiations were not bona fide and were not carried on at arm's length. See, for example, ; , where although the questions and the facts were different, a similar problem was presented. Nor will we undertake to narrate all of the circumstances which the respondent claims were questionable. To do so would confuse the considerations of the chief questions. The respondent determined that the income of Penn for 1949 was understated, with fraudulent intent, in the amount of $470,000, which resulted from Penn's failure to include in income $200,000, which respondent claims was constructively received fromAllis, and from Penn's deduction of $270,000, 248 which respondent contends was no more than a fiction, was not truly a payment of damages to Allis, and was part of a general tax evasion scheme. It is respondent's view that Magid and his associates devised a tax evasion scheme whereby $470,000 of Penn's income was siphoned off through Allis, as a siphon or conduit, to the three common stock shareholders, Magid, Montgomery, and Baker. He contends that the individuals did not have any bona fide claim against Allis; that they induced Allis to pay out the net sum of $470,000 to them under a fraudulent plan involving the purchase by Allis of stocks of Tungsten Alloy Corporation, which was followed by Magid's purchase of 1,000 shares of the common stock of Penn from Montgomery and Baker, which respondent contends was a means of giving them their share of the $470,000. The petitioners vigorously deny all of respondent's theory and interpretation of what was done. This Court is unable to conclude that there is clear and convicncing evidence that such overall tax evasion scheme was involved in the several agreements which were executed by Allis, Penn, and Magid. The background of the Allis and Penn dispute is as follows: In 1948, steel249 was scarce and the end-users, including Allis, were "desperate" in their efforts to get necessary supplies. Montgomery is an experienced steel man. He and Magid were able to lease a Navy reserve steel plant at Birdsboro and believed they could start a profitable business, but they needed additional capital and some firm commitments from a buyer or buyers of what they could produce, steel ingots. They carried on negotiations with Allis through Hawkinson. Allis was willing to invest $500,000 in Penn and gave Magid and Montgomery assurances of substantial future business and of help in getting an additional furnace installed, provided Allis received a priority in Penn's production. Magid and Montgomery had inquired of others about doing business, selling steel, and raising capital. Magid told Hawkinson in 1948, before the Allis-Penn contract was concluded, that he had an opportunity to sell some of the Penn stock for a profit of $500,000, and that he wanted firm assurances that a contract with Allis would represent a good business decision. The Executive Committee of Allis met with Montgomery and Magid and decided to invest $500,000 in Penn, to enter into a steel contract, and they gave250 the assurances requested. All of these matters involved serious business commitments. For Penn and its stockholders, the decision to do business with Allis was critical; Penn was a new corporation. Later, after Allis cancelled the contract, in 1949, for several reasons including Penn's breaches of contract, changes in the steel market, easier supplies of steel, and lower prices than were fixed under the Penn contract, one of the chief counsel for Allis, Louis Quarles, recalled the 1948 assurances of Allis, the 1948 negotiations with Montgomery and Magid, and he had some anxiety about the claims against Allis which Magid made in 1949, for himself and his associates, because Quarles and his associates "felt there might be a possibility of a promissory estoppel being asserted against Allis-Chalmers" by Magid and his individual associates. A bona fide steel contract had been made in 1948 between Penn and Allis. Early in 1949, Allis became dissatisfied with Penn's contract performances and suddenly cancelled the contract after due deliberations. There were valid grounds for the cancellation. Penn committed breaches of contract which Allis would not overlook. Quarles felt that "Allis was251 well within its rights in cancelling the contract and had a claim against Penn Ohio for damages." Penn objected, and there arose a bona fide business dispute. However, the action of Allis in cancelling the contract after only 6 months, gave rise to another dispute. Magid, for himself and his associates, as individual business men who had started a new business and relied on the assurances of Allis with respect to Penn's first contract, made claims against Allis for ther personal losses of other profitable business opportunities in the summer of 1948. About these individual claims, Quarles, both a member of the Executive Committee of Allis and its senior counsel, testified: I recall meeting Samuel E. Magid, Joseph B. Montgomery, Jr., and John J. Baker in the late spring or early summer of 1948. They came here to negotiate a contract with Allis Chalmers for the purpose of supplying Allis Chalmers with steel which was at that time very difficult to get and at premium prices. They represented that they owned and controlled the Penn Ohio Steel Corporation that had a steel plant at Birdsboro, Penn. which they had just taken possession of under a lease from the Navy. The arrangement was252 worked out whereby Allis Chalmers was to put in capital in the form of preferred stock and a term contract entered into which gave it a preferential right to purchase steel from that company. Most of the negotiations were between Mr. Magid and Walter Hawkinson, then Secretary and Treasurer of Allis Chalmers. Most of the discussions on behalf of the eastern people were by Mr. Magid. It was represented at the time that with proper financing they could increase their capital and construct an additional furnace. Magid said he could negotiate a contract with other companies but that he preferred to deal with Allis Chalmers. He also stated that he and his stockholders were losing possibilities of substantial immediate gain if the contract were entered into but he hoped to recoup their situation by continuing relationship with Allis Chalmers. My recollection is that they had an opportunity for an immediate capital gain in the sale of their stock but did not take it because of the continuing situation in regard to the contract. Messrs. Magid and Montgomery appeared before the Executive Committee stated their situation and the foregoing statements I believe were made at that time. The Allis253 Chalmers people had known of Mr. Montgomery and his record as a steel man and were favorably impressed. * In the course of the conversions [in 1948], the question of dealing with the Navy came up as it was apparent that their consent would be necessary, if new furnaces were to be built. I believe Walter Geist, who was then President of Allis-Chalmers, stated that the company had a great deal of work with the Navy and he might be able to assist at least to the extent of seeing that the Penn Ohio people would meet the right people. The work done under the contract by Penn Ohio was disappointing, They [Penn] fell behind in deliveries and did not give Allis-Chalmers the preferred delivery to which they were entitled. Instead, they made deliveries to Ford Motor Company. Inasmuch as the purpose of the contract was to obtain steel when there was a short supply, Allis-Chalmers felt greatly grieved, with the result that on March 31, 1948, Allis-Chalmers elected not to receive the additional steel to which it would have been entitled, and later, April 7, 1949, served formal notice of the cancellation of the contract. At this time, I turned the matter over to my then partner, 254 Leo Mann, with instruction to take charge and handle it. * * At no time during these negotiations was there any consideration given to the impact of income taxes upon anybody by me. Neither the tax counsel of Allis Chalmers nor the tax counsel in our office were consulted. In view of the breach of the contract by Penn Ohio it was not contemplated, nor did we expect or authorize, Hawkinson to pay any of the money to the company [Penn] by way of settlement. The financial outlay on behalf of Allis Chalmers was to cover all claims that might be asserted by individuals and it was expected that a release would be secured all around. From time to time, progress of the settlement contracts or changes were reported to me, for example, the substitution of Tungsten stock for that of Penn Ohio. Being advised that Walter Geist, President, and Walter Hawkinson thought the substitution advisable, I saw no reason for not concurring as it appeared to me that there were no legal questions involved. The final negotiations were completed by Hawkinson in New York and reported to the Executive Committee. There was, at one time, a limit of $200,000 and Hawkinson explained that he had exceed255 [exceeded] it by $10,000, which, in view of the magnitude of the transaction, was approved. At no time during the negotiations was any question of avoidance of tax raised and no one on behalf of Allis Chalmers nor my office had any participation in or design to, or attempt to mitigate or affect the impact of income tax upon anyone. The settlement was not at all tailoredto that end. It was one which was insisted upon with Allis Chalmers as the only means of settling the entire matter. * * * The testimony of Hawkinson is to the same effect. He testified that at the beginning of the 1949 settlement negotiations, Magid reminded him that he and his associates had given up an opportunity in 1948 to sell part of their Penn common stock for a profit of $500,000 in order to deal with Allis; that because of the assurances of Allis that it would help Penn obtain additional furnaces which would increase its production, Magid had committed himself to purchase part of the holdings of Penn common stock of Montgomery and Baker for a very large price; that Magid showed the commitment to Hawkinson; and that, therefore, the termination of the steel contract presented two problems for settlement, 256 the dispute between Allis and Penn relating to the contract, and the personal, individual claims of Magid and his associates "based upon the loss of their original opportunity and the failure of assurances given [by Allis]." Hawkinson also testified in answer to certain questions, as follows: Q. Now these negotiations for a settlement resulted in a settlement of two separate sets of claims, did they not? * * Between Allis-Chalmers and Penn-Ohio on the one hand, and Allis Chalmers and Magid in behalf of his associates Montgomery and Baker on the other hand; is that right? A. That's right. Q. Those negotiations resulted in a settlement to that effect? A. That's right. Q. Were those negotiations conducted in good faith? A. They were. Q. Were they conducted at arm's length? A. They were. Q. They were reduced to writing; that is, the settlements as concluded were reduced to writing; is that right? A. They were. Q. In the form of agreements between the several parties? A. And other documents, related documents. Q. Did the agreements and the related documents reflect truly and honestly the settlements negotiated and concluded between the parties? A. Yes. 257 Q. Were the settlements entered into for the purpose of masking or disguising the true nature of the transactions? A. They were not. * Q. That $470,000 was to be paid to Magid for part of his common stock in Penn-Ohio provided he furnished you at the closing with general releases of all of the parties and provided Penn-Ohio made good upon its port of the agreement of settlement? A. That is true. Respondent failed to prove by clear and convincing evidence his contentions that there was but one settlement agreement; that there were not bona fide, individual claims of and made by Magid, Montgomery, and Baker against Allis in 1949, based upon their reliance on the promises and assurances of Allis in 1948; and that the individual claims were part of a fraudulent tax evasion scheme. He failed to prove that "the taint of fraud" pervaded all of the transactions (as he states it). Upon the whole record, findings are made to the contrary. The evidence establishes that there were two settlement agreements. The first was between Allis and Penn, dated April 29, 1949. It settled the dispute about the 1948 steel contract and the cancellation thereof. Its terms constituted the258 settlement. The agreement was bona fide, was negotiated at arm's length, and it was not fraudulent or part of any tax evasion scheme. Allis did not agree to pay Penn $200,000, for any purpose, and Penn did not receive $200,000 constructively or otherwise, from Allis. Penn agreed to pay and paid Allis $270,000 in lieu of all damages claimed by Allis, for which Penn was entitled to take and correctly took in its return a deduction. Respondent erred in increasing Penn's income by $470,000. The respondent adopted the theory that there was in the negotiations a splitting-up of the contract - cancellation dispute into two parts; that Allis wanted restitution of overpayments it had made on the delivered steel due to overcharges by Penn, but that Penn wanted compensation from Allis for the cancelled part of the tonnage, 22,949 tons, and that a settlement was made on that basis, namely, a payment by Allis of $470,000 for the cancelled tonnage, and a payment by Penn of $270,000 to restore the overcharges, resulting in a net payment to Penn by Allis of $200,000. Respondent failed to prove this theory by clear and convincing evidence. We are satisfied from the entire record that there was not259 any such agreement. Respondent's theory represents his renegotiation of the dispute between Allis and Penn and his rewriting of the settlement agreement of April 29, 1949. Lacking clear and convincing evidence in support of respondent's theory, this Court may not and will not renegotiate the dispute and substitute a wholly different settlement agreement for the one which was written and executed after arm's length and bona fide negotiations. Since there is not clear and convincing evidence that the claim of Madig and his associates against Allis was a sham and that the settlement thereof was a fraudulent scheme, it may not and cannot be concluded that the $450,000 paid by Allis to Magid for Tungsten Alloy common stock, and the $30,000 paid by Allis to Tungsten Alloy Corporation for some of its preferred stock represented a constructive payment to Penn by Allis in settlement of the steel contract dispute. Respondent's contention that there was but one settlement agreement with Allis is consistent with his general theory that the individual claims of Magid and his associates were a sham and that the agreements relating thereto were a fraudulent device. However, the evidence establishes260 that there were two separate disputes and settlements; that all of the executed agreements were prepared by counsel for Allis; and that the Executive Committee of Allis required and directed that one dispute could not be settled unless the second dispute also was settled and Allis received a general release from all of the parties of all claims against it. Accordingly, the two settlements were interdependent, but the requirement of Allis that one dispute could not be settled unless the other dispute also was settled, did not make and constitute in substance one settlement agreement out of the two separate settlements. The principle stated in , certiorari denied ; and , does not apply here. Another element which respondent has regarded with suspicion is that the Executive Committee of Allis, on April 26, 1949, authorized Hawknsion to conclude the settlement of all of the disputes on the basis of a release of all claims "at a cost [to Allis] not to exceed $200,000.00, plus the accrued dividends on the preferred stock" held261 by Allis. The record shows that the above direction in a minutes of an Executive Committee meeting was somewhat ambiguous. The direction was succinct and did not go into detail. But the Executive Committee, at its meeting, was not engaged in drafting a contract or any one of the settlement agreements; they were written by counsel for Allis. The evidence as a whole establishes that the direction meant and was intended to mean that in view of the details of the negotiations by Hawkinson up to that point, which he had reported to the Executive Committee, the Committee fixed as the limit of the net cost to Allis of settling all of the claims, $200,000. This did not mean that the Executive Committee of Allis agreed to and directed that $200,000 should be paid to Penn. It did mean that the Executive Committee recognized that a separate claim was being made by Magid against Allis on behalf of himself and his individual associates, and that Allis was going to pay out funds to satisfy this claim which would represent a net cost to Allis of $200,000 after receiving Penn's payment of $270,000 in lieu of all damages. There is not clear and convincing evidence that respondent correctly interpreted262 this element. To the contrary, it is concluded that he distorted and misinterpreted the real and correct meaning of the foregoing direction of the Executive Committee of Allis, and that he erred in this respect by lifting this item out of the context and background which existed when this directive was given. Respondent's misconstruction of this item is indicative of the complexity of his whole theory which represents, in effect, his renegotiation of all of the negotiations and his rewriting of the agreements. We do not have in these cases clear and convincing evidence that the substance of the settlement agreement between Allis and Penn dated April 29, 1949, that the substance of the settlement agreement between Allis and Magid dated May 11, 1949, and that the substance of the agreements between Allis and Tungsten Alloy Corporation, dated May 10, and May 11, 1949, was not, in each instance, accurately and completely reflected by the terms and form of each agreement, as negotiated, executed, and carried out. It is concluded that the substance of each agreement was accurately and fully represented by the form and terms of each agreement. The individual petitioners reported in their263 returns capital transactions involving the purchases and sales of stocks of Penn and Tungsten Alloy. There is not clear and convincing evidence that the purchases and sales of those stocks represented false transactions which were carried out with intent to evade taxes. "Although the existence of fraud may be gathered from circumstances, the piling of inference upon inference hardly qualifies as the clear and convincing evidence by which fraud must be proved." . Respondent's determinations that false and fraudulent returns were filed with intent to evade tax are based upon the piling of inference upon inference, derived from his interpretations of all of the circumstances which surrounded the settlement of the disputes. His inferences and conclusions about the circumstances fall far short of the required proof of fraud by clear and convincing evidence, and we cannot find and conclude that in all of the agreements and transactions there is the sinister implication that the forms and outward appearances of the settlement agreements (between Allis and Penn, and between Allis and Magid) were a cloak to disguise a deliberate scheme264 of fraudulent tax evasion of the petitioners. See . The respondent must, of course, exert great diligence in protecting the revenues and thwarting tax evasion schemes. But it is well established that a taxpayer may decrease the amount of what otherwise would be his taxes by means which the law permits, ; . That principle may not be overlooked where fraud is not proved. See, also, (February 18, 1964). In the cases of the individual petitioners, the respondent tied up their stock transactions with his general premise that there was a dividend distribution by Penn of $470,000. Since that determination is rejected and it is concluded that the statute of limitations bars the deficiencies, there is no issue before us about whether their stock transactions, as separate and distinct transactions, gave rise to capital gains or losses which can be recognized for tax purposes. Whether or not each petitioner filed a false or fraudulent return with intent to evade tax is a question of fact. Fraud implies*265 bad faith, intentional wrongdoing, and the sinister motive of evading tax. Fraud is never imputed or presumed. The proof required to establish the fact of fraud is clear and convincing evidence of an intention to evade tax. The fact of fraud is not proved by the ordinary preponderance of evidence; nor by doubts as to the intentions of a taxpayer; nor by mere circumstances which seem to create inferences of fraud. ; ; ; ; and ; 285; and , both modifying Memorandum Opinions of this Court. Respondent has not presented clear and convincing evidence that each petitioner filed a fraudulent return with intent to evade tax. It follows that the assessments of the deficiencies are barred by the statute of limitations. Decisions will be entered for the petitioners. Footnotes1. Proceedings of the following petitioners are consolidated herewith: Joseph B. Montgomery, Jr., and Mary C. Montgomery, Docket No. 84059; Samuel E. Magid and Evelyn Magid, Docket No. 84060.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624996/	Wilfred J. Funk and Eleanor M. Funk, Petitioners, v. Commissioner of Internal Revenue, RespondentFunk v. CommissionerDocket No. 70665United States Tax Court35 T.C. 42; 1960 U.S. Tax Ct. LEXIS 53; October 13, 1960, Filed 53 Decision will be entered under Rule 50. 1. Held, a note transferable on the books of the debtor corporation is a "security" (sec. 23(k)(3), I.R.C. 1939), and therefore the deduction for its worthlessness is limited by section 23(k)(2). Cf. Carl Oestreicher, 20 T.C. 12">20 T.C. 12.2. Held, loans aggregating $ 32,500 formed the basis for business bad debts; such loans to a publishing company controlled by petitioner were proximately related to his occupation as a professional writer.3. Held, advances to the corporation, aggregating $ 55,000, at a time when it was in very poor financial condition were capital contributions and not true loans; deduction for loss with respect thereto is governed by provisions relating to capital losses and may not be taken as a bad debt. George A. Donohue, Esq., and Elden McFarland, Esq., for the petitioners.A. Jesse Duke, Jr., Esq., for the respondent. Raum, Judge. RAUM42 Respondent determined a deficiency in petitioners' income tax for 1953 in the amount of $ 79,129.32.Certain adjustments have been conceded by petitioners, leaving in controversy only the respondent's disallowance of a claimed54 bad debt deduction in the aggregate amount of $ 138,447.31 for 1953. The dispositive questions are:1. Whether a note representing certain advances to Wilfred Funk, Inc., by petitioner was "in registered form" (sec. 23(k)(3), I.R.C. 1939), with the consequence that a deduction for worthlessness thereof must be treated as a capital loss pursuant to section 23(k)(2).2. Whether loans made to Wilfred Funk, Inc., in 1949 and 1950 resulted in business or nonbusiness bad debts in 1953.3. Whether certain advances made to Wilfred Funk, Inc., in 1952 and 1953 represented true loans or capital investments.FINDINGS OF FACT.Some of the facts have been stipulated and are incorporated herein by reference.Petitioners are husband and wife residing at Montclair, New Jersey. Their joint income tax return for the calendar year 1953 was filed with the district director of internal revenue for Upper Manhattan, New York, New York.For many years prior to 1937 Wilfred J. Funk, referred to herein as petitioner, had been president of Funk & Wagnalls Company, a corporation engaged in publishing dictionaries, educational and other books, and a magazine known as "The Literary Digest." During this 43 55 period petitioner became familiar with the subject of lexicography, which includes the derivation, meaning, and use of words.In 1937 petitioner resigned as president of Funk & Wagnalls Company. Subsequently that year a corporation known as Kingsway Press, Inc., was organized. This corporation began the publication of a pocket-sized magazine called "Your Life." The original stock capitalization of $ 7,200 was increased to $ 11,000 in 1940, 60 per cent of which was owned by petitioner and 40 per cent was owned by Douglas E. Lurton, also a former employee of Funk & Wagnalls Company. Petitioner was president and editorial director of this company and received a salary annually which in 1953 amounted to $ 10,000; Lurton received a similar salary as vice president and editor. During the years 1937 and 1938, petitioner made loans to Kingsway Press, Inc., aggregating $ 53,200, which were repaid during the years 1939 through 1942 with interest.In 1939 a second corporation known as Your Health Publications, Inc., was organized with an initial capital stock of $ 6,000 which was increased to $ 11,000 in 1940, 60 per cent of which was owned by petitioner and 40 per cent by Lurton. Petitioner, 56 as president and editorial director, and Lurton, as vice president and editor, each received a salary annually which in 1953 amounted to $ 9,000. This corporation published a pocket-sized magazine called "Your Health."A third corporation known as Wilfred Funk, Inc., was organized in 1940. This company engaged in the business of publishing books of general interest, including three books written by petitioner and one book written by petitioner together with a man named Lewis. The capital stock consisting of 90 shares of common of a total par value of $ 450 was issued to petitioner for cash; 40 per cent of this stock was given by petitioner to two of the executives of the new corporation, Frank Henry and Spencer Armstrong. During the first year of its operation the corporation suffered heavy initial operating losses. The petitioner then bought back the 40 per cent minority stock interest and gave it to Lurton, who became vice president and editor. Petitioner became president and editorial director of the company. Subsequently, in 1951, the corporate capitalization was increased and in 1951 and 1952 petitioner paid in $ 125,000 for 1,250 shares of preferred stock.In 1941 a fourth57 corporation, Yourself Publications, Inc., was organized. This company published a pocket-sized magazine called "Your Personality." Petitioner paid in $ 600 for 60 per cent of the capital stock and Lurton paid in $ 400 for 40 per cent of the capital stock. Petitioner, as president and editorial director, and Lurton, as vice president and editor, each received an annual salary, which in 1953 amounted to $ 3,000. Petitioner lent this company $ 10,000 in 44 1941 which was repaid together with interest during the 4 succeeding years.A fifth corporation, Woman's Life Publications, Inc., was organized in 1942 and published a pocket-sized magazine called "Woman's Life." Petitioner paid in $ 600 for 60 per cent of the original capital stock and Lurton paid in $ 400 for the balance. As president and editorial director, petitioner received a salary annually which in 1953 amounted to $ 3,500, and Lurton received a similar salary as vice president and editor. In 1942 petitioner lent this company $ 10,000 which was repaid together with interest during the years 1943 through 1946.Also in 1942 a sixth corporation, Publications Management, Inc., was organized. This company rendered management58 services and advice to petitioner's various publishing corporations and to others in the magazine field. The $ 1,000 capital stock was paid in 60 per cent by petitioner and 40 per cent by Lurton. Petitioner as president received an annual salary from this company which in 1953 amounted to $ 1,000.In 1944 a seventh corporation, Basic Publications, Inc., was organized by Lurton. It published a pocket-sized magazine originally called "Success Today" but subsequently called "Marriage." Lurton paid in 60 per cent of the small capitalization and the petitioner 40 per cent, the converse of stock ownership with respect to the other six corporations organized by petitioner referred to above. Petitioner, as vice president and editorial director, and Lurton, as president and editor, each received annual salaries which in 1953 amounted to $ 1,500. Lurton made a loan of $ 7,500 to the company in its initial stages which was repaid.Each of the foregoing seven corporations had a small capitalization. Subsequent to the initial separate operation of Wilfred Funk, Inc., all seven corporations were operated by the same office personnel at the same premises consisting of an area of about 40 by59 50 feet. The corporations had no plant or facilities other than office furniture and equipment. There were 5 or 6 office employees with an additional 8 or 10 temporary employees when a mail-order campaign was in progress. The work consisted chiefly in gathering articles or books, titling the articles, putting them together, and sending them to a printing firm in New Hampshire for printing and distribution. The magazines were distributed by American News Company direct from the printer. Advertising was handled through agencies. The books were printed by a printing company and distributed through bookstores or by mail-order coupons in magazines and newspapers. The corporations had no facilities for printing or distribution. It was a skeleton organization, incorporated separately for each of its various publications and enterprises. Each of the corporations, except Wilfred Funk, Inc., had an earned surplus at the beginning of 1953.45 Between 1937 and 1953, the petitioner's time was equally divided between his work as a writer and his work as an officer and director of each of the seven noted corporations.In 1937 Funk & Wagnalls Company published a book written by petitioner60 called "If You Think It New!" Petitioner received royalties therefrom from 1937 to 1941, inclusive, in the total amount of $ 1,220.78. In 1938, which was prior to the date of organization of Wilfred Funk, Inc., Funk & Wagnalls published another book written by petitioner called "When the Merry-Go-Round Broke Down." Petitioner received royalties therefrom during the year 1939 in the amount of $ 338.86.During the period 1942-1953, inclusive, Wilfred Funk, Inc., published three books written by petitioner and one by petitioner and Lewis, all on the meaning, derivation, and use of words. During this period petitioner received a total of $ 53,315.70 as royalties from the sales of these books. Petitioner has also from time to time written articles for the magazines he has been helping to edit and publish. Furthermore, beginning in 1944 petitioner wrote articles, primarily in the field of lexicography, which were published in Reader's Digest magazine. During the period 1944 to 1953, inclusive, he received a total of $ 53,900 from Reader's Digest for these articles. Through the publication of these books and articles, the petitioner has attained a considerable reputation as a literary61 personality and an authority in the field of lexicography.Following the organization of Wilfred Funk, Inc., in 1940, petitioner from time to time in 1940, 1941, and 1942 lent it amounts totaling $ 100,000, evidenced by promissory notes of the corporation. These notes were consolidated into a single promissory note dated December 15, 1942, which note was transferable on the books of the corporation and was redeemable upon specified notice "to the registered holder thereof at his registered address."During the years 1943 through 1949, Wilfred Funk, Inc., paid petitioner $ 37,851.89 on account of principal and $ 24,761.01 on account of interest with respect to this note. No further payments of principal or interest were received by petitioner with respect to this note except as hereinafter noted.Beginning in 1948 through 1952, Wilfred Funk, Inc., incurred annual net losses in its operation. In 1950 the loss amounted to $ 30,874.47, in 1951 to $ 51,621.66, and in 1952 to $ 61,069.76. At the beginning of 1950 the earned surplus deficit was $ 18,864.31. By the beginning of 1952 this deficit amounted to $ 101,205.10 and by the end of 1952 there was a deficit in earned surplus of 62 $ 162,014.46.During the period from October 27, 1949, to October 24, 1950, 46 petitioner made five further advances totaling $ 32,500 to Wilfred Funk, Inc., each evidenced by a promissory note.In 1950 Lurton, the then manager of Wilfred Funk, Inc., suggested that a skilled professional editor be employed since the volume of business the corporation was doing was insufficient to generate a profit. Lurton also suggested the corporation needed additional money of approximately $ 100,000 in order to succeed. The corporation called in the firm of business consultants, Rogers & Slade, to make an analysis and recommendation as to whether the business should be continued or liquidated. A man named Hill of that organization made an elaborate investigation and reported that he thought the business had a great possibility of success. Hill was then employed as manager of the corporation for several months. However, when profits still failed to materialize, the company on or about March 14, 1951, hired Joseph Margolies, who had been an outstanding man in that field, as its general manager.Before accepting this position, Margolies, together with his lawyer, examined the financial statement63 of Wilfred Funk, Inc., and insisted on incorporating in the employment agreement a provision that the last $ 20,000 of money lent to the company by petitioner and in addition $ 50,000 of new money contributed to the company by petitioner would be evidenced by 4 per cent $ 100-par-value preferred stock. The certificate of incorporation was accordingly amended to authorize the issuance of 1,500 shares of preferred stock, and the $ 70,000 was capitalized by the issuance of 700 shares of preferred stock to petitioner. Subsequently, between July 21, 1951, and April 30, 1952, petitioner paid in $ 55,000 additional as capital and received 550 shares of preferred stock therefor, making the total paid in capitalization $ 450 common stock and $ 125,000 preferred stock.Despite the management of Margolies, the company continued to lose money. During the period beginning July 29, 1952, and ending July 3, 1953, petitioner made further advances to the company as follows:Date1952AmountJuly 29$ 5,000Oct. 307,500Nov. 127,500Dec. 105,000Date1953AmountJan. 7$ 5,000Mar. 1810,000Mar. 255,000Apr. 285,000July 35,000Total55,000These advances64 were recorded on open account on the books of account of the company and as loans on the books of account of petitioner.47 A substantial portion of these advances was used in major efforts to produce a profitable operation. Past experience had shown that one "best seller" would be sufficient to put the company on a profitable operating basis. A new edition of a formerly successful book was prepared and an expensive and elaborate campaign was put on in an endeavor by mail order to revitalize the sale of this and other previously successful books. During 1952, $ 84,434.40 was spent for direct mail advertising. The effort was unsuccessful.Prior to July 3, 1953, petitioner decided to dispose of his interest in Wilfred Funk, Inc. He caused an appraisal of the corporation's assets to be made and upon the basis thereof entered into an agreement with the corporation, dated July 23, 1953, whereby he undertook to accept $ 11,201.25 in full settlement of all indebtedness due him by the corporation. At about this same time, an effort was made to interest Funk & Wagnalls Company in buying all of the stock of Wilfred Funk, Inc. Thereafter, in December 1953 petitioner sold his entire65 stock in Wilfred Funk, Inc., consisting of $ 450-par-value common stock and $ 125,000-par-value preferred stock, to Funk & Wagnalls Company for $ 1,000. Although petitioner was a large minority stockholder in Funk & Wagnalls Company at the time, this transaction was negotiated at arm's length.Before purchasing such stock and continuing the business, Funk & Wagnalls Company insisted upon certain conditions precedent, one of which was the curtailment of the indebtedness of Wilfred Funk, Inc., to petitioner. Hence, on December 15, 1953, petitioner, pursuant to his prior agreement with Wilfred Funk, Inc., agreed to accept and did accept from Wilfred Funk, Inc., the sum of $ 11,201.25 in cash and the assignment of a copyright of a value of $ 1,500 in full settlement of the entire indebtedness of $ 149,648.11.Petitioner took a $ 138,447.31 business bad debt deduction on his 1953 return based on his losses in settling with Wilfred Funk, Inc. Respondent disallowed the deduction and determined that $ 81,947.31 should be treated as a nonbusiness bad debt and that $ 55,000 should be treated as an addition to the claimed long-term capital loss on the sale of 90 shares of common stock of Wilfred66 Funk, Inc.Petitioner was engaged in the business of writing from 1937 through 1953. The losses on his loans and advances to Wilfred Funk, Inc., were sustained in 1953.OPINION.Petitioner presently contends that he is entitled to a business bad debt deduction for 1953 in the amount of $ 136,946.86, consisting of three separate items or groups of items, all of them involving loans or advances previously made by him to Wilfred Funk, 48 Inc. 1 That petitioner incurred these losses in 1953 is uncontroverted, the only issue being whether they are deductible in full as business bad debts, as claimed by him, or whether the deduction of one or more of the component items is limited by statute, as a loss on a registered security, nonbusiness bad debt or capital loss.67 1. The first item in controversy grows out of a series of advances made by petitioner to Wilfred Funk, Inc., from time to time during 1940, 1941, and 1942. These advances were evidenced by promissory notes, which were consolidated into a single promissory note in the face amount of $ 100,000, dated December 15, 1942. Subsequent payments on that note had reduced the amount of the debt to $ 62,148.11. However, we must agree with the Commissioner that any deduction based upon this item is limited by the provisions of section 23(k)(2) of the 1939 Code 2 relating to worthless "securities," since the note in controversy is, in our judgment, a "security" within the meaning of section 23(k)(3). 2 The note, by its terms, was transferable on the books of the corporation, and specifically referred to the holder as "the registered holder"; it was thus in "registered form," thereby falling precisely within the definition of "securities" contained in section 23(k)(3). Cf. Carl Oestreicher, 20 T.C. 12">20 T.C. 12.68 Petitioner's contention that the reasons for casting the note in registered form in 1942 had ceased to exist by 1953 is beside the point. The fact is that the form of the note remained the same, and, whether petitioner desired it or not, the provision in the note relating to transferability on the books of the company continued "to protect the holder by making invalid unregistered transfers." Gerard v. Helvering, 120 F. 2d 235, 236 (C.A. 2). We hold that the Commissioner properly disallowed a business bad debt deduction with respect to this note.49 2. Petitioner challenges the Commissioner's treatment of the $ 32,500 notes as nonbusiness bad debts on two grounds. He contends that they represented business loans because they were proximately related (a) to his business of organizing, financing, and managing corporations operating in the publishing field, of which Wilfred Funk, Inc., was one; and (b) to his professional occupation as a writer.The first reason appears to be of doubtful merit. It seems unlikely to us on the evidence that petitioner's relationship to the seven corporations (some of which represented merely different phases69 of the same venture) could constitute the conduct of a business of organizing, financing, and managing corporations. Cf. Phil L. Hudson, 31 T.C. 574">31 T.C. 574; H. Beale Rollins, 32 T.C. 604">32 T.C. 604, affirmed 276 F. 2d 368 (C.A. 4). However, we need not pass upon this point because we think petitioner's second reason is sound.There is no dispute between the parties that petitioner was a professional writer, but the Government argues that the advances in question were not proximately related to his occupation as a writer. It denies petitioner's claim that the assurance of a publishing outlet and the promotion of his reputation as a writer constituted one of the principal reasons for the organization of Wilfred Funk, Inc., and it points to evidence showing that during the period 1940 through 1953 the corporation paid or accrued royalties to authors of $ 257,483.49 of which only $ 53,315.70 was paid to petitioner. Although there is force to the Government's position, we think that the weight of the evidence tips the scales the other way.We may readily agree with the Government that one of the purposes of establishing70 and operating Wilfred Funk, Inc., was to create and utilize a vehicle for engaging in the publishing business, a business that cannot be attributed to petitioner in view of the corporate entity. See Phil L. Hudson, 31 T.C. at 583, and cases cited. But, on the evidence, we also agree with petitioner that another, and important purpose was to provide him with a ready publishing outlet for his own works and to enhance and exploit his reputation as a writer. The mere fact that the corporation published the works of a number of other authors does not at all detract from the substantial part that it was intended to play and in fact did play in the promotion of petitioner as a writer. Moreover, the use of his own name in the corporate title, even when publishing the works of other authors, was a means of keeping his name before the public to assist in the acceptance and sale of his own books. And had Wilfred Funk, Inc., failed financially, petitioner felt it would be a serious blow to his professional reputation and prestige. In the circumstances we hold that the $ 32,500 notes formed the basis for business bad debts. Cf. Tony Martin, 25 T.C. 94">25 T.C. 94;71 J. T. Dorminey, 26 T.C. 940">26 T.C. 940; Mac Levine, 31 T.C. 1121">31 T.C. 1121.50 3. The final series of advances, made on open account in 1952 and 1953 totaling $ 55,000, stands on a different footing. The Commissioner determined that these advances did not represent true loans but were in reality risk capital. We think the evidence supports that position.By July 29, 1952, when the first advance of this third group was made, the financial condition of Wilfred Funk, Inc., had substantially deteriorated. Beginning in 1948, Wilfred Funk, Inc., had been incurring annual losses continuously in its operation. In 1950 the net operating loss was $ 30,874.47, in 1951 it was $ 51,621.66, and in 1952 it was $ 61,069.76. At the beginning of 1952 the deficit in surplus had already sunk to $ 101,205.10 and at the end of that year it had worsened to a deficit of $ 162,014.46. It is apparent that by the time this third group of advances was made, from July 29, 1952, to July 3, 1953, Wilfred Funk, Inc., was already in the ever-tightening grips of insolvency. Advances made under such rapidly declining financial conditions could hardly have been made72 with a reasonable expectation of repayment, apart from the gamble based upon possible future corporate earnings.What we said in Phil L. Hudson, 31 T.C. 574">31 T.C. 574, is peculiarly applicable here (p. 583):Whether petitioner's advances to [Wilfred Funk, Inc.] represented genuine loans rather than risk capital is open to serious question. The need for his advances was largely attributable to [Wilfred Funk, Inc.'s] severe lack of working capital. No notes or other evidences of indebtedness were issued in respect of these advances * . It seems highly persuasive that the expectation of repayment was based only upon possible future earnings; and that petitioner was satisfied to let his money ride with the ups and downs of the venture, hoping that the [publishing] business would become profitable and that he would some day reap the fruits of a successful investment. These circumstances strongly suggest that the advances were intended as risk capital rather than loans, * We conclude that a bad debt deduction in respect of the $ 55,000 advances here in controversy was properly disallowed. Cf. Fred A. Bihlmaier, 17 T.C. 620">17 T.C. 620.73 Decision will be entered under Rule 50. Footnotes1. The three components are as follows: (a) $ 62,148.11 representing the unpaid portion of a $ 100,000 note; (b) five advances evidenced by promissory notes aggregating $ 32,500, which were made between October 27, 1949, and October 24, 1950; and (c) advances on open account from July 29, 1952, and July 3, 1953, aggregating $ 55,000. In satisfaction of his claim of $ 149,648.11, the sum of the foregoing items, petitioner received $ 11,201.25 in cash and the assignment of a copyright worth $ 1,500, thus sustaining a loss of $ 136,946.86. However, in his return petitioner claimed a deduction of $ 138,447.31. The difference, $ 1,500.45, is accounted for in large part by the copyright assignment; the remaining 45 cents is unexplained.↩2. SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions: * * * (k) Bad Debts. -- * * (2) Securities becoming worthless. -- If any securities (as defined in paragraph (3) of this subsection) become worthless within the taxable year and are capital assets, the loss resulting therefrom shall * * be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets.(3) Definition of securities. -- As used in paragraphs (1), (2), and (4) of this subsection the term "securities" means bonds, debentures, notes, or certificates, or other evidences of indebtedness, issued by any corporation * * * with interest coupons or in registered form↩. [Emphasis supplied.]	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624997/	SAM C. AND PATRICIA L. EVANS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentEvans v. CommissionerDocket No. 1807-72United States Tax CourtT.C. Memo 1975-181; 1975 Tax Ct. Memo LEXIS 194; 34 T.C.M. (CCH) 783; T.C.M. (RIA) 750181; June 9, 1975, Filed Wentworth T. Durant and Robert Don Collier, for the petitioners. Robert M. Smith, for the respondent. STERRETTSUPPLEMENTAL MEMORANDUM OPINION STERRETT, Judge: Pursuant to the Memorandum Findings of Fact and195 Opinion [T.C. Memo. 1974-267] filed herein on October 15, 1974, petitioners, on January 21, 1975, filed a Computation for Entry of Decision in conformity with Rule 155, Tax Court Rules of Practice and Procedure. A copy of petitioners' computation was thereupon served on respondent. After the granting of a continuance of a hearing on petitioners' computation from February 26, 1975 to April 2, 1975, respondent, on March 20, 1975, filed his Computation for Entry of Decision along with his objections to petitioners' computation. After an informal meeting in chambers on April 2, 1975 in which the parties' conflicting computations were discussed, the Court ordered the parties to file memoranda of law supporting their positions with respect to the amount of any loss to which petitioners were entitled in 1969 as the result of a personal note of Sam C. Evans in the amount of $160,016 given by him to the National Bank of Commerce (hereinafter referred to as the bank) to retire a note in a similar amount of Sam C. Evans, Inc. On May 2, 1975, respondent filed the requested Memorandum of Law along with a new Computation for Entry of Decision which reflected a concession by respondent that petitioners196 are entitled to a deduction in 1969 of $25,000 as a long-term capital loss resulting from the worthlessness of the stock of Sam C. Evans, Inc. On May 5, 1975, petitioners filed their requested Memorandum of Law and an amended Computation for Entry of Decision. Subsequently, on May 12, 1975, petitioners filed a document entitled "Objection to Respondent's Computation under Rule 155" in which they reiterated their position taken in their Memorandum of Law and further objected to respondent's omission of payments totaling $14,323.91 made by Sam C. Evans in 1969 on behalf of Sam C. Evans, Inc. from his computation regarding the deduction for the loss from worthless stock of Sam C. Evans, Inc. One of the issues presented to this Court by the parties in the above-entitled proceeding through the Notice of Deficiency and the pleadings was whether petitioners were entitled to deduct in 1969 depreciation on a Lear jet, interest paid on a loan, which petitioner Sam C. Evans guaranteed, from Texas Western Financial Corporation to finance the purchase of that aircraft, and the loss incurred on the subsequent sale of the aircraft. In their pleadings and on brief petitioners framed their basis197 for their claim to these deductions solely on the grounds that petitioner Sam C. Evans owned and used the aircraft and took out the loan individually in conducting a trade or business. Resolution of petitioners' claim to the deductibility of these items turned solely upon the question of whether petitioner Sam C. Evans individually or Sam C. Evans, Inc. owned and operated the aircraft and took out the loan from Texas Western Financial Corporation. We held that Sam C. Evans, Inc. was a viable corporation for federal income tax purposes, that it owned and operated the aircraft, and that it was the one to whom the loan was made. Consequently we denied petitioners' claims to the above-mentioned items. After the filing of our Memorandum Findings of Fact and Opinion in this case, petitioners, on November 8, 1974, moved for us to reconsider. Specifically, among other things, petitioners then claimed alternative deductions of $25,000, $160,016 and $14,323.91 relating to the above-discussed issue under different Code sections than those originally presented by the parties and considered in our opinion. Such requests for consideration of alternative deductions were denied in a Memorandum Sur198 Order dated December 26, 1974 on the ground that they were untimely raised. The basis for these denials was that since additional facts would be required to justify these claimed alternative deductions, our consideration of them at that late date would be prejudicial to respondent. Now, however, the parties have reached agreement with respect to one essential fact involved, thus leaving us in a position, we believe, to consider the claimed alternative deductions on the basis of the evidence contained in the record as it stands now. While there may be some facts not in the record which would be helpful to petitioners in supporting their claimed alternative deductions, we do not consider the Rule 155 computation a proper place in which to retry the case. Consequently, we shall consider any such lack of evidence as being unfavorable to petitioners' position. After agreement of the parties, by order dated April 2, 1975, we included the following statement, which we think essential to our consideration herein of petitioners' claimed alternative deductions, in our Findings of Fact: "When Sam C. Evans, Inc. sold the aircraft, its sole asset, it received nothing other than the discharge199 of its obligation to Texas Western." From this fact and other evidence contained in the record we conclude that any stock of or debt owed by Sam C. Evans, Inc. was wholly worthless at least immediately after the sale of the aircraft on or about December 4, 1969. The respondent concedes that petitioners are entitled to a deduction in 1969 of $25,000 as a long-term capital loss from worthless stock. The parties are in agreement that $25,000 was paid by Sam C. Evans as a down payment for the aircraft and that the $25,000 is a contribution to the capital of Sam C. Evans, Inc. By the same token, we think the $5,988.91 in interest and $8,335 in principal paid in August, 1969 by Sam C. Evans to Texas Western on behalf of Sam C. Evans, Inc. was intended to be, and did in fact constitute, a contribution to the capital of the latter corporation. Consequently, petitioners are also entitled to a deduction for this capital loss of $14,323.91 incurred when the stock of Sam C. Evans, Inc. became worthless in 1969. As for the claimed $160,016 loss the parties have narrowed their dispute as to the possible grounds for the deduction in 1969 down to two. These are: (1) whether the $160,016 represents200 a contribution to the capital of Sam C. Evans, Inc. which gives rise to a loss from the worthlessness of stock deductible in 1969 under section 165(g); and (2) whether the $160,016 represents the payment of a guaranty of Sam C. Evans, Inc.'s note of the same amount by Sam C. Evans which gives rise to a bad debt deductible in 1969 under section 166(d). The respondent contends that, on or about October 17, 1969 when Sam C. Evans gave his personal note to the bank the proceeds of which were used to retire a note of Sam C. Evans, Inc. in a similar amount that was guaranteed by Evans, the circumstances at that time indicate that such transaction was not a contribution to capital. Petitioners, on the other hand, assert that the retirement of Sam C. Evans, Inc.'s $160,016 note in October, 1969 relates back to a contribution to capital made by Sam C. Evans in June, 1969 and thus should be treated as a contribution to capital in October, 1969. Petitioners construe the facts of the instant case to show that Sam C. Evans purchased an aircraft in June and then contributed that aircraft to Sam C. Evans, Inc. also in June. Petitioners also contend that, under Texas law, Sam C. Evans was always201 personally liable on the loan used to purchase the aircraft and that thus his retirement of Sam C. Evans, Inc.'s $160,016 note (part of the refinancing of the original loan used to purchase the aircraft) relates to his contribution to capital and should be treated as such. Assuming petitioners' analysis of the facts to be correct, we do not believe their application of the principles of taxation involved to them to be correct. The record in this case shows that the aircraft was subject to a mortgage of $860,016 in favor of the bank and a note in that amount was issued in the name of Sam C. Evans, Inc. to the bank in June. Subsequently, in early July, Texas Western took out $700,000 of the loan made by the bank and was then given a security interest in the aircraft to the exclusion of the bank. Also at that time, Sam C. Evans, Inc. issued a new note to the bank for $160,016 which we believe was guaranteed by Sam C. Evans. Petitioners assert that what the whole transaction boils down to is the purchase of an asset (the aircraft by Sam C. Evans) with borrowed money and the contribution of that asset to a corporation, the stock of which subsequently became worthless. Thus, petitioners202 argue, Sam C. Evans' obligation on Sam C. Evans, Inc.'s $160,016 note orginated from the initial loan by the bank used to purchase an asset contributed to Sam C. Evans, Inc. Petitioners then assert that the case law provides that "[when] money is borrowed from a third party and invested in a business or in assets contributed to a business, the loss on the worthlessness of the business is sustained at the time the business becomes worthless * * * [and that] the time of repayment of the borrowed funds is immaterial." However, the cases cited by petitioners do not support this asserted principle of law. Rather, they stand only for the principle that where funds borrowed from a third party are used to purchase stock, a loss from the worthlessness of the purchased stock is deductible in the year of worthlessness of the stock and not in the year of payment of the loan. See, e.g.,J. J. Larkin,46 B.T.A. 213">46 B.T.A. 213 (1942); A.W.D. Weis,13 B.T.A. 1284">13 B.T.A. 1284 (1928). Clearly, that situation is not involved here. Under petitioners' analysis of the facts of the case, it would appear that the aircraft was contributed to Sam C. Evans, Inc. subject to a mortgage. Consequently, 203 Sam C. Evans' basis in his stock would not include the amount of the mortgage. Section 358(a)(1) and (d). We think the tax consequences of the retirement of Sam C. Evans, Inc.'s $160,016 note in October are to be determined in the instant case by consideration of whether Evans intended to enlarge his stock investment in the corporation when he gave the bank his personal note or whether he paid only because legally obligated to do so and without a desire to invest more capital. See Daniel Gimbel,36 B.T.A. 539">36 B.T.A. 539, 542 (1937). Considering the circumstances surrounding the retirement of Sam C. Evans, Inc.'s $160,016 note, especially its proximity in time to the practical demise of the corporation (sometime in November, 1969), and remembering that we have decided that any absence of pertinent evidence on any issue herein shall bear against petitioners, we hold that the transaction in question did not give rise to a contribution to capital. Sam C. Evans' act in issuing his own note in exchange (at least in reality) for the corporate note that he had guaranteed was surely an involuntary act, not an act intended to create additional capital for the corporation. We agree204 with respondent that the transaction in question must be considered as creating a debtor-creditor relationship between Sam C. Evans and the corporation. This conclusion requires us to consider whether Sam C. Evans is entitled to a bad debt deduction under the circumstances of this case. We have already decided that any debt owed by Sam C. Evans, Inc. was without value at least immediately after the aircraft was sold on or about December 4, 1969. The crucial inquiry upon which resolution of the question now at hand turns is whether the circumstances involved show that a payment of Sam C. Evans, Inc.'s $160,016 note occurred. The respondent relies upon the principle stated in Eckert v. Burnet,283 U.S. 140">283 U.S. 140 (1931) and Helvering v. Price,309 U.S. 409">309 U.S. 409 (1940) that the issuing of a note by a cash basis taxpayer in order to satisfy a corporate liability which he has endorsed or guaranteed is not a payment until the note itself is paid. Petitioners attempt to distinguish those cases by asserting that there there were only substitutions of notes but that here the proceeds of Sam C. Evans' note were applied to retire the corporation's note. On the evidence205 contained in the record, we do not find petitioners' distinction meaningful. While we recognize that in some instances a taxpayer may borrow from his creditor in order to pay off another debt owed or a guaranty made to that same creditor, see G. Douglas Burck,63 T.C. 556">63 T.C. 556 (1975), Thomas Watson,8 T.C. 569">8 T.C. 569, 579 (1947), Newton A. Burgess,8 T.C. 47">8 T.C. 47 (1947), such a situation has not been shown to be the case here. We think that the instant case must follow the result in Thomas Watson,supra at 578-79, and in T. Harvey Ferris,38 B.T.A. 312">38 B.T.A. 312 (1938), affirmed per curiam 102 F. 2d 985 (2nd Cir. 1939), both of which we believe present facts more favorable to the taxpayers involved therein than do the facts of the instant case. We believe that Humphrey v. Commissioner,91 F. 2d 155 (9th Cir. 1937), cited as support by petitioners, can be interpreted to be consistent with our view that what is involved here is merely a substitution of notes rather than a valid loan and a payment of a guaranty. If it cannot, since appeal lies in the instant case to a different circuit, we respectfully206 decline to follow it. The other cases cited by petitioners are not on point. Since Sam C. Evans did not pay off any part of his $160,016 note in 1969, no deduction under section 166(d) is allowable in 1969. An appropriate order will be entered.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624998/	GUARDIAN INDUSTRIES CORP. AND SUBSIDIARIES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentGuardian Indus. Corp. v. CommissionerDocket No. 27308-87United States Tax Court97 T.C. 308; 1991 U.S. Tax Ct. LEXIS 80; 97 T.C. No. 21; September 11, 1991, Filed 80 Decision will be entered under Rule 155. Ps engaged in the photo-finishing business. Both the photographic film Ps received from their customers for developing and the paper purchased by Ps for use in making prints contain silver halide compounds, which are removed during the developing process. Ps extracted silver-bearing waste materials from the chemical solutions used in photo-finishing and sold them in the ordinary course of their photo-finishing business. The sales were frequent and generated substantial income. Ps originally reported the sales proceeds as ordinary income on their tax returns, but subsequently amended such returns, reclassifying such proceeds as short-term capital gains. Held, the silver waste is property held primarily for sale to customers in the ordinary course of Ps' trade or business, and therefore is not a capital asset. C. David Swenson, A. Duane Webber, and David N. Bowen, for the petitioners. Robert J. Kastl and James E. Kagy, for the respondent. WELLS, Judge. WELLS309 Respondent determined the following deficiencies in petitioners' Federal income tax: YearDeficiency1983$ 8,128,5801984$ 728,942 After81 concessions by both parties, the sole issue remaining for decision is whether silver-bearing waste material generated in the course of petitioners' photo-finishing business is property held by petitioners primarily for sale to customers in the ordinary course of petitioners' trade or business. FINDINGS OF FACT Some of the facts have been stipulated for trial pursuant to Rule 91. 1 The stipulations and accompanying exhibits are incorporated in this Opinion irrespective of any restatement below. When the petition in the instant case was filed, petitioners' principal place of business was located in Northville, Michigan. Petitioners are engaged in three principal lines of business: the manufacture of glass (glass); the manufacture of insulation products (insulation); and the finishing of photographs (photo-finishing). 82 Gross revenues of each line of business for the years in issue were as follows: 19831984Glass$ 358,053,000$ 406,009,000Photo-finishing83,823,00096,648,000Insulation22,926,00033,120,000Pretax income from photo-finishing equalled $ 7,934,000 in 1983 and $ 6,446,000 in 1984. Petitioners entered the photo-finishing business in 1968 by purchasing ABC Photo. At that time, ABC Photo operated one plant, at Northville, Michigan, and had been in business since 1955. Petitioners expanded their photo-finishing business into new markets during the 1970's and 1980's by acquiring other finishers and constructing new plants. During the years in issue, petitioners operated as few as 10 and as many as 12 photo-finishing plants across the United States, and employed approximately 1,500 persons in connection with their photo-finishing operations. Petitioners performed photo-finishing services for 9,500 national and regional chain stores, discount stores, and independent retail outlets (retail outlets), which in turn offered photo-finishing services to amateur photographers. Petitioners also supplied photographic products to the retail outlets. Petitioners collected83 exposed film from the retail outlets on a daily basis, processed the film in their plants, and returned developed images and negatives to the retail outlets. In order to maintain its competitive position in the market, a photo-finisher was expected to process film within 24 hours. Furthermore, the terms of petitioners' agreements with the retail outlets did not allow petitioners to charge for prints and film that were not returned within 24 hours of pickup. Petitioners accordingly processed film within 24 hours of receipt. Photography involves the use of silver halide compounds, which record images when exposed to light. Both photographic film and the paper used for making prints contain silver halide compounds. Various chemical solutions are used to develop and fix latent images on film and paper (photo-finishing solutions). High quality alternatives to the silver compounds and chemical processes used to produce the final photographic image do not exist. 311 In black and white photography, the exposed silver compounds react with the developer solution to form the final image, while unexposed silver is washed away in the fixing baths. In color photography, various dyes are incorporated84 into the film and paper in addition to the light-sensitive silver halides, and a chemical reaction between the developer solution, the silver halide compounds, and the dyes produces the color image. After the chemical reaction occurs, the silver halides must be removed from the film or paper because they otherwise would hide the color image. Removal is accomplished by passing the film or paper through bleaching and fixing solutions in which the silver halides react with other chemicals to form silver thiosulfate. After the silver halides are removed, the silver compounds have no further utility in the developing process. Approximately 60 percent of the silver compounds introduced into photo-finishing solutions are attributable to photographic paper, while the remaining 40 percent are attributable to film. The photographic paper is purchased by petitioners as a raw material, whereas the exposed film is furnished by petitioners' customers for developing. During the years in issue, petitioners utilized a "closed-loop" photo-finishing system, which mixed new and used photo-finishing solutions and continuously recirculated the solutions within the system. Petitioners' predecessor, 85 ABC Photo, began to use such a system for some film processing in 1963, and had installed a closed-loop system in its newly constructed Northville, Michigan, plant when petitioners acquired it in 1968. Petitioners installed closed-loop systems in the finishing plants they built or purchased between the time they entered the photo-finishing business and the years in issue. Use of such a system was necessary in order to be competitive in the photo-finishing industry, as it was the most efficient and least time-consuming method of processing film and prints on a high-speed basis. The closed-loop system enabled petitioners to reduce the volume of solutions used in their operations by two to four times, which saved labor, material, and storage costs. Additionally, use of a closed-loop system reduced the volume of discharge required to be treated prior to disposal, thus decreasing the cost of compliance with applicable environmental laws. 312 In order to reuse solutions in the closed-loop process, petitioners had to remove certain material, including silver thiosulfate, from the photo-finishing solutions. The silver thiosulfate that was washed from film and paper contaminated the photo-finishing86 solutions and interfered with the ability of the solutions to produce negatives and prints of marketable quality. To remove silver thiosulfate, among other substances, from their photo-finishing solutions, petitioners incorporated electrolytic cells (cells) into the closed-loop system. Petitioners' predecessor, ABC Photo, first used cells in 1962 or 1963, and was operating them in its Northville, Michigan, plant prior to its acquisition by petitioners in 1968. Petitioners installed cells in each plant they built or acquired between 1968 and the years in issue. The cells passed an electric current through the solutions, causing silver and other substances to be deposited on the cells' cathodes. The material deposited on the cathodes, called "flake," consisted of, on average, 92 percent silver, with the remainder of the material consisting of other substances removed by electrolytic action (the silver and other substances removed from the photo-finishing solutions are hereinafter referred to as "silver waste"). Approximately 95 percent of the silver waste removed from the photo-finishing solutions was attributable to the cells in the closed-loop system. To ensure continued efficient87 operation, the cells were cleaned at least once a month by scraping the built-up silver waste off the cathodes. The silver waste was then weighed and placed in containers for shipment to a refiner. Quality control personnel also prepared reports concerning the amount of silver waste collected, which was compared to the total amount of silver entering the photo-finishing process, in order to monitor the efficiency of the waste removal process and to detect pilferage. To further monitor the efficiency of processes used to remove silver waste from the solutions, petitioners also weighed scrap photographic paper prior to discarding it, although petitioners did not recover the silver compounds in such paper. Petitioners produced periodic reports concerning the percentage of silver in the developing process which was recovered, the dollar value of such silver, and the success of its plants in 313 meeting target recovery rates. Petitioners desired to maximize the silver content of the waste material. During the years in issue, petitioners were subject to a variety of Federal, State, and local laws and regulations governing the levels of certain substances in the waste waters discharged88 from their plants into sewers or elsewhere (environmental regulations). The environmental regulations classified silver as a "toxic pollutant," and required petitioners to reduce significantly the concentration of silver thiosulfate in photo-finishing solutions before disposing of the solutions. Petitioners had to take steps to comply with environmental regulations beginning in 1968, and could not have complied with the standards in effect at that time without removing silver waste from their photo-finishing solutions. Even though treatment in the closed-loop system removed much of the silver waste in the photo-finishing solutions, petitioners were required to further reduce the concentration of silver waste before discharging the solutions into the environment. Petitioners reduced the concentration of silver waste in the solutions by passing used photo-finishing solutions and wash waters through a system of electrolytic cells and steel wool cartridges (tailing process). Approximately 5 percent of all silver waste collected by petitioners was attributable to the tailing process. Material collected in the steel wool cartridges, called "sludge," contained between 1 percent and89 9 percent silver. During 1984, petitioners recovered silver compounds from film scraps by placing them in the tailing process. Petitioners' quality control personnel checked the level of silver waste in the effluent every day to ensure compliance with environmental regulations. Silver waste collected in the tailing process was weighed and shipped to a refiner in the same manner as silver waste removed from the closed-loop system. In order to continue in the photo-finishing business, petitioners had to comply with the environmental regulations. Severe penalties could be imposed for violation of the environmental regulations, including large fines for each day a violation of clean water standards continued, closure of petitioners' plants, and jail terms for petitioners' employees. The environmental regulations were enforced actively, and, 314 despite their best efforts to comply, petitioners occasionally were cited for discharging effluent containing excessive levels of silver waste. Petitioners would have removed the silver waste from the solutions in order to comply with the environmental regulations even if the silver waste had been valueless. The silver waste generated by petitioners' 90 plants was sold to refiners. Petitioners' predecessor, ABC Photo, had begun selling silver waste in 1958 or 1959. During the years in issue, Metalex Systems Corporation, later known as Drew/Metalex, (Metalex) purchased substantially all of the silver waste generated by petitioners' plants. Occasionally, petitioners sent a shipment or part of a shipment to another refiner in order to test the accuracy of Metalex's silver assay. Metalex, like other refiners, actively solicited petitioners and other finishers to sell their silver waste to it, maintaining a sales force for such purpose. Two contracts entered into by petitioners governed the sale of silver waste during the years in issue. The first contract applied to shipments of silver waste made after April 30, 1983, through July 31, 1984, and the second applied to shipments made after July 31, 1984. Metalex and petitioners conducted brief negotiations concerning each agreement, which Metalex had drafted. Dealings between Metalex and petitioners during the years in issue followed a standard pattern. When a shipment was ready, petitioners placed the silver waste in containers provided by Metalex and then notified Metalex; Metalex91 arranged for the transportation of the silver waste to Metalex's plant at Metalex's expense. Risk of loss with respect to the silver waste passed to Metalex when the carrier took possession of the silver waste. Usually, one shipment per month was made from each plant, but a second shipment might have occurred during peak processing periods. When the silver waste arrived at the refinery, Metalex defined the amount of silver in the silver waste, processed it to remove most impurities, and then resold it to another refiner for processing into marketable silver bullion. The price Metalex paid petitioners was based on the amount of silver in the shipment and the spot market price of silver 21 315 days after shipment, less refining and assay charges. The charges in the agreements were based on the understanding that petitioners would sell Metalex substantially all silver waste generated by their finishing plants in a year, approximately 23,000 pounds. Petitioners received $ 2,949,933 from sales of silver waste in 1983, and received $ 2,546,287 from silver waste sales in 1984. Petitioners originally reported the proceeds of silver waste sales as ordinary income on their Federal income92 tax returns for the years in issue. Subsequently, petitioners amended such returns, recharacterizing such proceeds as short-term capital gain, and applied such proceeds against a long-term capital loss incurred after the years in issue that had been carried back to the years in issue. OPINION The issue we must decide is whether the silver waste was held by petitioners primarily for sale to customers in the ordinary course of their trade or business, as respondent contends, or whether the silver waste was held primarily for the operation of petitioners' photo-finishing business and then sold as an "incidental" part of such business. Section 1221 provides the general rule that a capital asset is "property held by the taxpayer (whether or not connected with his trade or business)." Congress has provided in section 1221(1)-(5) five specific classes of property that comprise the exclusive exceptions to capital asset status. Arkansas Best Corp. v. Commissioner, 485 U.S. 212">485 U.S. 212, 218, 99 L. Ed. 2d 183">99 L. Ed. 2d 183, 108 S. Ct. 971">108 S. Ct. 971 (1988); Azar Nut Co. v. Commissioner, 94 T.C. 455">94 T.C. 455, 461 (1990), affd. 931 F.2d 314">931 F.2d 314 (5th Cir. 1991). Congress intended that capital asset treatment be 93 an exception to the normal requirements of the Code and that the profits generated by everyday business operations be ordinary income. Malat v. Riddell, 383 U.S. 569">383 U.S. 569, 572, 16 L. Ed. 2d 102">16 L. Ed. 2d 102, 86 S. Ct. 1030">86 S. Ct. 1030 (1966); Bauschard v. Commissioner, 31 T.C. 910">31 T.C. 910, 916 (1959), affd. 279 F.2d 115">279 F.2d 115 (6th Cir. 1960). The Supreme Court in Arkansas Best Corp. held that the "general definition of the term 'capital asset'" encompasses all property not within the exclusions of section 1221(1)-(5). 485 U.S. at 218. Thus, it is clear that the narrow application of capital asset treatment 316 is a result of the broad reach of the statutory exceptions to such treatment. Whether property is held primarily for sale to customers in the ordinary course of a taxpayer's trade or business is essentially a question of fact, which must be decided by a consideration of all the surrounding circumstances. Gartrell v. United States, 619 F.2d 1150">619 F.2d 1150, 1152-1153 (6th Cir. 1980); Broughton v. Commissioner, 333 F.2d 492">333 F.2d 492, 494-495 (6th Cir. 1964), affg. a Memorandum Opinion of this Court; Cottle v. Commissioner, 89 T.C. 467">89 T.C. 467, 486 (1987).94 Petitioners carry the burden of proving that the silver waste is a capital asset. Case v. United States, 633 F.2d 1240">633 F.2d 1240, 1244 (6th Cir. 1980); Cottle v. Commissioner, 89 T.C. at 485; Rule 142(a). The controlling factor in determining the character of the silver waste is the purpose for which it is held, Gotfredson v. United States, 303 F.2d 464">303 F.2d 464, 467 (6th Cir. 1962); McCullough Transfer Co. v. Commissioner, 27 T.C. 822">27 T.C. 822, 832 (1957), which is to be determined as of the time of sale, although we may consider events occurring prior to such time in order to identify such purpose. Cottle v. Commissioner, 89 T.C. at 487. See also Suburban Realty Co. v. United States, 615 F.2d 171">615 F.2d 171, 182-184 (5th Cir. 1980) (taxpayer's purpose at time of sale to be determined with reference to primary holding purpose prior to time of decision to sell). The determination of the taxpayer's holding purpose is for the trier of fact to make, based on the taxpayer's methods of operation and the standards customary in his line of business. Gotfredson v. United States, 303 F.2d at 467.95 In deciding the holding purpose issue, more weight is given to objective evidence than to the taxpayer's own statements of intent. Philhall Corp. v. United States, 546 F.2d 210">546 F.2d 210, 215 (6th Cir. 1976); Daugherty v. Commissioner, 78 T.C. 623">78 T.C. 623, 630 (1982). To decide the character of the silver waste, we will consider a variety of factors which have been found useful in shedding light on the taxpayer's purpose for holding property; however, no single factor or combination of factors is dispositive. Byram v. United States, 705 F.2d 1418">705 F.2d 1418, 1424 (5th Cir. 1983); Philhall Corp. v. United States, 546 F.2d at 215; Broughton v. Commissioner, 333 F.2d at 495; Cottle v. Commissioner, 89 T.C. at 488. The factors 317 relevant to the instant case include: (1) The frequency and regularity of sales of the silver waste; (2) the substantiality of the sales and the relative amounts of income derived by petitioners from their regular business and the sales of the silver waste; (3) the length of time the silver waste was held; (4) the nature and extent of petitioners' business and the relationship96 of the silver waste to that business; (5) the purpose for which the silver waste was acquired and held prior to sale; and (6) the extent of petitioners' efforts to sell the property by advertising or otherwise; and (7) any improvements made to the silver waste by petitioners. Byram v. United States, 705 F.2d 1418">705 F.2d 1418, 1424 (5th Cir. 1983); Broughton v. Commissioner, 333 F.2d at 495; Mathews v. Commissioner, 315 F.2d 101">315 F.2d 101, 107 (6th Cir. 1963), affg. a Memorandum Opinion of this Court; Cottle v. Commissioner, 89 T.C. at 487-488. Under Malat v. Riddell, 383 U.S. at 572, in order for a sale of property to be classified as ordinary, sale to customers 2 in the ordinary course of business must be "of first importance," or the "principal" reason that property is held. We hold that proceeds from petitioners' sales of silver waste should be characterized as ordinary income. Our conclusion is supported by a number of considerations. 97 Respondent argues that petitioners sold the silver waste on a regular and frequent basis, thus indicating that the silver waste was held for the purpose set forth in section 1221(1). Petitioners respond with the argument that the contracts between themselves and Metalex effected a single sale of all silver waste shipments occurring during the time such contracts were in force. 3 Respondent counters, arguing that each shipment of waste to a refiner should be 318 considered a separate sale. We agree with respondent that each shipment constitutes a separate sale. In considering whether each shipment is a separate sale, we give the term "sale" its98 ordinary meaning, that is, a transfer of property for a fixed price in money or its equivalent. Rogers v. Commissioner, 103 F.2d 790">103 F.2d 790, 792 (9th Cir. 1939), affg. 37 B.T.A. 897">37 B.T.A. 897 (1938); Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C. 1221">77 T.C. 1221, 1237 (1981). See also Uniform Commercial Code (U.C.C.) sec. 2-106(1) (1987) (a "sale" consists of the passing of title from the buyer to the seller for a price). The question of whether a sale has occurred for Federal income tax purposes is essentially one of fact. Derr v. Commissioner, 77 T.C. 708">77 T.C. 708, 724 (1981). The key to deciding that a sale of property has taken place is a finding that the benefits and burdens of ownership have shifted from seller to buyer. Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C. at 1237. We must distinguish between an executory contract, which evidences an intent to sell, and the actual sales transaction. Derr v. Commissioner, 708">77 T.C. at 727; Hoven v. Commissioner, 56 T.C. 50">56 T.C. 50, 56 (1971). In Grodt & McKay Realty, Inc. v. Commissioner, supra, we considered99 various factors and circumstances in deciding whether a transfer of property occurred including: (1) Whether legal title has passed; (2) whether an equity has been acquired in the property; (3) whether the contract creates a present obligation on the parties to exchange legal title for the agreed price; (4) whether the right of possession is vested in the purchaser; and (5) which party bears the risk of loss with respect to the property. 77 T.C. at 1237-1238. 4Applying such factors, we hold that the sale of the silver waste occurred when it was shipped to Metalex, not when the contracts were executed. Although petitioners contracted to sell their entire output of silver waste to Metalex, we do not find that the execution of the contracts between 100 Metalex and petitioners effected an immediate transfer of ownership in all silver waste produced during the periods 319 they were in force. Petitioners did not possess the great bulk of the silver waste covered by the contracts at the time of execution. Manifestly, petitioners could not transfer what they did not own; furthermore, under the principles of the Uniform Commercial Code, 5 a transfer of title cannot occur until property is identified to the contract, see U.C.C. sec. 2-401(1), which, in the instant case, did not occur prior to the time the silver waste was extracted from the photo-finishing solutions. See U.C.C. section 2-501. 101 Shipment of the silver waste was made f.o.b. petitioners' place of business, and the risk of loss passed from petitioners to Metalex when such shipment was picked up by the common carrier for transport to Metalex. Metalex had neither the risks nor the benefits associated with ownership of the silver waste prior to shipment. For instance, if the silver waste had been stolen or destroyed prior to shipment, petitioners, and not Metalex, would have suffered the loss. Metalex was not obligated to pay a price for the silver waste until after shipment occurred. Consequently, until such time, the silver waste was petitioners' property; petitioners could, and sometimes did, sell some of it to other refiners. Therefore, the contracts upon which petitioners rely were executory in nature and a sale of silver waste did not occur until such material was shipped. Accordingly, we hold that each shipment was a separate sale. Each of petitioners' 10 to 12 plants made shipments at least monthly while in operation during the years in issue. Respondent has argued, and petitioners do not dispute, that at least 228 shipments of silver waste occurred in the years in issue. A corollary to our conclusion102 that each shipment is 320 a separate sale is a holding that such sales create a pattern of frequent, regular, and continuous sales, and we so hold. We also consider the amount of the proceeds of silver waste sales during the years in issue, $ 2,949,933 in 1983 and $ 2,546,287 in 1984. The large dollar amount of the sales suggests that the property is held for the purpose described in section 1221(1). Houston Endowment, Inc. v. United States, 606 F.2d 77">606 F.2d 77, 81 (5th Cir. 1979); Biedenharn Realty Co. v. United States, 526 F.2d 409">526 F.2d 409, 419 (5th Cir. 1976). Respondent argues that the percentage of petitioners' net income attributable to the silver waste sales, 37.2 percent in 1983 and 39.5 percent in 1984, shows that the sales were substantial. Petitioners respond with the argument that the proceeds of silver waste sales were not substantial, as they comprised only 3.5 percent of the $ 83,823,000 in revenues received by petitioners' photo-finishing business in 1983, and only 2.6 percent of the $ 96,648,000 in such revenues received in 1984. We do not find petitioners' comparison of the proceeds from silver waste sales to total revenue, however, to be103 persuasive. The percentage of receipts attributable to silver waste sales is low because petitioners' other activities produced large quantities of revenue, not because silver waste sales yielded insubstantial income. In Biedenharn Realty Co. v. United States, supra at 419, the Fifth Circuit stated that allowing capital asset treatment on the basis of such relative percentages "would be sanctioning special treatment for * * [taxpayers] arranging their business activities so that the income accruing to * * * [the sale of property in issue] represents only a small fraction of * * * [the taxpayer's] total gains." Moreover, in judging substantiality, a comparison of the size of the gains to the taxpayer's net income rather than to the taxpayer's gross receipts is "the more valid comparison." Real Estate Corp. v. Commissioner, 35 T.C. 610">35 T.C. 610, 614 (1961), affd. 301 F.2d 423">301 F.2d 423 (10th Cir. 1962). We therefore hold that the proceeds of petitioners' silver waste sales were substantial. Our conclusions that the silver waste sales were frequent and substantial weighs heavily against petitioners, as frequency and substantiality of sales104 often have been held to be the most important objective indicators of whether property falls within the terms of section 1221(1). Major 321 Realty Corp. v. Commissioner, 749 F.2d 1483">749 F.2d 1483 (11th Cir. 1985), affg. on this issue a Memorandum Opinion of this Court; Houston Endowment v. United States, 606 F.2d 77">606 F.2d 77 (5th Cir. 1979). Suburban Realty Co. v. United States, 615 F.2d 171">615 F.2d 171, 178 (5th Cir. 1980); Biedenharn Realty Co. v. United States, 526 F.2d at 416; Buono v. Commissioner, 74 T.C. 187">74 T.C. 187, 200 (1980). 6Frequency and substantiality of sales, however, are not the sole considerations supporting our conclusion that the silver waste was held for the purpose described in section 1221(1). We also consider the nature of petitioners' 105 business, the relationship of the silver waste to such business, and whether the sales of silver waste were in furtherance of petitioners' business. Gartrell v. United States, 619 F.2d 1150">619 F.2d 1150, 1155 (6th Cir. 1980); Broughton v. Commissioner, 333 F.2d 492">333 F.2d 492, 495 (6th Cir. 1964), affg. a Memorandum Opinion of this Court; Greene-Haldeman v. Commissioner, 31 T.C. 1286">31 T.C. 1286, 1292-1293 (1959), affd. 282 F.2d 884">282 F.2d 884 (9th Cir. 1960). In the instant case, petitioners' core business was photo-finishing, but petitioners also engaged in certain ancillary activities designed to further such business, such as furnishing photographic products and supplies to the retail outlets where film was dropped off for processing. Petitioners argue that the sale of silver waste was in no way connected with their photo-finishing operation, and that the prospect of selling the silver waste in no way affected the manner in which such enterprise was run. In the instant case, however, we decline to artificially segment what is in reality an integrated business operation. Consequently, we conclude that the silver waste was necessarily and continuously106 produced in the ordinary course of petitioners' everyday business operations, and, therefore, the regular and frequent sale of the silver waste is most naturally viewed as part of those business operations. The silver waste sales comprised more than an insignificant component of petitioners' photo-finishing business, as the silver waste sales yielded a large part of the profits of such business and accomplished the disposal of a toxic pollutant. Petitioners conducted the silver waste removal 322 operation in a businesslike manner, monitoring the efficiency of the extraction process, setting target recovery rates, placing film scraps in the tailing process to harvest the silver they contained, and seeking to maximize the silver content of the silver waste. We also note that petitioners' predecessor, ABC Photo, began selling silver waste in 1958 or 1959, well before the closed-loop processing system was adopted and before environmental regulations required its removal from waste water. Petitioners generated approximately 23,000 pounds of silver waste annually, most of which consisted of flake containing 92 percent silver, a valuable commodity. The sale of the silver waste was closely107 related to, and occurred in furtherance of, petitioners' photo-finishing business and was more than an "incidental" part of petitioners' photo-finishing business. 7Petitioners make much of the fact that they removed the silver waste from their photo-finishing solutions for business reasons unrelated to its sale. Specifically, petitioners were required to extract the silver waste in order to produce developed prints and negatives of 108 marketable quality, to reuse photo-finishing solutions in the closed-loop system, and to comply with environmental regulations governing the level of silver in waste waters discharged from their plants. Petitioners would have removed the silver waste for the foregoing reasons even if it had been valueless. We note, however, that the reasons petitioners removed the silver waste from the photo-finishing solutions are not conclusive of the purpose for which the silver waste was held. Klarkowski v. Commissioner, 385 F.2d 398">385 F.2d 398, 400 (7th Cir. 1967). Rather, such reasons are to be weighed with all other evidence indicative of petitioners' holding purpose. Accordingly, we have considered the reasons petitioners have advanced for extracting the silver waste from the photo-finishing solutions, but do not find that they are inconsistent with our finding that petitioners' efforts in regard to 323 the recovery and sale of the silver waste were an ordinary and necessary part of petitioners' business operations. 8109 We also consider the fact that approximately 60 percent of the silver waste removed from the photo-finishing solutions was attributable to silver compounds removed from photographic paper purchased by petitioners to make prints from film processed by them. Such photographic paper was included in petitioners' inventory. The cost of the paper, including the cost of the silver contained in the paper, was charged against gross receipts as part of the cost of goods sold. Consequently, a portion of the silver which petitioners extracted from the photo-finishing solutions and sold entered their business originally as inventory. Generally, where property is placed in inventory at the time of its acquisition, positive evidence of a change in the purpose for which it is held is required to find that such property has lost its original character. Duval Motor Co. v. Commissioner, 264 F.2d 548 (5th Cir. 1959), affg. 28 T.C. 42">28 T.C. 42 (1957); W.R. Stephens Co. v. Commissioner, 199 F.2d 665 (8th Cir. 1952), affg. a Memorandum Opinion of this Court; Luhring Motor Co. v. Commissioner, 42 T.C. 732">42 T.C. 732, 753 (1964); R.E. Moorhead & Son, Inc. v. Commissioner, 40 T.C. 704">40 T.C. 704, 710-711 (1963);110 Johnson-McReynolds Chevrolet Corp. v. Commissioner, 27 T.C. 300">27 T.C. 300, 305 (1956). We do not find that any intervening event in the developing process caused the silver (that originally was contained in the paper) to be held for any purpose other than the purpose set forth in section 1221(1). Although the silver compounds in the photographic paper were transformed into silver waste by the photo-finishing process, that physical and chemical change did not cause a change in the character or holding purpose of the silver contained in the silver waste extracted from the photo-finishing solutions. The silver remained a part of petitioners' photo-finishing 324 operation. From the very time petitioners' acquired the photographic paper containing the silver halides, they intended to recover part of the cost of their expenditure by the sale of the silver waste. The fact that the valuable components of the paper were sold to different purchasers, i.e., the paper in the form of prints to its film developing customers and the silver to Metalex, did not effect a change in petitioners' initial intent. Although the 40 percent of the silver waste derived from film 111 delivered by petitioners' customers to petitioners for developing did not originally enter petitioners' business as inventory, we do not find that such circumstance warrants the conclusion that such portion of the silver waste was held for a purpose other than sale after it was extracted from the photo-finishing solutions. 9 We note also that, during the greater part of the years in issue, petitioners were under a contractual obligation to sell the silver waste provided in the course of their photo-finishing business to Metalex. The existence of such a preexisting sale arrangement indicates that the property sold pursuant to such an arrangement was held primarily for sale. S & H, Inc. v. Commissioner, 78 T.C. 234">78 T.C. 234, 244 (1982). 112 Petitioners argue that their lack of efforts to market the silver waste indicates that the silver waste was not held primarily for sale. We do not find petitioners' argument persuasive, however, because market conditions made it unnecessary for petitioners to engage in any sales efforts to dispose of the silver waste -- refiners actively competed to purchase the silver waste. We thus do not attach much significance to the absence of such activities. Suburban Realty Co. v. United States, 615 F.2d 171">615 F.2d 171, 179 (5th Cir. 1980); Houston Endowment Inc. v. United States, 606 F.2d 77">606 F.2d 77, 83 (5th Cir. 1979); Daugherty v. Commissioner, 78 T.C. 623">78 T.C. 623, 632-633 (1982); Brady v. Commissioner, 25 T.C. 682">25 T.C. 682, 690 (1955). Petitioners also argue that they made no improvements to the silver waste before it was sold to refiners, and that such absence suggests that it was not held primarily for sale. 325 While the failure to improve property sold indicates that such property is not held primarily for sale, Adam v. Commissioner, 60 T.C. 996">60 T.C. 996, 1000 (1973), in the instant case such circumstance does not outweigh the113 other evidence, discussed above, indicating that the silver waste was held for the purpose described in section 1221(1), especially in view of the fact that much of the silver waste contained 92 percent silver. Respondent also points to the fact that petitioners initially reported the gain from the sale of silver waste as ordinary income on their tax returns for the years in issue, and only recharacterized it upon incurring a large capital loss in a year subsequent to the years in issue. While the treatment of an item on a return generally is not included in the list of factors to be considered in determining whether property is a capital asset, such treatment constitutes some evidence of its character, which must be weighed along with all other relevant evidence in reaching a decision. Waring v. Commissioner, 412 F.2d 800">412 F.2d 800, 801 (3d Cir. 1969), affg. per curiam a Memorandum Opinion of this Court; Southern Pacific Transportation Co. v. Commissioner, 75 T.C. 497">75 T.C. 497, 663-664, 703-704 (1980); Siewert v. Commissioner, 72 T.C. 326">72 T.C. 326, 337 (1979); Estate of Swayne v. Commissioner, 43 T.C. 190">43 T.C. 190, 200 (1964). See also114 Riley v. Commissioner, 37 T.C. 932 (1962), affd. 328 F.2d 428">328 F.2d 428 (5th Cir. 1964) (taxpayer's self description of activity constitutes evidence of its nature). In sum, based upon our weighing of the other factors in the instant case, we think petitioners had it right the first time. 10Respondent further points to petitioners' deduction of the expenses connected with the silver waste, such as the cost of silver compounds in the photographic paper petitioners used to make prints and the expenses of extracting it from the photo-finishing solutions and waste waters. Petitioners maintain that such expenses were deductible even after recharacterizing the proceeds of silver waste sales as short-term capital gain on their amended returns. 115 326 As a general matter, the expenses of acquisition or creation of a capital asset must be added to the taxpayer's basis in the asset and offset against the proceeds of its sale, even if such expenses otherwise would be allowable deductions under section 162. Commissioner v. Lincoln Savings & Loan Assn., 403 U.S. 345">403 U.S. 345, 354, 29 L. Ed. 2d 519">29 L. Ed. 2d 519, 91 S. Ct. 1893">91 S. Ct. 1893 (1971); Woodward v. Commissioner, 397 U.S. 572">397 U.S. 572, 574-575, 25 L. Ed. 2d 577">25 L. Ed. 2d 577, 90 S. Ct. 1302">90 S. Ct. 1302 (1970); Estate of Boyd v. Commissioner, 76 T.C. 646">76 T.C. 646, 660 (1981); Southern Pacific Transportation Co. v. Commissioner, 75 T.C. at 577-578. Petitioners rely upon H. G. Fenton Material Co. v. Commissioner, 74 T.C. 584">74 T.C. 584, 592 (1980), to sustain their deduction of expenses connected with the silver waste. We, however, distinguish H.G. Fenton on its facts. In H.G. Fenton, we permitted the taxpayer to deduct the cost of dumping fill on its land even though such dumping may have benefited the land. Unlike H. G. Fenton, petitioners' expenditures resulted in more than a speculative or incidental benefit to a capital asset; rather such expenditures resulted in the creation of property with considerable value, 116 which value was quickly and continuously realized by petitioners. Such facts do not indicate to us that petitioners created an "incidental" capital asset in the instant case. Petitioners should not be entitled to deduct the costs associated with the silver waste and then claim capital asset treatment on its sale. Accordingly, petitioners' treatment of the expenses associated with the silver waste as deductible costs weighs against classifying the silver waste as a capital asset. 11117 Based on the foregoing, we hold that the silver waste is property held by petitioners primarily for sale to customers in the ordinary course of their business. We, therefore, find it unnecessary to reach respondent's alternative *327 contentions concerning petitioners' basis in the silver waste and the applicability of the tax benefit rule. To reflect concessions and stipulations on other issues, Decision will be entered under Rule 155. Footnotes1. Unless otherwise noted, all section references are to the Internal Revenue Code as in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. While the term "to customers" sometimes has been analyzed in isolation to determine whether property is described in section 1221(1), the question of whether a taxpayer is selling to customers is relevant chiefly in the case of persons dealing or trading in securities or commodities. See King v. Commissioner, 89 T.C. 445">89 T.C. 445, 457-460 (1987); Kemon v. Commissioner, 16 T.C. 1026">16 T.C. 1026, 1032-1033 (1951). Outside the dealer/trader area, the term has been given such a broad meaning that separate consideration of it would not assist us in deciding the instant case. See Patterson v. Belcher, 302 F.2d 289">302 F.2d 289, 294 (5th Cir. 1962); S & H, Inc. v. Commissioner, 78 T.C. 234">78 T.C. 234, 243 (1982); Bynum v. Commissioner, 46 T.C. 295">46 T.C. 295, 302 (1966) (Tannenwald, J., concurring); Ashby v. Commissioner, 37 T.C. 92">37 T.C. 92, 98-99 (1961); Black v. Commissioner, 45 B.T.A. 204">45 B.T.A. 204, 210↩ (1941).3. We note that other taxpayers have unsuccessfully attempted to reduce the probative value of the instant factor by claiming that multiple transfers of property should be treated as one because they were made pursuant to the terms of a single contract. Bauschard v. Commissioner, 31 T.C. 910">31 T.C. 910, 915 (1959), affd. 279 F.2d 115">279 F.2d 115↩ (6th Cir. 1960).4. See also UCC sec. 2-401(2)↩ (a transfer of title occurs when the seller completes his delivery obligation to the buyer; where a contract does not expressly require delivery at destination, title passes to the buyer at the time and place of shipment.)5. We note that applicable State law frequently is relied upon in determining whether a sale has occurred for Federal income tax purposes. See, e.g., Hoven v. Commissioner, 56 T.C. 50">56 T.C. 50, 55-56↩ (1971). While such law would be of assistance to use in arriving at such conclusion in the instant case, it is not readily apparent from the facts which State's law controls. The contracts between Metalex and petitioners do not specify that any particular State's law governs transactions occurring pursuant to their terms, and shipments of silver waste were made from plants in almost a dozen States. Consequently, the laws of various States could govern the respective shipments. We do not think it would serve any useful purpose to make findings as to which State's law governs the shipments from each plant. We note, however, that each State in which petitioners' plants are located has adopted the Uniform Commercial Code, and we believe that the question of when a sale of the silver waste occurred may be satisfactorily addressed by reference to the general provisions of the Uniform Commercial Code.6. Bramblett v. Commissioner, T.C. Memo. 1990-296; Erfurth v. Commissioner, T.C. Memo 1987-232">T.C. Memo. 1987-232; Norris v. Commissioner, T.C. Memo. 1986-151↩.7. Consequently, cases relied upon by petitioners, such as Kirby Lumber Corp. v. Phinney, 412 F.2d 598">412 F.2d 598 (5th Cir. 1969); Hillard v. Commissioner, 281 F.2d 279">281 F.2d 279 (5th Cir. 1960), revg. 31 T.C. 961">31 T.C. 961 (1959); United States v. Bennett, 186 F.2d 407">186 F.2d 407 (5th Cir. 1951); Albright v. United States, 173 F.2d 339">173 F.2d 339 (8th Cir. 1949); Emerson v. Commissioner, 12 T.C. 875">12 T.C. 875 (1949); Thompson Lumber Co. v. Commissioner, 43 B.T.A. 726">43 B.T.A. 726↩ (1941), are inapposite to the instant case.8. Petitioners have cited a number of cases holding that the disposal of property no longer usable in a taxpayer's business results in capital gain or loss because such property is not held "primarily for sale." Cedarburg Fox Farms, Inc. v. United States, 283 F.2d 711">283 F.2d 711, 715-716 (7th Cir. 1960); Hillard v. Commissioner, 281 F.2d 279">281 F.2d 279 (5th Cir. 1960), revg. 31 T.C. 961">31 T.C. 961 (1959); Philber Equipment Corp. v. Commissioner, 237 F.2d 129">237 F.2d 129 (3d Cir. 1956), revg. 25 T.C. 88">25 T.C. 88 (1955); Gamble v. Commissioner, 68 T.C. 800">68 T.C. 800, 811-812 (1977); Kirk v. Commissioner, 47 T.C. 177">47 T.C. 177, 192-193 (1966); Tesche v. Commissioner, 33 T.C. 122">33 T.C. 122, 127 (1959); McDonald v. Commissioner, 23 T.C. 1091">23 T.C. 1091, 1097-1100 (1955); A. Benetti Novelty Co. v. Commissioner, 13 T.C. 1072">13 T.C. 1072, 1077-1079↩ (1949). We have considered the foregoing cases, as well as others cited by petitioners, but find them distinguishable.9. Furthermore, the factors discussed above, such as frequency and substantiality of sales, and the relationship of the sales to petitioners' business, all indicate that the portion of the silver waste attributable to film was held primarily for sale even if such portion is not part of petitioners' inventory.↩10. At trial, petitioners offered no evidence to explain their original return position with respect to the proceeds of silver waste sales. On brief, petitioners suggest that, in the absence of a net capital loss, petitioners had no need to determine whether the silver waste was a capital asset.↩11. Respondent also argues that the fact that the silver waste was held for only a short time prior to its disposal indicates that the silver waste was held for sale. Patterson v. Belcher, 302 F.2d 289">302 F.2d 289, 294 (5th Cir. 1962); Sovereign v. Commissioner, 32 T.C. 1350">32 T.C. 1350, 1359 (1959), affd. 281 F.2d 830">281 F.2d 830 (7th Cir. 1960); Bauschard v. Commissioner, 31 T.C. 910">31 T.C. 910, 917 (1959), affd. 279 F.2d 115">279 F.2d 115 (6th Cir. 1960); Philbin v. Commissioner, 26 T.C. 1159">26 T.C. 1159, 1164 (1956). Section 1221, however, does not condition capital asset status on any holding period. Sec. 1.1221-1(a), Income Tax Regs. (stating that, in determining whether property is a "capital asset," the period for which it is held is immaterial); Byram v. United States, 705 F.2d 1418">705 F.2d 1418, 1425 (5th Cir. 1983). See also Durliat v. Commissioner, T.C. Memo. 1982-563↩ (purchase and sale of property on the same day did not prevent such property from being considered a capital asset). Moreover, business considerations required prompt disposal of the silver waste once it was collected. We therefore find the short holding period to be a neutral factor in the instant case.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625000/	CHARLES H. CARTER and VIRGIE ANN CARTER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentCarter v. CommissionerDocket Nos. 9515-74, 10470-75.United States Tax CourtT.C. Memo 1978-202; 1978 Tax Ct. Memo LEXIS 318; 37 T.C.M. (CCH) 859; T.C.M. (RIA) 780202; May 31, 1978, Filed William E. Coombs, for the petitioners. George W. McDonald and W. Winter Nesbitt III, for the respondent. TANNENWALDMEMORANDUM FINDINGS OF FACT AND OPINION TANNENWALD, Judge: Respondent determined deficiencies in petitioners' Federal income tax as follows: Docket No.YearDeficiency9515-741971$1,218.2019722,788.9710470-7519738,444.98The issues remaining for decision are whether petitioners: (1) were engaged in the trade or business of boat chartering and writing; (2) are entitled to any deduction for operating expenses of their yacht; and (3) may deduct tuition expenses paid by petitioner Virgie Ann Carter. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference. Petitioners, Charles H. Carter and Virgie Ann Carter (Charles and Vann), are husband and wife, whose residence was320 in Honolulu, Hawaii, at the time of filing the petitions herein. They filed joint Federal income tax returns for the years 1971, 1972, and 1973 with the office of the Internal Revenue Service at Los Angeles, California. Charles is an attorney who practiced law in California from June, 1946, to August 1, 1971. Vann is an accredited school teacher in California, who taught school prior to her marriage to Charles in 1954 and worked as a substitute teacher during the 1954-55, 1955-56, 1959-60, 1965-66, and 1969-70 school years and as a resource teacher in the 1970-71 school year. A resource teacher is one who teaches enrichment courses as opposed to the traditional reading, writing, and arithmetic classes. Charles had built up a very successful law practice in Corona, California. His family maintained an expensive life-style and he had substantial investments in real estate and securities. He was concerned, however, that the demanding pace of his law practice was having an ill effect on his health and he wanted to get away from the pressures of his career. In 1966, petitioners began making plans to terminate their careers in Corona in the summer of 1971 and to sail around the321 world. In connection with this trip, they had the intention of writing about their experience, making films, and chartering their boat. The Carters were experienced yachtsmen. Charles had served in the United States Navy during World War II. Petitioners began cruising with their children in the late 1950's. They first owned a seventeen foot Glasspar Power boat on which they took cruises of several days and up to four weeks, exploring Lake Mohave, Lake Havasu, Lake Mead, Catalina Island, and Puerto Citas on the Gulf of Lower California. Around 1965, they acquired a twenty-six foot power boat, the Miss Vann. Aboard this boat, they explored a newly formed lake above the Glen Canyon Dam, travelled 1,500 miles from San Filipe, Mexico, to LaPaz, Mexico, and back in 1966 and travelled 3,000 miles from Everett, Washington, to Skagway, Alaska, and back to Everett in 1965. The Carters made extensive preparations for their voyage. In May 1966, they purchased Quest, an oceangoing motor-sailer. Both Charles and Vann took courses in seamanship, piloting, and first aid. Charles took courses in weather and celestial navigation. He became a licensed amateur radio operator and a322 master mariner entitled to operate uninspected vessels, limited to 350 tons for power and 100 tons for sail, on ocean waters and to carry up to six passengers for hire. The Carters and their three children took "shakedown cruises," sailing to San Francisco in 1967, Acapulco in 1968, and Hawaii in 1969. In further preparation for their voyage, the Carters purchased a 16mm Bolex camera, a film projector with sound, a slide projector, a portable typewriter and a dictating machine. Charles became an inactive partner in his law firm as of August 1, 1971. He retained the services of his legal secretary to type any manuscripts that he sent to her and to submit them to publishers on his behalf. The Carters donated their home to the YMCA and much of their furniture and personal items to the YMCA and St. John's Episcopal Thrift Shop. They arranged to have all their property, income, and expenses managed by Charles' legal secretary and an accountant. They moved aboard the Quest in the summer of 1971. On or about August 12, 1971, they and their three children set sail on their voyage, which was still in progress at the time of the trial. At the time of trial, Charles had completed323 three manuscripts and was working on a fourth manuscript. After an extensive search for a publisher and substantial rewriting, Charles entered into a contract with Quatro Graphics Publishing Company of Seattle, Washington, in December 1976 for publication of the first two manuscripts as one book entitled A Family Goes to Sea. He also wrote an article entitled "Across the Tasman in Winter" which was sold to Sea Spray Magazine of New Zealand for $85 and published in February 1975. An article entitled "Trekking to Mount Everest" has been submitted to "Outdoor Life" but no response had been received at the time of trial. In accordance with arrangements made prior to their departure, Vann wrote a series of articles for the Corona Daily Independent, a daily newspaper. From July 1971 through May 1973, she received $5 for each of 27 articles; from August 1973 through November 1976, she received $7.50 for each of 36 articles. On an undeterminable date, she sold an article entitled "Climbing Mt. Fuji," to Woman's Weekly Magazine of Sydney, Australia, for $85. She has submitted to two publishers a book entitled A Sailing We Did Go. At the time of trial, one publisher had rejected324 it and the other had not responded. Vann is also working on a cookbook of recipes from places they have visited and a children's book entitled Inkki Goes to Chopstick Land.The Carters' attempts to make films were not profitable and such efforts were discontinued. At various ports of call, they advertised for paying crew and/or charters. On their 1971, 1972, and 1973 tax returns, petitioners reported the following income and expenses relating to their voyage on Quest:197119721973Gross receipts: Chartering 1$2,000.00$ 900.00$ 375.00Articles35.00140.00Teaching94.00Interviews33.00Total$2,129.00$ 933.00$ 515.00Expenses: Boat expenses$3,619.00$4,892.00$10,578.00Writing & filmexpenses154.00836.00679.00Depreciation3,713.008,290.009,513.00Total$7,486.00$14,018.00$20,770.00Net Profit (Loss)($5,357.00)($13,085.00)($20,255.00)Those returns also reflected the following325 amounts and sources of income: 2197119721973Wages etc.$ 3,168.65Dividends (before $200 exclusion)648.69$ 527.95$ 681.15Interest1,485.392,612.414,234.22Income from lawpractice43,229.2634,448.372,802.79Net capital gain5,372.76339.8910,493.36Other income12,859.1933,194.2627,163.66Prior to the voyage, Vann arranged a course of study through LaVerne College, LaVerne, California, leading to a Master's Degree in Education. She paid tuition of $1,200 in 1971. In accordance with this plan, she studied schools in Micronesia and Japan and wrote papers for which she received credit. She also applied for substitute teaching jobs in Australia and Hawaii. In 1971, she earned $94 in Hawaii as a substitute teacher. 3 On June 6, 1976, she received a Master's Degree in Education. Other than as indicated, Vann has not taught326 since the 1970-71 academic year. ULTIMATE FINDING OF FACT Neither of petitioners was carrying on a trade or business or engaged in an activity for profit during the periods of time involved herein. OPINION The primary issue herein relates to the purpose of petitioners round-the-world trip on the Quest. Petitioners contend that they undertook the voyage in order to engage in writing and "chartering" activities from which they intended to make a profit and urge us to conclude those activities constituted a trade or business within the meaning of section 162(a) 4 with the result that the expenses of operating the Quest are fully deductible. Respondent asserts that petitioners set sail for personal reasons relating to their desire to change their family life-style and that their writing and chartering activities should be deemed "not engaged in for profit" within the meaning of section 183(c) with the deductions attributable to those activities limited accordingly. For the reasons327 hereinafter set forth, we agree with respondent. An activity not engaged in for profit under section 183 is the other side of the coin of a trade or business under section 162. Section 183(c) defines an "activity not engaged in for profit" as "any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212." The legislative history indicates that Congress intended to codify the distinction between a business and a hobby drawn by case law. (H.Rept. 91-413 (Part 1), 71 (1969), 3 C.B. 200">1969-3 C.B. 200, 245; S.Rept. 91-552, 103 (1969), 3 C.B. 423">1969-3 C.B. 423, 489. The test of whether an individual is carrying on a trade or business for purposes of section 162 is whether his primary or dominant motive is to make a profit. Godfrey v. Commissioner,335 F.2d 82">335 F.2d 82, 84 (6th Cir. 1964), affg. T.C. Memo 1963-1">T.C. Memo 1963-1; Hirsch v. Commissioner,315 F.2d 731">315 F.2d 731, 736 (9th Cir. 1963), affg. T.C. Memo 1961-256">T.C. Memo 1961-256;328 Jasionowski v. Commissioner,66 T.C. 312">66 T.C. 312, 319 (1976). The taxpayer's expectation of profit need not be reasonable, but it must be a good faith expectation. Mercer v. Commissioner,376 F.2d 708">376 F.2d 708 (9th Cir. 1967), revg. T.C. Memo. 1966-82; Hirsch v. Commissioner,supra; Stern v. United States, an unreported case ( C.D. Cal. 1971, 27 AFTR 2d 71-1148, 71-1 USTC par. 9375); Benz v. Commissioner,63 T.C. 375">63 T.C. 375, 383 (1974). Whether petitioners had the requisite profit motive is a question of fact to be determined on the basis of the entire record. Jasionowski v. Commissioner,supra at 319. The regulations set forth the relevant factors, derived from prior case law, which are to be considered in determining the applicability of section 183. Jasionowski v. Commissioner,supra at 320; Benz v. Commissioner,supra.The regulations further provide that no one factor is conclusive and we do not reach our decision herein by merely counting the factors that support each party's position. Sec. 1.183-2(b), Income Tax Regs.We recognize329 there are some outward manifestations of a business in petitioners' activities. They kept careful records of their income and expenses, they discontinued film making when they found it was not profitable, and they devoted extensive time to their activities. Sec. 1.183-2(b)(1), Income Tax Regs.But such indications of a business pale beside the considerable evidence that the genesis of the voyage was Charles' concern for the effect of his life-style on his health. His testimony left us with the distinct impression that his primary motive was to get away from the pressures of his law practice. He and Vann made a conscious decision to embrace a new way of life and the Quest was their instrument for implementing that decision. Petitioners attempt to establish their profit motive by stating they were compelled to supplement their income because their assets were insufficient to enable them to retire, but the record belies their claim. They appear to have had substantial assets and, indeed, by the time of trial they had been supporting themselves and their three children for six years with only negligible income from their claimed business activities. Further, if petitioners330 were truly concerned about making a profit, we think they would have investigated the profit potential of their boat chartering and writing plans before embarking on their voyage. Sec. 1.183-2(b)(2), Income Tax Regs. Compare Jackson v. Commissioner,59 T.C. 312">59 T.C. 312 (1972). The record contains no evidence of such an investigation and some of the responses from publishers suggest that the market may not have been very good for the type of books they were writing. Their claim of a profit motive in their chartering activities is also undermined by the evidence that paying passengers were carried only when it fit in with their planned itinerary. See Martin v. Commissioner,50 T.C. 341">50 T.C. 341, 355-356 (1968). Cf. Rand v. Commissioner,34 T.C. 1146">34 T.C. 1146 (1960) (section 212). Nor are we impressed with their emphasis on their extensive preparation for the trip. While the marine courses they took may have been relevant to chartering, virtually all of their preparation was necessary to assure their own safety. We are also influenced by the fact that petitioners had owned boats and engaged in boating activities for recreation for many years prior to their331 voyage around the world. This fact combined with their independent sources of income tends to indicate they were not motivated by profit. McGowan v. Commissioner,347 F.2d 728">347 F.2d 728 (7th Cir. 1965), affg. T.C. Memo 1964-241">T.C. Memo 1964-241; Benz v. Commissioner,63 T.C. at 385; Bessenyey v. Commissioner,45 T.C. 261">45 T.C. 261, 274 (1965), affd. 379 F.2d 252">379 F.2d 252 (2d Cir. 1967). Sec. 1.183-2(b)(9), Income Tax Regs.Petitioners seek to draw sustenance from Wright v. Commissioner,31 T.C. 1264">31 T.C. 1264 (1959), affd. 274 F.2d 883">274 F.2d 883 (6th Cir. 1960). That case held that the expenses of an attorney and his wife in taking a trip around the world, about which they wrote a manuscript of their experiences and impressions for publication, were not deductible as ordinary and necessary expenses of carrying on a trade or business. Petitioners seize upon a variety of distinctions between the facts in Wright and the facts herein to support their conclusion that Wright dictates a decision in their favor. But petitioners cannot, by a process of reverse English, elevate Wright to such precedential status. Wright simply332 held that the taxpayers' trip had been motivated by personal, rather than business, reasons and that any profit motive attaching to their contemplated publishing activities was purely incidental. 5 Cf. Ballantine v. Commissioner,46 T.C. 272">46 T.C. 272, 280 (1966). We are convinced that petitioners would have taken their voyage even if they had not planned to engage in chartering or writing activities and wether or not such activities produced a profit. In so stating, we recognize that petitioners would have been pleased to make a profit from such activities. We think, however, that at most these activities333 represent an attempt to recoup some of the costs of the voyage and this is simply not enough to justify the conclusion that petitioners were engaged in an activity for profit. Martin v. Commissioner,supra.6 Cf. Rand v. Commissioner,supra.We also note that any losses which petitioner could deduct would generate substantial tax benefits by reducing their liability on their other income. See sec. 1.182-2(b)(8), Income Tax Regs.In sum, we conclude that petitioners' primary or dominant purpose was to get away from the pressures of their previous lives and that their contemplated chartering and writing activities were merely incidental to accomplishing that purpose. They cannot convert what were essentially personal expenses into business expenses simply by writing about their personal experiences. We are reinforced in our conclusion by the precedence accorded to the non-deductibility of personal expenses under section 262 over the provisions of section 162. 334 See Sharon v. Commissioner,66 T.C. 515">66 T.C. 515, 522-523 (1976), and cases cited thereat (on appeal, 9th Cir., Dec. 20, 1976). Accordingly, we hold that petitioners' boat chartering and writing activities were not engaged in for profit and that the deduction of their expenses is governed by section 183. Under section 183(b), petitioners are entitled to deductions which are allowable without regard to whether an activity is engaged in for profit and to deductions which would be allowable if the activity were engaged in for profit. The latter deductions may not exceed the excess of gross income from such activity over the deductions allowed without regard to whether the activity is engaged in for profit. In 1973, respondent allowed petitioners to deduct their expenses of the voyage up to the amount of the income derived from their chartering and writing activities. In 1971 and 1972, he made an allocation which resulted in an allowance of such expenses in amounts less than petitioners' income from activities relating to their voyage. As the record shows, such allowance was based at least in part on the fact that petitioners had been unable to substantiate the actual335 expenditure of a large portion of the amount deducted on their returns for those years. That defect was cured by an augmentation of the record through further stipulation of the parties after trial. We have carefully examined the augmented record and are satisfied that petitioners are entitled, under section 183, to deduct amounts equal to but not in excess of their income from their activities, to wit, $2,129.00 for 1971 and $933.00 for 1972. The final issue is whether petitioners are entitled to deduct tuition in the amount of $1,200 for the taxable year 1971. Respondent does not question the amount claimed and does not deny that the courses Vann took maintained and improved the skills required for teaching. The sole question before us is whether Vann was in the trade or business of being a teacher at the time she undertook the course of study in question. See sec. 1.162-5(a)(1), Income Tax Regs.Respondent determined that petitioners were not entitled to the deduction on the ground that Vann had resigned her position as a teacher to take a voyage of indefinite length and was no longer engaged in the trade or business of teaching. Petitioners claim that she was still in336 the trade or business of teaching because she sought substitute teaching jobs at every port and earned $94 from such jobs in 1971. Yet, the substance of Vann's own testimony was that she signed up as a substitute teacher in different countries for educational purposes and, thus, the requisite profit motive is lacking. See Godfrey v. Commissioner,supra; Hirsch v. Commissioner,supra; Bessenyey v. Commissioner,supra.7Moreover, petitioners concede that they cut themselves off from their former careers completely and the record evinces no indication that337 they intend to return to such careers. Even if Vann hoped to return to teaching at some point in the future, her plan was of such an indefinite nature that it cannot support the conclusion that she was carrying on a trade or business of being a teacher in 1971. Compare Wyatt v. Commissioner,56 T.C. 517">56 T.C. 517 (1971), and Corbett v. Commissioner,55 T.C. 884">55 T.C. 884 (1971), with Furner v. Commissioner,393 F.2d 292">393 F.2d 292 (7th Cir. 1968), revg. 47 T.C. 165">47 T.C. 165 (1966). Decision in docket No. 9515-74 will be entered under Rule 155.Decision in docket No. 10470-75 will be entered for the respondent. Footnotes1. The record is unclear as to the income from paying crew and charters as such, but, for the purposes of this case, we assume that income from both sources is considered income from "chartering".↩2. The record indicates that petitioners had substantial wealth and that the cash flow therefrom was not only greater than the figures set forth in the table indicate (i.e., rental income reported was after depreciation) but also may well have had a substantially greater future potential.↩3. We note that Vann's W-2 Forms attached to the 1971 tax return showed wages of $101.25 received from schools in Hawaii. However, the parties have stipulated that Vann earned $94.↩4. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the taxable years in issue.↩5. Stern v. United States, an unreported case ( C.D. Cal. 1971, 27 AFTR 2d 71-1148, 71-1 USTC par. 9375), upon which petitioners also rely, is clearly distinguishable. There, the taxpayer was a resident of Los Angeles who incurred travel and lodging expenses in New York City in preparing a book. The court held the expenses were deductible under section 162(a)(2) since he was "away from home." Petitioners herein were not away from home, as Quest was their principal residence. See Hicks v. Commissioner,47 T.C. 71">47 T.C. 71↩ (1966).6. See also Lyon v. Commissioner,T.C. Memo 1977-239">T.C. Memo. 1977-239; Savarona Ship Corp. v. Commissioner,↩ a Memorandum Opinion of this Court dated November 12, 1942.7. Petitioners' attempt to embellish their argument by stating that Vann taught her own children on the yacht and by pointing out that she is writing a children's book. The teaching of one's own children is not an activity pursued with a profit motive and does not, by any stretch of the imagination, constitute a trade or business. As to writing children's books, petitioners have not shown such connection between Vann's course of study and her writing activities as would justify allowance of any part of the deduction under the limited conditions of section 183.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625001/	N. P. CHRISTENSEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Christensen v. CommissionerDocket No. 4380.United States Board of Tax Appeals7 B.T.A. 625; 1927 BTA LEXIS 3138; July 11, 1927, Promulgated 3138 WORTHLESS CORPORATE STOCK. - Upon the evidence, held, that certain stock became worthless during the year 1920 and that petitioner sustained a deductible loss in that year. W. Carey Martin, Esq., for the petitioner. John W. Fisher, Esq., for the respondent. TRUSSELL 625 This proceeding is for a redetermination of the petitioner's income-tax liability for the calendar year 1920, for which year the respondent has asserted a deficiency in the amount of $132.36. The petitioner 626 claims that there has been an overpayment in amount of $266 for the year 1920. The petitioner alleges that the respondent erred (1) in disallowing the deduction in the year 1920 of $4,125, representing a loss alleged to have been sustained during that year, and (2) in including in income for the year 1920, $1,239.05, representing commissions, alleged not to have been received. The second allegation of error was abandoned at the hearing on this proceeding. FINDINGS OF FACT. The petitioner is a resident of Atlantic, Iowa. During the months of December, 1919, and January, 1920, the petitioner purchased $15,000 worth of stock of the Commonwealth3139 Mortgage Bond Co. of Iowa, hereinafter referred to as the company, which was organized in the fall of 1919. For the said stock the petitioner paid $4,125 in cash and gave his notes for the sum of $10,875. During the first few months of 1920, petitioner sold stock in the company and for such services earned commissions totaling $1,239.05, which was credited on his notes during 1920. During 1921 the notes were paid, some in full and others at less than face value. During 1920 the company commenced the construction of a combined office and theater building in Des Moines. Its debts mounted, it became insolvent, and in September, 1920, a receiver was appointed to liquidate the company's assets. The building was partially completed in September, and there were filed against it mechanics' liens amounting to $284,990.17, which was approximately $200,000 more than the uncompleted building and the lease for the land upon which it was being constructed could be sold. The building stood in the uncompleted state for two years, during which time the highest offer therefor was $50,000. The structure and the lease were later sold for $75,000. In September, 1920, the company's liabilities3140 were greatly in excess of its assets. Its office furniture, which had a value not in excess of $2,000, was given to the lessor in payment of office rent then due. Notes receivable for the sum of $188,971.39, all of which had been given in payment for stock, were worth in September, 1920, not more than 10 cents on the dollar and a total of $18,128.77 was collected on all those notes. In September, 1920, the stock of the Commonwealth Mortgage Bond Co. was worthless. In his audit of the petitioner's income-tax return for the year 1920 the respondent included in income $1,239.05 as commissions constructively received, which action resulted in the deficiency here involved. The petitioner now admits the constructive receipt of the commissions 627 and there is no controversy as to the inclusion of the said $1,239.05 in gross income, but the petitioner now claims a deduction of the loss of $4,125 and that the allowance of such deduction would result in an overpayment of tax for the year 1920. OPINION. TRUSSELL: There has been submitted in evidence a public accountant's statement of the assets and liabilities of the Commonwealth Mortgage Bond Co. of Iowa as of June 30, 1920, two3141 months prior to the receivership. That statement and the testimony as to recoveries upon the liquidation of the company's assets show that in September, 1920, the assets and liabilities of the company appeared to be as follows: ASSETSCash$286.38Notes receivable:Subscribers for stock$18,128.77Real estate10,000.00Officers3,750.0031,878.77Accounts receivable246.58Securities15,642.50Farm90,000.00Construction and lease75,000.00Accrued interest120.29Total213,174.52LIABILITIESNotes payable to banks10,000.00Accounts payable:On construction$284,990.17On leasehold25,000.00To Kirkpatrick101.16310,091.33Miscellaneous accrued expenses16,943.08Mortgage on farm60,000.00Capital stock:Issued$109,309.20Subscriptions partly paid285,650.00Surplus paid in18,650.00413,609.20Total810,643.61Deficit597,469.09The record in this proceeding establishes that the stock of the Commonwealth Mortgage Bond Co. of Iowa, became worthless during 1920. The petitioner has admitted the constructive receipt of $1,239.05 as commissions earned during 1920 and applied3142 during that year on his *628 notes given to the Commonwealth Mortgage Bond Co. of Iowa in payment for stocks. That amount, having been paid in to the company during 1920 for stock which became worthless, constitutes a loss in addition to the $4,125 initial payment. The deficiency here involved resulted from the respondent's action of adding the said commissions to income and a deduction for the loss of $1,239.05 wipes out the deficiency. The petitioner having paid $5,364.05 for stock which became worthless in 1920, sustained a loss of that amount which is a proper deduction from gross income for the year 1920, under section 214(a)(4) and (5) of the Revenue Act of 1918. The petitioner's income-tax liability for the year 1920 should be recomputed in accordance with the foregoing findings of fact and opinion. Judgment for petitioner will be entered upon 15 days' notice, pursuant to Rule 50.Considered by TRUSSELL, LOVE, AND LITTLETON.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625002/	Estate of Payson Stone Douglass, Deceased, George W. Van Slyck and Douglas R. Nichols, Executors, Petitioners, v. Commissioner of Internal Revenue, RespondentEstate of Douglass v. CommissionerDocket No. 112178United States Tax Court2 T.C. 487; 1943 U.S. Tax Ct. LEXIS 93; July 31, 1943, Promulgated 93 Decision will be entered under Rule 50. Property transferred by decedent during his lifetime to trustees, not including himself, with discretion in the trustees to apply the income to the maintenance, education and support of decedent-grantor's minor child, held, not includible in decedent's gross estate. Helvering v. Mercantile-Commerce Bank & Trust Co. (Estate of Paul F. Donnelly), (C. C. A., 8th Cir.), 111 Fed. (2d) 224; certiorari denied, 310 U.S. 654">310 U.S. 654, distinguished. George W. Van Slyck, Esq., for the petitioners.Jonas M. Smith, Esq., for the respondent. Opper, Judge. OPPER487 OPINION.Petitioner disputes the correctness of a deficiency in estate tax determined in the amount of $ 43,228.93. The facts are stipulated and are found accordingly. The estate tax return was filed with the collector of internal revenue for the Newark, New Jersey, division. The question is whether the corpus of a trust created by the decedent during his lifetime for the benefit of a minor child is includible in the gross estate by reason of provisions permitting the trustees to "apply the income of such share, 94 or so much thereof as the Trustees may deem advisable, to or for the maintenance, education and support of such minor." The decedent was not one of the trustees.The relation of this proceeding to ; certiorari denied, , in the estate tax field is similar to that of , to , in income tax law. But where the legislative intent to cover permissive or discretionary trusts can be gathered from the income tax provisions and particularly from section 167, no corresponding aid is forthcoming from a reliance on section 302. Certainly, decedent's situation does not fit any of the conditions expressly listed in that section. Decedent did not retain during his life "the possession or enjoyment of" the property and he did not have "the right" to the income from it; neither could he "either alone or in conjunction with any person" designate those who should possess95 or enjoy the property or its income. Nor did there exist at the date of his death any power to change the enjoyment of the property or its income which was exercisable "by the decedent alone or by the decedent in conjunction with any other person." A resort to respondent's regulations indicates that his own interpretation of these sections does 488 not extend so far. Reference to the permissive trust is significantly absent, for example, from the statement that:The use, possession, right to the income, or other enjoyment of the property, will be considered as having been retained by or reserved to the decedent to the extent that during any such period it is to be applied towards the discharge of a legal obligation of the decedent, or otherwise for his pecuniary benefit. [Regulations 80, 1937, Ed., art. 18, as amended.] 1It is even difficult to refrain from construing respondent's brief as making a comparable admission, for it says at one point: * * As long as the grantor retained the right to have the income applied in discharge of his legal obligations the corpus is includable in his estate.And at another concedes that:* * * in this case the grantor did not reserve96 for himself the right to use the funds to carry out a legal obligation * And a search for any different concept as the true purpose of the legislators instantly runs afoul of their opportunity to conform the estate tax provisions more closely to the trust sections of the income tax law, and of their repeated failure to do so. ; certiorari denied, . In our view the principle of 97 the Donnelly case is not applicable to a decedent whose obligations will be discharged only through the action of trustees, at least where, as here, the decedent has not included himself among them. Respondent's determination is disapproved.Decision will be entered under Rule 50. Footnotes1. Compare, e. g., Regulations 86, article 167-1 (b), construing section 167, Revenue Act of 1934:* * * *"For the purposes of this article, the sufficiency of the grantor's retained interest in the income is not affected by the fact that the grantor has provided that the right to so effect or direct the distribution of income is, or may at some future time be, vested in any person (either alone or in conjunction with the grantor) not having a substantial interest in the income adverse to the grantor."↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625003/	GAILON W. BAILEY, JR. and GERMAINE BAILEY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentBailey v. CommissionerDocket No. 2898-81.United States Tax CourtT.C. Memo 1982-274; 1982 Tax Ct. Memo LEXIS 471; 43 T.C.M. (CCH) 1399; T.C.M. (RIA) 82274; May 18, 1982. Donald B. Brown, for the petitioners. Jeffrey I. Margolis, for the respondent. SCOTT MEMORANDUM OPINION SCOTT, Judge: When this case was called for trial on March 8, 1982, pursuant to notice previously given, respondent filed a motion to dismiss for lack of jurisdiction on the ground that the petition was not filed within 90 days after the mailing to petitioners by certified mail at their last known address of a notice of deficiency. Petitioners orally moved that this case be dismissed on the ground that the notice of deficiency was not mailed to their last known address. 472 It is clear that this case must be dismissed for lack of jurisdiction. The only issue is the ground for the dismissal. On February 17, 1981, petitioners filed a petition in which they alleged that they were residents of Ventura, California; that they timely filed their Federal income tax return for the year ending December 31, 1975, with the Internal Revenue Service Center, Fresno, California; and that at the time of the filing of that return they resided in Santa Paula, California, but subsequently moved to Ventura on or about May 25, 1977. They further alleged that they were informed and believed that respondent mailed a statutory notice of deficiency to them at their Santa Paula address on or about November 27, 1978, but that respondent knew of their change of address and had sent other correspondence to petitioners at their new address prior to the date of the mailing of the notice of deficiency. In support of this allegation, petitioners attached as an exhibit to their petition a copy of a letter dated August 11, 1978, from the Internal Revenue Service Center at Fresno to petitioners in regard to their 1977 income tax return which was addressed to their Ventura residence. 473 Petitioners alleged that they never received the notice of deficiency and did not know that it had been mailed when they were contacted by the Collection Division of the Internal Revenue Service. Petitioners' prayer is that the Court determine that no valid statutory notice of deficiency was mailed by respondent and that said Collection Division is barred from any collection of taxes on the basis of the statutory notice. On April 9, 1981, respondent filed an answer to the petition which denied all allegations in the petition on the ground that he lacked knowledge or information sufficient to form a belief as to the truth of that allegation except admitted to the mailing of the letter dated August 11, 1978, referred to above which had been sent to petitioners at their Ventura address. It is unnecessary to decide whether the pleadings as filed in this case are sufficient to invoke the jurisdiction of this Court. Clearly, this Court generally has jurisdiction to determine whether a notice of deficiency mailed to a taxpayer was a valid notice. However, because the manner in which this issue is raised in the instant case is in the context of a request that we enjoin the Collection474 Division from further proceeding to collect tax from petitioners, we seemingly could dispense with deciding the issue since we have no power to grant the injunctive relief sought by petitioners. The petition assigns no error in the determination of the deficiency made by respondent in the notice of deficiency and in that sense is not a petition filed with this Court "for a redetermination of the deficiency." Section 6213(a). 1 However, since respondent has now moved to dismiss the petition on the ground that it was filed more than 90 days after the mailing of the notice of deficiency, and petitioners have orally moved to dismiss the petition on the ground that no valid notice of deficiency had been mailed to petitioners, the fact that this case might be dismissed on other jurisdictional grounds does not deprive us of the power to determine the proper basis of dismissal of the case for lack of jurisdiction. We will consider the two motions made at the hearing and determine which of those grounds is the one on which the case should be dismissed for lack of jurisdiction. As we pointed out in Shelton v. Commissioner,63 T.C. 193">63 T.C. 193, 198 (1974): 475 Every court has judicial power to hear and determine, and inquire into, its own jurisdiction and to decide all questions, the decision of which is necessary to determine the question of jurisdiction. Stoll v. Gottlieb,305 U.S. 165">305 U.S. 165 (1938); * * * See also Nash Miami Motors, Inc. v. Commissioner,358 F.2d 636">358 F.2d 636, 637 (C.A. 5, 1966). When at any time and in any manner it is represented to the Court that it does not have jurisdiction, the Court should examine the grounds of jurisdiction before proceeding further, the question of jurisdiction being always open for determination. Wheeler's Peachtree Pharmacy, Inc.,35 T.C. 177">35 T.C. 177 (1960). * * * The motion to dismiss filed by respondent and the oral motion made by petitioners present a question which is often raised in this Court, although rarely is it raised over two years after the date of the mailing of the notice of deficiency. The facts as developed at the hearing held with regard to the two motions to dismiss for lack of jurisdiction are as follows: Petitioners resided in Ventura, California, at the time of the filing of their petition in this case. At the time petitioners filed476 their Federal income tax return for the calendar year 1975 they resided at 560 Foothill Road, Santa Paula, California (old address) and stated this to be their address on their 1975 income tax return. In late December 1976, petitioners were sent a notice from the Office of the District Director, Internal Revenue Service, Los Angeles, California, informing them that their 1975 tax return was being audited. This notice was sent to the Santa Paula address at which petitioners resided at that time. On May 25, 1977, petitioners moved from their home in Santa Paula, California, to 7255 La Cumbre Circle, Ventura, California (new address). Petitioners obtained change of address cards from the post office and notified their bank, various companies with whom they had accounts, a number of their friends and the United States Post Office of their change of address. They did not notify the Internal Revenue Service of the address change. On December 9, 1977, the Office of the District Director, Internal Revenue Service, Los Angeles, California, mailed to petitioners a 30-day letter enclosing a copy of the office audit report with respect to their 1975 income tax. This letter was mailed to477 petitioners' old address. This letter was not returned to respondent as undelivered. Respondent received a letter dated January 4, 1978, from a Jeffery A. Brightwell, on stationery indicating he was an attorney at law and showing his office address. The letter was addressed to the District Director, Internal Revenue Service, and at the top was: "Re: Gailon Bailey, 7255 La Cumbre, Ventura, CA 93003." Reference was made in the letter to the tax year 1975. The letter stated in part: We do not accpet your findings regarding the above taxpayer and do not consent to the assessment you have indicated. We furthermore protest the "summary audit" procedure, in that the above named taxpayer was not noticed and provided with an opportunity to be heard. A discussion is requested with one of your examiners at District Conference level regarding your findings. The letter further stated that it should be considered as a protest and "we do not waive any rights with respect to a full office or field audit for the above named taxpayer." On January 6, 1978, a letter from the Office of the District Director was mailed to Gailon Bailey (petitioner) at the old address. This letter stated478 that a letter had been received from Jeffery A. Brightwell, attorney at law, requesting that his tax audit be forwarded to the District Conferene Staff. The letter further stated that since "we do not have a power of attorney for Mr. Brightwell, we cannot act on his request," and that "If you disagree with the adjustments, you may request a District Conference or you may file a valid power of attorney with this office for Mr. Brightwell to represent you." The letter requested that respondent be advised within 10 days as to petitioner's intention. This letter was not returned to respondent as undelivered. Respondent received no reply to the January 6, 1978, letter from either petitioners or Mr. Brightwell. On or about April 10, 1978, petitioners filed their Federal income tax return for the calendar year 1977, giving as their address their new address in Ventura. Petitioners received a computer-generated letter dated August 11, 1978, from the Internal Revenue Service Center, Fresno, California, with respect to their 1977 return which stated, "We are processing your Federal income tax return for the year ended Dec. 31, 1977, and we find we need more information." This letter was479 stamped with a facsimile of the signature of the chief of the Correspondence Section at Fresno. In May 1978 a proposed statutory notice of deficiency for the year 1975 was drafted by an employee in the Audit Division of the District Director, Los Angeles, California, and on May 26, 1978, the proposed deficiency notice addressed to petitioners at their old address in Santa Paula was forwarded to the District Counsel, Internal Revenue Service, for review. This letter was mailed to petitioners by certified mail on November 27, 1978, to their old address in Santa Paula. The letter was not returned to respondent. During the years 1977 and 1978, petitioners' Federal income tax liability for the calendar year 1976 was also under investigation. Respondent, in 1978, issued a notice of deficiency to petitioners for their calendar year 1976, and petitioners received that notice. That notice for the year 1976 was also mailed to petitioners at their old address, which was the address shown on petitioners' 1976 Federal income tax return. Petitioners had a power of attorney on file with the Internal Revenue Service authorizing Mr. Brightwell to represent them for the year 1976.Petitioners480 understood that because of their filing a notice of change of address with the post office in Santa Paula all mail received at that post office address to them would be forwarded to them for a period of one year. However, Mr. Bailey was a friend of a person employed in the local post office in Santa Paula and for that reason mail was forwarded to petitioners for more than a year after they moved from Santa Paula to Ventura. Mr. Bailey did not recall receiving any of the correspondence with respect to the year 1975 sent to him by the Internal Revenue Service, but did not know of any other mail addressed to petitioners at their old address in Santa Paula that they did not receive during the years 1977 and 1978. Petitioners were contacted by a representative of the Collection Division of respondent with respect to the collection of the deficiency in their Federal income tax for the calendar year 1975 sometime in 1980. This representative of the Collection Division told Mr. Bailey that the tax for the year 1975 had been assessed pursuant to a statutory notice of deficiency issued in late November 1978. It is respondent's position that the statutory notice of deficiency mailed481 to petitioners on November 27, 1978, by certified mail to their old address was mailed to petitioners at their last known address as required by section 6212. No petition was filed by petitioners seeking a redetermination of the tax determined in that statutory notice within 90 days after the date of the mailing of the notice. Based on this premise, it is respondent's contention that this Court is without jurisdiction to redetermine the deficiency set forth in the notice of deficiency mailed to petitioners on November 27, 1978. It is petitioners' position that the notice of deficiency with respect to their calendar year 1975 was not mailed to them at their last known address and therefore the petition they filed in this case on February 17, 1981, should be dismissed because no valid notice of deficiency had been mailed to them for their calendar year 1975. Petitioners admit that they did not specifically notify respondent of any change in the address given on their tax return for the year 1975. However, they state that because another address was shown on their tax return for the year 1977 filed in April 1978, and because an attorney who was not authorized to represent petitioners482 for the year 1975 had mailed a letter to respondent showing Mr. Bailey's address as the new address in Ventura, respondent did not exercise due diligence in not ascertaining that petitioners had changed their address.Petitioners recognize that the great weight of authority is that a change of address shown on a subsequently filed tax return is not sufficient notice to respondent of a change in a taxpayer's address, but argue that the rule in the Ninth Circuit is different. Petitioners contend that under the holdings of the Court of Appeals for the Ninth Circuit, to which an appeal in this case would lie, in the cases of Cohen v. United States,297 F.2d 760">297 F.2d 760, 773 (9th Cir. 1962), and Welch v. Schweitzer,106 F.2d 885">106 F.2d 885 (9th Cir. 1939), a subsequently filed return is sufficient notice of a change in address to require respondent to use the address shown on the subsequently filed return as a taxpayer's last known address. Petitioners also rely on a District Court case, Georgia Pacific Corp. v. Lazy Two T. Ranch, Inc., an unreported opinion ( N.D.Cal. 1976, 76-2 USTC par. 9666, 38 AFTR2d 76-5081). The only one of the cases relied on483 by petitioners which contains language tending to support petitioner's position is Georgia Pacific Corp. v. Lazy Two T. Ranch, Inc.,supra.In our view the court in that case misconstrues the holding in Welch v. Schweitzer,supra, in a statement in that case which lends some support to petitioners' position. However, the facts as found by the court in the Georgia Pacific Corp. case show that the employees of the Internal Revenue Service were in fact aware of the taxpayer's new address at the time of the mailing of the notice of deficiency. In the case of Welch v. Schweitzer,supra, several returns showing the new address of the taxpayer had been filed at the time the notice of deficiency was issued to the address shown on the taxpayer's tax return for the year for which the notice was being issued. Internal Revenue Service representatives also had other reasons for being aware of the taxpayer's change of address. The holding of the Circuit Court in Welch v. Schweitzer,supra, concisely stated at page 887, is that the application of ordinary business principles to the tax business of the Government requires484 the Commissioner to avail himself of his business organization in the mailing of a notice of deficiency. The record in that case showed that field agents examining the taxpayer's account with respect to assessments made for another year had supplied the Commissioner with the correct business address of the taxpayer. Although the Welch v. Schweitzer case did point out that the notice sent to the taxpayer in March 1927 with respect to the years 1920 and 1921 was mailed after several returns for other years had been filed showing a change of address, it was not this fact alone on which the Circuit Court relied in reaching its conclusion that the notice was not mailed to the taxpayer's last known address. Petitioners refer to page 773 of the opinion in Cohen v. Commissioner,supra, as supporting their position. We find nothing in the Cohen case at page 773 or elsewhere to support petitioners' position. The Circuit Court in the Cohen case held that the Commissioner normally deals with a taxpayer at the residence or other address which is on record through the taxpayer's tax return for the year involved. The court then pointed out that the Moreno Avenue address485 was the address shown on the taxpayer's return for the year for which the deficiency notice was mailed and that the taxpayer had not notified the Commissioner of a permanent change of address. The court concluded (at 775): (* * * Here it is clear that the Moreno Avenue address was the last known permanent or residence address of Cohen. We did not hold in Maxfield, or in any other decision, either that mailing to such an address is insufficient, or that there must be, in the case of such mailing, affirmative proof that the taxpayer actually received the letter. The legislative history, cited in Gregory, makes it clear that Congress did not intend such a requirement.) Not only have petitioners failed to cite any case supporting their contention that filing of a subsequent year's return giving a different address is sufficient notice to respondent of a change of address, but in fact the cases referred to by petitioners support respondent's position. As we stated in Alta Sierra Vista, Inc. v. Commissioner,62 T.C. 367">62 T.C. 367, 374 (1974), affd. without published opinion 538 F.2d 334">538 F.2d 334 (9th Cir. 1976), the relevant inquiry pertains to the Commissioner's knowledge486 rather than to what may in fact be a taxpayer's most current address, and the burden is upon the taxpayer to keep the Commissioner informed of his proper address. In the instant case it would have been very unlikely that respondent would have available to him the address on petitioners' 1977 tax return when the notice of deficiency was drafted in May 1978. The testimony shows that it is highly unlikely that the Fresno service center would have processed petitioners' 1977 tax return to the point of having the address shown thereon on its computer records by the end of May 1978. More importantly, however, respondent had not been given such an indication that petitioners' address might have been changed to place on him any necessity to check for a different address. Although Mr. Bailey testified that he did not receive the 30-day letter, it is clear that he must have received that letter because of the letter sent to respondent from an attorney not authorized to represent petitioners. The only basis for the intended protest was the 30-day letter sent to petitioners. When respondent wrote Mr. Bailey asking that he either send a power of attorney or reply himself to the 30-day letter,487 petitioners should have been alerted to notify respondent of a change in address. Mr. Bailey states that he does not remember receiving this letter. In any event, since he clearly did receive the 30-day letter and gave it to an attorney, he should have inquired of the attorney as to his action with respect to that letter or notified the Internal Revenue Service of his change of address. The other information which petitioners argue should have alerted respondent to this change of address is the letter to respondent from the attorney who was not authorized to represent them for the year 1975. In the first place, this letter was entitled "Re: Gailon Bailey" only and could not possibly have been considered any notice of a change of address of petitioner Germaine Bailey. However, in our view respondent would not have been justified in assuming an attorney who had not bothered to obtain a power of attorney from petitioners before writing the Internal Revenue Service would give a proper address for a taxpayer, and certainly respondent would not have been justified in relying on such an address when no indication was given in the letter that the taxpayer had changed his address. 2488 Applying the concept set forth in numerous cases that absent any notification to respondent by a taxpayer that the address shown on his tax return is not his current address, respondent may properly used the address shown on the return for mailing a notice of deficiency, we conclude that the notice here involved was mailed to petitioners at their last known address and was a valid notice of deficiency. See Gray v. Commissioner,73 T.C. 639">73 T.C. 639 (1980); Budlong v. Commissioner,58 T.C. 850">58 T.C. 850 (1972).489 Finally, we should state that in our view the weight of the evidence in this case is that petitioners did actually receive the notice of deficiency for the year 1975. Mr. Bailey testified that he received all other mail sent to him at the old address at Santa Paula through the year 1978 insofar as he knew, but did not remember receiving any of the letters which the record shows were sent to him by the Internal Revenue Service. Furthermore, petitioner testified that he received the notice of deficiency for the year 1976 in 1978 because it was sent to him by the person who had purchased his house in Santa Paula. Petitioner also testified that he received so much correspondence from the Internal Revenue Service that he was not sure what letters he did or did not receive. At a minimum, when petitioners received a deficiency notice in 1978 with respect to their 1976 tax year addressed to the Santa Paula address, it was incumbent on them to notify respondent of any change in address to which a deficiency notice for 1975 should be sent. Petitioners knew of the audit of their 1975 return because notice of this audit had been sent to them prior to the time they moved from the Santa Paula490 address. In spite of Mr. Bailey's testimony that he did not recall receiving the 30-day letter mailed to him at the Santa Paula address on December 9, 1977, the record is clear that he must have received it. Furthermore, the records of respondent show that none of the correspondence respondent sent to petitioners at the Santa Paula address, including the notice of deficiency mailed on November 27, 1978, was returned to respondent. If the matter were determinative, which in our view it is not, we would conclude from the evidence in this case that petitioners did in fact receive the notice of deficiency mailed on November 27, 1978, to their old address in Santa Paula. This fact, however, is not determinative since we have concluded that the notice was properly mailed to petitioners at their last known address, and under such circumstances the notice is effective whether or not it was actually received. Cataldo v. Commissioner,60 T.C. 522">60 T.C. 522 (1973), affd. per curiam 499 F.2d 550">499 F.2d 550 (2d Cir. 1974), and cases there cited. Since the petition in this case was not filed within 90 days after the mailing of the notice of deficiency, respondent's motion to dismiss491 for lack of jurisdiction will be granted, and petitioners' oral motion to dismiss for lack of jurisdiction will be denied. An appropriate order will be entered.Footnotes1. Unless otherwise stated, all statutory references are to the Internal Revenue Code of 1954, as amended and in effect during the year here in issue.↩2. In Timmons v. Commissioner,T.C. Memo. 1978-262↩, we specifically held that when respondent relied on an address furnished to him by an attorney who was not representing the taxpayer with respect to the tax year involved as the address to which to send a notice of deficiency, he had not sent the notice to the taxpayer's last known address. We stated that respondent should have used the address appearing on the taxpayer's return as her last known address, absent some notification from the taxpayer of a change of address, if he did not otherwise have reason to believe that the taxpayer wanted mail directed to her to a different address.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625005/	SOUTHERN BELL TELEPHONE AND TELEGRAPH COMPANY, PETITIONER, ET AL., 1v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Southern Bell Tel. & Tel Co. v. CommissionerDocket Nos. 70887-70892.United States Board of Tax Appeals34 B.T.A. 540; 1936 BTA LEXIS 684; May 6, 1936. 684 Taxpayers, stockholders in the old company, individually agreed to sell their stock to a third party and placed the stock in escrow. The purchaser placed $100,000 in escrow to apply on payment. The assignee of the purchaser had sought to change the agreement into one providing for the transfer of the assets of the company, but the stockholders refused to do so. The assignee of the purchaser organized a new company to take over the assets of the old company. The stockholders of the old company, at the request of the assignee, officially approved a resolution approving and ratifying the action of the directors of the company conveying the assets of the company to a liquidating trustee for later transfer to the new company. The old company executed a deed to all its assets to the trustee and the trustee executed a deed to all such assets to the new company. The new company executed a mortgage on its assets which it placed in the hands of the assignee. The assignee secured a temporary loan of $3,622,200 on collateral security and drew its check to the escrow agent. All necessary subsequent steps were taken and the stockholders received payment for their stock. Held, the original685 contract for the sale of shares of stock by taxpayers was carried out in accordance with its terms, notwithstanding the elaborate procedure employed by the assignee of the purchaser, looking to the refinancing and further utilization of the property. Taxpayers are not liable as transferees of the assets of the old company. George R. Hunt, Esq., and Claude M. Houchins, Esq., for the petitioners. Brooks Fullerton, Esq., for the respondent. VAN FOSSAN 541 OPINION. VAN FOSSAN: The respondent determined a deficiency in the income tax of the Fayette Home Telephone Co. in the sum of $256,623.89 for the year 1929 and proposed to assess the same proportionately against the petitioners as transferees of the assets of that corporation, under section 311 of the Revenue Act of 1928. In these proceedings the petitioners contest their liability as such transferees. The questions now at issue are: (1) Whether the petitioners are liable as transferees of the assets of the Fayette Home Telephone Co. under the provisions of section 311 of the Revenue Act of 1928. (2) Whether the Fayette Home Telephone Co. realized a taxable profit upon the transfer686 of its assets in 1929. (3) Whether the Fayette Home Telephone Co. was entitled to a deduction from its gross income for unamortized discount on its bonds retired before maturity. (4) Whether the Fayette Home Telephone Co. was entitled to a similar deduction for premiums paid by it on its bonds retired before maturity. The facts, in substantially the following form, were agreed to by the parties: The petitioners are former stockholders of the Fayette Home Telephone Co. (hereinafter called the Fayette Co.), a dissolved Delaware542 corporation. The respondent has held them to be liable, as transferees of the assets of that corporation, for its alleged unpaid income taxes for the year 1929, in the amount of $256,623.89. The Fayette Co. was dissolved July 2, 1929, and at all times from December 15, 1928, to March 28, 1929, it had outstanding 101,240 shares of common stock, 3,000 shares of preferred stock, 7 percent bonds totaling $300,000 and 6 1/2 percent bonds in the amount of $50,000. The bonds were secured by a mortgage upon its properties. On December 15, 1928, S. E. Stern, to and through C. N. Manning, made an offer in writing to the stockholders of the Fayette687 Co. to purchase from them the outstanding shares of the common stock of that corporation and also the outstanding shares of stock of the Woodford Telephone Co. (hereinafter called the Woodford Co.). The stock of the Woodford Co., consisting of 10,000 shares, was owned and held by the Fayette Co. stockholders, pro rata, it having been issued to them in February 1928 as a dividend. The petitioners continued to be the owners of record of the stock of the Fayette Co. until the certificates were delivered by G. W. Thompson & Co. to the transfer agent for cancellation on March 28, 1929. The offer made by Stern was to purchase not less than 67 percent of the said stock and up to 100 percent thereof at $30 per share for the Fayette Co. stock, the Woodford stock being included at no additional cost. The offer was accepted in writing by the holders of approximately 90 percent of such stock, including that held by the petitioners, prior to December 27, 1928, and by the holders of 100,920 shares, of the total 101,240 shares outstanding, prior to March 1, 1929, the time for the acceptance of such offer having been extended. The written offer and acceptance between S. E. Stern and the Southern688 Bell Telephone & Telegraph Co. (hereinafter called the Southern Bell Co.), resulting in the contract between such parties, is typical of similar contracts entered into between Stern and the other stockholders, and is as follows: LEXINGTON, KY., December 15, 1928.MR. CHARLES N. MANNING, President, Security Trust Company, Lexington, Ky.DEAR MR. MANNING: Confirming my conversation with you today, I will purchase from you and the other stockholders of the Fayette Home Telephone Company who may wish to sell, not less than sixty-seven per cent (67%) of the outstanding shares of the common capital stock of said Fayette Home Telephone Company at Thirty Dollars ( $30) per share, and as many more shares of said common stock as are offered to me prior to December 27th, 1928, with the understanding that these shares are to be paid for in full on or before March 31st, 1929. In addition I agree to the following conditions, to-wit: That on or before December 31st, 1928, upon notification that not less than sixty-seven per cent (67%) of the total outstanding shares of the common capital 543 stock of said Company have been deposited with the Security Trust Company subject689 to the terms of this proposal, I will deposit with the Security Trust Company of Lexington, Kentucky, as escrow agent, the sum of One Hundred Thousand Dollars ($100,000) as evidence of good faith and as part of the purchase price of said shares, such sum to be held by it for account of the depositing shareholders, in escrow, subject to the fulfillment on my part of the terms and conditions set out in this letter. In the event of failure on my part to fulfill any and all of the obligations of the purchaser, the amount deposited is to be paid to the depositing shareholders, free of any claim on my part. You agree that the attached balance sheet and earnings statement are correct and represent the true and actual status of the Company, its income and all its disbursements for the period covered. That there are no undisclosed contingent contracts or liabilities that have not been given effect to in said balance sheet and that no contracts will be entered into by this Company except in the usual course of its business during the term of this agreement, and except also the purchase at par value of 175 shares of Jessamine Telephone & Telegraph Company stock now owned by Southern Bell690 Telephone & Telegraph Company, and that you will not declare or pay any dividends except the usual quarterly dividends on the preferred stock and the regular quarterly dividends of twenty-five cents per share on the common stock when they are regularly due, to-wit: On December 31st, 1928, and March 31st, 1929, the said dividends on the common stock being reserved by and payable to the present stockholders. That you will furnish me with abstracts of title showing good and valid title to all real estate and counsels' opinion satisfactory to my counsel that the Company is duly and legally organized and that its franchises are legal and regular, that there are no suits or actions pending against the Company, that the shares will be regularly issued, endorsed and stamped for transfer with signatures guaranteed by some bank or banker satisfactory to me. That all tax liabilities for years prior to 1929, properly due and payable, including Federal taxes, have been paid or reserved to the correct amount, and you severally bind yourselves to indemnify me against further tax assessments for said period. That you will, on five days' notice deliver to the escrow agent, on my order, all691 the shares that you propose herein to sell to me and that you will permit my engineers and accountants to make such examination of the books and records of the Company as we deem advisable during your regular business hours, and that you will assist me in all reasonable ways in securing such information as I require. You will agree to pay the escrow agent such fees as it may charge for services rendered herein. Under the terms and conditions of this proposal you represent that the Fayette Home Telephone Company owns three (3) shares of the capital stock of the Woodford Telephone Company, and that the stockholders of the Fayette Company own all the balance of the outstanding capital stock of the Woodford Company (there being no other classes of stock in said Woodford Company except common), and that you will deposit as part of the delivery of the Fayette stock, and without additional cost to me, the same proportion of the total number of shares of Woodford Company outstanding as the number of shares of the Fayette Company purchased by me bears to the total number of shares of Common stock of the Fayette Company now outstanding. Furthermore, you represent that the Fayette Company692 now owns or controls five hundred (500) shares of the capital stock of the Jessamine Telephone & 544 Telegraph Company out of the seven hundred and forty-four (744) total shares outstanding in said Company (there being no other classes of stock in said Jessamine Company except common), and will endeavor to purchase at par from the Southern Bell Telephone & Telegraph Company one hundred and seventy-five (175) shares of said Jessamine stock now owned by it, and that these five hundred (500) shares (and the additional one hundred and seventy-five (175) shares if purchased) will be retained by the Fayette Company and be part of its assets at the time of the completion of the purchase by me of said Fayette Company's stock as herein provided. It is agreed that you may accept this proposal and confirm sale on terms stated by affixing your signature hereunder with the number of shares you will deliver to me, and that each of the assenting stockholders who may wish to become parties to this agreement may likewise sign and state the number of shares to be delivered. No subscriber is to be liable for any of the obligations of any other subscriber, but merely binds himself to sell693 and deliver the number of shares specified by him at the price and on the terms and conditions herein specified. In the event the holders of at least 67 per cent of the outstanding Common stock of the Fayette Home Telephone Company shall not assent to or accept this proposal on or before December 27, 1928, I am to have the right to purchase at the price, on the terms, and at the time herein set forth the stock of the subscribers hereto, or to decline to purchase any of said stock, provided I shall notify you in writing on or before December 31, 1928, of my election to purchase or not to purchase. Assent of shareholders to said proposal may be evidenced by their signatures to this or to any one or any number of copies of this proposal. Respectfully yours, S. E. STERN. The undersigned holders of the number of shares of the Common stock of the Fayette Home Telephone Company set opposite their respective names hereby assent to and accept the above proposal and agree to deliver the number of shares set opposite their names respectively, on the terms and conditions above specified. Number of Shares [Signed] SOUTHERN BELL TELEPHONE & TELEGRAPH CO 21,620 12/17/1928 by694 BEN S. READ, President.Attest: GEORGE J. YUNDT, Secretary.[SEAL] The Fayette Co. purchased at par from the Southern Bell Co. the 175 shares of the Jessamine Telephone & Telegraph Co. (hereinafter called the Jessamine Co.). On December 31, 1928, S. E. Stern deposited or caused to be deposited with the Security Trust Co., as escrow agent, the sum of $100,000 as evidence of good faith and as part of the purchase price of the Fayette Co. and Woodford Co., to be held in escrow for the account of the depositing stockholders. Previous to making such deposit Stern had assigned one-half of his contract and had given an option on the other half, which option was exercised prior to March 23, 1929. 545 Upon notice from Stern, the holders of 100,920 shares of the Fayette Co. stock and 9,973 shares of the Woodford Co. stock delivered such stock to the escrow agent, properly endorsed, and appropriate receipts were issued by the escrow agent to the Southern Bell Co. and the other stockholders. At all times from December 26, 1928, to March 28, 1929, more than 67 percent of the Fayette Co. stock and the requisite amount of the Woodford Co. stock were held by and in695 possession of the escrow agent. On February 6, 1929, the Fayette Co. stockholders furnished to Stern counsel's opinion and abstracts of title covering the properties of the Fayette Co. and showing any pending litigation and undisclosed contingent contracts. The quarterly dividends payable December 31, 1928, and March 31, 1929, were reserved by and payable to the stockholders who had deposited the 100,920 shares in escrow. To cover its fees and expenses the escrow agent withheld 75 cents per share. On December 29, 1928, Stern assigned a one-half interest in his contracts of purchase to G. W. Thompson and his associates and thereafter, but prior to March 23, 1929, he assigned his remaining one-half interest therein to Thompson and his associates and authorized that the stock be delivered to them. Such assignment included all of his interest in the $100,000 deposited on December 31, 1928. George R. Hunt and C. N. Manning were informed of the said assignment during the latter part of January 1929, but were not furnished written evidence thereof until March 23, 1929. Between the date of the acceptance of Stern's offer by more than 67 percent of the Fayette Co. stockholders, and696 March 20, 1929, Thompson and his associates had an appraisal of the assets of the Fayette, the Woodford, and the Jessamine companies made by engineers. That appraisal was "as of March 20, 1929" and showed a present value of $3,719,944. The Fayette Co. stockholders knew of the appraisal but did not ascertain its amount. Prior to February 28, 1929, Thompson and his associates organized the Lexington Telephone Co., a Delaware corporation (hereinafter called the Lexington Co.). By letter of February 22, 1929, the attorneys for Thompson and his associates informed the attorneys for the Fayette Co. that the Lexington Co. had been so organized and stated that the Fayette Co. assets were to be transferred to it. By letter of February 25, 1929, the attorneys for the Fayette Co. replied, stating that they assumed from the letter of February 22, 1929, that it was the plan of Thompson and his associates to have the Lexington Co. purchase the stock of the Fayette Co. By letter of March 14, 1929, the attorneys for Thompson and his associates again informed the attorneys for the Fayette Co. that the assets of the latter company were to be transferred to the former company. 546 697 On March 18, 1929, the attorneys for Thompson and his associates in Lexington, Kentucky, personally submitted to George R. Hunt and C. N. Manning, directors of the Fayette Co., a proposed draft of minutes of meetings of the Fayette Co. directors and stockholders to be held on March 20 and 25, 1929, respectively, providing for the sale of the Fayette Co.'s assets and business to Thompson and his associates. Hunt and Manning declined to consider such a proposition or to submit the proposed minutes to the directors or stockholders of the Fayette Co. and, consequently, such minutes were not submitted or voted upon by the directors or the stockholders of that company. Manning refused to consider the proposed minutes because they provided for a sale of the Fayette Co. assets instead of the Fayette Co. stock, as provided in the contracts between Stern and the stockholders owning 100,920 shares of the Fayette Co. stock and because he had no authority to vary the terms of those contracts. He further asserted that a sale of assets as proposed would probably involve both the Fayette Co. and its stockholders in a Federal income tax liability. By a letter dated March 19, 1929, the attorneys698 for Thompson and his associates informed the attorneys for the Fayette Co. that they had conferred with tax experts to avoid any possible income tax liability against the Fayette Co. and were advised by tax counsel to transfer the Fayette Co. assets to the Lexington Co. through a liquidating trustee instead of directly, stating that "the end accomplished would be the same." The attorneys for Thompson and his associates thereupon employed the Security Trust Co. as their agent to act as liquidating trustee of the Fayette Co. in carrying out their plans. A revised draft of the proposed minutes was inclosed in the letter of March 19, 1929, and reflected the action taken by the directors of the Fayette Co. at the meeting held March 20, 1929. The minutes of the meeting held on that day record that it was called to consider and act upon: 1. A proposal to sell of the real and personal property, assets, franchises and good will of the corporation; 2. A proposed redemption of the First Mortgage Twenty-Year Gold Bonds secured by lien upon the property of the corporation; 3. The matter of dissolution of the corporation in the event of the sale of its property and assets. On March 25, 1929, the699 Fayette Co. stockholders passed the resolutions contained in the proposed minutes brought to Lexington, Kentucky, on that date by the attorneys for Thompson and his associates. Such directors' and stockholders' meetings were held and the resolutions recorded therein passed at the earnest request of Thompson and his associates in order to enable them to carry out 547 their plans. The resolutions as ratified by its stockholders at the meeting of March 25, 1929, in part, read: Whereas, the common stockholders of the Company have agreed to sell their stock at and for the price of $30 per share and the purchasers thereof have caused to be organized Lexington Telephone Company, a Delaware Corporation, for the purpose of acquiring all the assets, good will, franchises and other properties of this Company; and, Whereas, in order to effect such acquisition it is advisable and for the best interests of the Company that Security Trust Company, of Lexington, Kentucky, be made liquidating trustee of the Company for the purpose of receiving the purchase price of said common stock for the benefit of the common stockholders of the Company at the rate of $30 per share, and to distribute700 the same to the common stockholders, and of receiving payment for and to retire the preferred stock of the Company at par, plus accrued dividends, and to retire the bonds of the Company, and for that purpose that the assets of the Company be conveyed to said liquidating trustee, or its nominee, and thereafter conveyed by said liquidating trustee to Lexington Telephone Company, a Delaware corporation; and, Whereas, the Board of Directors of the Company, at a meeting duly convened and held according to law and the By-laws of the Company at the office of the Company on the 20th day of March 1929, by resolutions duly made, seconded and unanimously carried, considered it for the best interest of the Company and of its stockholders that all of its property and assets, including its good will and its corporate franchises, be conveyed to Security Trust Company, of Lexington, Kentucky, as liquidating trustee, and authorized and directed the proper officers of the Company to convey said property and assets for the foregoing purposes: Now, therefore, Be it Resolved that the action of the Board of Directors of the Company taken at its meeting held on the 20th day of March, 1929, be, and the701 same hereby is, authorized by the stockholders of the Company, and Be it Further Resolved that the proper officers of the Company be, and they hereby are, authorized and directed to execute all such documents of assignment, transfer and conveyance and perform such other acts as may be necessary or proper to convey the property and assets of the Company to Security Trust Company, a corporation organized under the laws of the State of Kentucky, as liquidating trustee, or to its nominee, to be transferred and assigned by it to Lexington Telephone Company, a Delaware corporation, upon receipt of the following sums by said Trustee, to be applied by it for the following purposes: (a) To retire and call $300,000 First Mortgage 7% Bonds of the Company at 110$330,000.00Interest at 7% to August 1, 192910,500.00(b) To retire and call $50,000 First Mortgage 6 1/2% Bonds at 11055,000.00Interest at 6 1/2% to August 1, 19291,625.00(c) To pay on Liquidation $100. per share on 3000 shares of the Company's preferred stock300,000.00Quarterly dividend to July 1, 19294,500.00(d) To pay to the common shareholders the price of $30 per share for each share of stock issued and outstanding and owned by them;702 and upon said Lexington Telephone Company assuming and agreeing to pay all current debts and obligations of Fayette Home Telephone Company as set 548 forth on the books of account of the Company, and to pay all taxes upon the property of the Company or the transfer thereof as herein provided: Be it Further Resolved that the Board of Directors and/or officers of the Company be, and they hereby are, authorized and directed to take such steps and perform such acts as may be necessary or expedient to carry out the intent of the proceedings had by the Board of Directors as aforesaid and by this meeting of the stockholders of the Company, and to perform all such acts and execute and deliver all such documents as will effectually vest good title in and to all the assets of this Company in Lexington Telephone Company, a Delaware corporation. All the petitioners except Karoline E. Gund were present at the stockholders' meeting of March 25, 1929. At the board of directors' meeting of March 20, 1929, the redemption of the first mortgage 20-year gold bonds of the company was authorized upon the consummation of the sale and transfer and also, upon such sale, the dissolution of the703 company was ordered. March 26, 1929, the Fayette Co., for a nominal consideration, executed a deed to all its properties to the Security Trust Co. as liquidating trustee, and placed it in the hands of George R. Hunt, as its attorney. On March 26, 1929, the Security Trust Co., as liquidating trustee, at the request of Thompson and associates executed a deed to the properties then owned by the Fayette Co., including the 675 shares of the stock of the Jessamine Telephone & Telegraph Co., to the Lexington Telephone Co., and placed it in the hands of George R. Hunt as attorney for the said liquidating trustee. A deed releasing the mortgage on the assets of the Fayette Co. securing its bonds was executed by the trustee thereunder and placed in the hands of George R. Hunt, as attorney for said trustee. On March 26, 1929, the Lexington Telephone Co. executed a trust deed conveying all of its property to the Continental-Illinois Bank & Trust Co. to secure its 15-year 6 percent bonds in the sum of $2,500,000 and placed it in the hands of George R. Hunt as attorney for Thompson and associates. Prior to February 28, 1929, Thompson and associates organized the Lexington Telephone Co., 704 with a capital structure of $2,500,000 first mortgage 15-year 6 percent gold bonds, series 1929, $1,000,000 2-year 5 1/2 percent convertible gold notes, $1,100,000 6 1/2 percent cumulative prior preferred stock, $500,000 6 1/2 percent cumulative preferred stock, and 20,000 shares of no par value common stock. On February 28, 1929, the Lexington Telephone Co., at its first meeting, accepted the offer of Thompson and associates, dated February 27, 1929, to exchange the assets then owned by the Fayette Co. for said securities of the Lexington Telephone Co., except the $1,100,000 6 1/2 percent cumulative prior preferred stock. The mortgagee, Continental-Illinois Bank & Trust Co., required, as a condition precedent to the issuance and delivery of the bonds of $2,500,000, 549 that the Lexington Telephone Co. acquire clear title to the properties of the Fayette Co., and that the said deed of trust be filed of record. The release of the mortgage securing the Fayette Co. bonds, the deed from the Fayette Co. to the liquidating trustee, and the deed from the liquidating trustee to the Lexington Telephone Co., held by George R. Hunt, in the capacities mentioned, were to be by him705 released and filed for record upon notice from Charles N. Manning so to do, and the trust deed from the Lexington Telephone Co. to the Continental-Illinois Bank & Trust Co., held by George R. Hunt as aforesaid, was to be by him released and filed for record immediately after the release and deeds had been released by him and filed for record. On March 26, 1929, the Security Trust Co. transmitted to the Harris Trust & Savings Bank, Chicago, Illinois, stock certificates for the 100,920 shares of Fayette Co. and 9,973 shares of Woodford Co., for the purpose of permitting inspection thereof by Thompson and associates, and to be held subject to its order or the order of C. N. Manning. The transactions were consummated March 28, 1929, at a meeting held in Chicago, Illinois, by representatives of the Harris Trust & Savings Bank, Chicago, Illinois, as agent of the Security Trust Co., Charles N. Manning, president of the Security Trust Co., representatives of the Continental-Illinois Bank & Trust Co., and G. W. Thompson, president of G. W. Thompson & Co., in the following sequence: (1) Continental-Illinois Bank and Trust Company made a temporary loan of $3,622,200 to G. W. Thompson and706 Company, Inc., on their collateral form note. (2) G. W. Thompson and Company, Inc., drew a check, payable to the Security Trust Company, against the above sum for $3,622,200, which was certified by the Continental-Illinois Bank and Trust Company and held by its said representatives. (3) The president of Security Trust Company, Charles N. Manning, delivered to G. W. Thompson, certificates properly endorsed in blank, with revenue stamps affixed, for the 100,920 shares of Fayette Company common stock and 9,973 shares of Woodford Company stock. G. W. Thompson received the said certified check for the $3,622,200 from the representative of the Continental-Illinois Bank and Trust Company, and delivered it to said Charles N. Manning, and the stock certificates were held by the representative of the Continental-Illinois Bank and Trust Company as collateral security for the said temporary loan of $3,622,200. (4) C. N. Manning deposited the check, immediately upon the receipt to the credit of the Security Trust Company, in the Harris Trust and Savings Bank, Chicago, Illinois, and also immediately made call loans of the greater portion thereof at the rate of approximately 15 per cent, 707 which prior to disbursement of said funds by the said Security Trust Company, earned interest in excess of $5,000. (5) C. N. Manning, after receipt of the check for $3,622,200, telegraphed and telephoned George R. Hunt at Lexington, Kentucky, to release and file for 550 record the title instruments, which George R. Hunt did immediately upon his being so notified, and in the following sequence: First: The release of mortgage securing Fayette Company bonds. Second: Deed from Fayette Company to Security Trust Company, as liquidating trustee. Third: Deed from Security Trust Company, as liquidating trustee, to Lexington Telephone Company. Fourth: Trust deed from Lexington Telephone Company to the Continental-Illinois Bank and Trust Company. (6) Immediately after releasing and filing for record the aforesaid title instruments, George R. Hunt advised the Continental-Illinois Bank and Trust Company thereof by telegraph. (7) Upon receipt of the telegram from George R. Hunt, the Continental-Illinois Bank and Trust Company delivered the bonds, notes, and preferred and common stocks of Lexington Telephone Company to G. W. Thompson and Company, Inc. who apportioned them708 to itself and its associates, and simultaneously Thompson and associates paid the temporary loan of $3,622,200, with money borrowed from the Continental-Illinois Bank and Trust Company on their collateral form notes, secured by trust receipts on bonds and notes of Lexington Telephone Company, and other securities. The rates for call money were high, and the Continental-Illinois Bank & Trust Co. required, as a condition to making the temporary loan of the $3,622,200 to G. W. Thompson & Co., that the transactions should take place as nearly simultaneously as possible and in the designated sequence, and the said transactions from the delivery by C. N. Manning to G. W. Thompson of the certificates for the 100,920 shares of Fayette Co. stock, and the 9,973 shares of Woodford Co. stock up to and including the delivery of the trust receipts to the Continental-Illinois Bank & Trust Co. by Thompson and associates, were consummated in less than three hours. Thompson and associates paid their notes secured by the trust receipts with the proceeds from the sale of the securities of the Lexington Telephone Co., contracts for the sale thereof having been made by them prior to March 28, 1929. 709 On March 28, 1929, G. W. Thompson & Co. stamped its name, as assignee, on the certificates for the 100,920 shares of Fayette Co. common stock and delivered them to the Harris Trust & Savings Bank, which forwarded them to the Security Trust Co., transfer agent, and the said transfer agent on April 6, 1929, issued a new certificate to G. W. Thompson & Co. for 100,920 shares of Fayette common stock. The letter, dated March 28, 1929, transmitting such stock certificates of the Fayette Co. from G. W. Thompson & Co. to the Security Trust Co., in part, reads: We herewith surrender and deliver to you for cancellation upon liquidation of Fayette Home Telephone Company, certificates for 101,240 shares of the common stock of the Fayette Home Telephone Company stock purchased from the former owners thereof by S. E. Stern under a written proposal dated December 15, 1928, addressed to Mr. Charles N. Manning, President of the Security Trust Company, Lexington, Kentucky, which stock and the certificates 551 evidencing ownership thereof, together with all the rights, benefits and privileges accruing to said Stern by reason of the acceptance of said proposal, the said S. E. Stern by written710 assignment dated March 23, 1929, sold and assigned to us. Upon the receipt of the $100,000 paid by S. E. Stern on December 31, 1928, the Security Trust Co. opened an account in its trust ledger designated "Escrow Agreement between S. E. Stern, C. N. Manning, et al.", and entered therein the said $100,000 as a receipt. Upon the receipt of the $3,622,200, paid by G. W. Thompson & Co. on March 28, 1929, the Security Trust Co. entered $2,927,600 thereof in the account, and $694,600 thereof in an account in its trust ledger designated "Liquidating Trustee for Fayette Home Telephone Company." The $3,722,200 was disbursed as follows: From account designated "Escrow Agreement between S. E. Stern, C. N.Manning, et al." - Paid to common stockholders of Fayette Home Telephone Company - 100,920 shares deposited with escrow agent at $29.25$2,951,910.00Thomas A. Coombs, commission62,880.14Hunt and Bush, attorney's fees500.00Security Trust Company, commission10,089.39Miscellaneous expenses2,220.47$3,027,600.00From account designated "Liquidating Trustee for Fayette Home Telephone Company" - Paid to holders of Fayette Home Telephone Company common stock not deposited with escrow agent 220 shares common at $29.25$6,435.00Retained by Security Trust Company - 220 shares common at $0.75165.00Retained by Security Trust Company - 100 shares common never surrendered to liquidating trustee at $30.003,000.00Paid bondholders - For redemption of $300,000 first mortgage 7% bonds at 110330,000.00For redemption of $50,000 first mortgage 6 1/2% bonds at 11055,000.00Paid preferred stockholders - Redemption of 2.974 shares of 6% preferred stock297,400.00Retained by Security Trust Company - 26 shares at $100.002,600.00694,600.003,722,200.00711 The petitioners herein were paid by the Security Trust Co. out of the account designated "Escrow Agreement between S. E. Stern, C. N. Manning, et al." sums equal to $29.25 per share for each share delivered 552 by them to the escrow agent under their said contracts with S. E. Stern, as follows: Southern Bell Telephone & Telegraph Co:For stock held by it direct$626,535.00For stock held for it by Read and Webb5,850.00C. N. Manning132,356.25Estelle des Cognets100,035.00Karoline E. Gund118,170.00Thomas S. Scott120,422.25Louis des Cognets (now deceased)99,450.00In their Federal income tax returns for the year 1929, each petitioner reported therein and paid a tax on the difference between the above stated amounts received and the cost to them of their Fayette Co. stock. The check covering the payment by the Security Trust Co. to the Southern Bell Telephone & Telegraph Co. of the above sum of $626,535 is typical of the checks issued to the other depositors of Fayette Co. common stock with the escrow agent, except the name of the payee and the amount thereof. On July 2, 1929, and at all times thereafter the Fayette Co. had no assets712 except cash in the amount of $188,372.21, and securities in the amount of $125,000 in the hands of the liquidating trustee. The directors of the Fayette Co. met April 8, 1929, and reduced the board to five directors, who thereupon passed a resolution to dissolve the Fayette Co., subject to the ratification of the stockholders. The Fayette Co. stockholders met May 6, 1929, and ratified the resolution of the directors to dissolve the Fayette Co. At said stockholders' meeting 101,196 shares of stock were represented, of which the 100,920 shares issued to G. W. Thompson & Co. were voted for it by proxy. On July 2, 1929, the State of Delaware issued a certificate dissolving the Fayette Co., and its 20-year bonds, par $350,000 dated February 1, 1921, which had been called for redemption, were retired, as aforesaid, as of August 1, 1929, with funds from the account designated "Liquidating Trustee of Fayette Home Telephone Company." The unamortized discount on the aforesaid bonds at the time of retirement was $16,153.41, and they were retired at a premium of $35,000. March 15, 1930, a Federal income tax return was filed for the Fayette Co. with the collector of internal revenue for713 the district of Kentucky, at Lexington, Kentucky, and did not include any income from the transactions. The Commissioner of Internal Revenue disallowed as a deduction from gross income the bond discount and premium, and on the basis thereof made a jeopardy assessment of $5,557.41, and thereafter on November 17, 1930, by registered mail, he sent the Fayette Co. notice of the said deficiency and the jeopardy assessment. The jeopardy assessment of the said $5,557.41 was made on a list approved November 1, 1930. Thereafter the Commissioner determined that the Fayette Co. sold its assets at a profit to it, in the 553 period January 1 to March 31, 1929, of $2,282,422.56, and on the basis thereof made a jeopardy assessment against the Fayette Co. of $251,066.48, and thereafter on December 28, 1930, by registered mail, he sent the Fayette Co. notice of the said deficiency and the jeopardy assessment thereof. The jeopardy assessment of the $251,066.48 was made on a list approved December 12, 1930. No petition was filed with the Board by the Fayette Co. from the above determinations. The said assessment lists were duly received by the collector for the district of Kentucky. The714 deficiencies assessed in jeopardy are still outstanding and unpaid. By notices of deficiency dated February 7, 1933, the Commissioner determined the petitioners herein were transferees of the assets of the Fayette Co., and liable for the deficiency for the year 1929, aggregating the amounts assessed in jeopardy. The basic issue in the case before us is whether the petitioners sold their stock. The petitioners contend that the original contract related solely to the sale of the Fayette Co. stock, was consummated exactly as agreed, and was not modified or superseded by any subsequent acts or agreements. The respondent contends there was a sale of the assets of the Fayette Co. and that petitioners are liable for income taxes on such sale, as transferees. These are transferee proceedings and, therefore, the burden of proof is on the respondent to establish the liability of the petitioners. The essential facts may be restated very briefly. The petitioners agreed to dispose of their stock in the Fayette Co. (and proportionate shares in the Woodford Co.) pursuant to a proposal made by S. E. Stern on December 15, 1928, and accepted by the petitioners at various times later, 715 but before March 1, 1929. The stock was to be placed in escrow. Stern agreed to buy the petitioners' stock for $30 per share, less certain escrow charges, and pay for it on or before March 31, 1929. He deposited $100,000 in escrow as evidence of good faith and as a part of the purchase price. Certain assurances of the correctness of balance sheets and the validity of titles were to be furnished by the sellers and other minor details were set forth. In order to make the contract effective, a time limit for securing the assent of 67 percent of the stockholders to the proposal was set at December 31, 1928, but was extended to a later date. With the exception of such time extension, the terms of the original contract were strictly complied with. Over 90 percent of the stockholders became signators thereto and the stock was deposited in escrow. It amounted to all but 320 of the 101,240 outstanding shares. Stern deposited the $100,000 in escrow. He, in the person of his assignees, paid for the stock on March 28, 1929, by means of a temporary loan 554 made to G. W. Thompson & Co. on their collateral form note. At the same time the escrow agent delivered the stock certificates, 716 properly endorsed in blank, to G. W. Thompson & Co., representing Stern's assignee. Thus, the consummation of the contract was accomplished with no change whatever in its terms or the status of the parties thereto. See ; affd., ; Fred Messerschmidt, Docket No. 47848, memorandum opinion entered October 4, 1933; appealed by the Government to the Circuit Court of Appeals for the Seventh Circuit and there dismissed on motion of the . Cf. . The respondent seeks to inject into the case the methods and means adopted by the assignees of Stern in carrying out their further plans and attempts to impute to the petitioners a complete knowledge of, acquiescence in, and agreement with those measures. He would charge them with the consequent tax burden created by such a situation. We believe his action in so doing is erroneous. The petitioners proceeded in exact compliance with their agreement with Stern. Thompson and his associates attempted to compel the petitioners to transform the contract into one transferring the717 assets of the Fayette Co., but Manning and the other petitioners persistently refused to do so. On March 1, 1929, over 90 percent of the Fayette Co. stockholders, owning almost all of its stock, had become parties to the contract and had divested themselves of the ownership of the stock. The petitioners were among these stockholders. At this time only delivery of the stock and payment therefor by the escrow agent remained to be done. At that time they were the nominal owners of stock and as such acted as directors and officers of the company. Their actions on March 20 and 25, 1929, in passing the resolutions and orders set forth in the record, were directed, controlled and dictated by the purchasers. The petitioners then had no personal interest in such corporate actions. To carry out the plan of securing the money with which to pay the petitioners for the stock, the formal approval of the Fayette Co. officials, then technically and nominally in control of the corporation, was required, but we are not justified in concluding that the official acts of the petitioners secured under such circumstances were their personal acts. The acts of the petitioners individually and as718 the officers of the Fayette Co. are comprehended in separate, distinct and unrelated sequences of events. The money which Stern and his assignees needed to complete the contract and pay their obligations under it may have been secured through the organization of the Lexington Co. and the pledging of its assets as collateral security with a bank, but that procedure was no affair of the petitioners. It was conceived, 555 arranged and carried out by Thompson and his associates. The only point of contact between them and the petitioners was the procurement of the petitioners' official actions as directors of the Fayette Co., as we have heretofore noted. Likewise, what Thompson and his associates did with the Fayette Co. after they had bought its stock from the petitioners and thus secured control of it, was of no concern to the petitioners. The record does not convince us that the assets of the Fayette Co. were transferred to the petitioners and by them sold to Stern and his assignees. The various book entries made by the Security Trust Co. were cited as being persuasive that the Fayette Co.'s assets, rather than its stock, were sold, but we must bear in mind that the Trust*719 Co. acted in several capacities. Its functions and duties were tripartite; it was trustee under the deed of trust securing the Fayette Co.'s bond issue; it was escrow agent under the stock sale agreement; and it was the liquidating trustee under the Thompson plan. Its actions may have overlapped and been somewhat confusing, but do not disturb the fundamental facts. Respondent relies heavily on . The facts in that case are basically different. There the stockholders clearly departed from their plan to sell the stock and made a sale of the assets. Here they adhered rigorously to their original plan. Since petitioners are not liable as transferees, it is unnecessary to consider the other issues. Decisions of no transferee liability will be entered.Footnotes1. Proceedings of the following petitioners are consolidated herewith: Thomas S. Scott; Security Trust Company, a Corporation, executor of Louis des Cognets, Deceased; Charles N. Manning; W. R. Springate, Executor, and Irene Dorner, Executrix of the Estate of Karoline E. Gund; and Estelle des Cognets. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625006/	Anthony Rock v. Commissioner.Rock v. CommissionerDocket No. 86433.United States Tax CourtT.C. Memo 1962-12; 1962 Tax Ct. Memo LEXIS 294; 21 T.C.M. (CCH) 46; T.C.M. (RIA) 62012; January 25, 1962294 Petitioner, owner of a minority stock interest in a dairy, sold his stock, pursuant to a written contract, for $63,000. Petitioner also executed a separate agreement whereby he agreed to refrain from competing with the vendee of his stock for a period of five years. He was to receive $45,000 for this agreement. Held, the agreement not to compete was a separate item of the transaction and the petitioner received ordinary income therefor. Rex E. Sager, Esq., 1704 First National Tower, Akron, Ohio., and Scott A. Belden, Esq., for the petitioner. Thomas J. Moroney, Jr., Esq., for the respondent. FAYMemorandum Findings of Fact and Opinion FAY, Judge: The Commissioner determined deficiencies in petitioner's income tax for the years 1955, 1956 and 1957 in the respective amounts of $240.95, $1,353.99 and $1,785.75. The petitioner conceded the correctness of all but one of the Commissioner's adjustments appearing in the statutory notice. The only issue remaining for decision is whether the vendor of a minority stock interest in a dairy company, who also by a separate agreement covenants, inter alia, not to engage in the dairy business for a period of five years, 295 realizes ordinary income or capital gain insofar as that part of the transaction relating to the covenant is concerned. Findings of Fact The petitioner filed his individual income tax returns for each of the years 1955, 1956 and 1957 with the district director of internal revenue at Akron, Ohio. Petitioner first entered into the dairy business in 1919 when he organized his own dairy. In 1930 he sold his company to the National Dairy Company and for the next five years was employed by them. However, in 1935 petitioner left the employ of the National Dairy Company to once again form his own dairy. The petitioner's new corporation was known as the X-Cel Dairy, and petitioner retained control of 85 percent of its stock. Fred Harter had been connected with the dairy business in the Akron, Ohio, area for over 50 years. In 1934 he organized a dairy known as Belle Isle Farm, Inc., hereinafter referred to as Belle Isle, and during the years pertinent hereto served as its president. Because of their long association with the dairy business, both petitioner and Harter were well known in the dairy business, particularly in the Akron area. In 1948 Belle Isle acquired the petitioner's296 stock in X-Cel Dairy, and the two corporations were merged. The petitioner received 210 shares of Belle Isle stock in exchange for his X-Cel Dairy stock. Following the merger, Belle Isle moved into the premises previously occupied by the X-Cel Dairy. The petitioner was elected secretary of Belle Isle and became a member of its Board of Directors. Harter, who together with his wife owned 495 shares of Belle Isle stock, remained president of the firm. In addition to his duties as secretary of the corporation which involved supervision of the financial affairs of the company, petitioner was responsible for the wholesale phase, both sales and delivery, of the business. The retail part of the business was handled by another employee, and as a result, petitioner had very little personal contact with the retail customers. Petitioner's compensation originally was to be at the rate of $500 per month. However, this was later reduced to $400 per month. In addition, the petitioner as head of a department was paid a bonus based upon the contribution his department made to the success of the business. It was estimated that petitioner's salary and bonus averaged about $9,000 a year. About two297 to three years after the merger, differences arose between Harter and the petitioner regarding the latter's authority. As a result of these differences, Harter suggested that it would be better if they discontinued doing business together. Thereafter, numerous discussions were held regarding the purchase by Harter of petitioner's interest in the firm, or vice versa. These discussions continued off and on until sometime in 1953. In September of that year Harter offered to buy petitioner's stock or to sell his own stock for $300 a share, in cash. Petitioner followed through and offered to pay Harter $300 per share for his stock. Harter deferred acceptance of the proposal until he could discuss the proposition with his associates. Petitioner's offer was subsequently rejected by Harter in early September 1953. In mid-September 1953 petitioner and Harter reached an agreement whereby petitioner agreed to sell his stock to the corporation. On or about October 1, 1953, petitioner executed a sales agreement under which he was to receive the sum of $63,000 for his 210 shares of Belle Isle stock. The consideration of $63,000 was to be paid as follows: $9,000 on October 1, 1953; $9,000 on January 2, 1954; 298 and $4,500 on the second day of each January thereafter until fully paid. In addition to the sales agreement, petitioner executed a separate agreement, also on October 1, 1953, providing, inter alia, that in consideration for the payment of $45,000, payable $2,250 quarterly on the second day of October, January, April and July of each year for a period of five years petitioner agreed not to compete with Belle Isle in any manner and in any area in which Belle Isle might be conducting its business, for a period of five years from the date of the agreement. The covenant not to compete was witnessed by J. A. MacGregor, the petitioner's certified public accountant, who was present at the settlement. The net worth of Belle Isle as of September 30, 1953, was $165,850.97. This figure was computed without reference to any goodwill which Belle Isle may have developed by its own independent operation 1 and without regard to the appreciated value of the real estate owned by Belle Isle. We find, as a fact, that the real estate owned by Belle Isle had increased in value and as of September 30, 1953, was worth not more than $15,000. We also find as a fact that Belle Isle enjoyed goodwill in the299 Akron community and that the value of this unrecorded goodwill as of September 30, 1953, was not in excess of $124,388. The book value of Belle Isle stock as of September 30, 1953, was approximately $191 per share. At the time the petitioner sold his 210 shares of Belle Isle stock there were 869 shares of Belle Isle stock outstanding. The stock itself was not traded on the open market nor did it have an established market price. Both before and after petitioner sold his Belle Isle stock small amounts of the stock had been sold to employees of the company and to relatives of Harter for approximately $300 per share. In January 1954 petitioner entered into the small loan and discount businesses and at the hearing of this case was still engaged in those businesses. The agreement of sale and the agreement not to compete accurately reflected the transaction as understood by the parties and both agreements were reached300 as a result of arm's length bargaining. Opinion Petitioner's principal argument is that the total consideration received by him, including that paid purportedly for his agreement not to compete, represented the fair value of his stock and, consequently, the amount allocated to the agreement not to compete was unrealistic and allocated only as part of a scheme to gain a tax advantage for the purchaser. In the alternative, petitioner contends that the agreement not to compete, if bona fide, was nonseverable from the purchase of the stock and, therefore, served merely to insure the purchaser the beneficial enjoyment of goodwill. In support of his principal argument, petitioner stated that he agreed to sell his stock for $500 a share 2 and that he had arrived at this figure by considering the book value of the stock together with his estimate of Belle Isle's unrecorded goodwill and real estate appreciation. Petitioner also testified that nothing was said to him regarding the execution of an agreement not to compete prior to the date on which the sales agreement was actually executed. Petitioner added that ae was not familiar with the tax consequences of such an agreement and agreed301 to sign the agreement only because of his poor health and the fact that he was no longer interested in the dairy business. While this Court is not bound by the parol evidence rule in seeking to determine the tax consequences of a transaction to which the Government is not a party, , nevertheless, when the parties to a transaction such as this one have specifically set out a covenant not to compete in a separate agreement and have given it an assigned value, strong proof must be adduced by the party seeking to overcome that declaration. (C.A. 2, 1959); , affd. (C.A. 9, 1961). The petitioner's testimony regarding the sales price of the stock, as well as the circumstances surrounding the agreement not to compete, was in conflict with Harter's testimony on the same subjects. Harter testified unequivocally that302 the price finally agreed upon was $300 per share, that the agreement not to compete had been discussed during prior negotiations, and that at several of the conferences between him and petitioner regarding the sale of the latter's stock petitioner was accompanied by legal counsel as well as by his accountant. Furthermore, Harter stated that Belle Isle felt it was essential that an agreement not to compete be obtained from petitioner. He explained that this feeling was motivated to a large degree by such things as petitioner's long association with the dairy business, the fact that the bulk of Belle Isle's wholesale business was derived from former customers of X-Cel Dairy, petitioner's personal relationship with many of these customers and the fact that petitioner had on previous occasions sold out his dairy business and later had re-entered the same business. After viewing the record as a whole, we have not been persuaded by petitioner that Belle Isle originally agreed to pay $500 per share for his stock or that his stock was actually worth $500 per share. We have previously found as a fact that the petitioner owned a minority interest in the corporation, that the stock was not303 traded on the open market and that the book value as of September 30, 1953, was approximately $191 per share. The petitioner admitted that the book value of the stock was the main factor considered in determining the price per share. Under such circumstances, we find it difficult to believe that Belle Isle would have agreed to pay petitioner $500 per share for his minority interest. Furtheremore, even if we were to redetermine the book value of the stock based upon the appreciated value of the real estate and the unrecorded goodwill, thereby providing a book value of approximately $343 per share, we are still unable to conclude, in the absence of other evidence further enhancing the value of the stock, that the petitioner's stock was actually worth $500 per share. Our belief in this regard is consistent with the fact that several sales of small amounts of Belle Isle stock occurred both a short time before and after the instant transaction. The price paid for the stock on each of these occasions was approximately $300 per share. The petitioner's specific assertion that the amount allocated to the agreement not to compete was unrealistic and allocated only to provide a tax advantage304 to the purchaser is also not supported by the record. The testimony of Harter convinces us that Belle Isle had sound business reasons apart from any tax consideration for wanting an agreement not to compete from petitioner and treated this agreement as a separate item in its negotiations with petitioner. In addition, the direct relation between the petitioner's prior annual salary and the amounts he was to receive yearly under the agreement not to compete attests to the validity of the amount allocated to this agreement. The fact that the petitioner may have given inadequate consideration to what the tax consequences to him of an agreement not to compete might be, and that had he been more fully aware of such consequences more vigorous bargaining on the allocation might have resulted, are "iffy" questions and do not control the issue here. , affd. (C.A. 10, 1954). Petitioner's alternative position is that the agreement not to compete was nonseverable from the purchase of the stock and, therefore, served merely to insure the purchaser the beneficial enjoyment of goodwill. It is true that this305 Court has held that where a covenant not to compete accompanies the transfer of goodwill in the sale of a going concern and it is apparent that the covenant not to compete has the function primarily of assuring to the purchaser the beneficial enjoyment of the goodwill which has been acquired the covenant is regarded as nonseverable and as being, in effect, a contributing element of the assets transferred. ; ; . Nevertheless, we have also noted that a distinction exists between the sale of a business by its direct owner on the one hand, where goodwill is the property of the vendor and his covenant may well be a contributing factor in the sale of the entire business, and, on the other hand, situations where the covenant is the personal agreement of the individuals who, as such, have no direct proprietary rights in the goodwill, including also transfers of stock accompanied by personal covenants of the stockholders. , affd. (C.A. 2, 1959). The instant case falls*306 into the latter category. The petitioner, here, agreed to sell his stock in Belle Isle. The goodwill of Belle Isle which was the only transferable goodwill ( , was not covered as a separate item in the contract of sale. However, as a separate item in the transaction, petitioner agreed for a specified consideration to sell his covenant not to compete. Under such circumstances, we believe the agreement not to compete is severable from the purchase of the stock. See and cf. (C.A. 10, 1954); Upon all the authorities, and after careful consideration of the record, we conclude that the agreement of sale and the agreement not to compete reflected the transaction as understood by the parties; that both agreements were reached as a result of arm's length bargaining; and that the agreement not to compete correctly incorporates the consideration paid for it, which should hence be treated as ordinary income to the petitioner. Decision will be entered for the respondent. Footnotes1. Goodwill in the amount of $6,876 was shown in the Belle Isle balance sheet dated September 30, 1953. However, this figure merely represented goodwill acquired through the purchase of other small dairies and did not represent goodwill developed by Belle Isle itself.↩2. At $500 a share, petitioner would have received $105,000. Under the two contracts actually executed by petitioner, the total consideration petitioner received was $108,000.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625007/	Beaver Valley Canning Company v. Commissioner.Beaver Valley Canning Co. v. CommissionerDocket No. 22086.United States Tax Court1950 Tax Ct. Memo LEXIS 13; 9 T.C.M. (CCH) 1120; T.C.M. (RIA) 50312; December 13, 195013 Where petitioner was under no legal obligation, either by the statute authorizing incorporation, [by] its articles of incorporation, [by] its bylaws, or [by] any other contract, to distribute, as "patronage dividends," "patronage refunds," or "repayments," amounts received in excess of its costs to its shareholder-customers, held, petitioner is not an association entitled to deduct or exclude from its gross income the amounts actually distributed during the taxable years James M. Stewart, Esq., 203 Hubbell Bldg., Des Moines, Ia., and Rolland E. Grefe, Esq., for the petitioner. Gene W. Reardon, Esq., for the respondent. RICEMemorandum Findings of Fact and Opinion This cause involves income, declared value excess-profits and excess profits taxes for the fiscal year ending April 30, 1944, and14 income tax for the fiscal years ending April 30, 1945 and 1947, as follows: 194419451947Income tax$ 4,205.63$3,347.14$17,765.68Excess profitstax16,572.24Declared valueexcess-profitstax796.73Petitioner claims an overpayment and overassessment of $2,221.38 in excess profits taxes for the fiscal year ending April 30, 1944, and of $1,494.59 in income taxes for the fiscal year ending April 30, 1947. The sole issue raised is whether "patronage dividends," "patronage refunds," or "repayments" distributed by petitioner to its stockholder-customers were includible in its gross income. Some of the facts were stipulated. Findings of Fact The stipulated facts are so found and are incorporated herein. Petitioner was incorporated March 1, 1937, under Chapter 384 of the 1935 Iowa Code entitled "Corporations for Pecuniary Profit," to conduct and carry on a canning business and any business incidental thereto. Its books of account are maintained and its tax returns are filed on an accrual basis. Federal tax returns for the fiscal years ending April 30, 1944, 1945 and 1947, were filed by petitioner with the collector of internal revenue15 for the district of Iowa, Des Moines, Iowa. The stockholders of petitioner are wholesale cooperative grocery companies who are members of the National Retailer Owned Grocers, known as N.R.O.G. The organizers were also members of N.R.O.G. The Articles of Incorporation of the petitioner provided for an authorized capital stock of $100,000 consisting of 1,000 shares with a six per cent cumulative dividend. This was amended September 16, 1944, by striking out all of Article IV (which contained all provisions regarding stock issuance, dividends, redemption, etc.) and authorizing capital stock of $200,000 divided into 2,000 shares of $100 par value. The amendment was silent as to dividends, redemptions, and other provisions contained in the original Article IV. At a Board of Directors meeting on June 7, 1941, a three per cent discount plan based on gross sales was authorized as of July 15, 1941. This was ratified at a stockholder's meeting on June 5, 1942, and a resolution was passed to continue this discount plan for the "current year," i.e., the year ending April 30, 1943. By action of the Board of Directors on August 28, 1943, this was continued for the fiscal year 1943-1944. Another16 resolution passed at this same meeting allowed sales to non-shareholder-customers, and a distinction was made between customers who owned petitioner's stock and those who did not. Only the former were to be entitled to such "patronage refunds" as the Board of Directors should decide upon from time to time. After an audit report determining the petitioner's earnings for the fiscal year ending April 30, 1944, the Board of Directors at a meeting on June 10, 1944, declared a "patronage refund" of 15 per cent, based on gross sales, to each shareholder-customer for the year. The sum of $27,396.78 was paid on June 22, 1944. After a similar meeting on May 5, 1945, a 4 1/2 per cent "patronage refund," based on gross sales to shareholder-customers, was declared for the fiscal year ending April 30, 1945, involving a total sum of $12,179.30. Following a preliminary audit for the year ending April 30, 1947, at a meeting of the Board of Directors on April 22, 1947, a resolution was passed to "repay" 12 1/2 per cent of the gross sales. The total sum paid was $89,796.16. The Commissioner disallowed deductions of these amounts for the years ending April 30, 1944 and 1945, and disallowed exclusion of17 the amount from the gross sales for the year ending April 30, 1947. Petitioner reported taxable income as: $15,450.32 for the year ending April 30, 1944; $37,819.77 for the year ending April 30, 1945; and $6,932.99 for the year ending April 30, 1947. There is no provision in the statute under which petitioner incorporated, in its articles of incorporation, or in its bylaws providing for the declaration or payment of patronage dividends, for the years herein involved. Petitioner's officers had informed shareholder-customers that there would be patronage refunds and this was one of the reasons purchases were made. However, the amount of such refunds was indefinite. Opinion RICE, Judge: The sole issue in this case is whether certain "patronage dividends," "patronage refunds," and "repayments" made by petitioner to its stockholder-customers were includible in petitioner's gross income and taxable to it; or whether such "dividends," "refunds," and "repayments" were the property of the stockholder-customers and not the property of the petitioner. Petitioner is an ordinary stock corporation organized for pecuniary profit under Iowa law. Neither by the Iowa statute under which it18 was organized, its articles of incorporation, nor its bylaws, was petitioner under a legal obligation to pay patronage dividends to any of its customers. At a meeting on August 28, 1943, the Board of Directors passed a resolution providing that shareholder-customers "* * * shall be entitled to such patronage dividends as the Board of Directors of Beaver Valley Canning Company decide upon, from time to time." After corporate earnings were known for the fiscal years ending April 30, 1944, 1945 and 1947, at meetings of the Board, patronage dividends to the shareholder-customers were declared from the earnings of such year. Petitioner claimed deductions for such amounts in its tax returns for the years ending April 30, 1944 and 1945, and excluded from its gross sales for the year ending April 30, 1947 the amount so paid. The Commissioner determined that such deductions and exclusions were not allowable for Federal taxation purposes. There is no express authorization in the Internal Revenue Code for deductions or exclusions of patronage dividends from gross income. Under long established practice, however, true patronage dividends have been excluded on the theory that the dividends are19 rebates of money belonging to the patrons rather than income to the association. ; ; . This has been recognized by the Treasury Department in rulings and by decisions of various courts. While petitioner organized under the general incorporation laws rather than under the statutes for cooperative associations, and offered no explanation therefor, such action is not controlling if petitioner actually organized and operates as a true cooperative. aff'd . An essential condition for such an exclusion is a pre-existing legal obligation to allocate a patronage dividend in the amount that was allocated or distributed. . Such a legal obligation may arise from the statute authorizing incorporation, the corporate charter or bylaws, or some other contract, but it cannot rest upon some corporate action taken after receipt of the money, such as action of the corporate directors20 or officers. ; ; , aff'd ; . While admitting that neither the statute, its charter, nor bylaws obligate it to pay the patronage dividends, petitioner argues that due to the representations which it made its shareholder-customers that there would be patronage dividends, and their reliance on such representations when purchasing, that it was bound to pay such refunds on the ground of promissory estoppel, and, therefore, that a binding legal obligation existed for such payments. Petitioner also argues had it not declared the patronage dividends it would have been subject to suit, but cites no cases where in a situation such as this, such a suit was allowed or successful. Nor have we found any case exactly in point. In , aff'd , plaintiff was allowed an accounting where he sold milk to21 the defendant corporation under a contract which provided he would receive a proportionate share of profits after amounts were set aside for dividends, reserves, supplemental expenses, etc. His sole contention was that profits were incorrectly computed, resulting in his receiving too little. In , the taxpayer was a sales organization buying products from its shareholder-vendors. At the close of each year the taxpayer's directors would determine the amount of profits which could be distributed and the distribution was made on the basis of the amount purchased from each member. While neither the articles of incorporation nor the bylaws required the profit to be distributed, there was evidence of an "understanding" that it would be done. An amendment to the bylaws had been suggested but never passed. We held that this "understanding" was not a contract, and since the petitioner was under no obligation to make any distribution until the Board of Directors had acted, the amounts paid were taxable income to the taxpayer. For the year there in question, about $7,000 was distributed, while over $13,000 was reported as taxable income. 22 The evidence did not show that this latter amount was set up as a reserve or held back for any like reason. We felt it could be used for dividends or anything else, and that for such reason there was no legal obligation compelling distribution of a definite amount or percentage. On appeal, our decision was affirmed. In , the taxpayer was held taxable on the patronage dividends where the statute under which it organized provided that part or all the profits could be distributed. Since the receipts could be used for a number of things and only a portion was required to be distributed, it was held that the directors had a discretion which negated any existing obligation. Similarly, in the case at bar, there was no showing of any definite and certain amount or percentage which would enable a court to find a valid contract even though there was a "representation." To have a valid contract, there must be certainty. A promise may attempt to define a price but may do so too indefinitely for enforcement. Williston on Contracts, § 41. As in , petitioner here reported*23 taxable income for the years in controversy and no evidence as to what this was kept for was offered. It could have been used in a number of ways. Therefore, we hold, that since the Board of Directors was under no legal obligation to declare and make such a distribution to its shareholder-customers, respondent's determination is sustained. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625012/	Joseph F. Moore, Petitioner v. Commissioner of Internal Revenue, RespondentMoore v. CommissionerDocket No. 16743-83United States Tax Court85 T.C. 72; 1985 U.S. Tax Ct. LEXIS 57; 85 T.C. No. 7; July 25, 1985, Filed 57 Decision will be entered for the respondent. T purchased at a purported price of $ 384,000 a tax shelter from U.S. Distributor structured as an exclusive territorial franchise or distributorship to sell gemstones and items of jewelry to be supplied by American Gold. T was one of about 1,000 purchasers of similar exclusive territorial franchises from U.S. Distributor. The minimum price for such an exclusive territorial franchise was purportedly $ 240,000. American Gold and U.S. Distributor were corporations newly created by tax shelter promoters, and had no goodwill. American Gold transferred to U.S. Distributor the exclusive right to distribute American Gold's "product" worldwide. U.S. Distributor paid nothing for this right, but proceeded to fragment it into exclusive territorial distributorships which it then undertook to market. American Gold's "product" was to be obtained from Davis, an individual who was actively engaged in the gemstone and jewelry business, but who was under no binding obligation to make any product available to American Gold. The principal purpose of the tax shelter was to take advantage of sec. 1253 of the Internal Revenue Code. Held: On this record, 58 the purported exclusive territorial franchise acquired by T was a sham, and he is not entitled to any deductions as "distributor's fees" under sec. 1253(d)(2)(B)(ii) or otherwise in respect of annual installments purportedly paid by him for his distributorship. He never made any sales nor attempted to make any sales or even explored the possibility of making any sales in his alleged exclusive territory. Held, further: The mere fact that T engaged in some profit-oriented jewelry transactions, either individually or as part of joint venture, primarily through a subsidiary of American Gold did not impart bona fides to his exclusive territorial franchise. None of those transactions occurred in or had any relationship to his "exclusive territory," and were entered into in part as part of an effort to create the illusion of bona fides of the exclusive territorial franchise. Since they were nevertheless profit-oriented, petitioner is entitled to deduct, under sec. 212 or possibly sec. 162, the ordinary and necessary expenses incurred in respect of such transactions. Such deductible expenses do not include his spurious exclusive "territorial distributorship fees." Philip R. Linsley, Joseph 59 F. Moore, pro se, and John E. Crooks, for the petitioner.John O. Kent and Gregory A. Roth, for the respondent. Raum, Judge. RAUM73 The Commissioner determined deficiencies in petitioner's Federal income taxes for 1979 and 1980 in the amounts of $ 11,845 and $ 7,618, respectively. The principal substantive issue for decision is whether the Commissioner erred in disallowing losses with respect to petitioner's purported activity as an "exclusive territorial distributor" of gemstones.FINDINGS OF FACTSome of the facts have been stipulated. The stipulation of facts and attached exhibits are incorporated herein by reference.Petitioner was a resident of Glendale, California, when he filed his petition herein.Petitioner is an attorney, licensed to practice law in the State of California. He is experienced in Federal tax law. He has appeared as counsel in this Court in tax shelter litigation, and he has qualified and testified as an expert witness in at least one criminal tax matter involving a tax shelter promoter.The losses in issue herein arose out of petitioner's involvement in a tax shelter based upon a gemstone distributorship program (program) organized by Joseph R. Laird (Laird) 60 and John Crooks (Crooks). Laird and Crooks are California attorneys who have organized and promoted tax shelters. Laird, the "mastermind" of the gemstone program herein, has promoted shelters involving real estate, coal, master recordings, motion pictures, and gemstones. He is cited as the "promoter" in Beck v. Commissioner, 74 T.C. 1534">74 T.C. 1534, 1536, (1980), affd. 678 F. 2d 818 (9th Cir. 1982). See also Oneal v. Commissioner, 84 T.C. 1235">84 T.C. 1235, 1242 n. 10 (1985). Petitioner worked an an "associate" in Laird's law firm from the summer of 1976 until around September 1979, when he became associated with the law firm which "represented" Laird. Crooks is petitioner's "friend * * and an associate * * * in certain matters," and is one of the attorneys of record in this case.Another person who played a prominent part in the organization and operation of the gemstone tax shelter herein is Frank Davis (Davis), a resident of Utah. He was in the jewelry business and was experienced in or familiar with the mining, cutting, importing, purchasing, selling, and mounting of diamonds and other precious gems. Davis became interested in 74 the jewelry business sometime in the late 1960's, and, in 1969, he was 61 employed in a "supervisory capacity" in a Brazilian diamond mining operation. Upon returning from Brazil, he enrolled in courses offered by the Gemological Institute of America, and earned a certificate in diamond grading and evaluation. Sometime during the mid-1970's he was engaged as a "manager" for Kimberly Distributors, a wholesale, manufacturing diamond distributorship, where a person named Larry Rutherford (Rutherford) worked for him as a salesman.Sometime in 1976 or 1977, Davis and Rutherford decided to leave Kimberly Distributors and start their own diamond wholesale operation. Thereafter, Davis, his wife, and Rutherford incorporated DWR, INC., (DWR) to engage mainly in the wholesaling of diamonds to the jewelry trade. Originally, Davis and his wife owned all of the stock of DWR, but Rutherford eventually exercised an option and became a minority shareholder of the company.DWR's business flourished. Initially, it sold its products to "jewelry stores, * * * wholesalers and dealers." Then, in 1977 or 1978, as the demand for investment grade diamonds, the highest quality diamonds, expanded, DWR started to sell to firms which were interested in diamonds mainly as an investment, 62 rather than simply as jewelry. Davis estimated that by early 1979, DWR's gross sales had reached "a couple of million dollars" and that he, and thus DWR, had "access" to over $ 10 million worth of gemstones, primarily from the inventory of other suppliers, principally in New York, including some of the suppliers who enjoyed the privilege of buying diamonds directly from the DeBeers diamond cartel ("sight" buyers).DWR was well-positioned to take advantage of the growing demand for investment grade diamonds. Although Davis resided in Utah and carried on DWR's business from a base in that State, he had private line connections with important sources in New York. He had well developed "loyalties" within the trade, and, because he was interested in buying for DWR all types of diamonds, not just the investment grade type, he had a favorable position with suppliers who were then besieged with investors searching for only high quality diamonds.Rutherford's work for DWR was largely that of a salesman. In June 1979, he attended the first annual Precious Gems 75 International Conference, a conference for those "interested in tangible assets as a medium of investment." There he met Laird and Crooks, 63 who presented him with "a concept and a business approach * * [for] creating [a] market for distributing diamonds and gemstones." This "concept and * * * approach" basically involved DWR's selling the right to distribute its product to "people interested in the diamond and precious stone world" who would then sell the product on a consignment basis through retail jewelry stores.Rutherford reported Laird's and Crooks' distributorship proposal to Davis, who thereafter met with Laird and Crooks to discuss the idea more fully, and who found the proposal acceptable.Soon after Laird, Crooks, Davis, and Rutherford discussed the distributorship proposal, they formed three entities: American Gold & Diamond Corp. (American Gold), United States Distributor, Inc. (U.S. Distributor), and Gem-Mart Consultants, Inc. (Gem-Mart). American Gold, a Utah corporation, initially owned equally by Davis and Rutherford, was to supply gemstones to the program at a price which would purportedly allow the distributors to earn a profit on the product's resale. Like DWR, American Gold was to be an entity through which Davis could buy and sell gemstones. DWR was not availed of to supply products to the program 64 since Davis was yet unwilling to "blend" DWR's reputation with the program. Davis had no legal obligation to supply gemstones to American Gold or to distribute them through it.U.S. Distributor, a Nevada corporation, initially owned by Crooks and Laird, was to market the distributorship program. American Gold granted it the exclusive "right" to distribute American Gold's "product" worldwide for a period of 50 years, beginning with July 1, 1979. U.S. Distributor paid American Gold nothing for this right. U.S. Distributor was then to sell the right to distribute American Gold's "product" within certain specific geographic areas defined by zip code ("distributorships") to investors ("territorial distributors") like petitioner, who, as will appear hereinafter, "purchased" one of the distributorships. The distributorships were marketed by U.S. Distributor through a team of salesmen experienced in financial matters but in general unfamiliar with precious gems or the jewelry business. In marketing the distributorships, emphasis 76 was placed upon tax savings. The distributorships were sold to persons who were inexperienced in the jewelry business. The minimum price for a distributorship 65 was $ 240,000, and increased substantially depending primarily upon the amount of tax savings sought by the purchaser. The price of the distributorship purchased by petitioner, hereinafter more fully described, was $ 384,000. The goal of the program was to sell about 5,000 distributorships, but ultimately only some 1,000 were sold.Gem-Mart, a wholly owned subsidiary of American Gold, was to take advantage of Davis' sales ability and theoretically to assist the territorial distributors in selling the product to jewelry stores. It was to act as the "sales arm" for the territorial distributors.Soon 66 after the above-described entities were created, Laird and Crooks purchased Rutherford's interest in American Gold. Thereafter, Davis traded one-half of his interest in American Gold for a one-quarter interest in U.S. Distributor. Also, at some unspecified time, Crooks, or a member of his family, purchased Laird's interest in American Gold and U.S. Distributor. Upon the conclusion of these transfers, Davis emerged as the owner of one-fourth of the stock of American Gold and U.S. Distributor, and Crooks (together with his family) owned three-fourths of the stock of each of these corporations.Sometime in late 1979, Crooks requested petitioner to examine a draft tax opinion letter concerning the tax shelter program involved herein and asked whether he would assist in the program's tax defense. After reviewing the letter, petitioner not only agreed to aid in the tax defense, but also decided to acquire a distributorship for himself.The operative document reflecting the purchase and sale of a territorial distributorship is contained in a pamphlet captioned "Contract Documents." The pamphlet contains a "Tax Opinion Letter," the "Territorial Distributorship Agreement," and "Exhibits." 67 Each pamphlet bears a serial number, and U.S. Distributor is identified at the lower half of the front cover with an address in Carson City, Nevada. There were at least two copies of the pamphlet in respect of each purchase and sale, one containing the executed Territorial Distributorship Agreement retained by the purchaser, and the other containing the duplicate original executed Territorial Distributorship 77 Agreement to be kept by U.S. Distributor. 1 The pamphlet containing petitioner's retained duplicate original was introduced in evidence. American Gold was also a party to the Territorial Distributorship Agreement and is referred to therein as "Importer," and U.S. Distributor is referred to as "Distributor." The Territorial Distributorship Agreement (referred to hereinafter sometimes merely as the agreement) provides in principal part as follows:TERRITORIAL DISTRIBUTORSHIP AGREEMENTThe undersigned represent and agree as follows:* * * 3. PRODUCT of IMPORTER includes the following:Product A includes a combination of (1) a Diamond; (2) A quality Analysis Certificate from [a] * * recognized independent gemological laboratory * * * [and] (3) One Certificate from an independent 68 gemological laboratory or an independent appraiser which verifies that the Diamond matches the contents of the Quality Analysis Certificate with a statement of its Estimated Market Retail Price.Product B includes a combination of (1) an investment grade quality Ruby, or an investment grade quality Sapphire, or an investment grade quality Emerald; (2) a Quality Analysis Certificate from [a] * * recognized independent gemological laboratory * * * [and] (3) One Certificate from an independent gemological laboratory or an independent appraiser which verifies that the gem matches the contents of the Quality Analysis Certificate with a statement of its Estimated Market Retail Price.Product C includes a combination of (1) a Precious gem imported from Brazil; [and] (2) a statement from an independent appraiser of its Estimated Market Retail Price.A Precious Gem imported from Brazil is defined as one of the following Gems: Aquamarine, Amethyst, Citrine, Garnet, Kunzite, Opal, Precious Tourmaline, Rubellite, and Precious Topaz.Product D includes a combination of (1) a Precious Gem originating in Australia, India, Africa, Thailand, Burma or Sri Lanka (formally [sic] Ceylon), and other areas; 69 [and] (2) a statement from an independent gemological laboratory or from an independent appraiser of its Estimated Market Retail Price.A Precious Gem originating in Australia, India, Africa, Thailand, Burma or Sri Lanka (formally [sic] Ceylon) is defined as one of the following: Amethyst, Aquamarine, Citrine, Emerald, Garnet, including Green Garnet, Opal, Precious Tourmaline, Ruby, Sapphire, and Tanzanite.78 Product E - Fine Jewelry.Product F - Costume Jewelry.Product G - Such exclusive rights to purchase Precious Gems and commercial and industrial gem materials as IMPORTER may acquire, on a prorated basis with all other TERRITORIAL DISTRIBUTORS during the term of any TERRITORIAL DISTRIBUTORSHIP. * * 4. IMPORTER has delegated to DISTRIBUTOR the exclusive right to distribute worldwide one hundred (100%) percent of its PRODUCT as is described in Paragraph 3 hereof for a period of fifty years beginning with July 1, 1979.5. DISTRIBUTOR will not compete with any TERRITORIAL DISTRIBUTOR and agrees that all of the PRODUCT to which it is entitled pursuant to Paragraph 4 will be made available exclusively to TERRITORIAL DISTRIBUTORS.6. DISTRIBUTOR hereby transfers to TERRITORIAL DISTRIBUTOR 70 an exclusive TERRITORIAL DISTRIBUTORSHIP permitting TERRITORIAL DISTRIBUTOR to engage in the business activity as set forth herein within the Specified Territory, including the right to distribute the PRODUCT to retail and wholesale outlets within the Specified Territory.7. TERRITORIAL DISTRIBUTOR is entitled, along with all other TERRITORIAL DISTRIBUTORS within the United States, to purchase the entire supply of the PRODUCT of IMPORTER on a pro rata basis with all other TERRITORIAL DISTRIBUTORS.8. IMPORTER has an arrangement to acquire Diamonds purchased by several "sight buyers" from the Central Selling Organization and from other primary sources. * * 9. IMPORTER has relationships with major volume-suppliers of Colored Precious Gems and these relationships will form a basis for sales by IMPORTER to TERRITORIAL DISTRIBUTORS at favorable prices.10. IMPORTER has relationships with suppliers of Costume Jewelry, and these relationships will form a basis for sales by IMPORTER to TERRITORIAL DISTRIBUTORS at favorable prices.11. IMPORTER is a manufacturer of fine jewelry.12. IMPORTER is continuously advised by individuals who are highly skilled and pre-eminent in their fields of the economics 71 of the gem industry, the political considerations affecting the gem industry, purchasing of gems, fair standards of sales, gemological analysis and quality grading of gems, and appraisal of Diamonds and other Precious Gems. * * 13. WARRANTIES * * B. DISTRIBUTOR warrants that:In the event TERRITORIAL DISTRIBUTOR adopts the accrual method of accounting for the business covered by this TERRITORIAL DISTRIBUTORSHIP AGREEMENT, DISTRIBUTOR will supply at its expense a defense of the tax treatment of TERRITORIAL DISTRIBUTOR projected in the Tax Opinion Letter. Such support will include representation at the Internal Revenue Service level upon the issuance of a 30-day letter from the Internal 79 Revenue Service (IRS Form 950(DO) or its equivalent), and defense in the United States Tax Court and the United States Court of Appeals. * * * As a foundation for said warranties, a Trust has been established wherein the Trustee holds real property consisting of 2,000 acres of land appraised at $ 8,000,000 which is encumbered in the approximate amount of $ 3,000,000. Trustor has transferred to Trustee the power to obtain the reconveyance of approximately 150 acres of said land from the effect of 72 any encumbrance thereon, and Trustee shall cause to be released said 150 acres of said land from the effect of any encumbrance and thereafter shall hold said land free and clear of any encumbrance until it is sold pursuant to the terms of said Trust. Said 150 acres to be so released and so held have been appraised at $ 4,000 per acre. All of this property is residential and/or commercial. The Trustee has been instructed to sell or exchange any amount of said real property in order to pay TERRITORIAL DISTRIBUTORS any damages they may suffer as the result of the breach of the warranty expressed in Paragraphs 13 A and B.Trustee has been instructed to continue with planning and engineering of said real property to enable the Trustee to subdivide and sell parcels thereof.Trustee has been instructed to invest the surplus cash from such sales in Diamonds and Precious Gems and to hold, sell, and reinvest in Diamonds and other Precious Gems in order to maintain a fund in the form of Diamonds and Precious Gems of at least $ 1,000,000 in Market Value.The Trustee shall release the real property remaining in the Trust when Trustee holds an inventory of at least $ 1,000,000 in Market Value of 73 Diamonds and other Precious Gems as defined in this Agreement.Said inventory of Diamonds and Precious Gems shall be held and managed by Trustee by selling and reinvesting in Diamonds and other Precious Gems during the existence of this Agreement.14. The PRODUCT will be provided to TERRITORIAL DISTRIBUTOR at a price as follows:Product A - Either approximately one hundred ten (110%) percent of the average price charged by major diamond cutters on 47th Street in New York City * * or, at the option of IMPORTER, forty (40%) percent of the stated Estimated Market Retail Price as of the date of the statement.Product B - From thirty-five (35%) percent to forty (40%) percent of the stated Estimated Market Retail Price provided by an independent gemological laboratory or an independent appraiser.Product C - From twenty (20%) to thirty (30%) percent of the stated Estimated Market Retail Price provided by an independent gemological laboratory or an independent appraiser.Product D - From twenty (20%) percent to thirty (30%) percent of the stated Estimated Market Retail Price provided by an independent gemological laboratory or an independent appraiser.Product E - From thirty-five (35%) percent 74 to forty (40%) percent of the suggested retail price.Product F - Twenty (20%) percent of Suggested Market Retail Price.80 Product G - A price which does not exceed IMPORTER'S cost plus fifteen (15%) percent.15. The full purchase price provided in Paragraph 14 for PRODUCT must be deposited with IMPORTER at the time of the order.16. TERRITORIAL DISTRIBUTOR agrees to make prepayments to DISTRIBUTOR on all Principal Sum Annual Installment Promissory Notes delivered from TERRITORIAL DISTRIBUTOR to DISTRIBUTOR pursuant to this TERRITORIAL DISTRIBUTORSHIP AGREEMENT. Said prepayments will be in the amount of ten (10%) percent of the total cost of TERRITORIAL DISTRIBUTOR for all PRODUCT purchased from IMPORTER pursuant to Paragraph 14.A TERRITORIAL DISTRIBUTOR will be instructed by DISTRIBUTOR as to the method of payment to be utilized with reference to this prepayment requirement. All prepayments received will be applied to Promissory Notes, whether Recourse or Non-Recourse in chronological order. This prepayment requirement will terminate on December 31, 2004.* * * 19. This Agreement has employed the term "Estimated Market Retail Price." Depending upon the appraiser involved, similar terms 75 may be substituted, including: (1) Estimated Retail Replacement Value; (2) Estimated Retail Replacement Cost; (3) Appraised Retail Value; (4) Total Estimated Value Based on Retail Replacement; (5) Market Value.20. The term of the TERRITORIAL DISTRIBUTORSHIP will be 35 years commencing on the date of this agreement.21. The TERRITORIAL DISTRIBUTORSHIP will include the Territory described in Exhibit D.22. TERRITORIAL DISTRIBUTOR is authorized to appoint agents and dealers within the Territory.23. In consideration of the Territorial Distributorship transferred herein, TERRITORIAL DISTRIBUTOR SHALL pay to DISTRIBUTOR a Principal Sum as set forth in Exhibit A, Part I, and purchase PRODUCT from IMPORTER as set forth in Exhibit A, Part II.* * * 25. TERRITORIAL DISTRIBUTOR specifically represents and understands as follows:(a) That he has sufficient business experience to operate his Territorial Distributorship.(b) That he has the financial capacity to develop the Territory.(c) That he intends to personally promote the PRODUCT in the Territory acquired or cause promotion to be effected within the Territory.(d) That, as a TERRITORIAL DISTRIBUTOR, he will not be entitled to participate with 76 other TERRITORIAL DISTRIBUTORS with reference to expenses, profits, or otherwise. Further, that his profits, if any, earned as a TERRITORIAL DISTRIBUTOR will depend solely on his own management and marketing ability, and not that of the DISTRIBUTOR or the IMPORTER or any affiliate.81 (e) That he has read the Tax Opinion Letter addressed to DISTRIBUTOR by the law firm of SOMERS & ALTENBACH, and he understands that the tax incidents involving his becoming a TERRITORIAL DISTRIBUTOR may vary from those of other individual TERRITORIAL DISTRIBUTORS, and there can be no assurance that the Internal Revenue Code or the Regulations thereunder, as they exist or as they may be amended, will allow any TERRITORIAL DISTRIBUTOR the tax benefits referred to in the Tax Opinion Letter.(f) That he believes there is a realistic possibility of profits from the operation of the TERRITORIAL DISTRIBUTORSHIP.(g) That, as a TERRITORIAL DISTRIBUTOR, he will not be entitled to utilize any trademark or trade name of DISTRIBUTOR or IMPORTER.(h) That the MINIMUM PRODUCT PURCHASE REQUIREMENT of Colored Precious Gems is not purchased as a part of the inventory of the TERRITORIAL DISTRIBUTOR for resale, and that the 77 TERRITORIAL DISTRIBUTOR will continue to hold those Colored Precious Gems for purpose of display to prospective customers.The agreement incorporates a "Security Agreement" which provides that any nonrecourse note used to pay a portion of the "Principal Sum" would be secured by an interest in all of the territorial distributor's rights in his distributorship, including an interest in all "receivables and inventory owned * * * pursuant to the" territorial distributorship. The principal sum is the amount the territorial distributor is to "pay" for his territorial distributorship. As will appear more fully hereinafter, no such "Principal Sum" is set forth in the body of the agreement.Following the Territorial Distributorship Agreement and the Security Agreement are a number of exhibits designated A through F, applicable to either agreement wherever reference is made in either to an exhibit. Part I of Exhibit A specifies the requirements for payment of the principal sum. It obligates 78 the territorial distributor to deliver, upon execution of the agreement, a recourse note for one-twelfth of the principal sum. Thereafter, on December 1 of each of the following 11 years starting with 1980, the territorial distributor is to tender cash or a recourse note or a nonrecourse note, or some combination of any two or all three, totaling one-twelfth of the principal sum. Although Exhibit A refers to the "Principal Sum" in accordance with paragraph 23 of the Territorial Distributorship Agreement, it does not set forth the amount of that "Principal Sum" but merely makes reference to Exhibit D, which purportedly fixes the amount of the "Principal Sum."82 Part II of Exhibit A binds the territorial distributor to purchase certain "Minimum Product" from American Gold. In 1979, the territorial distributor is required to buy, for cash:A. * * * Product C or D (Colored Precious Gems) having an aggregate appraised Estimated Market Retail Price of not less than twenty-five (25%) percent [of that portion] of the Principal Sum Annual Installment [paid in cash or financed with a recourse note], or, in the alternative;B. * * * Product C or D (Colored Precious Gems) having an aggregate Estimated 79 Market Retail Price of not less than $ 5,000 and Product A (Diamonds) for the difference between the minimum cash purchase provided for in Paragraph A and the cost of Product C or D multiplied by 2.5.Unlike the favorable prices at which gems would be sold generally to the territorial distributor for resale, the prices to be paid for the minimum product were fixed in the agreement, as follows:C. With reference to the Minimum Product Purchase Requirement only, the price for Product C or D (Colored Precious Gems), will be one hundred (100%) percent of its Estimated Market Retail Price. With reference to the Alternative Minimum Product Purchase Requirement including Product A (Diamonds) and Product C or D, the price for Product A will be fifty eight (58%) percent of its Estimated Market Retail Price.In the years subsequent to 1979, the same formula for purchase of minimum product appears to have been applicable except that the territorial distributor is explicitly relieved of the requirement to purchase any product C or D. In this respect, paragraph D of part II of Exhibit A, after setting forth the minimum product purchase requirement, states "except that no minimum purchase of Product 80 C or D will be required." However, paragraph E of part II of Exhibit A further indicates that in such later years the "selection of the particular PRODUCT A, C or (D) for the purpose of the Minimum Product Purchase Requirement * * * shall be at the discretion of Importer." The seeming or possible contradiction between the statement "that no minimum purchase of Product C or D will be required" and American Gold's right to determine which product must be purchased, is unexplained.Exhibits B and C are the "FORM" recourse promissory note and the "FORM" nonrecourse promissory note, respectively, to be used by the territorial distributor in making his principal sum payments to U.S. Distributor. Each note is payable in five 83 equal annual installments commencing on December 31, 2004, and bears "Interest (not compounded) at the rate of six (6) percent per annum * * payable in full with the first principal installment." Prepayments are allowed and, indeed, are required by paragraph 16 of the Territorial Distributorship Agreement, but are first to be applied against interest. However, such prepayments are required only to the extent that (and measured by a percentage of) any product -- other 81 than minimum product -- purchased by the territorial distributor from American Gold. But there is no requirement that the territorial distributor purchase any product whatever other than minimum product, and no prepayment is required in connection with the purchase of minimum product. Further, since the purchase of minimum product is required only in an amount equal to one-fourth of that part of the annual installment paid for the distributorship in cash or by recourse note, and since the distributor has the option of paying every installment in full after 1979 with a nonrecourse note, he is under no obligation whatever to purchase minimum product after 1979 to the extent that he chooses to use nonrecourse notes. The recourse note is unsecured, but liability thereon is "not limited to any prepayment obligation, specific collateral or otherwise." The nonrecourse note is secured only by the Security Agreement.Exhibit D is a form for identifying the territorial distributor's assigned distributorship territory, "Minimum Product Purchase Requirement," and principal sum. It was left blank at the time the Territorial Distributorship Agreement was purportedly entered into by petitioner, 82 U.S. Distributor, and American Gold. No specific territory was then 2 assigned to petitioner, nor was the amount of the "Principal Sum" set forth as called for by Exhibit A. Exhibit E, a duplicate of Exhibit B, is the form recourse note to be actually executed and used in making the first principal sum payment, the payment due upon the execution of the agreement. Exhibit E in the agreement purportedly entered into by petitioner was filled in and dated by him on December 84 27, 1979. Since the purported purchase price for his distributorship was $ 384,000 (an amount confusingly not appearing anywhere in the agreement), 383 the principal sum of the Exhibit E recourse promissory note signed by petitioner was, in accordance with Exhibit A, one-twelfth of that $ 384,000 purchase price, namely, $ 32,000. Although the Territorial Distributorship Agreement begins with the words "The undersigned represent and agree as follows," nowhere in the body of that agreement is the identity of the territorial distributor disclosed or referred to, nor is that agreement signed at the end thereof by any of the parties, nor is it dated either in the body or at the end thereof. The only place where there is provision for date and signatures of the "undersigned" parties in respect of the agreement, itself, is Exhibit F.Exhibit F was a blank form, which, prior to being filled in and signed by petitioner, read as follows:EXHIBIT FThe undersigned acknowledges that he has either read or has had available to him for reading all of the "TERRITORIAL DISTRIBUTORSHIP CONTRACT DOCUMENTS" 84 which consist of a SUMMARY OF BUSINESS OPPORTUNITY, a TAX OPINION LETTER, and a TERRITORIAL DISTRIBUTORSHIP AGREEMENT. Signatures on this page relate to the entire TERRITORIAL DISTRIBUTORSHIP AGREEMENT, including the SECURITY AGREEMENT, and to EXHIBITS A, B, C, D, E, F, and G, and the signatures signifiy that the signer has read and understands the entire TERRITORIAL DISTRIBUTORSHIP AGREEMENT, including the EXHIBITS attached thereto.In the event that Territorial Distributor makes no choice of total Territory, or that the Territory chosen is not available, DISTRIBUTOR is authorized to designate a Territory for him.Signature of TERRITORIALDISTRIBUTOR and DEBTOR * * *85 ACCEPTANCEThe undersigned hereby accepts the above named as a TERRITORIAL DISTRIBUTOR and DEBTOR.Executed at Carson City, Nevada as of U.S. DISTRIBUTOR, INC. AMERICAN GOLD & DIAMOND CORPORATIONBy By Petitioner signed and dated Exhibit F on December 27, 1979, but the portion of Exhibit F calling for acceptance and signature on behalf of the other parties to the agreement, namely, U.S. Distributor and American Gold, was left blank. Another copy of Exhibit F was executed on February 29, 1980, on behalf of U.S.85 Distributor and American Gold. That copy was sent to petitioner; it contains petitioner's signature, but there is no date opposite that signature. That second copy of Exhibit F has been stapled to the inside cover of petitioner's retained "Contract Documents" pamphlet containing the Territorial Distributorship Agreement.Exhibit G is a "RECEIPT FOR PAYMENT TO INDEPENDENT CONTRACTOR," to be used to evidence the territorial distributor's cash and/or recourse note payments to Professional Escrow Service, Inc. ("Escrow" or the "Escrow company"), which apparently was to act as escrow agent for American Gold and U.S. Distributor. Prior to being filled in, Exhibit G read as follows:EXHIBIT GReceipt for Payment to Independent ContractorThe undersigned receipts for a check payable to Professional Escrow Service, Inc., in the amount of $ and a RECOURSE NOTE in the amount of $ . The check and the RECOURSE NOTE mentioned above shall be mailed forthwith to Professional Escrow Service, Inc., 300 Hot Springs Road, Suite 20, Carson City, Nevada 89701.Signature of INDEPENDENTPrint Name CONTRACTORStreet AddressCity - State - Zip( )Telephone Number86 INSTRUCTIONS 86 TO EARL MARTINSON, INC., REPRESENTATIVE:You have two copies of the TERRITORIAL DISTRIBUTORSHIP CONTRACT DOCUMENTS with the same number. Exhibits D, E, F and G in each Manual must be filled out and fully executed. One of the Manuals is to be given to the TERRITORIAL DISTRIBUTOR, and the other is to be mailed to Professional Escrow Service, Inc. After acceptance by DISTRIBUTOR and IMPORTER an executed copy of Exhibit F will be mailed to the TERRITORIAL DISTRIBUTOR for insertion in the copy of the Contract Documents retained by the TERRITORIAL DISTRIBUTOR.It was filled in (by hand) solely by insertion of the amount of $ 1,000 in respect of the check. Everything else was left blank. Earl Martinson, Inc., is not identified in the record, but seems in some fashion to have assisted in the marketing of the program.At the time that petitioner signed the Exhibit E $ 32,000 promissory note, December 27, 1979, he was theoretically obligated by Exhibit A (if the Territorial Distributorship Agreement were to be regarded as having then been fully in effect) to purchase minimum product from American Gold in an amount of not less than 25 percent of that note, i.e., not less than $ 8,000. The 87 $ 1,000 check referred to in Exhibit G was intended to be in partial fulfillment of that obligation. And although Exhibit A to the agreement required that the minimum product be purchased for cash, petitioner at the same time on December 27, 1979, executed a note in the amount of $ 7,000 for the remainder of his obligation in respect of the $ 8,000 minimum product purchase requirement. That $ 7,000 note bore interest at the rate of 10 percent a year. It is petitioner's position that the requirement of purchase for cash was orally waived to the extent of the $ 7,000 note. The $ 7,000 note was payable to the Escrow company, and was due on December 31, 1979. It has not been paid.At the time of petitioner's signing of the various documents referred to above on December 27, 1979, there was present John Knowles, then president and authorized representative of U.S. Distributor. Mr. Knowles did not then sign the agreement or any document purporting to bind U.S. Distributor. Among the documents delivered to U.S. Distributor or the Escrow company at that time was a worksheet identifying the territory or territories being requested by petitioner. He purports to have relied upon alleged 88 oral assurances by Mr. Knowles that the territory primarily desired by him, near his 87 office in Encino, California, would be assigned to him. However, as indicated above, when Exhibit F was finally executed on behalf of U.S. Distributor and American Gold on February 29, 1980, no territory whatever was assigned to petitioner. At that time, Mr. Knowles signed for U.S. Distributor in his capacity as president, and a person named Glen Symons signed as "attorney-in-fact" for American Gold.On December 28, 1979, petitioner delivered a $ 100 check to Gem-mart in payment of fees "due" under the terms of a "Consulting Contract." However, that contract was not executed until February 29, 1980, at the same time that the basic agreement between petitioner and U.S. Distributor and American Gold was executed. Under the "Consulting Contract," Gem-Mart was to assist petitioner in the merchandising of American Gold's product, inter alia, by negotiating with jewelers on petitioner's behalf. The contract specifically declared that Gem-Mart was "retained to produce results" but that Gem-Mart would make no "business decisions" and would have no power to "contract" on petitioner's behalf. 4 In return 89 for Gem-Mart's services in arranging sales, petitioner agreed to pay Gem-Mart 50 percent of gross profits. Petitioner's $ 384,000 purported purchase of the distributorship was the largest purchase he had ever made. In deciding whether to purchase a distributorship, petitioner did not investigate any other gem distributorship program.At the time petitioner signed the agreement, he had only "reasonable" assurances as to the area in which he would be the exclusive distributor of American Gold's product. Although he had been informally advised that he would receive a territory within Zip Code 91436 in Encino, California, one within Bethesda, Maryland, and one within Galway, Ireland, such assignments were not guaranteed and he could be allotted other areas. And, as noted above, Exhibit D to the executed agreement (whether 90 the date of execution be treated as December 27, 1979, or February 29, 1980) which should have identified petitioner's exclusive territory, was left blank.88 Petitioner was not finally assigned his exclusive territory until October 1980. On August 25, 1980, petitioner received a completed Exhibit D dated July 30, 1980, indicating that his territory for distributing American Gold's product would be the areas defined by Zip Codes 91316 in Encino, California, and 20014 in Bethesda, Maryland, and the cities of Galway and Waterford, Ireland. An "Addendum" to this exhibit which "clearly sets forth * * * the jewelry outlets that comprise * * * [petitioner's] Territorial Distributorship," listed the names of four outlets each in the foregoing Encino and Bethesda zip code areas.However, on October 24, 1980, petitioner received a letter advising him that he had been incorrectly assigned jewelry outlets and, thus, was then allotted "two new Zip Codes in Bethesda, each of which has only one jewelry outlet in it, and * * * two additional outlets in Encino." An enclosed "new" Exhibit D, dated October 22, 1980, listed four zip code areas -- 91316 and 91436, in Encino, and 20015 and 21237 in Bethesda 91 -- and the cities of Galway and Waterford in Ireland. The "Addendum" to this exhibit recorded five outlets in the 91436 Zip Code and one in each of the other three zip code areas. Only one of the outlets listed in the latter "Addendum," the one in the 91316 Zip Code area, appeared on the earlier list. Petitioner does not now know whether any of the jewelers named on the addendum are currently in business. In explaining the need for changing petitioner's territory, the second letter (signed by Glen Symons for the Escrow company) stated that "we discovered that Penni had been assigning jewelry outlets incorrectly." The identity of Penni, her position, and her authority to make assignments of territories were undisclosed.Neither of the above-described Exhibits D made clear whether petitioner had been assigned specific geographic areas or simply certain outlets within such areas. At trial, petitioner was unable to resolve this confusion. Indeed, he was uncertain as to what the status of his distributorship would be if those outlets listed on the "Addendum" closed or moved from his assigned exclusive territory, or whether he was exclusively entitled to distribute to outlets thereafter 92 commencing business within those areas. Also, although he "understood" that he was allowed to sell directly to individuals 89 within his territories, he was not sure whether the agreement permitted such activity.Petitioner remained a territorial distributor through the date of trial. He discharged his obligation to pay one-twelfth of his principal sum amount in 1980 by delivering to U.S. Distributor an agreement Exhibit B recourse promissory note in the amount of $ 16,000 and an agreement Exhibit C nonrecourse promissory note also in the amount of $ 16,000. Each note was dated December 31, 1980, was interest-bearing, and was payable in five equal annual installments beginning December 31, 2004.In approximately September of 1981, petitioner executed a "Modification of Contract" (modification or Modification Agreement) which altered essential terms of the agreement. The principal changes made by the modification included the elimination of the interest provisions of the recourse and nonrecourse notes used to finance principal sum payments, an increase in the price to territorial distributors of products C and D, and a reduction, in some instances, of the prepayment amount required 93 by paragraph 16 of the agreement. 5 The purpose of these alterations was to conform the contractual terms of the agreement as signed by petitioner in 1979 with later agreements made during 1980 and 1981 with other, new territorial distributors. Apparently, the later agreements differed in many ways from that signed by petitioner. Attached 94 to the Modification Agreement were copies of seven promissory notes, six of which petitioner had executed. Three of these notes, two "recourse" in the amounts of $ 32,000 and $ 16,000 and one "nonrecourse" in the amount of $ 16,000, were intended as substitutes for the promissory notes petitioner used in 1979 and 1980 in making his principal sum payments. These three new notes reflected the changes made by the Modification Agreement, including the elimination of 90 the interest requirement. They were "Dated as of:" January 1, 1981, and, like the old notes, were payable in five annual installments, but to begin on December 31, 2006, two years later than the old notes. Two other similar notes, one "recourse" and one "nonrecourse," each in the amount of $ 16,000 and each "Dated as of" December 31, 1981, were in payment of petitioner's 1981 principal sum obligation. A final note, carrying a 10 percent per annum interest rate but no due date, in the amount of $ 4,000 was "For use in 1981 for Minimum Product Purchase."The Modification Agreement and its attachments could at best be described as confusingly inexact and unprofessional. For example, it makes reference to certain pages and 95 paragraphs allegedly in the agreement, but these references in no way correspond with the appropriate paragraphs in the agreement. However, even though petitioner "acknowledged that he * * [had] read the * * * [modification] and * * * compared the language of his original agreement with the language of the modification," he could not resolve the confusion, nor could he recall "noting" the inaccuracies at the time he signed the modification. Also, a paragraph contained in the attached "nonrecourse" notes reads:This is a Non-Recourse Note. Maker's liability is not limited to any prepayment obligation, specific collateral or otherwise. [Emphasis supplied.]Petitioner concedes that this is the definition of a recourse, not a nonrecourse, note (indeed, the emphasized sentence above is found verbatim in the recourse notes), but he could not explain this glaring inconsistency. 696 A further instance of drafting nonsense is a provision in the Modification Agreement purporting to modify a 20-percent prepayment requirement (see note 5 supra, p. 89) although there is admittedly no such 20-percent prepayment obligation in the agreement. 7Petitioner has made no attempt to retrieve the original notes replaced pursuant to the Modification Agreement. He 91 regarded the notes as being possibly negotiable, and indicated that, as a lawyer, in the ordinary course of business, he would never substitute a new promissory note for an old note without having the old note returned. Nevertheless, he has not recovered possession of those notes replaced pursuant to the Modification Agreement, nor does it appear that he made any effort to obtain them. His apparent indifference to leaving outstanding multiple copies of these executed notes representing the same liability was in marked contrast to his attitude 97 in respect of possible outstanding duplicate copies of his executed Exhibit E recourse promissory note. Since the agreement was executed purportedly in duplicate original and since it was petitioner's retained original copy (containing a signed Exhibit E recourse promissory note) that was before the Court, he was questioned whether he had signed both an original as well as a duplicate Exhibit E recourse promissory note. He replied "Of course not. I wasn't that crazy."Petitioner discharged his yearly obligation to pay one-twelfth of his principal sum in 1982 and 1983 by delivering each year to U.S. Distributor a nonrecourse note in the amount of $ 32,000. The 1982 nonrecourse note was a filled-in copy of the agreement Exhibit C form nonrecourse note with the provisions relating to interest crossed out. This note was dated December 27, 1982, payable in five equal annual installments commencing December 31, 2004. The 1983 nonrecourse note was substantially different from both the Exhibit C form note and the nonrecourse notes attached to the Modification Agreement. The five equal annual payments on this note were to begin on December 31, 2008, and prepayments were required in an 98 amount other than that required by the agreement as altered by the Modification Agreement. This note was "Dated as of" October 24, 1983.The agreement required petitioner to purchase, for cash, minimum product with an "Established Market Retail Price" of not less than 25 percent of that part of his annual principal sum payment paid in cash or financed with a recourse promissory note. Thus, petitioner should have purchased, for cash, minimum product with a "Retail Price" of at least $ 8,000 in 1979, $ 4,000 in 1980, and $ 4,000 in 1981. However, he actually purchased only $ 1,000 of minimum product for cash. 92 He neither purchased nor received any further minimum product.In 1979, petitioner purported to meet his minimum product purchase requirement by tendering to the Escrow company the $ 1,000 check and the $ 7,000 promissory note described above. See p. 86 supra. Thereafter, on April 28, 1980, petitioner received minimum product consisting of nine product C type gems for his $ 1,000 check.Aside from the nine Product C type gems received in April 1980, petitioner never obtained further minimum product, which, pursuant to the agreement, could not be resold. Shortly after entering 99 into the agreement, he arrived at an oral understanding with Crooks that relieved him of his obligation to make any further purchases of minimum product.Notwithstanding his apparent agreement with Crooks, petitioner tendered to the Escrow company one promissory note in 1980 and one in 1981, each in the amount of $ 4,000, in respect of his minimum product purchase requirement. 8 However, an "Agreement," in evidence, referring to the "promissory note executed by [petitioner] * * * on December 31, 1980," read, in pertinent part: "AMERICAN GOLD & DIAMOND CORPORATION agrees that the dollar amount of any purchase of PRODUCT * * * by the maker of the promissory note shall be credited as a payment on said promissory note." This "Agreement" was "Dated: As of" December 31, 1980, and was signed for American Gold by Crooks as "Attorney in Fact." The $ 4,000 promissory note dated December 31, 1980, has not been returned to petitioner. No writing similar to that of the foregoing in respect of petitioner's 1980 minimum product purchase requirement exists with respect to either his 1979, $ 7,000 or 1981, 100 $ 4,000 obligations. At trial, petitioner initially testified that he "[considered] [himself] * * relieved of the obligation to comply with the terms of" the 1979 note, but was unable to state that he had reached such an understanding with anyone authorized to represent American Gold. (Although petitioner testified about an oral understanding with Crooks, see above, there was no indication that Crooks represented or even purported to represent American Gold in this connection.) 93 Later, petitioner changed his testimony, admitting, instead, that "Although I have not had the opportunity to check with American Gold * * to see what their attitude is, as to whether or not they feel I still owe them the $ 7,000 and whether or not they still owe me the minimum product if I pay it. I just don't know the current status of that. I haven't had a chance to discuss it." He did "believe," however, that the 1981 $ 4,000 note "has been satisfied." Petitioner has not attempted to learn whether the 1979, $ 7,000 note has been canceled. 9In connection with petitioner's transactions involving gemstones, he adopted 101 the fictitious name "Euhedral Enterprises" (Euhedral). In December 1980, he registered such name with the Los Angeles City County Recorder and applied for and received "City of Los Angeles Business Tax Registration [Certificates]" authorizing Euhedral to make retail and wholesale sales. In addition, he applied for and, in 1981, received a "Seller's Permit" from the California State Board of Equalization. Also, petitioner purchased stationery and business cards bearing Euhedral's name and opened checking accounts in its name in California and North Dakota, 10102 During 1980, 1981, 1982, 1983, and 1984, petitioner paid business taxes to the city of Los Angeles in the amounts of $ 38.75, $ 47.95, $ 60.67, $ 52.50, and $ 54.93, respectively. During 1981 through 1983, he filed quarterly "State, Local and District Sales and Use Tax [Returns]" with the California Board of Equalization, but, since he had no sales subject to California sales tax, such returns showed no tax liability. In Maryland where he had no sales, he neither filed any sales tax returns nor paid any sales taxes.Petitioner has never, at least until the date of trial, sold any of American Gold's product in any part of his assigned exclusive territory. Although he was aware that, notwithstanding his contract with Gem-Mart, he initially had to approach prospective purchasers, he has never contacted, either in person or otherwise, any jeweler in his assigned territory for the purpose of selling or even exploring the possibility of selling American Gold's product. At the time he 94 entered into the Territorial Distributorship Agreement, he had no intention of then visiting any jeweler in Bethesda or Ireland. Currently, he states that he has no interest in approaching any jeweler until the diamond market "improves" and has not acquired any "display" diamonds to use to arouse purchasers' interest. He has never taken custody of any gemstones other than the nine minimum product items previously discussed, which he had purchased for $ 1,000.During 1980 petitioner from time to time received form communications from Gem-Mart which were apparently being sent to all 103 other territorial distributors. In general, these communications announced the availability of various gems for purchase by the territorial distributors which Gem-Mart would in turn undertake to resell in accordance with the "Consulting Contract" between the individual territorial distributor and Gem-Mart. In some of the communications there was pointed reference to the tax benefits and the importance of showing some sales activity before the end of the year in order to obtain full tax benefits. Petitioner nevertheless made no purchases of any gems for resale at any time until December 1980.In response to a communication from Gem-Mart dated December 8, 1980, announcing the availability of certain colored gems to be imported from Brazil, petitioner sent a letter, also dated December 8, 1980, to Frank Davis as president of Gem-Mart in Provo, Utah, transmitting a $ 15,000 check payable to "Gem-Mart Trust Fund." He stated that the funds transmitted were "to be applied to your program concerning the import and sale of colored stones." He added that it was his understanding that Gem-Mart would be able to conclude a purchase and sale of colored stones on his behalf prior to the close of 104 the year, obviously intending thereby to support a claimed deduction for 1980. On or about December 12, 1980, Gem-Mart, without any further consultation with petitioner, used $ 10,366.50 of this money to purchase eight noninvestment grade diamonds, but not any imported colored Brazilian gems. By the end of December 1980, it sold some of the diamonds for a total of $ 8,923. Petitioner determined that the cost of the diamonds thus sold was $ 7,931. None of the stones was sold to any purchaser within petitioner's assigned 95 exclusive territory, nor does it appear that any effort was even undertaken to make any such sale in such territory.Gem-Mart also sold gemstones on petitioner's behalf through a joint venture program it created in 1981. Under this program, Gem-Mart pooled the resources of participating territorial distributors and then bought and sold gemstones on behalf of all participants in proportion to their respective interests in the joint venture. Each participant was credited with a proportionate share of the venture's sales and profits. As previously noted, petitioner in December 1980 had transmitted $ 15,000 to Gem-Mart for use in the purchase and sale of gemstones 105 on his behalf; and in February 1983, he transmitted an additional $ 5,000 to be added to the amount credited to him by Gem-Mart for use in the joint venture. None of Gem-Mart's sales on behalf of the joint venture was made to purchasers in petitioner's assigned exclusive territory.Petitioner was also involved in a program, "[by] virtue of [his] * * contractual agreement with Gem-Mart," through which he, along with other interested territorial distributors, financed jointly the purchase of inventory to be placed for sale with the Philip Michaels Jewelry Store (Philip Michaels) located inside the Denver, Colorado, Marriott Hotel. Petitioner, in February 1983, sent a $ 5,000 check to Gem-Mart representing his pro rata investment in that project. Participants in this program shared part of the profit on the sale of the financed inventory. Philip Michaels was owned by a corporation, DaMar Management Co.'s, Inc., which in turn was owned, in part, by Davis. Davis' indirect ownership of Philip Michaels was not disclosed to the territorial distributors; rather, it was represented to them that DaMar was "not affiliated" with Gem-Mart. As of December 1983, petitioner was treated as having 106 $ 5,732.64 invested in the Philip Michaels venture.Gem-Mart not only offered territorial distributors the above-described programs but also circulated "updates" and "Special Sale Bulletins." These publications were intended to educate territorial distributors about the gemstone industry, to provide information concerning Gem-Mart, and to announce special purchase opportunities and sales programs. Also, they often warned (as indicated above) that, for example, "it is most important that you show some sales activity within your 96 Territorial Distributorship before the end of the year -- in order to have full tax benefits," or "it is this type of purchase which establishes proof of authentic business operation of your Territorial Distributorship for the IRS." In addition, the "Updates" contained a section called "The Late Update" which often discussed tax-related issues such as tax reform, tax collection, and the problem of so-called tax protesters.Gem-Mart's sales programs were petitioner's only marketing outlet for American Gold's product until March 1983. He then made arrangements with a traveling salesman named Warren Johnson (Johnson) to sell product in Johnson's sales territory, 107 basically North Dakota, Minnesota, and Wisconsin. Petitioner was introduced to the opportunity of selling through a salesman by Dick Koons, who had sold distributorships and who was himself also a territorial distributor in Fargo, North Dakota. Petitioner has never met Johnson.Petitioner reported the following gross sales from the purchase and sale of American Gold's product:Sales by:PhilipWarrenYearGem-MartMichaelsJohnson1980$ 8,923.000 0 198111 74,439.000 0 198225,851.000 0 198318,917.71$ 2,214.35$ 3,193.95None of these sales occurred in any part of petitioner's assigned territory. Petitioner had no expectation that any individual employed by either Gem-Mart or American Gold would attempt to sell product within his territory.If the foregoing sales of American Gold's product 108 on petitioner's behalf are to be regarded as having been made pursuant to his Territorial Distributorship Agreement, his purchase of the merchandise involved should have resulted in a reduction in the amounts he owed U.S. Distributor under the notes he used to finance his principal sum payments. Pursuant to paragraph 16 of the agreement, a certain portion of the 97 amounts petitioner owed to U.S. Distributor should have been paid to U.S. Distributor each time purchases of American Gold's product were made by him or on his behalf. Although statements from Gem-Mart indicate that it withheld such payments before crediting petitioner with sales proceeds, 12109 the record does not establish that such funds were in fact paid to U.S. Distributor or that, if indeed the payments were made, U.S. Distributor made any notation, either on the notes or otherwise, reflecting such payment. Petitioner elected to use the accrual method of accounting for reporting income and expenses with respect to his territorial distributorship. On Schedule C of his respective Federal individual income tax returns, he reported the following with respect to his alleged operation of the distributorship:Total 13110 Net profitYearincomeDeductionsor (loss)19790$ 32,100($ 32,100)1980$ 99219,265(18,273)19817,29719,745(12,448)19824,6432,3282,315 19834,6271,3823,245 The deductions in the above table consisted of the following components shown on the respective Schedules of petitioner's returns for the years 1979-83:1979Distributorship fee$ 32,000Consulting fee10032,1001980Bank charges$ 80Commissions496Interest2,620Office supplies30Taxes39Distributorship fee16,00019,2651981Commissions3,649Interest48Taxes9Distributorship fee16,000License3919,7451982Bank service charges3Commissions2,264Taxes612,3281983Bank service charges32Commissions1,297Taxes531,38298 The "Distributorship [Fees]" in the amounts of $ 32,000 for 1979, $ 16,000 for 1980, and $ 16,000 for 1981 represent the amounts of the recourse notes petitioner employed in each of those years in making his annual principal sum payments. The 1980 interest deduction of $ 2,620 equals $ 1,920 (the 6-percent simple interest with respect to the 1979-$ 32,000 recourse promissory note), plus $ 700 (the 10-percent simple interest with respect to the 1979-$ 7,000 note). Petitioner did not report as income in his 1981 return the 1981 forgiveness of the $ 1,920 interest component. Nor did he report as income the $ 700 interest component 111 for any year in which his liability on the $ 7,000 note may be regarded as terminated. All of the "Commissions" for the years 1980-82 and substantially all of the "Commissions" for 1983 represented Gem-Mart's 50-percent share of the profits on sales which it generated.99 On October 6, 1982, petitioner filed Form 5213, "Election to Postpone Determination with Respect to the Presumption that an Activity is Engaged in for Profit," with the Internal Revenue Service Center at Fresno, California. He thus made the election set forth in section 183(e), I.R.C. 1954, to "postpone a determination whether the presumption that an activity * * * is engaged in for profit until the close of * * * the fourth taxable year * * * following the taxable year in which first engaged in such activity." On the Form 5213, he described his "for Profit" activity as the:Ownership, operation, development and exploitation of a wholesale and/or retail investment gem and/or jewelry business under the terms of a license and/or territorial distributorship agreement entered into between the taxpayer and his licensor and/or distributor in 1979, or otherwise.In his deficiency notice herein, dated April 11, 1983, the Commissioner 112 disallowed the losses petitioner claimed on Schedule C of his 1979 and 1980 returns with respect to the operation of his territorial distributorship. The Commissioner explained his determination as follows:1. You have not established that this amount was paid, or if it was paid, that it is an allowable deduction under any section of the Internal Revenue Code of 1954.2. You have not established that your activities in your alleged distributorship were not sham transactions to create artificial tax losses.3. You have not established that your activities in your alleged distributorship amounted to carrying on any trade or business within the meaning of Section 162 of the Internal Revenue Code of 1954, or were activities within the meaning of Section 212 of the Internal Revenue Code of 1954.4. You have not established that your alleged payment of a Distributorship Fee qualifies under Section 1253 of the Internal Revenue Code of 1954.He further determined that, if the above reasons were not sustained, petitioner's use of the accrual method of accounting materially distorted his income and that, pursuant to section 446(b), I.R.C. 1954, he would be required to utilize the cash receipts and 113 disbursements method of accounting in reporting his income with respect to the operation of the territorial distributorship. Additionally, he determined that the notes used to pay the "Distributorship Fee" were not bona fide debt obligations.100 OPINIONThis case involves a tax shelter structured as an exclusive territorial franchise to distribute gemstones and items of jewelry in an attempt to take advantage of section 1253(d)(2)(B)(ii) of the Internal Revenue Code of 1954. 14114 115 The principal tax benefit sought under these provisions is the deduction of a "Distributorship Fee" in the amount of "recourse" notes given by the exclusive territorial franchisee as installment payments for his distributorship. In this case, petitioner purported to purchase in 1979 a distributorship for $ 384,000, payable in 12 annual installments of $ 32,000 each. The deductions primarily at issue are the face amount of a $ 32,000 "recourse" note given by him as the first installment in 1979 and the face amount of a $ 16,000 "recourse" note which he gave as part of the second installment in 1980. 15In our judgment, the evidence overwhelmingly establishes that the so-called exclusive territorial franchise involved herein is a sham. We so find as a fact. Accordingly, we hold that petitioner is not entitled to the deductions claimed by him in respect of that exclusive territorial franchise. The mere fact 101 that he may have engaged in random profit-oriented jewelry transactions through Gem-Mart or otherwise in areas wholly outside of his exclusive territory cannot impart bona fides to his "exclusive territorial" franchise allegedly purchased by him. Those transactions were employed in part to give color to petitioner's claim to disproportionately large deductions based upon his alleged obligations 116 relating to his purchase of the exclusive territorial franchise. To be sure, petitioner is entitled to deduct any ordinary and necessary expenses associated with such random sales under section 212 of the Code, and the Government has conceded on brief the allowance of such deductions. But those transactions -- to be discussed more fully hereinafter -- can hardly justify the allowance of the large deductions of amounts allegedly paid (through notes or interest accrued thereon) in respect of a spurious exclusive territorial franchise itself.The record is replete with details leading to our finding that petitioner's exclusive territorial franchise is a sham. It would perhaps serve no useful purpose to enter into a comprehensive discussion of every such detail, but we will now proceed to comment on some of them that we regard as particularly noteworthy.The sham character of the exclusive territorial franchise. -- At the outset, it is important to understand that the very foundation for the entire territorial franchise or distributorship program rested on quicksand. At the base of that program were two newly created entities, American Gold and U.S. Distributor. Neither had any established 117 goodwill or indeed, so far as this record reveals, even any assets of consequence. Although Davis had access to precious gems in substantial amounts, American Gold, itself, had no inventory or product or source of product apart from what Davis might voluntarily make available to it. Yet American Gold purported to grant to U.S. Distributor an exclusive "right" for 50 years to distribute American Gold's "product" worldwide. But, as just noted, American Gold had no "product" other than that which Davis might choose to make available to it, and he was under no contractual or other legal obligation to sell or turn over any "product" to American Gold. Thus, the entire structure could collapse if Davis should decide to direct the flow of the inventory to some other entity controlled by him, or to make 102 some other use of such inventory, or if he should decide to abandon the gemstone and jewelry business, or if he should become incapacitated by accident or illness, or upon his death. And the "right" which American Gold granted to U.S. Distributor was to extend over a period of 50 years -- a "right" that was so defeasible and so illusory. The record shows that U.S. Distributor paid absolutely 118 nothing for this "right," and in our view, it wasn't worth much more.Having paid nothing for the foregoing "right" to distribute American Gold's product worldwide, U.S. Distributor then proceeded to fragment this right into geographical segments and to "sell" such fragments as exclusive territorial distributorships to franchisees, each of whom would then theoretically undertake to promote the sale of American Gold's product within the exclusive specified territory allocated to him. The minimum price for such a franchise or distributorship was $ 240,000, an amount that increased sharply depending primarily upon the amount of "tax savings" that the purchaser wished to achieve. Petitioner chose to purchase one for $ 384,000. The goal of the program was to sell some 5,000 distributorships, although only about 1,000 were actually sold. Even at the minimum price of $ 240,000, the total amount thus sold was at least about $ 240 million -- all for segments of a "right" which U.S. Distributor got for nothing and which was wholly illusory! In this connection, the territorial distributorship program is not unlike other so-called tax shelters which involve the resale of, for example, motion 119 pictures, master recordings, or lithographic plates, at grossly inflated prices. See, e.g., Flowers v. Commissioner, 80 T.C. 914">80 T.C. 914, 937 (1983); Siegel v. Commissioner, 78 T.C. 659">78 T.C. 659, 685 (1982); Brannen v. Commissioner, 78 T.C. 471">78 T.C. 471, 494, 498 (1982), affd. 772 F.2d 695">772 F.2d 695 (11th Cir. 1984); Reali v. Commissioner, T.C. Memo. 1984-427, 48 T.C.M. (CCH) 826">48 T.C.M. 826, 53 P-H Memo T.C. par. 84,427. See also Estate of Franklin v. Commissioner, 544 F.2d 1045">544 F.2d 1045, 1048 (9th Cir. 1976), affg. 64 T.C. 752">64 T.C. 752 (1975); Estate of Baron v. Commissioner, 83 T.C. 542">83 T.C. 542, 554 (1984).Bearing in mind that neither American Gold nor U.S. Distributor had any goodwill whatever in respect of any potential exploitation of that "right," one may well ask who in his right mind would undertake to buy a $ 240,000 or $ 384,000 franchise in these circumstances. In the case of petitioner, 103 whom we found to be knowledgeable and highly sophisticated, the answer surely cannot be found in the oft-repeated cynical observation attributed to P.T. Barnum that "There's a sucker born every minute." The explanation is that the entire program of exclusive territorial franchises was merely an elaborate scheme to avoid taxes, having no business purpose.The inescapable 120 conclusion is that the so-called exclusive territorial franchise involved herein is a sham, and that it is not the sort of thing that Congress ever intended to include within the meaning of "franchise" in section 1253, any more than it intended the virtually meaningless steps in Gregory v. Helvering, 293 U.S. 465">293 U.S. 465, 469 (1935), to qualify as a corporate "reorganization" within the statutory provisions there under consideration. In the numerous attempts to support tax-avoidance devices, it has become increasingly fashionable to quote dicta in Gregory to the effect that a taxpayer has the legal right "to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits" (293 U.S. at 469). But the use of that dicta in cases like the present stands Gregory on its head, for the very holding in Gregory was to the contrary, where the Court concluded that what was done there, even though scrupulously in accord with the literal language of the statute, was mere artifice and not the thing that the statute intended. In this connection, compare Saviano v. Commissioner, 765 F.2d 643">765 F.2d 643, 654 (7th Cir. 1985), affg. 80 T.C. 955">80 T.C. 955 (1983), where the Seventh 121 Circuit stated in commenting upon the principle that one may so arrange his affairs that his taxes may be as low as possible:The freedom to arrange one's affairs to minimize taxes does not include the right to engage in financial fantasies with the expectation that the Internal Revenue Service and the courts will play along. The Commissioner and the courts are empowered, and in fact duty-bound, to look beyond the contrived forms of transactions to their economic substance and to apply the tax laws accordingly.The fact that petitioner did actually participate in some profit-oriented jewelry transactions wholly unrelated to his exclusive territory should not obscure the spurious nature of the franchise itself. Before commenting more fully on this aspect of the case, we will meanwhile now set forth some of the factors relating to petitioner's Territorial Distributorship Agreement, itself, and the conduct of the parties thereunder, 104 which give further confirmation to our findings as to the sham character of his exclusive territorial franchise.Although petitioner purported to undertake to pay $ 384,000 for an exclusive territorial distributorship, his exclusive territory was nowhere identified 122 in the agreement, either when signed by him on December 27, 1979, or when signed on behalf of the other parties thereto on February 29, 1980. The only place in the agreement where the territory was to be specified was Exhibit D. But Exhibit D was left entirely blank when the agreement was originally signed by petitioner in December 1979 and finally executed by all parties in February 1980. To be sure, petitioner had requested a territory including certain portions of Encino, California, and Bethesda, Maryland, and he had been told by a Mr. Knowles in December 1979 that such territory would be assigned to him if it had not been assigned to someone else. But such oral "assurance" by Mr. Knowles had no binding effect, and in fact no such assignment was made to petitioner on February 29, 1980, when the agreement was finally executed by all the parties.It staggers the imagination to believe that any careful lawyer like petitioner would even consider obligating himself to purchase an exclusive territorial franchise for $ 384,000 -- an amount shown by the evidence to have been vastly in excess of any investment that he had ever theretofore made in his lifetime -- when the location of 123 the territory was not specified in the contract. Indeed, under the contract, he could have been assigned a territory in Alaska, in the Soviet Union, in Greece, Turkey, South Africa, Sri Lanka, or anywhere in the world. The location of the territory does not appear to have been of critical importance to petitioner, and the real explanation for this seemingly extraordinary situation is that this was no true, bona fide agreement to purchase an exclusive territorial franchise.We note that a completed Exhibit D was received by petitioner in August 1980, but even this Exhibit D was superseded by another Exhibit D in October 1980, specifying different areas identified by different zip code numbers in both Encino and Bethesda. It was explained to him that some unidentified person named "Penni" had been assigning territories incorrectly. Again, this is but further evidence that the 105 parties were not taking the agreement seriously, and gives added weight to our finding of sham.Another fact that we cannot ignore is that, up to the time of trial herein (July 1984), petitioner never made any sales whatever, or attempted to make any sales, or even explored the possibility of making any sales 124 in his exclusive territory -- either in person, or through Gem-Mart or any other agent. He explained his failure to make any effort on the ground that beginning sometime in 1980 there was a sharp decline in selling prices of investment-grade diamonds, that the diamond market was in disarray, and that he was waiting for it to stabilize. We found that explanation wholly unconvincing and incredible.True, the evidence did establish that there had been a very steep and uncontrolled rise in the sales prices of investment-grade diamonds for a period up to some point in 1980, when there was a turnaround in prices for such stones. However, we regard the evidence in respect of the diamond market merely as a smokescreen, calculated to mislead the IRS and this Court. Investment-grade diamonds represented only a part of American Gold's purported "product," and, as indicated by the minimum product requirement of the agreement, the real focus was not upon investment-grade diamonds but upon the high-profit imported colored gems, products C and D. Petitioner could readily have undertaken (either alone or through an agent) to do something about making sales or at least exploring the possibility 125 of making sales of colored gems or other product in his exclusive territory. Plainly, he was not limited to selling investment-grade diamonds, and the record shows that there was market activity even in sales of diamonds, generally. Indeed, in December 1980, Gem-Mart sold some diamonds on petitioner's behalf in a random sale or sales wholly unrelated to his exclusive territory. We simply do not believe petitioner's explanation for his failure to make any effort whatever, even on an exploratory basis, to visit a single jewelry outlet in his territory. The real explanation is that he "bought" a tax-avoidance device, not a bona fide $ 384,000 exclusive territorial franchise.Further evidence of the spurious character of the agreement is the conduct of the parties in respect of the contractual requirement that petitioner purchase "Minimum Product" for 106 cash. His obligation in this respect was to buy for cash minimum product in an amount equal to one-fourth of the face amount of any recourse note given by him as part of an installment payment of the purchase price of his franchise. Since he gave such notes in the amounts of $ 32,000, $ 16,000, and $ 16,000 for the years 1979, 1980, and 126 1981, respectively, he was contractually obligated to buy minimum product for cash in the amounts of $ 8,000, $ 4,000, and $ 4,000, for those years, respectively. Yet, he did no such thing, with the assent of, or at least without objection from, any of the parties concerned. He purchased $ 1,000 of minimum product (imported colored stones) in 1979, and nothing in 1980 or 1981. Instead, he gave notes (for which he did not receive any minimum product) in the amounts of $ 7,000, $ 4,000, and $ 4,000. These notes have not been paid. He has been explicitly relieved of liability on one of them, and, in our view of the evidence, he neither regards himself as liable on the other two, nor will he ever make payment thereon.In 1981, there was a "Modification" agreement which made substantial changes in petitioner's original agreement to purchase his $ 384,000 exclusive territorial franchise. The Modification Agreement was undated, and recited merely that it "has been executed no later than December 31, 1981," an extraordinary situation leaving up in the air the matter of just when the revised provisions became legally effective. 16 Notwithstanding some testimony indicating otherwise, we 127 are satisfied on the record that there were no real negotiations between the parties as to the substance of the Modification Agreement. These new provisions were characterized by confusion, sloppy draftsmanship, and inaccuracies -- hardly the sort of thing that a competent lawyer like petitioner would have been expected to enter into if it were indeed regarded seriously by the parties as fixing their respective rights and obligations. One of the most amazing provisions in the modification agreement is a retroactive elimination of interest on installment notes given in payment of the principal sum ($ 384,000). Since the notes bore 6-percent simple interest and matured some 25 to 30 years later, the elimination of the interest 107 reduced petitioner's purported ultimate aggregate liability by over 150 percent of the face amounts of the notes. Moreover, as we pointed out in our findings, supra, p. 90, the self-contradictory language 128 in one of the notes identified as a nonrecourse note described the maker's liability as unlimited! Petitioner obviously paid little, if any, attention to the content of these notes when he signed them.Of even greater significance in assessing the bona fides of the entire transaction is petitioner's indifference to obtaining possession of the old notes when executing new, substitute notes under the Modification Agreement. It is inconceivable to us that a knowledgeable and careful lawyer like petitioner would execute a new note without, at the same time, having the substituted note returned to him, particularly when he regarded them as being possibly negotiable. The record indicates that he did not even make any effort to recover possession of the old notes. The explanation in our judgment is that he did not take these notes seriously and that he did not think that he would ever be called upon to pay them. We heard his testimony that he intended to pay those notes ultimately, but we did not find that testimony credible. In the context of this entire record, we do not believe that petitioner in fact contemplates payment of the notes. 17130 This circumstance gives added weight to our 129 finding that his exclusive territorial franchise is a sham. In reaching the foregoing conclusion as to the nature of petitioner's "exclusive territorial franchise," we hasten to 108 point out that we were fully aware of, but not fooled by, petitioner's transparent attempts to clothe his distributorship in the garments of a genuine business enterprise. The adoption of the fictitious name "Euhedral Enterprises," the registration of that name with the Los Angeles authorities, the Los Angeles authorization of Euhedral to make retail and wholesale sales, the obtaining of a seller's permit from the California State Board of Equalization, the purchase of stationery and business cards bearing Euhedral's name, the opening of checking accounts in its name in California131 and North Dakota, the payment of minor amounts of business taxes to the City of Los Angeles during the years 1980-84, the filing of sales tax returns with the California Board of Equalization during 1981-83 (unaccompanied by any payment, since there were no California sales) -- all these were merely parts of the disguise obviously intended to project the misleading image of a gemstone business being carried on by petitioner in his exclusive territory. Petitioner never conducted any gemstone or jewelry business, either alone or through Gem-Mart or any other agent, in his exclusive territory. The adoption of the name Euhedral Enterprises was nothing more than a meaningless gesture. There is not the slightest indication that there was any advertising in its name, or that there were any efforts whatever, by mail, word of mouth, or otherwise, to call attention to its very existence to any prospective purchaser of gems.The record is replete with other evidence of lack of bona fides in petitioner's purported purchase of an exclusive territorial franchise for $ 384,000. We need not belabor the point further. The exclusive territorial franchise was a sham. Section 1253 was never intended 132 to apply to any such situation. And the same considerations are equally applicable to any attempt to support the claimed deductions under section 162 to the extent that they relate to the so-called exclusive territorial franchise. Petitioner is therefore not entitled to any deduction for accrued distributor's fees or interest in respect of any note relating to the exclusive territorial franchise.There is a further aspect to this case which, in any event, calls for the disallowance of the deduction claimed by petitioner for 1979. As is amply revealed by the record and set forth in 109 our findings, there was no binding contract whatever during 1979 giving petitioner any purported franchise. The earliest date on which any contract was executed by the parties was February 29, 1980, and even on that date no exclusive territory was then assigned to petitioner.The jewelry transactions conducted or arranged by Gem-Mart. -- Although it is true that petitioner invested certain funds to enable Gem-Mart to execute some jewelry transactions, either directly on petitioner's behalf or through a joint venture, these transactions bore no relationship whatever to petitioner's so-called exclusive territorial 133 franchise. Not a single sale was made -- or even attempted to be made so far as this record discloses -- in the exclusive territory 18 allegedly purchased by petitioner for $ 384,000. These sales had nothing whatever to do with petitioner's so-called exclusive territory. Yet the principal deductions at issue herein are amounts euphemistically described as "distributorship fees," purportedly paid or incurred by petitioner to acquire his exclusive territorial franchise.To be sure, the sales made by Gem-Mart either directly or through Philip Michaels in Denver, Colorado, can fairly be treated as transactions entered into for profit. And the Government now concedes that petitioner is entitled under section 212 to all the ordinary and necessary expenses incurred in connection with these sales. But the spurious "distributorship fees" do not qualify 134 as such ordinary and necessary expenses. Such "fees" were in no sense proximately related to these sales. The "fees" were theoretically incurred to obtain an exclusive territorial franchise, and these sales were not made in any way in connection with any such exclusive territorial franchise. Such sales were obviously calculated in part to create the misleading impression that petitioner had made a bona fide purchase of an exclusive territorial franchise and was actually making sales pursuant to the authority granted to him under that franchise. No such latter conclusion could be further from the truth.110 Nor is there any persuasive force to petitioner's desperate effort to breathe vitality into his position by the suggestion that the sales made outside his territory were made "on an exclusive basis, together with other distributors," which should therefore qualify for treatment under section 1253. He contends that more than one person can join in the acquisition of an exclusive right to distribute a product. This is an unassailable truism, but that is not what occurred here. Petitioner did not join with anyone in "acquiring" his "exclusive territorial franchise," nor did he join 135 with anyone else in acquiring exclusive rights to distribute American Gold's product in the territory of such other person. It is sheer nonsense to assert that sales made by the joint venture were made in any exclusive territory acquired by petitioner. 19136 These sales were nothing more than transactions entered into by petitioner for profit -- whether regarded as casual transactions governed by section 212 or as a separate business governed by section 162 -- wholly unrelated to any exclusive territorial franchise allegedly purchased by him. He is entitled to no deduction under section 1253 or under section 162 in respect of any exclusive territorial distributorship fee or any item relating thereto. He is entitled under section 212 -- and possibly under section 162 -- to any ordinary and necessary expenses incurred in connection with such sales, but such expenses do not include any "distributorship fee" or any item relating thereto. What we have said above is applicable in large part to the few sales made on petitioner's behalf in 1983 by the traveling salesman, Warren Johnson. These sales were made in Johnson's area of business activity, namely, North Dakota, Minnesota, and Wisconsin. They were wholly unrelated to any exclusive territorial franchise allegedly purchased by petitioner for zip code areas belatedly specified in Encino, California; 111 Bethesda, Maryland; and Galway and Waterford, Ireland. Such sales in no way support petitioner's 137 claim to deductions for his exclusive territorial "distributorship fees" and related items.Burden of proof and other issues. -- At the start of the trial, petitioner filed a "Motion to Shift Burden of Proof to Respondent Re the Issue of Whether Petitioner Engaged in the Activity at Issue Herein for Profit." Since petitioner's counsel assured the Court that a ruling on the motion would not affect his conduct of the case, and since he recognized that the sham issue raised by the Government "probably covers the profit motive material also," the Court decided not to rule on the motion at that time. The motion was based upon section 183 of the Code, pertinent provisions of which are set forth in the margin. 20139 140 Petitioner relies upon the alleged fact that he 183 reported a profit in 2 of 5 consecutive years as required by section 183(d) and the fact that he timely filed an election under section 183(e). Petitioner's position is explained in his motion as follows:Internal Revenue Code Section 183(d) provides that should the taxpayer so elect, respondent may not make a determination as to whether the presumption applies. Petitioner properly made the election. Since the determination in 138 the Statutory Notice of Deficiency was premature, it should have been raised only by way of respondent's Answer. In this regard, Rule 142(a) of the Rules of Practice and Procedure of the United States Tax Court states, in relevant part, "The burden of proof shall be upon the petitioner, * * * except that in any new matter * * * pleaded in his answer, it shall be upon respondent * * ." We reject that contention. It is faulty for a number of reasons, but we need articulate only several of them. In the first place, 141 regardless of who bore the burden of proof, a full record was made herein, and our conclusion as to the sham character of the exclusive territorial franchise is amply supported by the evidence even if the burden of proof was upon respondent.In the second place, petitioner's position is based upon the slippery assumption that his concededly bona fide casual jewelry transactions may be blended together with a phony exclusive territorial franchise so as to create the illusion of a single "activity" within section 183, in order to support the deduction of a spurious "distributorship fee" by reson of profits earned in two years from the casual jewelry transactions. But, as we have found above, these two "activities" may not be synthesized. In fact, petitioner carried on no "activity" whatever in respect of his purportedly exclusive territorial franchise. 21142 The casual sales bore no valid relationship whatever to the so-called exclusive territorial franchise, and there was no profit whatever in any of the 5 years in respect of the "activity" of functioning as a territorial distributor.Before petitioner may successfully invoke the provisions of section 183(d) and (e), the burden is upon him to show that he qualifies thereunder, i.e., that the conditions specified for the 113 application of these provisions have been met. As with any presumption, the party relying upon it must establish the basic facts giving rise to it. Fed. R. Evid. 301 advisory committee note. 22 See also S. Rept. 93-277, at 9 (1974); H. Rept. 93-1597, at 5-6 (1974). In this connection, petitioner has totally failed. He has not shown that there was an "activity" over a 5-year period in which the alleged exclusive territorial franchise was an integral part, and in which he derived a profit in 2 of the 5 years. To the contrary, the record is abundantly clear in revealing that whatever jewelry transactions may have been conducted on petitioner's behalf, none of them could properly be blended with the exclusive territorial franchise 143 so as to represent a single "activity" in which the distributor's fees are a legitimate charge against the profits of the jewelry sales. The same considerations that we dealt with earlier in this opinion in support of our finding that the so-called exclusive territorial franchise was a sham are equally pertinent here.A further impediment may well exist in respect of petitioner's position. The statutory provisions involve not a burden of proof, but merely a presumption. Once established, a presumption requires only that the party against whom it is directed go forward with evidence to rebut or meet the presumption. The "risk of nonpersuasion" -- i.e., the burden of proof -- remains throughout the trial on the party on whom it was originally cast. Fed. R. Evid. 301. See Rockwell v. Commissioner, 512 F.2d 882">512 F.2d 882, 885 (9th Cir. 1975). But see Faulconer v. Commissioner, 748 F.2d 890">748 F.2d 890 (4th Cir. 1984), 144 reversing a memorandum opinion of this Court. However, we need not pass upon this point.Moreover, in view of the conclusion that we have reached, we need not dwell on still further considerations that arguably support the Government's position -- e.g., that even the modest "profits" reported by petitioner for the two years 1982 and 1983 would vanish if the nonrecourse notes in those years were taken into account; that in view of the possibility of distortion of income by manipulative use of recourse or nonrecourse notes to produce either profit or loss under the accrual system, 114 the Commissioner was justified in requiring petitioner to report his transactions on the cash basis rather than on the accrual basis in order to clearly reflect his income, thereby resulting in the disallowance of the deduction for the distributor's fees reflected in the unpaid "recourse" notes given in 1979 and 1980, the years before the Court; or that regardless of petitioner's system of accounting, section 1253(d)(2)(B) requires actual "payment" in discharge of the principal sum over a period of 10 or more years and that petitioner's recourse notes "are merely promises to pay, rather than payments." Cf. 145 Don E. Williams Co. v. Commissioner, 429 U.S. 569">429 U.S. 569 (1977).It is not necessary to pursue the matter any further. The claimed deductions now in controversy were plainly not allowable.Decision will be entered for the respondent. Footnotes1. Certain "Instructions" at the bottom of Exhibit G to the agreement, infra↩, p. 86, would appear to indicate that there was still a third copy that was to be sent to an escrow company in Carson City, Nevada.2. As will appear hereinafter, there were only two possible dates when the agreement might arguably have been entered into: Dec. 27, 1979, and Feb. 29, 1980. At neither of those dates was there any executed Exhibit D identifying any territory purportedly assigned or to be assigned to petitioner.↩3. The purchase price does not appear in the body of the agreement, and although there is a place therefor on the form constituting Exhibit D, that exhibit was left entirely blank, as noted above, at whatever date the agreement may conceivably be considered as having been entered into. See note 2 supra↩. As will appear hereinafter, the amount was entered on two different Exhibits D dated July 30, 1980, and Oct. 22, 1980, which were inconsistent with each other in the identification of the territory purportedly assigned to petitioner.4. The evidence, however, establishes that Gem-Mart did in fact make "business decisions" and carried out transactions without consulting petitioner in connection with any sales arranged by it. As will appear hereinafter, no sales were in fact made in petitioner's exclusive territory and the sales actually made are referred to hereinafter as "random" or "casual" sales.↩5. Par. 16 of the agreement provided for prepayments on "all Principal Sum Annual Installment Promissory Notes * * * in the amount of ten (10%) percent of the total cost of" product purchased from American Gold. A statement within the body of the modification read, in part, "prepayment requirements on notes when purchasing product have been reduced from ten and twenty percent to five and ten percent." Promissory notes attached to the modification contained a paragraph which called for prepayments which varied depending upon the type of product a distributor purchased. However, see supra↩, p. 83, as to the illusory character of the prepayment requirement. The reduction in the modification would be applicable only if a territorial distributor purchased any product (other than minimum product), and he was under no obligation to make any such purchase.6. Upon being shown this inconsistency at the trial, petitioner exclaimed, "I'll be darned."7. It is conceivable that the 20-percent figure appears in the "Contract Documents" pamphlet that was used for 1981 and possibly for 1980. However, the Modification Agreement as it relates to petitioner should properly have been made applicable to the Territorial Distributorship Agreement signed by him that was contained in the 1979 version of the "Contract Documents" pamphlet. No copy of the 1980 or 1981 "Contract Documents" pamphlet was attached to the Modification Agreement or made available to the Court.↩8. The note for 1981 was that $ 4,000 note attached to the Modification Agreement. See supra↩, p. 90.9. No evidence was presented concerning whether the 1981 $ 4,000 note has been canceled.↩10. Petitioner opened a checking account in 1983 in North Dakota in connection with a relationship he established with Warren Johnson, a traveling salesman, who, as set forth more fully hereinafter, sold jewelry in North Dakota, Minnesota, and Wisconsin.11. Petitioner's only investment with Gem-Mart through 1981 was his original $ 15,000 check in December 1980. The $ 74,439 sales, which yielded a "total income" of $ 7,297 prior to allocating 50 percent thereof to Gem-Mart as its share, obviously were made in substantial part out of a revolving fund based on reinvestments of proceeds of sales stemming from petitioner's original $ 15,000 investment.↩12. Another confusing aspect of this case that petitioner could not clarify concerns the amount of these withholdings. Documents in evidence indicate that Gem-Mart withheld, as repayments of the notes petitioner used to finance his principal sum payments, amounts ranging from 12 1/2 to 5 percent of petitioner's share of profit on Gem-Mart sales made on his behalf. Petitioner could not "specifically" explain the difference in percentages, but did allude to the changes the modification made to the prepayment obligation. However, these changes (to the extent applicable to petitioner) merely reduced the obligation from 10 percent to 5 percent. Also, although the agreement and the modification require prepayments based upon a percentage of "total cost of TERRITORIAL DISTRIBUTOR for all PRODUCT purchased," Gem-Mart appears to have withheld a smaller amount, based upon a percentage of gross profit, not a percentage of cost.13. Total Income = Sales - Cost of Goods Sold + Other Income. The only items of "other income" reflected in the above table were $ 117 in 1982 identified as "Misc." and $ 197 in 1983 identified as "Interest."14. SEC. 1253. TRANSFERS OF FRANCHISES, TRADEMARKS, AND TRADE NAMES.(a) General Rule. -- A transfer of a franchise, trademark, or trade name shall not be treated as a sale or exchange of a capital asset if the transferor retains any significant power, right, or continuing interest with respect to the subject matter of the franchise, trademark, or trade name.(b) Definitions. -- For purposes of this section -- (1) Franchise. -- The term "franchise" includes an agreement which gives one of the parties to the agreement the right to distribute, sell, or provide goods, services, or facilities, within a specified area.* * * (d) Treatment of Payments by Transferee -- (1) Contingent payments. -- * (2) Other payments. -- If a transfer of a franchise, trademark, or trade name is not (by reason of the application of subsection (a)) treated as a sale or exchange of a capital asset, any payment not described in paragraph (1) which is made in discharge of a principal sum agreed upon in the transfer agreement shall be allowed as a deduction -- * * * (B) in the case of a payment which is one of a series of approximately equal payments made in discharge of such principal sum, which are payable over --(i) the period of the transfer agreement, or(ii) a period of more than 10 taxable years, whether ending before or after the end of the period of the transfer agreement,in the taxable year in which the payment is made * * *↩15. In addition, he gave a $ 16,000 nonrecourse note to complete the $ 32,000 installment for 1980. Also related to the franchise is a claimed deduction in 1980 for two items of interest aggregating $ 2,620 accrued in 1980 in respect of (a) petitioner's $ 32,000 installment note for 1979 and (b) a $ 7,000 note given by him as part of a purported obligation to purchase gemstones in 1979.↩16. The parties stipulated that "In approximately September 1981, petitioner executed" the Modification Agreement. There is no evidence whatever as to when it was executed by the other parties or as to the date when it became legally binding upon the parties.↩17. Nor is our conclusion in this respect affected by the provisions of par. 16 of the agreement, supra, p. 80, requiring prepayments in the amount of 10 percent of the franchisee's cost for all product (other than minimum product) purchased from American Gold. In the first place, no product was purchased by petitioner for resale in his exclusive territory. Moreover, to the extent that Gem-Mart acquired any product on petitioner's behalf, which it sold in random transactions outside of petitioner's territory, it withheld from him a percentage of the profit on sale, not the larger amount based upon a percentage of cost as purportedly required by par. 16 of the agreement. Such withholdings appear to have been in comparatively small amounts. Further, the record is utterly silent as to whether the amounts of any such withholdings were ever recorded on the notes as having been paid to that extent. Since petitioner thought that the notes might be negotiable, it again raises the troubling question whether he seriously regarded them as an obligation, particularly in view of the fact that he made no effort to find out whether such "prepayments" had actually been entered on the notes. The entire subject of the so-called prepayments impresses us merely as a device for increasing to some extent the profits realized on behalf of the owners of American Gold and U.S. Distributor (both ultimately owned in identical proportion by the same persons) on the random sales of gems furnished to the program by Davis -- in part as part of an attempt to give color to the purported bona fides of the exclusive territorial franchise.18. We note also that par. 25(c) of the Territorial Distributorship Agreement, supra, pp. 80-81, recites that petitioner "intends to personally promote the PRODUCT in the Territory acquired or cause promotion to be effected within the Territory↩" (emphasis supplied). The evidence establishes that there was no compliance herein with this provision.19. Further, in this connection, the first sentence of par. 25(d) of the Territorial Distributorship Agreement provides that "as a TERRITORIAL DISTRIBUTOR, [petitioner] will not be entitled to participate with other TERRITORIAL DISTRIBUTORS with reference to expenses, profits, or otherwise." Moreover, the second sentence of that paragraph states that the territorial distributor's "profits, if any, earned as a TERRITORIAL DISTRIBUTOR will depend solely on his own management and marketing ability, and not that of the DISTRIBUTOR or the IMPORTER or any affiliate." Yet Gem-Mart was wholly owned by American Gold (the "Importer"), and petitioner's contract with Gem-Mart, pursuant to which Gem-Mart conducted or arranged to conduct all of the sales in 1980, 1981, and 1982, on petitioner's behalf, was entered into on Feb. 29, 1980, the very same day that the Territorial Distributorship Agreement was entered into by all the parties thereto.20. SEC. 183. ACTIVITIES NOT ENGAGED IN FOR PROFIT.(a) General Rule. -- In the case of an activity engaged in by an individual or an S corporation, if such activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter except as provided in this section.(b) Deductions Allowable. -- In the case of an activity not engaged in for profit to which subsection (a) applies, there shall be allowed -- (1) the deductions which would be allowable under this chapter for the taxable year without regard to whether or not such activity is engaged in for profit, and(2) a deduction equal to the amount of the deductions which would be allowable under this chapter for the taxable year only if such activity were engaged in for profit, but only to the extent that the gross income derived from such activity for the taxable year exceeds the deductions allowable by reason of paragraph (1).(c) Activity Not Engaged in for Profit Defined. -- For purposes of this section, the term "activity not engaged in for profit" means any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212.(d) Presumption. -- If the gross income derived from an activity for 2 or more of the taxable years in the period of 5 consecutive taxable years which ends with the taxable year exceeds the deductions attributable to such activity (determined without regard to whether or not such activity is engaged in for profit), then, unless the Secretary establishes to the contrary, such activity shall be presumed for purposes of this chapter for such taxable year to be an activity engaged in for profit. In the case of an activity which consists in major part of the breeding, training, showing, or racing of horses, the preceding sentence shall be applied by substituting the period of 7 consecutive taxable years for the period of 5 consecutive taxable years.(e) Special Rule. -- (1) In general. -- A determination as to whether the presumption provided by subsection (d) applies with respect to any activity shall, if the taxpayer so elects, not be made before the close of the fourth taxable year (sixth taxable year, in the case of an activity described in the last sentence of such subsection) following the taxable year in which the taxpayer first engages in the activity. For purposes of the preceding sentence, a taxpayer shall be treated as not having engaged in any activity during any taxable year beginning before January 1, 1970.(2) Initial period. -- If the taxpayer makes an election under paragraph (1), the presumption provided by subsection (d) shall apply to each taxable year in the 5-taxable year (or 7-taxable year) period beginning with the taxable year in which the taxpayer first engages in the activity, if the gross income derived from the activity for 2 or more of the taxable years in such period exceeds the deductions attributable to the activity (determined without regard to whether or not the activity is engaged in for profit).↩21. We note that in connection with the "at risk" provisions of sec. 465, there may be instances where some activities may be "aggregated." Sec. 465(c)(3)(B) and (C). But even under those provisions, petitioner's inactive "activity" of being an exclusive territorial distributor could not be aggregated with his wholly separate "activity" involving random sales of jewelry elsewhere.22. Trials before this Court are conducted in accordance with the Federal Rules of Evidence, 28 U.S.C. app., the rules of evidence applicable in trials without jury in the U.S. District Court for the District of Columbia. Sec. 7453, I.R.C. 1954; Rule 143(a), Tax Court Rules of Practice and Procedure; Fed. R. Evid. 101↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625014/	AMY H. CRELLIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. EDWARD W. CRELLIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. WILLIAM H. JACKSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Crellin v. CommissionerDocket Nos. 5766-5768.United States Board of Tax Appeals12 B.T.A. 234; 1928 BTA LEXIS 3572; May 31, 1928, Promulgated 3572 Held, on the evidence that the dividends involved herein were cash dividends and not stock dividends. H. Maurice Darling, Esq., for the petitioners. George G. Witter, Esq., for the respondent. MARQUETTE 234 These proceedings are for the redetermination of deficiencies in income tax asserted by the respondent for the year 1917 as follows: Amy H. Crellin, $431.10; Edward W. Crellin, $7,760.85, and William H. Jackson, $11,446.76. The issues raised by the pleadings are (1) whether certain dividends received by the petitioners in the year 1917 were stock dividends or taxable dividends, and (2) if they were taxable, whether they were paid from surplus accumulated prior to December 31, 1916. The cases of Edward W. Crellin, Docket No. 5767, and William H. Jackson, Docket No. 5768, were consolidated for hearing and decision, and it was stipulated that the decision in those cases would control the decision in the case of Amy H. Crellin, Docket No. 5766. FINDINGS OF FACT. The petitioners are individuals residing at Pittsburgh, Pa. The petitioner Amy H. Crellin is the wife of the petitioner Edward W. Crellin. Prior to March 1900 the3573 petitioners Edward W. Crellin and William H. Jackson formed a partnership with one Berkley N. Moss, each owning a one-third interest therein, to carry on the business of manufacturing structural steel for bridges, water tanks, and other purposes. In March, 1900, they organized the Des Moines Bridge & Iron Works, hereinafter called the Des Moines Co., under the laws of Iowa, which succeeded to the assets and business of the partnership. Each of the three former partners owned an equal number of shares of the capital stock of this corporation, and there was an oral agreement that their interests would remain equal. In 1911 Moss sold his stock in the corporation to Crellin and Jackson, and from that date Crellin and Jackson, and their families, owned in equal amounts the greater part of the shares of the corporation. 235 There was an oral understanding between Jackson and Crellin that they would continue to own the capital stock of the corporation in equal shares, it being understood that the shares held by their respective families would be considered their shares for the purposes of the agreement. In the year 1907 the Des Moines Co. established a branch office at Pittsburgh, 3574 Pa. Within a few years this branch became more important than the main office, and in the year 1916 it was incorporated as the Pittsburgh-Des Moines Co. under the laws of Pennsylvania. Crellin and Jackson owned practically all of the Pittsburgh Company's stock in equal proportions, and they had an oral agreement that they would keep their interests and those of their families equal. The original capital of the Pittsburgh Company was paid in as follows: The Des Moines Co. issued dividend checks to Crellin and Jackson; they endorsed the checks back to the company, and it in turn transferred the amount of the checks to the Pittsburgh Company, which issued its stock therefor. The Pittsburgh Company was created in order to escape the Pennsylvania tax on foreign corporations doing business in that State. No change was made in the manner of conducting the business; separate books were kept, but the Des Moines Company and the Pittsburgh Company were thought of, and referred to by the officers and employees thereof, as the Des Moines branch and the Pittsburgh branch. The two corporations worked as a unit. Tools, material, workmen and orders were freely shifted from Des Moines to Pittsburgh, 3575 and vice versa, as the needs of the moment required. The salaries paid to Crellin and Jackson were made up by the corporations in practically equal amounts. Beginning in 1902 certain of the more valued employees of the Des Moines Company were given the opportunity to purchase stock in that corporation at par, and beginning some time in 1917 the employees of the Pittsburgh Company were given the opportunity to purchase stock in that corporation at par. The shares so issued constituted a special class of common stock, known as "Employees Stock," which differed from the common stock issued to Crellin and Jackson, and their families, in that the employee could not sell or transfer his stock to any other person, and upon leaving the employ of the company he was required to return his stock to the company, which bound itself to take the stock at par. Employees owning stock could cash their dividend checks or turn them back to the company for more stock, as they wished. If the employees elected to turn back their dividend checks and take stock, they were given the privilege of taking stock in either of the companies. 236 From March, 1900, to the end of the year 1917 only3576 small amounts were drawn by Crellin and Jackson as salary, and all the profits of the two corporations were turned back into the business, except as hereinafter noted. In the years prior to 1908 the surplus of the Des Moines Company was capitalized at the end of each year by transferring it by means of entries debiting the shop accounts, or gain and loss account, and crediting the capital stock account. Beginning in 1908 checks were drawn when the directors authorized a dividend, and these checks were endorsed and returned to the company by Crellin and Jackson and stock issued to them for the amount of the checks. There was always an understanding between Crellin and Jackson that this would be done. Moss was also a party to this arrangement until his retirement in 1911. Except in the years 1911, 1913, and 1914, the total amounts of the dividend checks largely exceeded the amount of the cash on hand, the surplus of the corporation being represented principally by materials and supplies on hand, and buildings and equipment. During the year 1917 the officers of the Des Moines Company and the Pittsburgh Company were E. W. Crellin, president; W. H. Jackson, secretary-treasurer, 3577 and G. A. Smith, vice president. On January 22, 1917, the directors of the Des Moines Company declared a 37 per cent dividend by the following resolution: The Secretary and Treasurer made the financial report of the Corporation as of December 31st, 1916, showing surplus of $206,442.33, and reported that after paying the dividends on the Preferred Stock due January 15, 1917, and providing for the Government Income Taxes, the general taxes and bonuses on Capital Stock, that a dividend of 37 per cent. might be paid on the Common Capital Stock moved that such dividend be paid upon such stock for the prorata portion of the year 1916. Seconded by G. A. Smith, the motion carried and a dividend of 37 per cent. on the Common Stock was ordered paid in accordance with the schedule appearing on the following page. * * A check for the amount of the dividend due each stockholder, pursuant to the foregoing resolution, was drawn by the company and actually delivered to the stockholder. The Crellin family received dividend checks in the total amount of $73,260, the Jackson family received checks in the total amount of $73,620, and the other stockholders received checks in the total amount3578 of $50,678.16. All of the checks received by the Jackson family, and all of the checks received by the Crellin family, excepting two checks in the amount of $629, were endorsed back to the Des Moines Company. When these dividend checks were endorsed back to the Des Moines Company the amounts thereof were credited to the Pittsburgh Company by the following entry on the books of the Des Moines Company: January 26, 1917.Debit to Cash.Cr. PGH. D.M. CO. (Per a/c Amy H. Crellin)$31,820.00Cr. PGH. D.M. CO. (Per a/c E. W. Crellin)40,182.00Cr. PGH. D.M. CO. (Per a/c W. H. Jackson)5,550.00Cr. PGH. D.M. CO. (Par a/c W. H. Jackson)67,710.00145,262.00237 On the books of the Pittsburgh Company the personal accounts of Amy H. Crellin, E. W. Crellin, and W. H. Jackson, were respectively credited with the amount of the checks which had been turned back to the Des Moines Company, and the Des Moines Company was charged on the books of the Pittsburgh Company with the total amount so credited. Thus there resulted an increased credit of $73,260 to the Jacksons on the books of the Pittsburgh Company, an increased credit of $72,002 to the Crellins on the3579 books of the Pittsburgh Company, and a total debit to the Des Moines Company of $145,262. At the time the January dividend was declared and paid by the Des Moines Company, there were 5,444 shares of capital stock outstanding, of which 1,980 shares were held by the Crellin family, 1,980 shares by the Jackson family, and 1,444 shares by outsiders. Of the 1,444 shares held by outsiders, the holders of 658 shares took Des Moines Company stock in exchange for their dividend checks, the holders of 625 shares took Pittsburgh stock, and the holders of 161 shares elected to take cash. On January 29, 1917, the directors of the Pittsburgh Company declared a 37 per cent dividend by the following resolution: The Secretary-Treasurer reads the Financial Statement of the Corporation as of December 30, 1916, showing a surplus of $94,043.59 and reported that after paying the dividends on the Preferred Stock due January 15, 1917, and providing for the Government Income Taxes, the general taxes, and bonus on capital stock, that a dividend of 37 per cent. might be paid on the common capital stock, and moved that such a dividend be paid on such stock. Seconded by E. W. Crellin. The motion carried3580 and a dividend of 37 per cent. on the common capital stock was ordered paid in accordance with the following schedule: DISTRIBUTION OF PITTSBURGH-DES MOINES COMPANY COMMON STOCK DIVIDENDS. Name.Shares.37 per cent dividend.W. H. Jackson1225$45,325.00E. W. Crellin105338,961.00Amy H. Crellin1726,364.00G. A. Smith274.00Max Whitacre451,665.002497$92,389.00Dividend checks were issued to the Crellins and the Jacksons in the amount of $45,325 to each family. Upon the receipt of the dividend 238 checks the Crellins and the Jacksons endorsed them back to the Pittsburgh Company and the amounts thereof were credited to their personal accounts on the books of that company, making a total increase of $118,585 to the personal credit of the Jackson family, and a total increase of $117,327 to the personal credit of the Crellin family on account of the dividends declared on January 22, 1917, by the Des Moines Company, and on January 29, 1917, by the Pittsburgh Company. On January 31, 1917, the Pittsburgh Company issued to the Crellin family 1,160 shares of its capital stock of a total par value of $116,000, and also issued to3581 the Jackson family 1,160 shares of its capital stock of a par value of $116,000. Since the total credit to the Jackson family on account of the dividends mentioned amounted to $118,585, and the total credit to the Crellin family on account of said dividends amounted to $117,327, there remained, after the issuance to each family of stock of the Pittsburgh Company of the par value of $116,000, a balance of $2,585 to the credit of the Jackson family and a balance of $1,327 to the credit of the Crellin family on account of said dividends. Max Whitacre and G. A. Smith, who were, on the dates the January dividend of the Pittsburgh Company were declared and paid, the owners of 45 shares and 2 shares, respectively, of the capital stock of the Pittsburgh Company, turned back their dividend checks to the company for shares of the capital stock of the Pittsburgh Company and the Des Moines Company, respectively. On August 27, 1917, the Des Moines Company declared a 10 per cent dividend by the following resolution: The Secretary-Treasurer called attention to the financial statement of the Corporation and to the amount which had been carried as Material Inventory Reserve Account from the3582 earnings of 1916, and after discussion it was decided that owing to the high prices which steel had maintained during the year, that this reserve was unnecessary, and therefore, moved that a dividend of 10% be paid from this 1916 material reserve account upon the common capital stock of this Company as shown by the books outstanding July 1, 1917, in accordance with the rule for participation which has been followed in the past by the Company. The motion was seconded by G. A. Smith and carried, and a dividend of 10% on the common capital stock was ordered paid in accordance with the schedule appearing on the following page. * * On August 31, 1917, dividend checks were issued to the Crellin and Jackson families in the amount of $19,800 each and these checks, except two amounting to $340, were endorsed back to the company, which on September 6, 1917, and September 8, 1917, debited cash and credited the Pittsburgh Company "(Per a/c of W. H. Jackson)" etc., with the amounts thereof. The Pittsburgh Company took up these credits by charging the Des Moines Company and crediting 239 the personal accounts of the Jacksons and Crellins with the same amount. No stock was issued3583 by the Pittsburgh Company to the Jacksons and Crellins at this time for the reason that the Pittsburgh Company had issued to each family $14,500 of stock in February, 1917, and $19,500 of stock in March 1917, under the circumstances hereinafter set forth. On August 27, 1917, and August 31, 1917, the Crellins and the Jacksons owned 3,960 shares out of 5,812 shares of the capital stock outstanding in the Des Moines Company, the remaining 1,852 shares being held by employees. As to these 1,852 shares, the holders of 709 shares took Des Moines Company stock in exchange for their dividend checks, and the holders of 1,143 shares elected to take cash. The Pittsburgh Company in the spring of 1917 was insufficiently capitalized and unable to properly care for the business incidental to war conditions. In order that the company might make as good a showing as possible in obtaining contracts and have its capital stand as high as possible, Jackson and Crellin arranged in February, 1917, that instead of having the company borrow additional capital on its own notes, they would borrow on their notes $50,000 in February and $40,000 in March, and make advances to the company from the proceeds3584 of the notes. However, in order to prevent these advances from appearing as accounts payable, Crellin and Jackson agreed to take stock in the company to the extent of the advances so that on the financial statement of the company the stock so issued would balance the advances. Crellin and Jackson each transferred to the Pittsburgh Company from the proceeds of personal loans the amounts of $19,500 on February 8, 1917, and $14,500 on March 27, 1917. The company debited cash and on the same dates it issued capital stock in the same amounts to Crellin and Jackson, and their families. These issues of stock had the form of purchases and sales, but by agreement between Crellin and Jackson they were issued in anticipation of a subsequent dividend. On August 8, 1917, the Pittsburgh Company paid the joint note for $40,000 from the proceeds of which Crellin and Jackson loaned the company $39,000, and on August 28, 1917, it paid the joint note for $50,000, from the proceeds of which they had loaned the company $29,000. The amounts so paid were charged to the personal accounts of Crellin and Jackson and cash was credited with the same amount. On August 27, 1917, the Pittsburgh Company3585 declared a dividend of 10 per cent by the following resolution: The Secretary and Treasurer called attention to the financial statement of the Corporation and to the amount which had been carried as Material Inventory Reserve Account, from the earnings of 1916, and after discussion it was decided that owing to the high prices which steel had maintained during the year, that this reserve was unnecessary, and therefore moved that a dividend of 240 10 per cent. be paid from this 1916 material reserve account upon the common capital stock of this company as shown by the books outstanding July 1, 1917, in accordance with the rule for participation which has been followed in the past by the company. The motion was seconded by G. A. Smith and carried, and a dividend of 10% on the common capital stock was ordered paid in accordance with the schedule appearing on the following page. * * On August 31, 1917, the company issued dividend checks to the Crellin family in the amount of $26,703.27 and dividend checks in the same amount were also issued to the Jackson family. These checks were duly endorsed by the Crellins and Jacksons and were returned to the Pittsburgh Company3586 and the amounts thereof were credited to the personal accounts of the Jacksons and Crellins, cash being debited. On September 30, 1917, the Pittsburgh Company issued capital stock to the Jackson family and the Crellin family in the amount of $25,000 each and charged the same to their personal accounts. On August 27, 1917, and August 31, 1917, the Crellins and the Jacksons held 5,450 shares of the 6,042 shares of the capital stock of the Pittsburgh Company outstanding, the remaining 592 shares being held by employees. As to these 592 shares the holders of 309 shares elected to take cash. The Des Moines Company and the Pittsburgh Company, at the times they declared the dividends hereinbefore mentioned, had surplus at least equal to the amounts of the dividends. However, the cash available on January 22, 1917, to meet the dividend of the Des Moines Company declared on that date, which amounted to $197,198.16, was $5,163.20. The cash available on August 30, 1917, to meet the dividend declared by the Des Moines Company on August 27, 1917, which amounted to $57,988.39, was $14,645.26. The cash available on January 30, 1917, to meet the dividend declared by the Pittsburgh Company3587 on January 29, 1917, which amounted to $92,389, was $7,248.51. The cash available on August 30, 1917, to meet the dividend declared by the Pittsburgh Company on August 27, 1917, which amounted to $59,014.94, was $32,733.17. The Crellins and the Jacksons had personal accounts only with the Pittsburgh Company; they had no personal accounts with the Des Moines Company. The petitioners in their income-tax returns for the year 1917 treated the dividends as above set forth as stock dividends and not taxable as income. The respondent, upon audit of the returns, determined that the dividends were taxable and that there were deficiencies in tax as hereinbefore set forth. 241 OPINION. MARQUETTE: These three proceedings are identical as to the facts and the issue involved. The issue is whether certain distributions declared and made by the Des Moines Company and the Pittsburgh Company are taxable dividends or stock dividends. The distributions in question are (1) that of the Des Moines Company declared on January 22, 1917; (2) that of the Pittsburgh Company declared on January 29, 1917; and (3) and (4) those of both companies declared on August 27, 1917. The petitioners3588 contend that the distributions were stock dividends. This contention is controverted by the respondent. It may be stated at the threshold of this inquiry that the four dividends, in so far as they were paid to the stockholders of the two companies other than the Crellins and the Jacksons, were taxable, regardless of the fact that some of the stockholders may have exchanged their dividend checks for stock. They were given the option of either cashing their checks or exchanging them for stock, and that fact is of itself sufficient to render them taxable and not stock dividends. Eisner v. Macomber,252 U.S. 189">252 U.S. 189. It is therefore necessary to consider these dividends only in so far as they were paid to the petitioners and their families. For convenience we will first consider the two dividends of the Des Moines Company. In the case of Towne v. Eisner,245 U.S. 418">245 U.S. 418, the court, in pointing out some of the essential characteristics of a stock dividend, said, through Mr. Justice Holmes: * * * A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests of the shareholders. Its property is3589 not diminished, and their interests are not increased. * * The proportional interest of each shareholder remains the same. The only change is in the evidence which represents that interest, the new shares and the original shares together representing the same proportional interest that the original shares represented before the issue of the new ones. The language just quoted was repeated, with approval, by the Supreme Court in Eisner v. Macomber, supra.We are of the opinion, for the reasons hereinafter stated, that the dividends declared by the Des Moines Company do not conform to the requirement of a stock dividend just pointed out, and that it is unnecessary to determine whether they possess the other characteristics of a stock dividend. The declarations of dividends in January and in August were followed by the issuance of dividend checks. The petitioners in each instance endorsed the checks and returned them to the company. The Des Moines Company thereupon credited upon its books the amount of these checks to the Pittsburgh Company. Subsequently, the Pittsburgh Company issued 242 its own stock to the petitioners to absorb these credits. 3590 That this constituted a stock dividend by the Des Moines Company, as the petitioners contend, we can not agree, in the light of what the Supreme Court has stated in Towne v. Eisner, supra, and Eisner v. Macomber, supra.Upon the issuance of dividend checks and the transfer of the amount thereof to the Pittsburgh Company, the assets of the Des Moines Company were diminished by the amount of the checks and the assets of the Pittsburgh Company were increased by the same amount. The dividends had become fully separated and segregated from the assets of the Des Moines Company, and the stock which the petitioners received did not represent any interests in the property of that company. It is argued, however, by the petitioners that the Des Moines Company and the Pittsburgh Company were affiliated corporations, constituting in fact a single economic unit, and that the dividends in question were stock dividends notwithstanding the fact that they were paid to the petitioners in stock of the Pittsburgh Company. This contention is, we think, fallacious. The provisions of the several revenue acts providing for the filing of consolidated returns3591 by affiliated corporations, that is, by two or more corporations where certain conditions exist in regard to the ownership or control of their capital stock, lay down a rule of taxation and not a rule of property. Assuming, but not deciding, that the Des Moines Company and the Pittsburgh Company were affiliated within the purview of the Revenue Act of 1917 and entitled to file a consolidated return of income and invested capital, they were, nevertheless, two separate, distinct legal entities, organized in different jurisdictions, with different laws governing their existence. Each owned its own property, separate and apart from the other, just as fully and completely as if they were not affiliated for purposes of taxation, and neither held any of the capital stock of, or had or exercised any dominion or control over the other. The fact that the majority of the capital stock of each corporation was held by the same individuals and that the same persons held identical offices in each company, does not change the situation. The two corporations were, nevertheless, separate legal entities and neither one had any right in or title to the property of the other. We are of the opinion3592 that the two dividends declared and paid by the Des Moines Company were cash dividends or dividends paid in stock of the Pittsburgh Company, and in either case they resulted in taxable income to the petitioners. Peabody v. Eisner,247 U.S. 347">247 U.S. 347. The circumstances surrounding the two dividends of the Pittsburgh Company differ from those pertaining to the dividends of the Des Moines Company, in that the dividend checks issued to the Crellins and the Jacksons by the Pittsburgh Company were 243 endorsed back to that company, which issued its stock to Crellin and Jackson in approximately the full amount of the checks. However, the dividends were, in our opinion, taxable to the petitioners. The resolutions declaring the dividends were in the ordinary form for declaring cash dividends and there is nothing therein to indicate that they were intended to be paid in stock. On the contrary, as we have pointed out above, the stockholders, other than the Crellins and the Jacksons, had at all times the option of cashing their dividend checks or exchanging them for stock, and as to these stockholders, the dividends were clearly taxable. As to Crellin and Jackson3593 it appears that they endorsed back their checks to the corporation and were later issued stock because they had agreed between themselves that they would do so and thus keep their interests in the corporation equal. This was their voluntary contract to which the corporation was not a party, and for the reasons hereinafter set forth, it could not convert into a stock dividend what would otherwise be a taxable dividend. Furthermore, it may be noted that these dividends also lacked one of the essential characteristics of a stock dividend pointed out in Towne v. Eisner, and Eisner v. Macomber, supra, namely that in a true stock dividend "the proportional interest of each shareholder remains the same." After each of the dividends under consideration, the proportionate interests of the stockholders of the Pittsburgh Company were materially changed, the interests of the Jacksons and the Crellins being increased, and the interests of the other stockholders being diminished. The situation here presented is in many respects similar to that found in 3594 W. J. Hunt,5 B.T.A. 356">5 B.T.A. 356, wherein we discussed at length the question of stock dividends. The facts in that case were as follows: On December 1, 1917, the board of directors of the Merchants Bakery, Inc., adopted a resolution recommending to the stockholders that the capital stock of the corporation be increased from $65,000 to $100,000, and that the additional issue of $35,000 of capital stock be offered to the stockholders at par in proportion to their respective holdings. At a special meeting of the stockholders of the corporation called on December 1, 1917, the recommendation of the board of directors submitted on the same date was by resolution adopted by the stockholders, and the capital stock was increased to $100,000 in accordance with the recommendation made by the board of directors. On December 24, 1917, at a meeting of the board of directors of the corporation, the following resolution was adopted: * * Resolved: that the business of the company showed that its operation had been so prosperous in the year 1917 as to justify the payment of an 244 extra dividend. Now, Therefore, Be it resolved that an extra dividend of $60 per share is hereby3595 declared payable on the stock outstanding as of January 1, 1917. Subsequent to the adoption of the resolution by the board of directors and the stockholders at the meetings held on December 1, 1917, but prior to the declaration of the dividend on December 24, 1917, it was agreed by all of the stockholders, including those who were members of the board of directors, that they would take stock and pay for it with the money distributed by the corporation to the extent of $35,000, and that checks received from the corporation should be deposited to the credit of the individual stockholders, whose checks in payment for stock would be simultaneously deposited. At the meeting of the board of directors on December 24, 1917, the stockholders delivered to the treasurer of the corporation their personal checks aggregating $35,000. These checks were given in payment for stock but were not to be presented for payment until the corporation's checks representing the pro rata share of the dividend due each stockholder were deposited. Some of the stockholders who signed and delivered checks to the corporation had no money in the banks upon which they were drawn; others were for amounts in excess3596 of the respective balances of the personal bank accounts of the makers, and by agreement they were held by the corporation until January 2, 1918, when the checks of the corporation were made out in favor of all the stockholders in amounts aggregating $39,000. The treasurer of the corporation deposited the checks issued to the stockholders in the bank to the personal credit of the stockholders and simultaneously deposited to the credit of the corporation the checks given it by the stockholders. When the dividend was declared the corporation had a surplus in excess of $39,000, but actually had only $10,600 in cash when the dividend checks were issued. In holding that the dividend was a cash dividend and not a stock dividend, we said in part: The taxpayer relies in support of his contention upon the cases of United States v. Mellon,281 Fed. 645; United States v. Davison, 1 Fed.(2d) 465; and Appeal of Theresa Zellerbach,2 B.T.A. 1076">2 B.T.A. 1076. Whether, in any case, a dividend is a stock or cash dividend is a question of fact and the question must be decided upon the peculiar facts in each case. While the Board will look through3597 form to substance in order to arrive at what actually occurred, it is sometimes difficult to determine what is mere form and what is in fact substance. The form which a transaction takes frequently determines what the transaction is. * * * In this case, however, there was a segregation of the profits of the corporation. The corporation issued its check to the stockholders for their proportionate share of the corporate earnings. Each stockholder endorsed the check and turned it back to an officer of the corporation who deposited to the stockholder's credit, whereupon the checks given by the stockholders for stock were presented 245 and paid. The fact that the stockholders, in accordance with an agreement entered into among themselves, purchased stock from the corporation with a portion of the money received, is to our mind not controlling. It does not mean that the stockholder did not receive from the corporation his proportionate part of the earnings. His proportionate part of the profits of the corporation became separated from the corporate funds and in every substantial sense of the word was income derived and separated from capital. What a stockholder does with3598 his part of the earnings of the corporation when these earnings have become separated from corporate funds and become the property of the stockholder, seems to us to be not material in the consideration of the case. * * * It was urged by the petitioner that he and all the other stockholders had an oral agreement to the effect that they would take the dividend in cash but would apply it on the purchase of new stock. It does not appear, however, that this was the action of the corporation or that any such agreement was entered into by the corporation. Without such an agreement on the part of the corporation itself, the stockholders were not legally bound to subscribe for the new stock, nor were they under any legal duty to apply the checks in payment for new stock. The agreement among the Stockholders can not alter the action of the corporation in declaring a cash dividend. Agreements made by stockholders as such are not to be treated as the contract of the corporation unless the corporation formally ratifies or adopts them. 3599 De La Vergne Co. v. German Savings Institution,175 U.S. 40">175 U.S. 40; Moore & Handley Hardware Co. v. Towers Hardware Co.,87 Ala. 206">87 Ala. 206; 6 So. 41">6 So. 41. By the overwhelming weight of authority, when the power to do particular acts or general authority to manage the affairs of the corporation is vested in the directors or trustees, it is vested in them not as individuals, but as a board, and as a general rule they can act so as to bind the corporation, assuming that there is no ratification or estoppel, only when they act as a board and at a legal meeting. Kansas City Hay-Press Co. v. Devol,72 Fed. 717; Ames v. Goldfield Merger Mines Co.,227 Fed. 292. The members of the governing body of a corporation are agents of the corporation only as a board and not individually. Hence, it follows that they have no authority to act save when assembled at a board meeting. The separate action individually of the persons composing such governing body is not the action of the constituted body of men clothed with corporate power. 3600 Commercial Brewing Co. v. McCormick,225 Mass. 504">225 Mass. 504; 114 N.E. 812">114 N.E. 812; Citizens' Securities Co. v. Hammel,14 Cal. App. 564">14 Cal.App. 564; 112 Pac. 731. In this case, even if it be conceded that the individual members of the board of directors could have legally bound the corporation, it is not alleged by any witness that the agreement referred to was other than an agreement between the stockholders, those who were to receive the dividends, and it related to what they would do with their dividends and not to the manner in which the corporation would distribute their dividends. There is no evidence that the directors as such undertook to act for the corporation. The resolution declaring the dividend did not recognize any such agreement as having been made. It is true that the corporation may have acted and very likely did act upon the assumption that the stockholders, in accordance with the agreement among themselves, would purchase stock with their dividends, but this is not sufficient to change what was declared by the corporation to be a cash dividend to a stock dividend. The stockholders were not legally bound to take stock. 3601 * * The dividend which was declared in this case, according to the resolution by which it was declared, was a cash dividend. The fact that the recipients of 246 that dividend agreed to apply it to the purchase of stock is not sufficient to change the nature of the transaction. It is not material what the recipients of the dividend agreed to do with it when it was received. A violation of the agreement of the stockholders to purchase stock with that dividend would not have given the corporation a right to sue for the application of that money to the purchase of stock. * * When the dividend in this case was declared it took the form of a cash dividend. The resolution made no reference to anything else. The resolution represented the action of the corporation and there was no evidence that it did not correctly reflect the corporate action. If we concede that the corporation had knowledge of the agreement among its stockholders and relied upon that agreement in declaring the cash dividend, it does not alter the situation. If the stockholders had not desired to take stock, the corporation could not have relied upon the agreement to compel them to do so. It seems3602 to us that under the facts the stockholders had an option to take and retain the cash or to purchase stock with it. The petitioners rely on the cases of United States v. Mellon,279 Fed. 910, affd. 281 Fed. 645; United States v. Davison, 1 Fed.(2d) 465, affd. 9 Fed.(2d) 1022; Weiss v. Stearn,265 U.S. 242">265 U.S. 242; and Theresa Zellerbach,2 B.T.A. 1076">2 B.T.A. 1076. However, the facts in these cases are easily distinguishable from the facts in the instant case and hence the decisions therein are not decisive of the issue here. Counsel for the petitioners also strenuously urged in support of their contention that when the dividends under consideration were declared the corporations did not have sufficient cash to pay them. We attach no great weight to that fact. As we said in Eugene E. Paul,2 B.T.A. 150">2 B.T.A. 150: * * We do not regard the fact that the corporation had insufficient cash on hand to pay the dividend as of controlling importance. It had a surplus in excess of the dividend declared, and the indebtedness to its stockholders existed irrespective of that fact. The right3603 to declare a dividend from surplus profits was exercised by the directors and it became their duty to provide ways and means to make payment thereof. If surplus profits have in fact been earned and are invested in property used in the business of a corporation, a dividend may properly be paid by borrowing money. * * We are of the opinion that the two dividends paid by the Pittsburgh Company were cash dividends and taxable to the recipients. The petitioners introduced no evidence in support of their other assignment of error, and on the pleadings that issue must be decided in favor of the respondent. Reviewed by the Board. Judgment will be entered on 15 days' notice, under Rule 50.MILLIKEN MILLIKEN, dissenting: I can not concur in the entire opinion, for it seems to me that, as to some of the dividends, the decisions of the United States Circuit Court of Appeals for the Third Circuit (the *247 circuit in which these petitioners reside), in United States v. Mellon,281 Fed. 645, and United States v. Davison, 9 Fed.(2d) 1022, are contrary to the decision here made. TRUSSELL agrees with the dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625015/	THOMAS J. LOCKE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Locke v. CommissionerDocket No. 10616.United States Board of Tax Appeals8 B.T.A. 534; 1927 BTA LEXIS 2848; October 6, 1927, Promulgated 2848 1. Cost of a warehouse roof as ordinary and necessary expense paid or incurred in the taxable year disallowed. 2. Petitioner sold merchandise to the management of a dormitory owned by the State of Mississippi, and operated by employees of a State institution for the service of students. The State made no appropriations for such dormitory, which was maintained by collecting funds from students. Prior to or during the taxable year, dormitory funds were embezzled, and, at the end of such year, there were unpaid claims against the dormitory management in large amounts. The State was under no legal liability for the debts of the dormitory management. Held, that the amount due the petitioner from the dormitory management was a worthless debt at December 31, 1920, and that, for Federal tax purposes, it was a proper deduction from gross income for that year. Harry M. Jay, C.P.A., for the petitioner. W. Frank Gibbs, Esq., for the respondent. LANSDON 534 The respondent has determined deficiencies in income tax for the years 1919 and 1920, in the respective amounts of $2,199.43 and $4,954.28. In his brief, counsel for the petitioner avers2849 that there is an error in the computation of the deficiency for 1920, and that, even if the respondent properly disallowed the deductions claimed, the true deficiency is only $4,906.57. The petitioner concedes that the deficiency for 1919 is correct. The issues for 1920 relate to the respondent's disallowance as a deduction from the petitioner's gross income for that year of certain amounts alleged to represent ordinary and necessary business expenses and a debt ascertained to be worthless and charged off in the taxable year. 535 FINDINGS OF FACT. The petitioner is an individual residing at Columbus, Miss., where he is in business as a wholesale grocer. In his income-tax return for 1920, the petitioner deducted the amount of $4,620.91 from his gross income, claiming the same as ordinary and necessary expense paid or incurred in the construction of a new roof on warehouse owned by him and used in his business. The respondent disallowed such deduction. Prior to, and during the year 1920, the petitioner furnished certain supplies to the dormitory management of the Mississippi Agricultural and Mechanical College at Starkville. This dormitory was owned by the State2850 and was conducted by employees of the said college, which is a state institution, maintained by legislative appropriations, made from session to session. The legislature makes no appropriation for food or other dormitory expenses, which are met by assessments or collections from the students who use such facilities. The petitioner has sold commodities to the dormitory department continuously since 1913, receiving payment therefor direct from the college up to 1919; then the account began to grow in arrears notwithstanding all efforts possible to collect. At December 31, 1920, the dormitory management was indebted to the petitioner in the amount of $16,595.14. At the request of the petitioner and creditors similarly situated, an audit of the affairs of the dormitory management was begun about July 15, 1920, and completed in the fall of 1920. This audit disclosed that there had been waste or misappropriation of funds paid by students for dormitory privileges in the amount of approximately $80,000 and that there were no funds available for the payment of any of the overdue dormitory accounts. The petitioner then and in 1920, presented his claim for reimbursement to the Governor2851 of the State (who was ex-officio a member and chairman of the board of trustees of the college), and to state senators. In 1922 the legislature of the State of Mississippi enacted a law making appropriations for the claims against the dormitory management of the college. This act was passed by a very close vote after one of the hardest fights the then governor had before the legislature. From such appropriation in the total amount of $78,251.68, the petitioner received a payment of $15,155.57, leaving unpaid on the account in question the sum of $1,438.17. Prior to the close of the year 1920, the petitioner ascertained that the account in question was worthless and charged it off his books. The petitioner had been advised in person by the Governor of the State of Mississippi of the latter's efforts in his behalf and of the failure to secure the legislators' permission to negotiate a loan to pay the account, before said account was charged off. 536 OPINION. LANSDON: The petitioner admits that his tax liability for the year 1919 has been correctly determined by the respondent and we, therefore, approve the asserted deficiency for that year in the amount of $2,199.43. 2852 The petitioner introduced no evidence respecting the amount or the deductibility of $4,621.91 claimed as a deduction from gross income of 1920 as an ordinary and necessary expense paid or incurred in the construction of a new roof on a warehouse owned by him and used in his business. As to this issue the petitioner submitted his case on the pleadings, relying upon an admission in the respondent's answer which reads as follows: Admits that the Commissioner of Internal Revenue has disallowed a deduction of $4,620.91 claimed by the taxpayer to have been expended during the year 1920 for placing a new roof on taxpayer's warehouse, but denies he committed error in so doing. The answer of the respondent also denies that said expenditure represents an ordinary and necessary expense to the taxpayer in 1920 and further contains a general denial which in terms denies generally and specifically each and every allegation contained in the petition not previously admitted, qualified, or denied by the answer. Obviously, there is no admission by the respondent upon which we can base findings of fact sufficient to enable us to determine that the deduction claimed was an ordinary and necessary2853 expense actually paid or incurred in the taxable year involved. On this point the determination of the respondent is approved for lack of evidence. Prior to, and during the year, the dormitory of the Mississippi Agricultural and Mechanical College was managed by employees of that institution. The money to pay for the service so provided was collected from the students. The State made no appropriation for operating or revolving funds for this purpose. During the year 1920, an audit disclosed that dormitory funds, collected from students, in the amount of approximately $80,000, had been lost or misappropriated. The dormitory management was without resources to meet its obligations to the petitioner and other creditors. The State of Mississippi was under no legal obligation to replace the misappropriated funds, but it was within the power of the legislature to appropriate public funds for the payment of such claims. Consulted by the Governor, the individual members of the legislature declined, for the most part, to commit themselves as to an appropriation or to approve the suggestion of borrowing money for the payment of the claim of the petitioner and others. There was no2854 regular session of the legislature until 1922. *537 In all the circumstances, we are of the opinion that the petitioner's claim against the dormitory management of the Mississippi Agricultural and Mechanical College was worthless at December 31, 1920. It was charged off during the taxable year and should be allowed as a deduction from gross income for such year. See . The petitioner's brief filed in this proceeding, calls attention to an alleged mathematical error in the computation of the proposed deficiency in tax for the year 1920, and asserts that on the basis of the respondent's action, the correct deficiency would be $4,906.57, instead of $4,954.28. We do not have sufficient data in the record to pass upon this question. Inasmuch, however, as the alleged error, if it exists, is purely mathematical, the matter can no doubt be checked and adjusted in the recomputation of the deficiency under Rule 50. Reviewed by the Board. Judgment will be entered on 15 days' notice, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625016/	JEAN W. ESTES AND WILLARD H. ESTES, JR., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.Estes v. CommissionerDocket No. 7604-82.United States Tax CourtT.C. Memo 1984-636; 1984 Tax Ct. Memo LEXIS 37; 49 T.C.M. (CCH) 255; T.C.M. (RIA) 84636; December 6, 1984. 37 Held: Self-employment income and expenses related to E's forestry consulting business determined; Held further, part of the underpayment of E's Federal income tax for 1975 to 1978, inclusive, was due to fraud. Section 6653(b), I.R.C. 1854Willard H. Estes, Jr., pro se. Theodore Craft, for the respondent. NIMS MEMORANDUM FINDINGS OF FACT AND OPINION NIMS, Judge: In this case, respondent determined the following deficiencies in Federal income tax and additions to tax: Additions to TaxTaxable YearFederal Income TaxI.R.C. § 6653(b) 11975$1,682.00$ 841.0019761,161.00581.0019772,964.001,482.0019781,668.00834.001979355.00Total$7,830.00$3,738.00The above deficiencies were determined as follows: 1. In the income tax liability of petitioner, Willard H. Estes, Jr. and the Estate of Phyllis W. Estes, deceased, Willard H. Estes, Jr., Administrator,38 for the taxable year 1975. The Estate of Phyllis W. Estes is not a party to this proceeding. 2. In the income tax liability of Willard W. Estes, Jr. for the taxable years 1976 and 1977. 3. In the income tax liability of Willard H. Estes, Jr. and Jean W. Estes for the taxable years 1978 and 1979. 4. Respondent determined the addition to tax for fraud under section 6653(b) on the part of Willard W. Estes, Jr. for the years 1975 to 1978, inclusive. The deficiencies resulted from respondent's determination that petitioner Willard H. Estes, Jr. understated gross income from his private forestry consulting business in each of the taxable years in question and that for the years 1975 to 1978, inclusive, such understatements were due to fraud. Some of the facts have been stipulated and are so found. FINDINGS OF FACT Petitioners Willard H. Estes, Jr. (hereinafter sometimes called "petitioner") and Jean W. Estes are husband and wife and resided in Pepperell, Massachusetts, when they filed their petition herein. Jean W. Estes is a party to this case only by reason of having filed joint returns with her husband for some of the years in question. Petitioner filed39 a joint return individually and as administrator of the Estate of Phyllis W. Estes, deceased, for the taxable year 1975. For the taxable years 1976 and 1977, petitioner filed returns as a qualifying widower with dependent children. In his Notices of Deficiency for these years, respondent reclassified petitioner's status to that of "married filing separately" on the ground that petitioner was married during those years. Petitioner does not contest this change. For the years 1978 to 1979, petitioners filed joint returns. Throughout 1975 to 1978, inclusive, petitioner was employed by the Commonwealth of Massachusetts as a full-time salaried forestry consultant. He was also self-employed part-time as a private forestry consultant. In 1979, petitioner was self-employed full-time as a private forestry consultant. In each of the years 1975 to 1978, inclusive, petitioner received Forms W-2 from his employer, the Commonwealth of Massachusetts, which Forms specified petitioner's gross wages for the particular year to which the Form W-2 related. Petitioner attached a copy of the Form W-2 for the year to which it related to each of his returns filed for years 1975 to 1978, 40 inclusive. Petitioner reported the gross wages shown on each of the Forms W-2 for the particular year to which it related on each of his returns filed for years 1975 to 1978, inclusive. In each of the years 1975 to 1978, inclusive, petitioner earned gross income from his part-time self-employment as a private forestry consultant from the following sources in the following amounts: GROSS RECEIPTS(Gross Income)1975197619771978Jowalco, Inc.$1,400.00Tambone Corporation$ 800.00$ 628.002,645.00Bingham Lumber, Inc.900.00Resources DevelopmentCorporation3,143.00William R. Tapply &Son Lumber Co.1,250.0075.00Parke Lumber & BoxCompany, Inc.1,141.503,332.504,257.50Ralph A. Esty & Sons,Inc.350.00Curtis Lumber Company504.85William Marshall, Jr.50.00Irving Davis931.00San-Vel Concrete Corporation50.00Theodore N. Bachrach741.00Dcnald Greig617.31Parlee Lumber Box Co., Inc.2,964.50Elbthal Realty Trust5,000.00Totals$6,334.50$5,365.35$8,727.50$10,353.81Petitioner did not report any of the above itemized gross income41 from part-time self-employment on his returns for the years 1975 to 1977, inclusive. For 1978, of the total $10,353.81 gross self-employment income received by petitioner in that year, $5,949.00 was reported on Schedule C of the 1978 return and $4,405 was unreported. Petitioner made certain payments during 1976, 1977 and 1978, as itemized below: DateAmount of CheckPayeeGroup 12/3/76$20.00Raymond Gagnon6/1/7650.00Lechemere Sales6/9/7610.00Earl L. Davis & Sons, Inc.12/8/7641.34Verne E. Elliott12/13/76$50.00Marjorie A. Varney12/30/762,186.19Earle L. Davis & Sons, Inc.1/25/77600.00Ray Gagnon2/9/77350.00Ray Gagnon2/9/77607.87Earl L. Davis & Sons2/24/77900.00William McMahon3/16/77500.00William McMahon3/16/77100.00Verne Elliott3/23/7710.71Mooress3/25/77245.00Verne E. Elliott3/25/77527.00Bill McMahon4/2/77161.27Verne Elliott4/6/77303.50Earle L. Davis & Sons, Inc.4/9/7753.82Verne E. Elliott4/26/77385.00John F. Massey5/14/77264.00Verne E. Elliott7/22/7762.45Verne E. Eliott8/2/7739.90Lechemere SalesGroup 22/18/7650.00Lechemere Sales3/16/7615.00Lechemere Sales6/11/7618.02Lechemere Sales6/14/7650.00Lechemere Sales8/28/76526.15Lechemere Sales11/1/76$33.52Lechemere SalesUndated 1977103.28Lechemere Sales2/4/77255.82Lechemere Sales5/31/7788.20Lechemere Sales10/4/7750.00Lechemere Sales11/4/7750.00Lechemere Sales11/28/77150.00Lechemere SalesGroup 31/12/7650.00Gordon College4/1/764.75N.H.V.T.C. Test4/10/7660.00Robert Estes5/22/76100.00Barbara Estes6/3/7615.00University of Mass.6/14/7615.00University of Mass.7/26/76200.00Barbara Estes8/26/76500.00Gordon College8/26/761,075.50University of Mass.9/1/76100.00Robert Estes9/1/76100.00Barbara Estes9/7/76200.00Robert Estes9/27/7620.00Barbara Estes4/12/7680.00Robert Estes10/24/77375.00Robert Estes1/20/7830.00Janet Estes1/31/78100.00Barbara Estes4/19/78$60.00Janet Estes5/15/78100.00Stephen Estes7/17/78600.00Stephen Estes7/17/78600.00Robert Estes7/17/78600.00Janet Estes10/2/78600.00Cash10/28/78362.00Robert Estes42 In connection with an examination of the returns for 1975 to 1978, inclusive, by an agent of the Internal Revenue Service, petitioner admitted to the examining agent that he had not reported any self-employment income for 1975, 1976 and 1977. In 1978, petitioner paid $1,500 to his son Robert W. Estes for work which Robert performed on petitioner's behalf for Elbthal Brothers of Antrim, New Hampshire. Throughout the years 1975 to 1979, inclusive, petitioner worked as forestry consultant helping private landowners market their timber. This was in addition to the work petitioner performed as an employee of the Commonwealth of Massachusetts during 1975 to 1978, inclusive. Much of petitioner's private consulting work consisted of going through forested land and marking trees to be cut in such a way that the loggers employed by the landowners would know which trees to cut. In addition, the marking made it possible for petitioner to perform a check to make sure that those trees actually cut by the loggers were the ones which petitioner had marked for cutting. In general, petitioner would make up a timber sale contract and carry it through to completion. Petitioner's43 son Robert was born on May 10, 1957. His son Stephen was born on June 27, 1955. Petitioner also has two daughters: Barbara, born on February 9, 1953, and Janet, born in 1960. All of petitioner's children worked with him from time to time in his forestry consulting business during 1976, 1977 and 1978. Petitioner and his various children would work together in teams of two, in that one person would mark the tree and the other would keep a written tally. Petitioner taught his children how to measure trees, both as to diameter and height. Diameter is measured by using a pair of calipers and height is measured with an instrument called a clinometer. Petitioner also taught his children how to identify and tally various species of hardwood and softwood. The tallying of trees consisted of using a "dotgrid" system with each dot representing a tree to be cut within a given square of the grid. Petitioner used a part of a family room in his home as an office, in which he stored his papers and met with loggers and others in connection with his forestry consulting business. Respondent allowed as deductions certain business expenses incurred by petitioner in connection with his self-employment44 activities. For the years 1975 to 1977, inclusive, none of these were claimed by petitioner or petitioners on their returns for those years, since no self-employment income was reported. Petitioners claimed deductions against self-employment income for 1978 and 1979. Respondent allowed a portion of the deductions claimed for these latter two years, and disallowed the balance on the ground that they constituted non-deductible personal expenses. The business deductions allowed by respondent are as follows: Item19751976197719781979Heat$ 83$ 93$ 146$$Electricity556556Telephone129205365Insurance1964100140Car Expenses315Forestry Supplies2117233Gasoline and Repairs732Depreciation369619250250Van Expenses20Van Repairs173Gas and Oil803Car and TruckExpenses3851,018Travel97Bank Charges25Totals$622$1,545$2,515$897$1,268OPINION Petitioners have conceded that substantial amounts of gross income was omitted from their returns for the years 1975 to 1978, inclusive, but maintain that petitioner Willard H. Estes, 45 Jr. (petitioner) incurred business expenses for all of the years in issue, including 1979, exceeding the amounts allowed by respondent. Petitioners also challenge the addition to tax for fraud under section 6653(b). With the exception of certain amounts which petitioners paid to certain of his children as compensation, we agree with respondent's determination of allowable business expense deductions. As to these latter items, petitioners' evidence consisted of two groups of unexplained checks, listed under "Group 1" and "Group 2" in our Findings of Fact, petitioner's own testimony and some "before and after" pictures of the outside of a room in his house. Petitioner submitted the checks listed in Group 1 as "Office Repairs," but failed to connect in any way any specific check with any specific office repair. Petitioner submitted the checks listed in Group 2 under the rubric "camera supplies," but offered no explanation of the checks' connection with his business. Petitioner testified that one room of his house was used exclusively as a home office. However, respondent's agent visited petitioner in that room, and his description of it convinces us that the room was46 a family room which petitioner also used for office work. The agent testified that the room, which contained the type of account rements one might expect in a family room, including a sofa, TV set, fireplace, etc., also contained a desk where petitioner could have performed office work. The agent testified that the allowance for home office expense deductions were made on the basis of petitioner's factual representations made to the agent prior to the latter's visit to the home, and that he, the agent, would have made lesser allowances had he seen the room prior to the time he made the allowances. We need not examine the technical requirements of section 280(A)(c) regarding the use of a portion of a residence as a home office, since in any event petitioners have failed to substantiate any home office expenses in excess of those allowed by respondent. In addition, petitioners have totally failed to explain or substantiate any claim for other business deductions -- with the sole exception of compensation paid to certain of the children -- in excess of those allowed by respondent, and we therefore agree with his determination with regard to those items. The checks listed47 in Group 3 of our Findings of Fact were submitted by petitioners as "Payments to Children." In addition, petitioner and his son, Robert W. Estes, both testified that petitioner paid $1,500 to Robert for work which he performed on petitioner's behalf in 1978 for Elbthal Brothers of Antrim, New Hampshire. In his brief, respondent skirts making a concession that the $1,500 was actually paid and, if it was, that it represents deductible compensation. Given petitioner's overall evasiveness in his dealings with his government as reflected by this case, respondent is perhaps not to be faulted for applying the adage "once burned twice shy" in this instance. Nevertheless, we are satisfied from the testimony that Robert performed services on petitioner's behalf and received the $1,500 payment in 1978. We accordingly allow a $1,500 deduction for that year. We are also satisfied that petitioner's children Barbara, Stephen and Janet, as well as Robert, also performed some services for petitioner in his forestry consulting business in 1976, 1977 and 1978. Petitioner testified with considerable specificity that he and various of his children worked as two-person teams in marking48 and tallying trees for logging. As suggested by the dates of birth of petitioner's children (which we have listed in our Findings of Fact), the children were old enough during the years at issue to have helped their father with the work he performed. Unfortunately, except for the Elbthal Brothers' job noted above, petitioner has totally failed to connect any of the payments made to or on behalf of his children to any specific job. The payments listed, particularly those to various colleges, could as easily represent personal payments as payments for services. In his testimony, petitioner estimated that each job cost him, in expenses, 50 percent of the amount received. We consider this estimate to be totally unrealistic. In the absence of records, the inexactitude of any allowable deductions is of petitioner's own making, and under the circumstances our own estimates must "bear heavily against the [petitioner]." Cohan v. Commissioner,39 F.2d 540">39 F.2d 540 (2d Cir. 1930). Consequently, in the exercise of our best judgment under the circumstances, we limit our allowance to 50 percent of the payments listed in Group 3 which were made directly to the respective49 children. The allowable deductions are therefore as follows: 1976-$430; 1977-$188; 1978-$926. Remaining for decision is the question as to whether the addition to tax for fraud is to be imposed for each of the years 1975 to 1978, inclusive. During the examination of his returns for these years, petitioner at first denied that he had failed to report any self-employment income, and then, upon being confronted with evidence that he had received such income, attempted to justify his failure by claiming that the amounts omitted were nominal and would be substantially offset by deductions. In fact, the amount omitted in each of the years was quite substantial. At the trial of this case, petitioner offered no better explanation for his failure to report than that offered to the revenue agent. Section 6653(b) provides that if any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 50 percent of the underpayment. The existence of fraud is a question of fact to be determined upon consideration of the entire record. Gajewski v. Commissioner,67 T.C. 181">67 T.C. 181, 199 (1976), affd. by50 unpublished order 578 F.2d 1383">578 F.2d 1383 (8th Cir. 1978). To prove fraud, the Commissioner must show that the taxpayer acted with the specific intent to evade a tax believed to be owing. Stoltzfus v. United States,398 F.2d 1002">398 F.2d 1002, 1004 (3rd Cir. 1968). In the instant case there are specific indicia of fraud. First, there is petitioner's consistent, substantial and admitted understatement of gross income over four years. Marcus v. Commissioner,70 T.C. 562">70 T.C. 562, 577 (1978), affd. in an unpublished opinion 621 F.2d 439">621 F.2d 439 (5th Cir. 1980). In addition, there is petitioner's blatant denial, when questioned by the revenue agent, that he omitted self-employment income when in fact he had omitted substantial amounts in each of the four years 1975 to 1978, inclusive. Furthermore, it cannot escape our attention that petitioner assiduously and correctly reported the class of income (i.e., wages) which he knew would be reported to the Internal Revenue Service by a third party on W-2 forms, but omitted self-employment revenue which he apparently assumed would go unreported by third parties, and therefore would remain undetected by the IRS. For all*51 of the above reasons, we conclude that respondent has proven by clear and convincing evidence that petitioners' underpayments for the years 1975, 1976, 1977 and 1978 were due to fraud. Accordingly, the additions for fraud under section 6653(b) for those years are sustained. To reflect the foregoing, Decision will be entered under Rule 155.Footnotes1. All section references are to sections of the Internal Revenue Code of 1954 in effect for the respective years in question. 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/4625017/	David C. Goodwin, Petitioner v. Commissioner of Internal Revenue, RespondentGoodwin v. CommissionerDocket No. 2087-77United States Tax Court73 T.C. 215; 1979 U.S. Tax Ct. LEXIS 27; October 31, 1979, Filed 27 Decision will be entered under Rule 155. Held: 1. Conviction of petitioner under sec. 7206(1), I.R.C. 1954, for the same years involved in the instant case in which an addition to tax under sec. 6653(b), I.R.C. 1954, is asserted estops him from denying that his returns were false and fraudulent and that there was an omission of income from his return in each year;2. A part of the underpayment in petitioner's tax for each of the years here in issue was due to fraud; and3. Amount of income which petitioner failed to report in each year determined from the record. David C. Goodwin, pro se.James F. Kearney, for the respondent. Scott, Judge. Featherston, J., dissenting. Drennen, Tannenwald, and Hall, JJ., agree with this dissenting opinion. Chabot, J., dissenting. Nims, J., agrees with this dissenting opinion. SCOTT 216 Respondent determined deficiencies in Federal income tax and additions to tax under section 6653(b)128 (fraud) for the calendar years and in the amounts listed below:Additions to taxYearDeficiencysec. 6653(b)1968$ 1,926.30$ 963.1519692,379.311,189.6519702,666.571,333.29In his answer, respondent asserts that the addition to tax for 1969 should be increased by $ 481.18, for a total addition to tax of $ 1,670.83 for 1969.The following three issues are presented for our consideration: (1) Whether petitioner is estopped by his conviction of violating section 7206(1) by filing false returns which he knew substantially understated his total reportable income for each of the years 1968, 1969, and 1970 from denying in this case that his returns were false in that the income reported thereon was substantially understated; (2) whether there is an underpayment of tax any part of which is due to fraud for each of the years 1968, 1969, and 1970; and (3) whether petitioner failed to report income for the years in the amounts determined by respondent or in any other amounts. 2 FINDINGS OF FACTSome of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.When the petition in this 29 case was filed, petitioner was a legal resident of Trenton, N.J.During the years in issue, petitioner was a committeeman and during part of this time mayor of Hamilton Township in Mercer County, N.J., and was in charge of the road department of that township. He was also the Chief of the Bureau of Recreation of the State of New Jersey. He had no other gainful employment although he held unpaid positions as an officer of the American Legion and State Director of American Legion Baseball.On February 13, 1974, a United States grand jury for the 217 District of New Jersey, sitting at Newark, returned an indictment against petitioner charging him with five counts of extortion involving vendors and contractors selling to Hamilton Township during 1969 and 1970, and also charging him with three counts of violating section 7206(1) for 1968, 1969, and 1970 -- counts VI, VII, and VIII. Count VI of the indictment is as follows:COUNT VIThat on or about the 9th day of February, 1969, in the District of New Jersey, the defendant herein:David C. Goodwina resident of Trenton, New Jersey, did wilfully and knowingly make and subscribe and cause to be made and subscribed, a United States Joint Income 30 Tax Return (Form 1040) for the calendar year 1968, which was verified by a written declaration that it was made under the penalties of perjury, and which was filed with the Internal Revenue Service, which said income tax return he did not believe to be true and correct as to every material matter, in that it was stated on Line 7, Page 1, of said income tax return that total income was the sum of $ 18,747.68, whereas, as he then and there well knew and believed, the correct total income for the period reported was an amount substantially in excess of the reported total sum of $ 18,747.68.In violation of Section 7206(1), Internal Revenue Code, Title 26, United States Code, Section 7206(1).Counts VII (relating to 1969) and VIII (relating to 1970) of the indictment are identical to count VI except as to the years involved and the dollar amount of reported income. On November 6, 1974, petitioner entered a plea of guilty to counts VI, VII, and VIII of the indictment which are alleged violations of section 7206(1). On March 19, 1975, a judgment with respect to the indictment returned on February 13, 1974, was entered against petitioner by the United States District Court, District of New 31 Jersey. This judgment stated in part as follows:MonthDayYearIn the presence of theattorney for the governmentthe defendant appeared inperson on this date31875 * * WITH COUNSEL * * * * * )GUILTY, and the court being satisfied that * PLEA)there is a factual basis for the plea, on Counts)6, 7, and 8. * * )Defendant has been convicted as charged of theFINDING &)offense(s) of filing false and fraudulent incomeJUDGMENT)tax returns.))26:7206(1)The court asked whether defendant had anything tosay why judgment should not be pronounced. Becauseno sufficient cause to the contrary was shown, orappeared to the court, the court adjudged thedefendant guilty as charged and convicted andordered that: The defendant is hereby committed tothe custody of the Attorney General or his authorizedSENTENCE)representative for imprisonment for a period ofOR)two (2) years on Count 6, execution of term sentencePROBATION)suspended and the defendant is placed on probationORDER)for a period of two (2) years from this date. It isfurther adjudged that the defendant do pay a fine of$ 2,000.00 by the end of the period of probation. Itis further ordered and adjudged that imposition ofsentence on Count 7 and 8 is hereby suspended.It is further ordered and adjudged that Counts1, 2, 3, 4, and 5 are hereby dismissed.32 218 During 1968, 1969, and 1970, petitioner made it known to some persons seeking to do business with Hamilton Township that they would have to make contributions "to the party" (i.e., to the Harry E. Lieberman Democratic Club of Hamilton Township, hereinafter sometimes referred to as the Democratic Club) in order to get the township's business. Sometimes petitioner specified the amount. Sometimes petitioner stated that the amount was to be paid to him in cash. In a number of cases, the amounts so paid to petitioner were then paid by him to A. Harry Glogoff, treasurer of the Democratic Club. Some of the amounts so paid to petitioner were acknowledged by letters from the Democratic Club to the payors.Table I shows some of the sales of equipment, materials, and services made by vendors or contractors to Hamilton Township during the years in issue: 219 Table IDateVendor or contractorAmountOn or about Mar. 19, 1968North Jersey Equipment Co$ 15,460.00On or about Apr. 23, 1968W. E. Timmerman Co15,460.00Various dates in 1968Barrett Paving Co., Inc1 198,105.69On or about July 2, 1969Colonial Garage, Inc37,281.00Various dates in 1969Barrett Paving Co., Inc1 129,811.27On or about May 7, 1970North Jersey Equipment Co16,175.00On or about June 10, 1970Lynn Equipment Co29,900.00On or about July 23, 1970Colonial Garage, Inc13,350.00Various dates in 1970Barrett Paving Co., Inc1 124,643.1933 Respondent, in the notice of deficiency, determined petitioner received unreported income in the form of kickbacks from companies doing business with Hamilton Township, as indicated in table II:Table IIDatePayorAmount1968Mar. 19North Jersey Equipment Co$ 750.00May 5W. E. Timmerman Co750.00May 29Barrett Paving Co., Inc701.25July 24do1,371.50Aug. 22do587.50Sept. 25do736.37Nov. 27do1,050.00Dec. 17do500.00Total6,446.621969May 28Barrett Paving Co., Inc$ 690.00June 25do700.00Aug. 1Colonial Garage, Inc2,355.00Aug. 14Barrett Paving Co., Inc1,500.00Oct. 8do$ 500.00Nov. 3do1,000.00Total6,745.001970Apr. 30North Jersey Equipment Co$ 800.00May 21Barrett Paving Co., Inc200.00June 19Lynn Equipment Co., Inc1,500.00July 8Barrett Paving Co., Inc1,150.00Aug. 4Colonial Garage, Inc2,670.00Aug. 13Barrett Paving Co., Inc1,000.00Nov. 25do800.00Total8,120.0034 220 Respondent's employees prepared a schedule showing contributions to the Democratic Club that were acknowledged by letters and which appear to have been deposited in a checking account of the Democratic Club, as indicated in table III:Table IIIDateParty involvedAmountCheckCashAug. 5, 1968Patrick Cleary$ 25$ 25Aug. 8, 1968Barrett Paving Co., Inc450450Aug. 29, 1968Gil Frazier-ScheidelerEquipment Co., Inc250250Oct. 7, 1968Colonial Garage, Inc500500Oct. 7, 1968Albert E. Barrett1,0001,000Oct. 7, 1968George Tindall100100Oct. 7, 1968Parsons, Brinckerhoff,Quade & Douglass, Engineers400$ 400Oct. 7, 1968Michael Bradley200200Oct. 7, 1968Shelly Acuff800800Oct. 7, 1968Joseph Leto100100Nov. 12, 1968Committeeman David Goodwin100100July 14, 1969Gill Frazier, ScheidelerEquipment Co., Inc200200July 21, 1969Philip Scuteri1,0001,000Aug. 2, 1969Colonial Garage, Inc1,5001,500Aug. 3, 1969Mayor David Goodwin(No amount noted)Aug. 3, 1969Shelly Acuff400400Dec. 3, 1969Patterson Chevrolet(No amount noted)May 26, 1970Barrett Paving Co., Inc300300June 3, 1970Committeeman David Goodwinby N.J. Equipment Co500500June 5, 1970Fred F. Morelli(No amount noted)June 16, 1970Barrett Paving Co., Inc300300June 25, 1970Anonymous1,0001,000Aug. 10, 1970Colonial Garage, Inc(No amount noted)Nov. 23, 1970Barrett Paving Co., Inc(No amount noted)Totals9,1251,6007,52535 221 During the years before the Court, deposits were made to a checking account of the Democratic Club as indicated in table IV:Table IVNumber ofTotalTotalForm notYeardepositscashchecksindicated196825$ 11,501.00$ 22,263.21$ 427.6619693111,060.6522,448.450 1970419,100.0023,613.17625.00Totals9731,661.6568,324.831,052.66On August 1, 1969, petitioner deposited $ 2,240 in cash in his savings account at First National Bank of Bordertown, Bordertown, N.J.On June 22, 1970, petitioner repaid $ 1,000 in cash against a loan he had with the United Savings & Loan Association.Petitioner and his wife, Eva H. Goodwin, filed a joint Federal income tax return for 1968. On this return, petitioner showed his occupation as Chief Bureau Recreation and his employer as the State of New Jersey, Trenton, N.J. His wife's occupation was shown as housewife. On this return, petitioner reported total income of $ 18,747.68 consisting of $ 18,664.42 of wages or salaries and $ 83.26 of other income, which was composed of $ 30.46 of interest and $ 52.80 for sale or exchange of property. Itemized deductions totaling $ 2,533.41 were claimed. The claimed deductions were composed of medical expense; charitable contributions; 36 real estate, State and local gasoline, and general sales taxes; interest expense composed of interest on a home mortgage, interest paid to a bank, and interest paid to a credit union; and miscellaneous deductions including expenses of attending an American Legion convention, automobile expense based on miles driven as State Director, American Legion Baseball, and professional dues. No other deductions were claimed.Petitioner and his wife filed a joint Federal income tax return for the calendar year 1969 in which petitioner's occupation was 222 shown as "Chief, Department Recreation State, Mayor, Hamilton Township." His wife's occupation was shown as "housewife." On this return, salaries and wages of $ 20,360.48 were reported and other income of $ 650, which consisted of gain on the sale of a capital asset, making total reported income of $ 21,010.48. From this reported income was deducted as adjustments the amount of $ 1,820. These adjustments consisted of unreimbursed automobile expense in connection with being on the township committee and mayor of the township of $ 940 and a sick pay exclusion of $ 880. On his 1969 return, petitioner claimed itemized deductions of $ 2,798.19, again 37 consisting of medical expenses, taxes, charitable contributions, and miscellaneous expenses in connection with sponsorship of a team, convention expenses, and also in this year an amount under "League of Municipalities."Petitioner and his wife filed a joint Federal income tax return for the calendar year 1970. Petitioner's occupation on this return was shown as "Chief, Recreation Department State," and his wife's occupation as "housewife." He reported salaries and wages of $ 21,780.32 and interest income of $ 345.18, for a total of $ 22,125.50, from which was subtracted an adjustment representing transportation expenses of $ 600 (computed as $ 1,200 on automobile mileage driven, less $ 600 reimbursement), leaving adjusted gross income of $ 21,525.50. On this return, petitioner claimed itemized deductions of $ 2,511.08, again consisting of medical expenses, taxes, charitable contributions, interest expense, and miscellaneous expenses composed of American Legion delegate expenses and professional dues.For each of the years 1969 and 1970, the income from salaries and wages reported by petitioner on his return totals the amount shown on the Form W-2 petitioner received from the State 38 of New Jersey plus the amount shown on the Form W-2 petitioner received from the Township of Hamilton, N.J.3Petitioner did not receive unreported income with respect to the following items listed in table II: 223 1968May 5W. E. Timmerman Co$ 750Nov. 27Barrett Paving Co., Inc1,050Dec. 17Barrett Paving Co., Inc5001969Nov. 3Barrett Paving Co., Inc1,0001970June 19Lynn Equipment Co., Inc1,500Nov. 25Barrett Paving Co., Inc800OPINIONRespondent takes the position that petitioner is estopped by reason of his conviction on a plea of guilty of violation of section 7206(1) for each of the years 1968, 1969, and 1970 from denying that his return for each of these years was false and fraudulent in that he knew and believed that his correct total income for each of these years was an amount substantially in excess of the income reported on his return for the year.Respondent argues, based on the decisions in Arctic Ice Cream Co. v. Commissioner, 43 T.C. 68 (1964), and Plunkett v. Commissioner, 465 F.2d 299 (7th Cir. 1972), affg. a Memorandum Opinion of this Court, that for the purposes of applying the doctrine of collateral estoppel there is no difference 39 between a conviction based upon a plea of guilty and a conviction entered after a trial on the merits. Both of these cases specifically so hold and we follow the holdings of those cases in the instant case.In support of his position that because of his conviction petitioner is estopped to deny that his return for each of the years 1968, 1969, and 1970 is fraudulent and to deny that he omitted substantial amounts of income from his return in each of those years, respondent relies on Considine v. Commissioner, 68 T.C. 52 (1977).In the Considine case, we held that the taxpayer was estopped by his conviction after a jury trial of violating section 7206(1) from denying that his return for the year there involved was fraudulent in that it failed to report a specific item of capital gain income. We pointed out that estoppel applies only with respect to those facts actually litigated in the first case which were essential to the judgment in that case. In the instant case, therefore, we must decide what facts were litigated and 224 essential to the judgment in the criminal case since the conviction was on a guilty plea.In Arctic Ice Cream Co. v. Commissioner, supra, we stated (p. 75): "It is 40 well settled that a plea of guilty means 'guilty as charged in the indictment,' and that such a plea is a conclusive judicial admission of all of the essential elements of the offense which the indictment charges." The essential element of the indictment in the instant case, to which petitioner pleaded guilty, was that in each of the years here in issue, he subscribed under penalties of perjury a joint Federal income tax return which was filed with the Internal Revenue Service, which return he did not believe to be true and correct in that he well knew and believed that his correct total income for the year was substantially in excess of the income he reported.The indictment for violation of section 7206(1)4 in the instant case to which petitioner pleaded guilty, as was the indictment in Considine v. Commissioner, supra, was for willfully subscribing under penalties of perjury a Federal income tax return known or believed to be incorrect in that income was omitted therefrom. 5 It was essential to petitioner's conviction that it be shown that he willfully subscribed to a return which he knew and believed to be false in that income was omitted therefrom. As discussed in the Considine41 case, the willful subscribing to a false return is the filing of a fraudulent return. In fact, the judgment here convicted petitioner of filing "false and fraudulent income tax returns." In our view, here, as in Considine, petitioner is estopped to deny that his return for each of the years here in issue was false and fraudulent and that he omitted substantial amounts of income from his return in each of these years.Petitioner argues that the should not be collaterally estopped from denying the charges in the indictment to which he pleaded guilty 42 because --I was advised at the time of these allegations to plead guilty by my attorney to 225 the income tax charges and all other charges would be dropped, which they were. I was told by my attorney at that time that if I pleaded guilty nothing would happen. They would realize that this money did go to the Harry Lieberman Democratic Club, and my pension would be safe. This turned out to be a false statement. I was fined $ 2,000 in Federal Court, which has since been paid. I was placed on two years probation, which has been served, and my pension has been taken away from me * * With respect to a similar contention made by a taxpayer in Plunkett v. Commissioner, supra, the court stated as follows (pp. 306-307):We concur in the opinion of the court below that"[the] stated understanding of counsel, that the government would move to dismiss charges against Mrs. Plunkett if petitioner would plead guilty to the charges against him, does not vitiate petitioner's otherwise voluntary plea of guilty where the agreement was fully performed in conformity with the petitioner's expectations. Petitioner did not misunderstand the terms or the immediate consequences of the agreement and his plea 43 of guilty. Hence, the existence of the agreement does not affect the voluntariness of his plea." 29 CCH Tax Ct.Mem. at 1247.* * * Plunkett also complains that the judge who accepted his guilty plea was not informed of any evidentiary foundation to support the criminal charge. Consequently, the provision of Rule 11 of the Federal Rules of Criminal Procedure that "[the] court shall not enter a judgment upon a plea of guilty unless it is satisfied that there is a factual basis for the plea" was allegedly violated. * * The alleged defect in the proceedings against Plunkett was not of constitutional dimensions. The petitioner took no appeal directly attacking his conviction or sentence, and he has paid the fine imposed upon him. In light of these circumstances and the restrictions placed on McCarthy by Halliday, we can see no justification for sustaining Plunkett's collateral attack on the conviction and for voiding the consequences of that conviction in the present case.In the instant case, petitioner makes no contention that any representations of any type were made to him by any representative of the Government or by the Court. He refers to advice to him by his own attorney which 44 "turned out to be a false statement." He has made no showing that he was not fully apprised by the Court of the consequences of his plea of guilty. The judgment in this case recites that the Court is "satisfied that there is a factual basis for the plea" of guilty. No showing has been made that this finding in the judgment is not based on 226 questions propounded to petitioner or adequate facts otherwise ascertained by the District Court judge before entry of the judgment. We, therefore, conclude here, as did the court in Plunkett v. Commissioner, supra, that no justification exists for sustaining a collateral attack on petitioner's conviction on a plea of guilty.In order for collateral estoppel to apply with respect to the issue raised under section 6653(b), it must be shown as stated in Considine v. Commissioner, supra at 64, that the facts to which the estoppel applies are "ultimate facts with respect to which an identical issue is presented under section 6653(b)." As stated in Sunnen v. Commissioner, 333 U.S. 591">333 U.S. 591, 599-600 (1948), where a question of fact essential to the judgment in the first case is actually litigated and determined in that proceeding, the parties are bound by 45 the determination in a subsequent proceeding even though the cause of action is different. In order for the judgment in the prior proceeding to be given conclusive effect, it must establish "one of the ultimate facts in issue in the subsequent proceeding." Yates v. United States, 354 U.S. 298">354 U.S. 298, 338 (1957); The Evergreens v. Nunan, 141 F.2d 927">141 F.2d 927-928, 931 (2d Cir. 1944), affg. 47 B.T.A. 815">47 B.T.A. 815 (1942), cert. denied 323 U.S. 720">323 U.S. 720 (1944). In The Evergreens v. Nunan, supra at 928, the term ultimate fact in the collateral estoppel context is defined as "one of those facts, upon whose combined occurrence the law raises the duty, or the right, in question." Such an ultimate fact is distinguished in that case from an evidentiary fact, "from whose existence may be rationally inferred the existence of one of the facts upon whose combined occurrence the law raises the duty, or the right." 646 A conclusion that a taxpayer has filed a false and fraudulent return from which substantial income is omitted is a finding of an ultimate fact. This is one of the ultimate facts required to be shown in order to sustain an addition to tax under section 6653(b), even though it is necessary under that section, in order to find the addition to tax to be due, to make a further ultimate 227 finding of fact that there is an underpayment of tax due to the fraudulent omission of income from the return. 7 While section 6653(b) does not include the phrase "with intent to evade tax" as did section 293(b), I.R.C. 1939, this difference in wording was not a change in the proof necessary to show that a taxpayer is liable for an addition to tax for fraud. If an underpayment of tax is due to fraud, it is this fraud which comprises the intent to evade tax. See McGee v. Commissioner, 61 T.C. 249">61 T.C. 249, 257 (1973); Plunkett v. Commissioner, supra at 303. Therefore, to find the further ultimate fact that an underpayment of tax results from the fraudulent omission of income from the return is to find that the underpayment 47 is due to fraud with intent to evade tax. While, as heretofore pointed out, an "ultimate fact" is defined in The Evergreens v. Nunan, supra at 928, for purposes of collateral estoppel as one of the facts "upon whose combined occurrence the law raises the duty, or the right, in question," we have found no case specifically discussing what is an "ultimate fact" in a case involving an addition to tax under section 6653(b), other than the Considine case, the Amos case, and cases similar to the Amos case. We have therefore analyzed cases applying collateral estoppel in other situations to determine the nature of the facts considered in those cases to be ultimate facts 48 in relation to the issues involved in those cases. From this analysis, we can compare the facts in those cases to which collateral estoppel was held to apply in relation to the issues therein to the fact of fraudulent omission of income from a Federal tax return to the issue of whether there is an underpayment of tax, a part of which is due to fraud.In Local 167 v. United States, 291 U.S. 293">291 U.S. 293 (1934), the Court held Local 167 to be estopped by a prior criminal conviction involving 1929 and prior years from denying that it engaged in a conspiracy prior to 1929. In that case, the issue to be determined was whether petitioner was engaged in a conspiracy in 1930 and should be enjoined from so engaging. The Supreme Court stated in this respect (pp. 298-299):228 The judgment in the criminal case conclusively established in favor of the United States and against those who were found guilty that within the period covered by the indictment the latter were parties to the conspiracy charged. The complaint in this suit includes the allegations on which that prosecution was based. The defendants in this suit who had been there convicted could not require proof of what had been duly adjudged between 49 the parties. And, to the extent that the answers attempted to deny participation of convicted defendants in the conspiracy of which they had been found guilty, they are false and sham and the district court rightly so treated them. Oklahoma v. Texas, 256 U.S. 70">256 U.S. 70, 85. Cf. Coffey v. United States, 116 U.S. 436">116 U.S. 436, 442. Stone v. United States, 167 U.S. 178">167 U.S. 178, 184.Following the above-quoted holding, the Court discussed the evidence with respect to the existence of a conspiracy for the period following the period to which the prior conviction related, which was the issue in the case.Local 167 v. United States, supra, was one of the cases relied on in Tomlinson v. Lefkowitz, 334 F.2d 262">334 F.2d 262 (5th Cir. 1964), cert. denied 379 U.S. 962">379 U.S. 962 (1965), for the holding that a conviction of a taxpayer under section 7201 estopped him from denying his liability for the addition to tax for fraud under section 6653(b).In Thomas v. United States, 314 F.2d 936 (5th Cir. 1963), remanding a Memorandum Opinion of this Court, the Government was held collaterally estopped by a prior District Court decision involving the taxpayer's liability for income taxes in 1955 to deny that a farm was operated for a profit in 1955. 50 The issue involved in the second case was whether the farm was operated for profit in the years 1956 through 1958.In Pena-Cabanillas v. United States, 394 F.2d 785">394 F.2d 785 (9th Cir. 1968), it was held in a case involving an indictment of a person for illegally reentering the United States after having been deported that the person was estopped by a prior conviction to deny that he was an alien as of the date of the prior conviction. It was specifically pointed out that evidence was proper with respect to whether his reentry into the United States was legal and his status at the date of that reentry.In Gemma v. Commissioner, 46 T.C. 821">46 T.C. 821, 834 (1966), we held in a case involving the addition to tax for fraud under section 6653(b), but not involving an issue as to the statute of limitations, that the taxpayer was estopped by entry of a plea of guilty to a charge of willful failure to file an income tax return for the year 1956 to deny that his failure to file a return for that year was willful.229 The case of United States v. Fabric Garment Co., 366 F.2d 530 (2d Cir. 1966), discussed at some length in Considine v. Commissioner, supra at 64-65, held collateral estoppel to apply in a civil action 51 from a conviction in a prior criminal case in circumstances quite comparable to those here involved. In the Fabric Garment case, the issue involved a claim for conversion of goods. In the prior case, Fabric Garment had been convicted of unlawfully disposing of goods made under contract for the Government and making false statements as to the disposition of the goods. The Court held Fabric Garment to be collaterally estopped to deny that it unlawfully disposed of wool serge, but not as to the amount disposed of. See also Monjar v. Commissioner, 13 T.C. 587">13 T.C. 587, 617 (1949).From these cases, it is clear that uniformly courts have held that a fact which by its nature is an ultimate fact, such as the omission of substantial income from a false and fraudulent return which has been decided in a prior case, collaterally estops the person involved in the prior case from denying in a later action that ultimate fact, even though other facts must be found to dispose of the issue involved in the second case. In our view, petitioner in this case is estopped by his conviction in the prior criminal case from denying that he filed a fraudulent Federal income tax return from which was omitted substantial 52 income for each of the years here involved.Having concluded that petitioner is estopped to deny that his returns for the years here in issue were false and fraudulent in that he knowingly failed to report substantial income, it is necessary for us to decide whether respondent has shown by clear and convincing evidence that a part of the underpayment of tax in each of these years was due to this fraud with intent to evade tax. It is not necessary to a conviction under section 7206(1) that the false statement or omission on the return result in an underpayment of tax. See United States v. Rayor, 204 F. Supp. 486 (S.D. Cal. 1962). However, a necessary part of the showing of an addition to tax under section 6653(b) is that there is an underpayment due to fraud.The record here contains petitioner's tax returns showing all the deductions claimed by petitioner. None of the deductions claimed by petitioner on these returns has been disallowed by respondent. Petitioner's returns, therefore, constitute a statement of petitioner as to the deductions to which he is entitled in 230 each of the years here in issue. This is clear evidence of petitioner's deductions. Petitioner's only business in 53 the years here in issue was that of being an employee, a State employee and a township committeeman and mayor. The only deductible business expenses petitioner could have from his employment were employee business expenses. Petitioner produced no evidence and made no claim that he was entitled to any deductions other than those claimed on his return. From petitioner's returns, respondent has shown the amount of his deductible expenses in each year here in issue.Petitioner does claim that he turned over all the money which he received in cash from suppliers of goods and services to Hamilton Township to the treasurer of the Democratic Club, Mr. Glogoff. 8 Petitioner claims that he collected the money only as the agent of the Democratic Club and that he in fact turned the money over to the club treasurer. If petitioner had in fact collected the money merely as an agent for the Democratic Club, he would have received no income from such collection. However, in this case, petitioner is estopped to deny that he received unreported income. As we pointed out in Diamond v. Commissioner, 56 T.C. 530">56 T.C. 530, 541 (1971), amounts received by a taxpayer who acts merely as a conduit for the funds 54 are not required to be included in the recipient's income. See also Florists' Transworld Delivery Assn. v. Commissioner, 67 T.C. 333">67 T.C. 333 (1976). Where a person collects funds with no claim of right to such funds but collects such funds merely as agent, the funds do not constitute income to him. The fact that all such funds collected by a person are promptly transmitted to another is indicative that the person collecting the funds has no claim or right to the funds. Lashells' Estate v. Commissioner, 208 F.2d 430">208 F.2d 430 (6th Cir. 1953). 9 In this case, respondent has recognized that petitioner had no claim of right to the part of the cash paid to him by persons supplying goods and services to Hamilton Township which he did, in fact, turn over to the treasurer of the Democratic Club. Respondent, in his computation, eliminated such amounts from the amounts includable in petitioner's income. The special agent testified that the exhibit showing the computation of this elimination of the 231 funds paid over to the Democratic Club was based on an exhibit prepared for the criminal trial. To the extent petitioner was only a conduit of funds collected by him to the Democratic Club, such funds were not 55 income to petitioner. Since funds collected by petitioner as agent for the Democratic Club and turned over to that club are not income to petitioner, the amounts so turned over are not deductions.Clearly, amounts received by a taxpayer as "kickbacks" under a claim of right are income to that taxpayer. Lydon v. Commissioner, 351 F.2d 539">351 F.2d 539 (7th Cir. 1965), affg. a Memorandum Opinion of this Court; Cain v. Commissioner, 460 F.2d 1243">460 F.2d 1243 (5th Cir. 1972), affg. a Memorandum Opinion of this Court.On the basis of this record as a whole, we conclude that respondent has shown by clear and convincing evidence that part of the underpayment in tax in each of the years here in issue was due to petitioner's failure to report substantial amounts of income on his false and fraudulent returns. In our opinion, this is sufficient to show that part of the underpayment of tax by petitioner 56 in each year here in issue was due to fraud with intent to evade tax.However, there are other indications of fraud in this record. Petitioner received the payments from the suppliers of goods and services to Hamilton Township in cash. Petitioner testified under oath that "every penny that was ever given to me was never solicited" whereas we have found on the testimony of a number of other witnesses in this case that petitioner did solicit funds from suppliers of goods and services to Hamilton Township. There is a cash deposit to petitioner's savings account in approximately the amount and at approximately the time of one of the cash payments he received from a supplier to Hamilton Township. On the basis of this record as a whole, we conclude that petitioner is collaterally estopped to deny that he filed fraudulent returns which substantially understated his income for each of the years here in issue and that respondent has shown by clear and convincing evidence that an underpayment of tax resulted from these understatements of income, a part of which was due to fraud.Understatement of IncomeRespondent asserts that petitioner received unreported income in the form of kickbacks from 57 companies doing business 232 with Hamilton Township in the amounts listed in table II. Petitioner contends that any moneys received by him from vendors, such as those listed in table II, in their dealings with Hamilton Township, were "campaign contributions" to the Democratic Club and were turned over to the treasurer of that organization. In other words, petitioner contends he was merely a conduit or agent for any funds given to the Democratic Club and as such, he is not taxable on these payments.We conclude that petitioner did not receive unreported income as to six of the asserted payments (as set forth in the findings of fact, supra); as to the other payments, we conclude that petitioner has failed to meet his burden of proving error in respondent's determination.In analyzing whether the various payments listed by respondent constitute taxable income to petitioner, we first note that the burden of proof is on petitioner because the statutory notice is presumptively correct. Rule 142(a), Tax Court Rules of Practice and Procedure; Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933).The question, as to each of the asserted payments, is whether petitioner has carried his burden of proving that 58 the asserted payment does not represent income taxable to him.North Jersey Equipment Co., Inc. -- The record includes credible testimony that petitioner received the asserted payments from North Jersey Equipment Co., Inc., in 1968 and 1970. Petitioner has not persuaded us that respondent's determinations are incorrect. As to these payments, we hold for respondent.W. E. Timmerman Co. -- Respondent's witness testified that, after selling a street sweeper to Hamilton Township on behalf of W. E. Timmerman Co., he gave petitioner cash in an amount equal to about 5 percent of the price the township paid for the sweeper. This testimony corroborates respondent's determination that petitioner received $ 750 on May 5, 1968, from W. E. Timmerman Co. However, the witness also testified that he received a "thank you" letter from the treasurer of the Democratic Club. That letter is in evidence; it is dated May 6, 1968; it thanks the witness for his "generous contribution" to the Democratic Club's Campaign Committee; it does not indicate the amount the contribution. On May 17, 1968, $ 1,010 in bills was deposited to the checking account of the Democratic Club's Campaign Committee.233 On the 59 basis of this evidence and petitioner's testimony, we hold for petitioner as to the asserted $ 750 payment by W. E. Timmerman Co. in 1968.Barrett Paving Co., Inc. -- Respondent's witness testified that all the Barrett Paving Co., Inc., payments to petitioner were made during summer and early fall. This testimony conflicts in part with respondent's determinations set forth in table II, supra. Respondent presented no other credible evidence as to the Barrett payments. On the basis of respondent's evidence and petitioner's testimony, we hold for petitioner as to the following asserted Barrett payments:1968Nov. 27$ 1,050Dec. 175001969Nov. 31,0001970Nov. 25800Petitioner has not persuaded us that respondent's determinations as to the remaining Barrett payments are incorrect and so we hold for respondent as to the remaining Barrett payments.Colonial Garage, Inc. -- The record includes credible testimony that petitioner received the asserted payments from Colonial Garage, Inc., in 1969 and 1970. Petitioner has not persuaded us that respondent's determinations are incorrect. As to these payments, we hold for respondent.Lynn Equipment Co., Inc. -- As to the asserted $ 1,500 payment by 60 Lynn Equipment Co., Inc., in 1970, respondent presented the testimony of an Internal Revenue Service employee who stated that a Mr. Hobart Poole had told him that he had cashed a check (for $ 3,737.50) from Lynn Equipment Co., Inc., "and gave a portion of this check to Mr. Goodwin." (Transcript, p. 50.) Just before this statement, respondent's counsel had been put on notice about the essentially hearsay nature of other testimony of this witness, as follows:The Court: * * * Now, the petitioner has not objected to them, and I am going to admit them. But unless they are corroborated or some other special circumstances are shown, I will not give any weight to that type of hearsay testimony.Mr. Kearney: Your Honor, we will call a witness with respect to the transactions. Mr. Rush's testimony was directed more to the manner in which he arrived at the payment bases that were contained in the notice of deficiency 234 and in the scope of the other information was necessary with that regard, Your Honor.The Court: Very well.Mr. Kearney: I appreciate the hearsay nature of it, Your Honor. No, --The Court: So long as you understand the situation.Mr. Kearney: Your Honor, we will call a witness with 61 respect to each of the payments.The Court: FineMr. Kearney: With respect to Lynn Equipment Company, Mr. Rush, how did you arrive at the adjustment that was made for Lynn Equipment? [Transcript, p. 49.]The testimony as to the asserted Lynn Equipment Co., Inc., payment was given in response to the quoted question by respondent's counsel. Respondent presented no other evidence on this point. Cf. Cain v. Commissioner, supra.As to this asserted payment, the Court credits petitioner's denials. (Transcript, pp. 15-22.) We hold for petitioner as to the asserted $ 1,500 payment by Lynn Equipment Co., Inc., in 1970.Respondent, by amendment to answer, claimed an increased addition to tax under section 6653(b) for the year 1969, stating that in the notice of deficiency, the addition to tax was computed on the basis of the amended return and not on the original return. The addition to tax for fraud under section 6653(b) is to be applied to the difference between the correct tax due and the tax shown on a taxpayer's timely filed return. Stewart v. Commissioner, 66 T.C. 54 (1976); Breman v. Commissioner, 66 T.C. 61">66 T.C. 61 (1976). A copy of the amended return was not placed in evidence. However, 62 the parties stipulated that petitioner and his wife filed a timely return for 1969, a copy of which was attached to the stipulation. Since amended returns are not the statutory return, although recognized for certain purposes by respondent's regulations (see Koch v. Alexander, 561 F.2d 1115 (4th Cir. 1977)), we accept this stipulation as to the 1969 return as referring to the statutory timely filed return. Therefore, the addition to tax under section 6653(b) should be computed on the basis of the difference in petitioner's tax computed in accordance with this opinion and the tax shown on petitioner's return which has been stipulated in this case.235 To reflect the conclusions reached herein, 10Decision will be entered under Rule 155.FEATHERSTON; CHABOTFeatherston, J., dissenting: I disagree with that portion of the majority opinion which estops petitioner from 63 showing that he did not file a fraudulent return for each of the years in controversy. Estopping petitioner in this respect, in my opinion, has led the majority to apply an erroneous standard in finding that some part of the deficiency for the years in issue was "due to fraud" within the meaning of Code section 6653(b).As I understand the teaching of the Supreme Court in Commissioner v. Sunnen, 333 U.S. 591">333 U.S. 591, 599-600 (1948), and the numerous cases which have followed it, application of the principle of collateral estoppel "must be confined to situations where the matter raised in the second suit is identical in all respects with that decided in the first proceeding and where the controlling facts and applicable legal rules remain unchanged." In Cromwell v. County of Sac, 94 U.S. 351">94 U.S. 351, 353 (1876), a case upon which Sunnen relied heavily, the Supreme Court explained that when applying collateral estoppel "the inquiry must always be as to the point or question actually litigated and determined in the original action, not what might have been thus litigated and determined. Only upon such matters is the judgment conclusive in another action." See also Restatement, Judgments, sec. 68(a)64 (1942).Due to petitioner's conviction under section 7206(1), the majority has estopped petitioner "from denying that he filed a fraudulent Federal income tax return from which was omitted substantial income for each of the years here involved." The effect of the majority opinion is to equate the willful filing of a return containing a false statement with the commission of fraud with intent to evade tax. On this ground, it has limited respondent's burden of proof to a showing "that a part of the 236 underpayment of tax * * was due to this fraud with intent to evade tax." Estopping petitioner from denying that his returns were fraudulent is error, because the existence of fraud in petitioner's returns was not alleged, litigated, or decided in the prior criminal case.Section 7206(1)1 makes it a crime for one to willfully make and submit any return which is verified by a written declaration that it is made under the penalties of perjury and which he does not believe to be true and correct as to every material matter. The "intent to evade taxes is not an element of the crime charged under this section," i.e., section 7206(1). Siravo v. United States, 377 F.2d 469">377 F.2d 469, 472 n. 4 (1st Cir. 1967). 65 Rather, the purpose behind section 7206(1) is to punish falsification in tax returns even absent fraud or, indeed, the existence of a deficiency.Sustaining the conviction of a taxpayer who was charged with having falsified in his return the source of his income, the court in United States v. Di Varco, 484 F.2d 670">484 F.2d 670, 673 (7th Cir. 1973), cert. denied 415 U.S. 916">415 U.S. 916 (1974), noted "the need for accurate information concerning the source of income so that the Internal Revenue Service can police and verify the reporting of individuals and corporations." The court thus concluded that "a 66 misstatement as to the source of income is a material matter," within the meaning of section 7206(1). The following statement by the trial court (343 F. Supp. 101">343 F. Supp. 101, 103 (N.D. I11. 1972)) was quoted with approval (484 F.2d at 673):One of the more basic tenets running through all the cases is that the purpose behind the statute [sec. 7206(1)] is to prosecute those who intentionally falsify their tax returns regardless of the precise ultimate effect that such falsification may have. [Emphasis added.]Other courts have agreed that section 7206(1) "[imposes] the penalties for perjury upon those who wilfully falsify their returns regardless of the tax consequences of the falsehood." 237 Gaunt v. United States, 184 F.2d 284">184 F.2d 284, 288 (1st Cir. 1950), cert. denied 340 U.S. 917">340 U.S. 917 (1951); cf. Silverstein v. United States, 377 F.2d 269">377 F.2d 269, 270 (1st Cir. 1967). Indeed, proof that the falsification resulted in no tax deficiency is "not relevant to the issue raised" by an indictment under section 7206(1). Schepps v. United States, 395 F.2d 749">395 F.2d 749 (5th Cir. 1968), cert. denied 393 U.S. 925">393 U.S. 925 (1968); cf. Hoover v. United States, 358 F.2d 87">358 F.2d 87, 88-89 (5th Cir. 1966), cert. denied 385 U.S. 822">385 U.S. 822 (1966).Here, the indictment 67 under section 7206(1) charges that petitioner willfully filed a verified return which "he did not believe to be true and correct as to every material matter" in that petitioner "well knew and believed * * * [that his] correct total income * * * [was] substantially in excess of the" amount reported. To this charge for 1968, 1969, and 1970, petitioner pleaded guilty. Because petitioner's crime under section 7206(1) was completed with the knowing omission of income, conviction was proper in his case even if petitioner, when filing his returns, thought he had deductions to offset the omissions, and in making the omissions, had no intent to defraud the Government of its lawful taxes but rather was attempting merely to conceal the kickbacks he had taken. Therefore, to borrow the words of Cromwell v. County of Sac, 94 U.S. at 353, the question of fraud was not "actually litigated and determined" in the criminal action. Hence, petitioner should not be estopped from denying in the instant case that the underpayment of tax was due to fraud.I think the majority's error in applying collateral estoppel in this context stems from the premise that "the willful subscribing to a false return [i.e., 68 a return containing a false statement] is the filing of a fraudulent return." This premise, which is essential to the majority's position, was stated in Considine v. Commissioner, 68 T.C. 52">68 T.C. 52, 61 (1977). In that case, at page 59, the Commissioner pointed to the following statement in Amos v. Commissioner, 43 T.C. 50">43 T.C. 50, 55 (1964), affd. 360 F.2d 358">360 F.2d 358 (4th Cir. 1965): "The term 'willfully' as used in section 7201 has authoritatively been defined in prior judicial decisions to encompass all of the elements of fraud which are envisioned by the civil penalty described in section 6653(b)." The Commissioner also emphasized that, in United States v. Bishop, 412 U.S. 346 (1973), and in United States v. Pomponio, 429 U.S. 10">429 U.S. 10 (1976), the Supreme Court construed the word "willfully" to bear the same meaning in each of sections 7201, 7202, 7203, 7204, 7205, and 7206. 238 Adopting the Commissioner's argument, the Court concluded in Considine v. Commissioner, supra at 61, 68, that conviction under section 7206(1) constitutes "proof that the return is fraudulent" and that collateral estoppel prevents a petitioner convicted under section 7206(1) from denying that any underpayment for the same year was due 69 to fraud; respondent's burden was limited to showing that there was an underpayment of tax.I think the Considine opinion erroneously reads the element of fraud into the word "willfully" contained in section 7206(1). As the majority here correctly states, "willfully" as used in section 7206(1) means "a voluntary, intentional violation of a known legal duty." United States v. Pomponio, supra at 12; United States v. Bishop, supra at 360. This definition says nothing about fraud. The Bishop court buttressed its conclusion that "willfully" has the foregoing uniform meaning in sections 7201-7207 by noting ways in which those statutes differ, one from the other, specifically in "the designation of certain express elements of the offenses." United States v. Bishop, supra at 358-360. For example, the Court, at page 359, described the express element of the offense under section 7201 as the "attempt to evade." In the following statement, the Court explicitly cautioned against interpreting the word "willfully," as used in sections 7201-7207, to include the section 7201 requirement of "an attempt to evade" (412 U.S. at 360 n. 8):Semantic confusion sometimes has been created when courts discuss 70 the express requirement of an "attempt to evade" in section 7201 as if it were implicit in the word "willfully" in that statute. * * * This Court may be somewhat responsible for this imprecision because a similar analysis was employed in Spies v. United States, 317 U.S. 492">317 U.S. 492, 497-499, 63 S. Ct. 364">63 S.Ct. 364, 367, 87 L.Ed. 418 (1943). Greater clarity might well result from an analysis that distinguishes the express elements, such as an "attempt to evade," prescribed by section 7201, from the uniform requirement of willfulness.The language quoted above from the Amos opinion was used in the context of a discussion of the similarity of section 7201 ("willfully attempts * * * to evade * * * tax") and section 6653(b) ("underpayment * * * due to fraud"). The element of fraud necessary for conviction under section 7201 was equated with that essential for the imposition of the civil penalty under section 6653(b). It is the attempt to evade tax which is tantamount to fraud. "The real character of the offense lies 239 * * in the attempt to defraud the government by evading the tax." Gariepy v. United States, 220 F.2d 252">220 F.2d 252, 259 (6th Cir. 1955), cert. denied 350 U.S. 825">350 U.S. 825 (1955). Thus, it is correct to 71 conclude, as we did in Amos, that a taxpayer's conviction under section 7201 of having attempted to evade or defeat a tax for a taxable year estops that taxpayer from denying under section 6653(b) that part of his underpayment for the same year was "due to fraud." See, e.g., Tomlinson v. Lefkowitz, 334 F.2d 262">334 F.2d 262 (5th Cir. 1964), cert. denied 379 U.S. 962">379 U.S. 962 (1965); Moore v. United States, 360 F.2d 353">360 F.2d 353, 355 (4th Cir. 1966), cert. denied 385 U.S. 1001">385 U.S. 1001 (1967).However, in my opinion, to hold that a conviction of "willfully" making a false statement in an income tax return within the meaning of section 7206(1) estops a taxpayer from denying that any underpayment of tax he may have made for the year of the return was "due to fraud" misapplies the principle of collateral estoppel. Conviction under section 7206(1) establishes that petitioner willfully, or voluntarily and intentionally, violated the legal duty not to make a false statement as to any material matter on his income tax return. It does not establish that he violated that duty with an intent, or in an attempt, to evade tax.I am aware that the finding and judgment entered by the District Court states: "Defendant has been convicted as 72 charged of the offense(s) of filing false and fraudulent income tax returns. 26:7206(1)." But, in entering this minute order, the court simply paraphrased the heading of section 7206, "Fraud and False Statements." Paragraphs (2), (3), and (4) of section 7206 describe crimes involving fraud, but, as explained above, section 7206(1) does not.While I disagree with the majority position that petitioner is estopped from denying fraud, I think petitioner is estopped to deny the question actually litigated and determined in the criminal action -- in the words of the indictment, that he --wilfully and knowingly * * * [filed an income tax return for each of the 3 years for which he was convicted which] he did not believe to be true and correct as to every material matter, in that * * * he then and there well knew and believed * * * the correct total income for the period reported was an amount substantially in excess of the reported total sum [in each such year].Because "a fact decided in an earlier suit is conclusively established between the parties and their privies, provided it was necessary to the result of the first suit" ( Hyman v. Regenstein, 258 F.2d 502">258 F.2d 502, 510 (5th Cir. 1958); The Evergreens v. Nunan, 141 F.2d 927">141 F.2d 927, 928240 (2d Cir. 1944), 73 cert. denied 323 U.S. 720">323 U.S. 720 (1944); Fox v. Commissioner, 61 T.C. 704">61 T.C. 704, 711 (1974)), petitioner is not entitled to relitigate the issue as to these omissions in the instant case.In resolving the issue of whether any part of petitioner's underpayments of tax were "due to fraud," it will be important to weigh his failure to show he had deductions to offset these judicially-established omissions of income. See, e.g., United States v. Bender, 218 F.2d 869">218 F.2d 869, 871 (7th Cir. 1955), cert. denied 349 U.S. 920">349 U.S. 920 (1955). I do not think, however, such failure establishes fraud as a matter of law. Petitioner is entitled to litigate the fraud issue without regard to the principle of collateral estoppel. In other words, the Court must decide, in the light of all the evidence, whether the underpayments of tax were "due to fraud," i.e., whether petitioner made the income omissions with "the specific purpose to evade a tax believed to be owing." Carter v. Campbell, 264 F.2d 930">264 F.2d 930, 936 (5th Cir. 1959); Webb v. Commissioner, 394 F.2d 366">394 F.2d 366, 377 (5th Cir. 1968), affg. a Memorandum Opinion of this Court. I respectfully dissent because it is not clear that the evidence has been weighed under this standard.Chabot, 74 J., dissenting: Petitioner was indicted on five counts of extortion and three counts of willfully filing false Federal income tax returns (sec. 7206(1)). 1 Nine months later, he "copped a plea"; he pled guilty on the three false return counts. Four months after that, all five extortion counts were dismissed and petitioner got probation and a $ 2,000 fine. On the basis of the foregoing, the majority refuse to allow 241 petitioner to deny that his tax return for each of the years before the Court was false and "fraudulent," within the meaning of section 6653(b). 2 Having thus foreclosed petitioner from denying fraud and omission of substantial 75 amounts of income, the majority then conclude that petitioner is liable for the civil fraud addition to tax for each of the 3 years.From this conclusion I respectfully dissent, because --(1) Petitioner's conviction under section 7206(1) was not a conviction of "fraud";(2) Collateral estoppel is not applicable; and(3) In the absence of collateral estoppel, respondent has not borne his heavy burden of proving petitioner's liability for civil tax fraud.(1) Petitioner Was Not Convicted of FraudThe question before us is whether respondent has carried his burden 3 of proving by clear and convincing evidence 4 that petitioner has committed civil tax fraud. In Amos v. Commissioner, 43 T.C. 50">43 T.C. 50 (1964), affd. 360 F.2d 358">360 F.2d 358 (4th Cir. 1965), we held that criminal "tax evasion" under section 72015 was equivalent to civil tax fraud under section 6653(b), even though the word "fraud" does not appear in section 7201. The majority in the instant 76 case conclude that petitioner's conviction under section 7206(1) estops him from denying that his returns were fraudulent.In Amos, we held there was sufficient identity between the requirements of section 7201 and those of section 6653(b) to warrant application of collateral 77 estoppel as to fraud. Section 242 7206(1), on the other hand, falls far short of this identity. In particular, a conviction under section 7206(1) does not require a showing that petitioner willfully attempted to evade tax ( Gaunt v. United States, 184 F.2d 284">184 F.2d 284 (1st Cir. 1950); 678 United States v. Lodwick, 410 F.2d 1202">410 F.2d 1202, 1205-1206 (8th Cir. 1969)), nor does it even require a showing of an understatement of income ( United States v. Di Varco, 484 F.2d 670">484 F.2d 670 (7th Cir. 1973)). It may be that the evidence (or the charge in the indictment) in the prior action is sufficient to prove an intent to evade or defeat the payment of taxes -- i.e., the equivalent of the intent component of fraud. 7 However, collateral estoppel applies only if the matter was "essential to the judgment * * 79 in the first tax proceeding." Commissioner v. Sunnen, 333 U.S. 591">333 U.S. 591, 601 (1948). See United States v. Colacurcio, 514 F.2d 1">514 F.2d 1, 6-7 (9th Cir. 1975). It is not essential, for a conviction under section 7206(1), to prove an intent to evade or defeat the payment of taxes. Gaunt v. United States, 184 F.2d at 288.From the foregoing, it is evident that petitioner's prior conviction under section 7206(1) is not a proper basis for use to estop him, in the instant case, from denying that his returns were "fraudulent."The majority follow Considine v. Commissioner, 68 T.C. 52">68 T.C. 52 (1977), on the basis of which they conclude that "the willful subscribing to a false return is the filing of a fraudulent return" (p. 224 supra). I do not agree with this conclusion and believe Considine should be overruled.Considine included the following analysis:243 (1) "Willfully" has the same meaning in section 7206 as it has in section 7201. United States v. Pomponio, 429 U.S. 10">429 U.S. 10 (1976); United States v. Bishop, 412 U.S. 346">412 U.S. 346 (1973). 80 Considine v. Commissioner, 68 T.C. at 59.(2) "Willfully" in section 7201 "has authoritatively been defined in prior judicial decisions to encompass all of the elements of fraud which are envisioned by the civil penalty described in section 6653(b)." Amos v. Commissioner, 43 T.C. at 55. Considine v. Commissioner, 68 T.C. at 59.(3) Therefore, "willfully" in section 7206(1) encompasses all the elements of fraud in section 6653(b) (except that the latter provision requires a showing of an underpayment of tax). Considine v. Commissioner, 68 T.C. at 60.In order to show under section 7206(1) that a taxpayer willfully makes a return which he does not believe to be true and correct as to every material matter, it is necessary to establish that the return as filed is not correct in a material respect, that the taxpayer at the time of filing the return did not believe it to be correct in every material respect, and that he subscribed to the return "willfully." "Willfully," in the context of section 7206, simply means a voluntary, intentional violation of a known legal duty. United States v. Pomponio, 429 U.S. 10">429 U.S. 10 (1976). 881 82 In order to show under section 6653(b) that a taxpayer is liable for the fraud addition to tax, it is necessary to establish that there was an underpayment due to fraud. Fraud is an actual intentional wrongdoing, and the intent required is the specific purpose to evade a tax believed to be owing. E.g., Webb v. 244 , 394 F.2d 366">394 F.2d 366, 377 (5th Cir. 1968), affg. a Memorandum Opinion of this Court; 9Powell v. Granquist, 252 F.2d 56">252 F.2d 56, 60 (9th Cir. 1958); Wiseley v. Commissioner, 185 F.2d 263">185 F.2d 263, 266 (6th Cir 1950), revg. 13 T.C. 253">13 T.C. 253 (1949); Estate of Pittard v. Commissioner, 69 T.C. 391">69 T.C. 391, 400 (1977); McGee v. Commissioner, 61 T.C. 249">61 T.C. 249, 256 (1973), affd. 519 F.2d 1121">519 F.2d 1121 (5th Cir. 1975). Therefore, in order to prove an underpayment due to fraud under section 6653(b), respondent must prove that there was an underpayment of tax, that petitioner had the specific purpose and intent to evade a tax believed to be owing, and that the underpayment was due to 83 or caused by the purpose and intent to evade tax.In short, the quoted language of Amos, relied upon in Considine and by the majority in the instant case, was elliptical. The essential equivalent of section 6653(b) "fraud" is not the one word "willfully"; it is rather the section 7201 phrase "willfully attempts * * to evade * * * tax." Amos v. Commissioner, 43 T.C. at 55. Considine, then, is inconsistent with both the Supreme Court's analysis in Pomponio and our analysis in Amos. Considine should be overruled.(2) Collateral Estoppel Is Not ApplicableThe Congress has not commanded the courts concerning the doctrine of collateral estoppel in tax cases. The doctrine has been developed by the courts and results in a party to a case being forbidden to dispute a matter which is otherwise properly before the court in that case.In The Evergreens v. Commissioner, 47 B.T.A. 815">47 B.T.A. 815 (1942), a Board-reviewed opinion, we applied the doctrine in determining the tax basis of property sold by a cemetery corporation in 1934 and 1935. All issues in that case had been settled by stipulation, except for the March 1, 1913, value 10 of those lots that had been owned by the cemetery 84 corporation on the latter date. The Commissioner had determined that the March 1, 1913, fair market value of all the lots, both those that were improved and those not improved, was $ 0.30 per square foot. The cemetery corporation pointed out that, in an earlier case, the Board had determined that all the improved land had a March 1, 1913, fair 245 market value of $ 1.55 per square foot; the corporation argued that that earlier determination settled the matter as to the improved land for the second case. The corporation maintained that the $ 1.55 value was also an appropriate starting point for determining the March 1, 1913, fair market value of the unimproved land; it argued that that land should be valued at the improved land value less the cost of the improvements (for a net value of $ 1.35 to $ 1.47 per square foot).The Board was unanimous in agreeing with the cemetery corporation that, as to the improved land, the value determined in the earlier suit was conclusive. As the Board noted, on this point the earlier determination was not to be reexamined "for, if necessary, that 'decision makes white black; black, white; the crooked, straight; 85 the straight, crooked.' Bouvier, Law Dictionary." (47 B.T.A. at 825.) However, with two dissents, the Board concluded that it could ignore the earlier determination in deciding on the value of the unimproved land. Accordingly, the Board rejected the cemetery corporation's above-described approach as to the unimproved land. After analyzing the matter, the Board concluded that $ 0.35 per square foot was the appropriate March 1, 1913, fair market value for the unimproved land.The Board's holding was approved on appeal. The Evergreens v. Nunan141 F.2d 927">141 F.2d 927 (2d Cir. 1944). In approving the position the Board had adopted, the Court of Appeals pointed out that the collateral estoppel doctrine does not mean that every matter necessary to the result in the first case is conclusively established between the parties in all future suits (141 F.2d at 929), but only those matters which are "ultimate facts" in the future suits (141 F.2d at 931). This view of the limitation of collateral estoppel has been adopted by the Supreme Court ( Yates v. United States, 354 U.S. 298">354 U.S. 298, 338 (1957)), 11 by this Court ( Amos v. Commissioner, 43 T.C. at 54; 1287 Gammill v. Commissioner, 62 T.C. 607">62 T.C. 607, 616246 (1974)), 86 and by the American Law Institute's Restatement of Judgments (sec. 68, comment p). 1388 Notwithstanding the American Law Institute's description of the ultimate fact-mediate data distinction as "a clear and workable definition," in many situations the distinction has not been applied or is difficult to apply. Happily, we need not search far for guidance in applying this distinction in civil tax fraud cases, for the point was set down as follows in Amos v. Commissioner:In the instant case imposition of the civil penalty prescribed by section 6653(b) depends upon a determination 89 of the ultimate fact that petitioner's underpayment of tax for the years 1955 through 1958 was due to fraud. This ultimate fact for determination herein is the same ultimate fact which was determined adversely to petitioner in the prior criminal proceeding. It is therefore our decision that petitioner is conclusively bound, under the doctrine of collateral estoppel, by that prior adverse determination. Tomlinson v. Lefkowitz, 334 F.2d 262">334 F.2d 262 (C.A. 5, 1964), affirming an unreported case (S.D.Fla. 1962). [43 T.C. at 55-56; emphasis added.]a "mediate" fact within this context would be a fact merely tending to establish an essential element of the offense, rather than the essential element itself. [43 T.C. at 55, n. 6; emphasis in original.]The willful filing of an income tax return omitting income is a fact which if true may, together with further facts, be a basis 247 from which an intent to evade tax may be inferred. It is not an "ultimate" fact in a section 6653(b) proceeding.The majority correctly recognize that, in order for the judgment in the prior proceeding to be given conclusive effect, it must establish one of the ultimate facts (as defined in The Evergreens v. Nunan, supra) 90 in issue in the subsequent proceeding, page 225 supra. The majority then state "A conclusion that a taxpayer has filed a false and fraudulent return from which substantial income is omitted is a finding of an ultimate fact" in a section 6653(b) proceeding, page 226 supra. The latter statement may well be the law, but its application here is based on the assumption that the fact essential to the section 7206(1) proceeding (the willful subscribing to a return from which substantial amounts of income have been omitted) is a conclusion that petitioner has filed a fraudulent return. As indicated above (section (1) of this dissenting opinion) that assumption is unfounded.Therefore, I would hold that collateral estoppel does not apply to estop petitioner from denying fraud, nor from denying he willfully filed income tax returns from which substantial amounts of income have been omitted for the years before the Court.(3) Analysis of the EvidenceOn the basis of the record as a whole, including the demeanor of the witnesses and the evidence relied upon by respondent (see n. 7 supra), although the issue is not free from doubt, I would conclude that respondent has failed to bear his heavy 91 burden of proving fraud by clear and convincing evidence.Testimony of payors. -- In the instant case, petitioner claims he was an agent for the Democratic Club. Although respondent presented witnesses who testified petitioner made it known to them that they would have to make contributions to the Democratic Club in order to get the township's business and who testified that they made actual cash payments to petitioner, this evidence does not conflict with petitioner's explanation. Several of respondent's witnesses testified they understood they were making contributions to the Democratic Club. None testified he or she understood the money was a kickback to petitioner rather than a payment to petitioner as an agent of the Democratic Club.Payments in cash. -- That the kickbacks were made in cash is 248 consistent with fraud, as asserted by respondent, but it also is consistent with petitioner's explanation. A substantial portion of the Democratic Club's checking account deposits were in the form of cash (table IV supra). Also, most of the acknowledgment letters used by respondent's employees in preparing their worksheets were acknowledgments of cash (table III supra). Clearly, the 92 practice of making cash payments to the Democratic Club was not unusual at the times and place involved herein. Large transfers of cash may have afforded opportunities for improprieties, but a showing of tax fraud by petitioner requires evidence far clearer and more convincing than this.Letters of acknowledgment. -- The lack of letters of acknowledgment, too, does little to bolster respondent's case. Even the few letters of which there is evidence show that each of the people who apparently paid petitioner, except Lynn Equipment Co. (see tables II and III supra), received at least one acknowledgment letter at some time during the years before the Court. Respondent indicated that the acknowledgment letters that had been used in preparing the notice of deficiency appear to have disappeared while in the custody of a Department of the United States Government. Respondent has not shown that no other letters existed. Respondent has not shown why acknowledgment letters would be sent sometimes and not other times. Respondent has not explained why a "skimming" operation, such as respondent would have us believe was in effect, would call attention to the possibility of "sticky fingers" 93 by sending written acknowledgments sometimes and not other times. On balance, the evidence presented as to the acknowledgment letters seems to cast as much doubt on respondent's case as it does on petitioner's case.Unexplained deposit. -- Respondent presented evidence of an unexplained deposit of $ 2,240 in cash to petitioner's savings account on August 1, 1969. Respondent would have us infer that the source of the unexplained deposit was the $ 2,355 payment from Colonial Garage made August 1, 1969. I do not believe that one unexplained cash deposit is an indicium of tax fraud. See York v. Commissioner, 24 T.C. 742">24 T.C. 742 (1955).Therefore, I would conclude that respondent has failed to prove by clear and convincing evidence that petitioner is liable for an addition to tax for fraud under section 6653(b) for any of the 3 years before the Court.249 An additional comment may be in order.Under Arctic Ice Cream Co. v. Commissioner, 43 T.C. 68">43 T.C. 68 (1964), a guilty plea in a criminal tax case can be the basis for collateral estoppel. However, in a civil tax case --(1) If petitioner had conceded the matter out of court, then there would be no collateral estoppel;(2) If petitioner had contested the 94 matter, but stipulated as to a point, then there would be no collateral estoppel as to that point ( United States v. International Building Co., 345 U.S. 502">345 U.S. 502, 505 (1953)); and(3) If petitioner had contested the matter and had gone to trial, but conceded the matter on brief, then there would be no collateral estoppel ( Coors v. Commissioner, 60 T.C. 368">60 T.C. 368, 389-392 (1973), affd. 519 F.2d 1280">519 F.2d 1280, 1283 (10th Cir. 1975)).I find it hard to distinguish between the civil cases and the matter now before us.A wag has defined the law as "common sense, as modified by the legislature." But nothing in the statute commands the results reached by the majority. 14 The concept -- and the distinctions drawn by the foregoing cases -- have been designed by the courts in part for the convenience of the courts. At least as to the distinctions discussed above, the modifications of commonsense may not properly be charged to the legislature.Footnotes1. Unless indicated otherwise, all section references are to sections of the Internal Revenue Code of 1954, as in effect for the taxable years in issue.2. The other contested adjustment, determination of petitioner's medical expense deduction, is solely derivative; it depends on our resolution of the underreporting issue.↩1. The total amounts paid to Barrett Paving Co., Inc., for work performed for Hamilton Township are comprised of many items. Copies of invoices have been admitted as stipulated exhibits; also a worksheet compiling the invoices has been stipulated. Unfortunately, a comparison of the two reveals a number of invoices that do not appear on the worksheet and also some amounts listed on the worksheet for which there are no invoices in the record. The amounts set forth in the table represent the amounts which appear both on the worksheet and on the invoices.↩3. No Form W-2's for the year 1968 are in the record.↩4. SEC. 7206. FRAUD AND FALSE STATEMENTS.Any person who --(1) Declaration under penalties of perjury. -- Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; or↩5. We are not here concerned with whether, and if so, to what extent, collateral estoppel would apply where a conviction for violation of sec. 7206(1)↩ was based on a charge of falsely subscribing under penalties of perjury to a statement or document other than a Federal income tax return.6. One of its definitions of ultimate facts in Black's Law Dictionary 1691, 1692 (4th ed. 1968 rev.) is the following:"Those facts found in that vaguely defined field lying between evidential facts on the one side and the primary issue or conclusion of law on the other, being but the logical results of the proofs, or, in other words, mere conclusions of fact. Christmas v. Cowden, 44 N.M. 517">44 N.M. 517, 105 P.2d 484">105 P.2d 484, 487↩."7. In the case of Considine v. Commissioner, 68 T.C. 52">68 T.C. 52, 59 (1977), we discussed at some length the fact that willful, as used in sec. 7206(1) and sec. 7201, has the same meaning and that the bad faith or evil intent referred to in cases discussing the meaning of the word, willful, in the context of these statutes "simply means a voluntary, intentional violation of a known legal duty." See United States v. Pomponio, 429 U.S. 10">429 U.S. 10, 12 (1976). See also Amos v. Commissioner, 43 T.C. 50">43 T.C. 50, 55 (1964), affd. 360 F.2d 358">360 F.2d 358↩ (4th Cir. 1965).8. At the time of the trial, Mr. Glogoff was deceased.↩9. In Pierson v. Commissioner, T.C. Memo. 1976-281↩, involving the question of "whether certain payments received" by the taxpayer and "remitted by him to a member of the Yorty Administration" should be included in his income, we held that they should not be so included.10. Although the deficiency notice was sent to both petitioner and his wife, Mrs. Goodwin did not file a petition with the Court. Respondent's counsel assured the Court that respondent intended to abate the assessment made against Mrs. Goodwin to the extent, if any, that the Court redetermines the deficiency against petitioner.↩1. SEC. 7206. FRAUD AND FALSE STATEMENTS.Any person who -- (1) Declaration under penalties of perjury. -- Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; * * ** * * shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $ 5,000, or imprisoned not more than 3 years, or both, together with the costs of prosecution.↩1. SEC 7206. FRAUD AND FALSE STATEMENTS.Any person who -- (1) Declaration under penalties of perjury. -- Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; * ** * * shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $ 5,000, or imprisoned not more than 3 years, or both, together with the costs of prosecution.↩2. SEC. 6653. FAILURE TO PAY TAX.(b) Fraud. -- If any part of any underpayment (as defined in subsection (c)) of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 50 percent of the underpayment. * ↩3. SEC. 7454. BURDEN OF PROOF IN FRAUD, FOUNDATION MANAGER, AND TRANSFEREE CASES.(a) Fraud. -- In any proceeding involving the issue whether the petitioner has been guilty of fraud with intent to evade tax, the burden of proof in respect of such issue shall be upon the Secretary.(This language reflects several amendments since 1968 which have no effect on the instant case.)↩4. Rule 142(b), Tax Court Rules of Practice and Procedure. E.g., Stone v. Commissioner, 56 T.C. 213">56 T.C. 213, 220 (1971); Otsuki v. Commissioner, 53 T.C. 96">53 T.C. 96, 105↩ (1969).5. SEC. 7201. ATTEMPT TO EVADE OR DEFEAT TAX.Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $ 10,000, or imprisoned not more than 5 years, or both, together with the costs of prosecution.↩6. "The defendant's argument rests upon the fallacious premise that an indictment under § 145(b) [I.R.C. 1939, predecessor of sec. 7201] charging the filing of a false and fraudulent return as the manner of attempting to evade or defeat payment of income taxes defines a crime the elements of which are identical with the crime defined and made punishable by § 145(c) [I.R.C. 1939, predecessor of sec. 7206(1)]. It seems to us clear that the latter subsection makes it a felony merely to make and subscribe a tax return without believing it to be true and correct as to every material matter, whether or not the purpose in so doing was to evade or defeat the payment of taxes. That is to say, it seems to us that the subsection's purpose is to impose the penalties for perjury upon those who wilfully falsity their returns regardless of the tax consequences of the falsehood. Whereas subsection 145(b) condemns as felonious wilful attempts to evade or defeat taxes 'in any manner', and one manner, certainly, is by the wilful filing of a return known to be false in some material respect. Thus while the proof of an offense under subsection 145(b) may incidentally also prove an offense under § 145(c), it must in addition indicate an intent in some manner to evade or defeat a tax which is due. In brief, it seems to us evident that the scope of the two subsections is different with respect to an attempt to evade or defeat taxes, and certainly the language of § 145(b) is broad enough to include the filing of a false and fraudulent return as a punishable manner of attempted tax evasion. * * [184 F.2d at 288↩.]"7. Note that respondent does not rely upon petitioner's conviction or guilty plea as evidence in the instant case; respondent relies upon them only as elements of his collateral estoppel argument.↩8. In Pomponio, the Supreme Court stated as follows:In Bishop we held that the term "willfully" has the same meaning in the misdemeanor and felony sections of the Revenue Code, and that it requires more than a showing of careless disregard for the truth. We did not, however, hold that the term requires proof of any motive other than an intentional violation of a known legal duty. We explained the meaning of willfulness in § 7206 and related statutes:"The Court, in fact, has recognized that the word 'willfully' in these statutes generally connotes a voluntary, intentional violation of a known legal duty. It has formulated the requirement of willfulness as 'bad faith or evil intent,' [United States v.] Murdock, 290 U.S. [389,] 398, or 'evil motive and want of justification in view of all the financial circumstances of the taxpayer,' Spies [v. United States], 317 U.S. [492,] 498, or knowledge that the taxpayer 'should have reported more income than he did.' Sansone [v. United States], 380 U.S. [343,] 353. See James v. United States, 366 U.S. 213">366 U.S. 213, 221 (1961); McCarthy v. United States, 394 U.S. 459">394 U.S. 459, 471 (1969)." 412 U.S., at 360.Our references to other formulations of the standard did not modify the standard set forth in the first sentence of the quoted paragraph. On the contrary, as the other Courts of Appeals that have considered the question have recognized, willfulness in this context simply means a voluntary, intentional violation of a known legal duty. * * [429 U.S. at 12↩; fn. ref. omitted.]9. T.C. Memo. 1966-81↩.10. See sec. 1053 and its predecessors.↩11. "The normal rule is that a prior judgment need be given no conclusive effect at all unless it establishes one of the ultimate facts in issue in the subsequent proceeding. So far as merely evidentiary or "mediate" facts are concerned, the doctrine of collateral estoppel is inoperative. The Evergreens v. Nunan, 141 F.2d 927">141 F.2d 927; Restatement, Judgment § 68, comment p. * *"The dissenting Justices in Yates stated their agreement with the Court majority on the collateral estoppel issue (354 U.S. at 350↩).12. The rule governing the application of collateral estoppel to tax litigation has been stated by the Supreme Court to be as follows: "where a question of fact essential to the judgment is actually litigated and determined in the first tax proceeding, the parties are bound by that determination even though the cause of action is different." Commissioner v. Sunnen, 333 U.S. 591 (1948). To this must be added the observation that collateral estoppel is not applicable to every fact which may have been determined in the first suit, or which may be an issue in the second suit. Rex v. Duchess of Kingston, 20 How. St. Tr. 355, 538 (H.L. 1776). For the estoppel to apply to conclusively establish a fact in question, determination of that fact must have been necessary or essential to the result in the first suit and the fact in question must be an "ultimate" fact for determination in the second suit. For this purpose, "ultimate facts" are "those facts upon whose combined occurrence the law raises the duty or right in question," as distinguished from "evidentiary facts" or "mediate datum," which are those facts "from whose existence may be rationally inferred the existence of" an ultimate fact. The Evergreens v. Nunan, 141 F.2d 927">141 F.2d 927, 928 (C.A.2, 1944), certiorari denied 323 U.S. 720">323 U.S. 720↩. [Emphasis in original.]13. In its 1948 Supplement to the Restatement of the Law (p. 336), the American Law Institute revised comment p to sec. 68 of the Restatement of Judgments (relating to collateral estoppel as to questions of fact) to read as follows:"p. Evidentiary facts. The rules stated in this Section are applicable to the determination of facts in issue, i.e., those facts upon whose combined occurrence the law raises the duty or the right in question, but not to the determination of merely evidentiary or mediate facts, even though the determination of the facts in issue is dependent upon the determination of the evidentiary or mediate facts."The institute explained (1948 Supp. at 337) its action as follows:"Change: Original Comment p has been revised."Reason for Change: In Evergreens v. Nunan, 1944, 141 F.2d 927">141 F.2d 927, 152 A.L.R. 1187">152 A.L.R. 1187, Judge Learned Hand defined facts in issue as those facts upon whose combined occurrence the law raises the duty or the right in question and has referred to merely evidentiary facts as mediate data. This seems to be a clear and workable definition of the two classes of facts. Comment p has been amplified so as to include Judge Hand's terminology."No subsequent change has been made by the institute on this point.↩14. The term "collateral estoppel" appears neither in the Internal Revenue Code nor in any other part of the United States Code that provides the Congress' instructions to the courts as to the Internal Revenue Code.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625019/	Estate of Sara Louise Gill, Robert S. Gill, Executor and Robert S. Gill, Individually, Petitioners, v. Commissioner of Internal Revenue, RespondentGill v. CommissionerDocket No. 84163United States Tax Court35 T.C. 1208; 1961 U.S. Tax Ct. LEXIS 190; March 31, 1961, Filed 190 Decision will be entered for the respondent. Judgment of United States District Court entered pursuant to remand by circuit court decision rendered July 18, 1958, in favor of petitioner requiring the exclusion from petitioner's 1949 income of amount previously reported on his income tax return, on theory that such amount was properly includible in petitioner's 1948 income, held to constitute circumstances falling within the provisions of sections 1311- 1314, I.R.C. 1954, reopening the statute of limitations for the limited adjustment permitted by those sections for a period not expiring earlier than 1 year from October 16, 1958, the date on which the time to petition for a writ of certiorari from the circuit court decision expired without such petition having been filed. Winston B. McCall, Esq., for the petitioners.Frederick T. Carney, Esq., for the respondent. Scott, Judge. SCOTT 1208 Respondent has determined a deficiency in petitioners' income tax for the taxable year 1948 of $ 24,898.52. The 1209 issues raised are whether respondent may reopen the taxable year 1948 under the provisions of sections 1311- 1314 of the Internal Revenue Code of 1954, and, if so, the proper amount of 191 income to be included in that year.FINDINGS OF FACT.Some of the facts have been stipulated and are found accordingly.Robert S. Gill, hereinafter referred to as petitioner, is an individual and is also the duly appointed and acting executor of the estate of Sara Louise Gill, his deceased wife, who with him filed a joint income tax return for the year 1948 with the district director of internal revenue for the district of Alabama.The notice of deficiency was mailed to petitioner on September 28, 1959. There was no waiver filed by petitioners of the statute of limitations on assessments and collections, and no claim of fraud has been asserted against petitioners.Petitioner, for the year 1948 and for a number of years prior thereto, filed his income tax returns on a calendar year basis. From 1941 to 1945 he was a partner in the firm of Gill Printing and Stationery Company, Mobile, Alabama, a partnership which filed its returns and kept its books on a fiscal year ending April 30 of each year.In July 1945, petitioner acquired the entire ownership of Gill Printing and Stationery Company and thereafter operated the business as a sole proprietorship. Petitioner continued to close the books 192 of the business as of April 30 of each year through the year ended April 30, 1953, and continued through the calendar year 1952 to report on his calendar year income tax returns, income from the business of Gill Printing and Stationery Company determined for a fiscal year ending April 30, reporting the income in the calendar year in which the fiscal year used for the business ended, as he had done when the business was a partnership.In the joint income tax return filed for the calendar year 1949, the petitioner reported the net income of Gill Printing and Stationery Company for the fiscal year May 1, 1948, to April 30, 1949, in the amount of $ 63,838.38.Petitioner filed claims for refund of income taxes paid for the years 1949, 1950, and 1952 and for a period ended April 30, 1951, which claims were disallowed by respondent.The claim for refund filed by petitioner for the calendar year 1949 was in the amount of $ 7,536.84 and was on the theory that for the year 1949 petitioner should have reported all the income earned by the Gill Printing and Stationery Company for that calendar year and should have excluded from income for the calendar year 1949, amounts earned by the sole proprietorship 193 in 1948 which had been included in the income reported on his 1949 income tax return. In his claim for refund for 1949, petitioner made the following calculation: 1210 Correct taxable income for the period:Business profit for the fiscal year ended Apr. 30,1949$ 63,838.38Less proportion allocable to calendar year1948 (2/3)42,558.9221,279.46Add: 2/3 of business profit for fiscal year endedApr. 30, 195028,766.3450,045.80Add: Other income as corrected738.9050,784.70Less: Deductions allowable, as corrected4,447.1546,337.55Less: Exemptions1,800.0044,537.55Taxable IncomeCorrect tax on income of $ 44,537.55$ 15,007.88Amount assessed and paid22,544.72Refund due1 7,536.84Subsequent to the disallowance of his claims for refund petitioner filed civil action No. 8214 in the United States District Court for the Northern District of Alabama praying for a refund of income taxes paid for 1949 and other years. The refund suit insofar as it related to the year 1949 was based on the claim for refund which contained the calculation hereinabove set forth. The complaint alleged that petitioner's income should be reported on a true calendar year basis and that the Government 194 was in error in attempting to place petitioner on a fiscal year basis of reporting income. The amount of the refund sought in this action for the year 1949 was the same amount as sought in the disallowed claim, i.e., $ 7,536.84. In this suit the Government contended that petitioner should report his income on a fiscal year basis. The claim for refund was not introduced in evidence and was not a part of the proceedings in the civil action. The allegations of the complaint in this civil action pertinent here are contained in paragraph 3 thereof as follows:Plaintiffs aver that under date of June 10, 1952, the Internal Revenue Agent in Charge, Birmingham District, concluded and advised plaintiffs that their federal income tax return for all purposes should be filed on a calendar year basis, and that plaintiff's income from the Gill Printing and Stationery Company, of which plaintiff Robert S. Gill was the sole proprietor throughout the tax year here involved, should likewise be reported on a calendar year basis. Plaintiffs agreed with this conclusion, and thereafter made adjustments of the 1211 books and records of said business and in federal income tax returns filed by them in subsequent 195 years. Plaintiffs aver that by reason of said adjustment their correct taxable income for the year 1949, less exemptions, was $ 44,537.55 on which the total and correct federal income tax was the sum of $ 15,007.88. Plaintiffs aver that the federal income tax assessed and paid by plaintiffs for the year 1949 was $ 22,544.72, and that plaintiffs are, therefore, due a refund of the difference, namely, $ 7,536.84, with interest.In the District Court case the parties stipulated the correct amount of petitioner's income for the calendar year 1949 ($ 46,337.55), and for the fiscal year ending April 30, 1949 ($ 60,549.13). The parties also stipulated the appropriate amounts of income for the other years in issue in that case. After an adverse decision from the United States District Court, petitioner appealed the case to the United States Court of Appeals for the Fifth Circuit. That court in an opinion reported as Gill v. United States, 258 F. 2d 553 (C.A. 5, 1958), held that the petitioner herein, prior to his sole proprietorship of the Gill Printing and Stationery Company, had been on the calendar year basis of accounting and that such basis was proper for the reporting of income in 196 his returns. The United States District Court was reversed and the case was "remanded for other and further proceedings." In footnote 9 at the end of the opinion the court stated:The parties stipulated that in the event the Court were to hold that Taxpayer's accounting period was a calendar year, the amount of refund is to be computed by the parties subject to determination by the Court in the event of disagreement. This will comprehend, to the extent applicable and heretofore raised, the collateral matters of limitations, determination or overassessments and the like.Neither party sought rehearing or a writ of certiorari or review of the circuit court's opinion.On remand to the United States District Court, the tax liability for the year 1949 was computed on the basis of income of $ 46,337.55 with exemptions of $ 1,800 leaving a taxable income of $ 44,537.55. Petitioner's computation was discussed with representatives of the Internal Revenue Service but was not agreed to by such representatives or by the United States Attorney acting for the United States of America. The United States District Court directed the Government also to file a computation of the tax liabilities but 197 when such computation was not filed within the time allowed by the District Court, that court, on September 29, 1958, entered judgment for petitioner in accordance with his computation, including therein other years not involved here. The judgment includes the amount of $ 7,536.84 as a refund for the year 1949 claimed in civil action No. 8214 referred to hereinabove and in the claim (Form 843) heretofore mentioned, and the various amounts shown on the claim are correct. The United States of 1212 America thereafter filed a motion to vacate the judgment on October 17, 1958, which motion after hearing thereon was overruled by order entered December 10, 1958.Petitioner's net income for the 12-month period, January 1, 1948, to December 31, 1948, was $ 58,603.66. Petitioner reported on his return for that year net income in the amount of $ 53,713.71, a difference of $ 4,889.95. This increase is correctly arrived at by adding to 1948 income the amount of $ 42,558.92, being petitioner's income from his business for the period May 1, 1948, to December 31, 1948, and by eliminating from income the amount of $ 37,668.97, being petitioner's income from his business for the period May 1, 1947, 198 to December 31, 1947.Following remand of the refund suit by the United States Court of Appeals for the Fifth Circuit, counsel for the plaintiff prepared the judgment and at the time it was submitted to the District Court discussed the tax computation with the court showing the judge the stipulated amount of income and the amount shown in the complaint.The computation of the tax itself was not filed with the District Court, but in making his computation the petitioner's attorney verified the amount of $ 46,337.55 of adjusted gross income for 1949 stipulated in the District Court and computed the tax and refund due and included the amount for the latter in the judgment he prepared for the signature of the District Court judge.Under the tax computation shown on the claim for refund filed for 1949 the amount of $ 42,558.92 representing income from petitioner's business for the period May 1, 1948, through December 31, 1948, was excluded from the income as reported by petitioner on his 1949 income tax return as being income for the calendar year 1948 from business profits. Under the stipulation of the parties in the District Court case, the opinion of the circuit court in Gill v. United States, supra, 199 required this exclusion from petitioner's 1949 income to be made by the District Court under the order of remand in arriving at the amount of refund due the plaintiff for the year 1949.Petitioner on his income tax return for 1948 reported as his business income the profits of his business for the fiscal year ended April 30, 1948, and did not include the $ 42,558.92 profits for the period May 1, 1948, through December 31, 1948, which was removed from his income as reported for the year 1949 in the tax computation which resulted in the refund for that year included in the judgment of the District Court entered pursuant to the mandate of the circuit court.No amended return has been filed by petitioner for the calendar year 1948 and no additional taxes have been paid for that year over and above the tax shown on petitioner's 1948 return.1213 OPINION.The first issue presented is whether respondent has made a timely determination of deficiency against petitioner for the taxable year 1948. Respondent contends that under the provisions of section 1311 (a) and (b)(1) and section 1312(3)(A) of the Internal Revenue Code of 1954, 1201 202 there was adopted by petitioner in his refund suit in the District 200 Court and his appeal from the decision therein to the circuit court resulting in the decision in Gill v. United States, 258 F. 2d 553 (C.A. 5, 1958), a position which is inconsistent with the exclusion or omission of income from petitioner's sole proprietorship business for the period May 1, 1948, to December 31, 1948, from petitioner's 1948 income. Respondent contends his notice was sent within the 1-year period from the final determination with respect to the year 1949 as allowed by section 1314(b) of the 1954 Code. 2Petitioner contends that respondent has failed to meet his burden of proof of showing that pursuant to an inconsistent position maintained by petitioner, the determination in the case of Gill v. United 1214 , required the exclusion from petitioner's gross income of an item which 203 was included in his 1949 income tax return and which was erroneously excluded or omitted from petitioner's gross income for the year 1948. The facts clearly establish that in the refund claim filed for the year 1949, petitioner claimed that there should be excluded from his 1949 income the amount of $ 42,558.92 representing the portion of the business profits for the fiscal year ended April 30, 1949, which was allocable to the period May 1 through December 31, 1948. The facts show that the refund suit was based on this claim and that the amount of income for petitioner's year 1949 should petitioner's position in the refund suit be sustained was the exact amount as shown on petitioner's refund claim. The facts show that petitioner's position was sustained by the circuit court and no petition for certiorari therefrom was filed. The facts also clearly show that petitioner for his calendar year 1948 reported as his income from business profits only the income for the fiscal year ended April 30, 1948, and did not include the profit for the period May 1, 1948, through December 31, 1948. We agree with respondent that the facts in this case bring it within the provisions of sections 1311204 and 1312(3)(A) of the 1954 Code. Cf. Albert W. Priest Trust, 6 T.C. 221">6 T.C. 221 (1946), and Estate of A. W. SoRelle, 31 T.C. 272">31 T.C. 272 (1958).Petitioner next contends that respondent's determination of deficiency was not made within the 1-year period from the determination in the case of Gill v. United States, supra, as required by section 1314(b) of the Internal Revenue Code of 1954. Petitioner argues that the prior determination became final on July 18, 1958, when the Court of Appeals upheld petitioner's claim for refund for the taxable year 1949; and, therefore, the notice of deficiency for the year 1948 not being issued until more than a year thereafter, was not timely. Respondent contends that the earlier determination did not become final until judgment was entered by the District Court on September 29, 1958, and that inasmuch as the notice of deficiency was mailed within a year thereof, such notice was timely.In support of his contention that respondent's notice of deficiency was not timely under section 1314 in that it was not mailed within 1 year after the determination for the year 1949 became final, petitioner cites several Supreme Court opinions to the effect that a court's decision 205 is final when rendered. Richfield Oil Corp. v. State Board, 329 U.S. 69">329 U.S. 69, and Market Street R. Co. v. Commission, 324 U.S. 548">324 U.S. 548. However, we feel that these cases are not in point. These cases were decided under the statutory provisions now contained in 28 U.S.C. sec. 1257 which provide that "Final judgments or decrees rendered by the highest court of a State in which a decision could be had, may be reviewed by the Supreme Court * ." It is clear that this statute is concerned with "final judgments or decrees" which 1215 complete the action to be taken by the State court as distinguished from interlocutory orders or decisions necessitating further proceedings in the State courts before the litigation is concluded therein. In the same context 28 U.S.C. sec. 1291 provides that the Courts of Appeals shall have jurisdiction of appeals from "all final decisions of the district courts * * ." In this meaning of the term "final decision" the decision of the District Court in the Gill case which was appealed by this petitioner to the Fifth Circuit resulting in the decision of July 18, 1958, favorable to petitioner was final. "Determination" is defined in section 1313(a)(1) of the 1954 Code 206 insofar as here pertinent not as a "final decision" but as "a judgment, decree, or other order by any court of competent jurisdiction, which has become final." Section 7481 of the Internal Revenue Code of 1954 contains a definition of when a decision of this Court becomes final. Section 7481 generally places the date when a decision of this Court becomes final at the time that the determination is beyond review and thus fixed. It appears to us that this concept of the term "become final" is also appropriate to a judgment of a District Court or circuit court within the meaning of section 1313(a)(1) of the Internal Revenue Code of 1954.The Court of Appeals for the Fifth Circuit entered its decision on July 18, 1958. Although this decision when rendered was final in that it might have formed the basis for a petition for a writ of certiorari to the Supreme Court, for the purposes of section 1313, that decision did not "become final" until the expiration of the time for filing such petition for a writ of certiorari. The time in which a petition for a writ of certiorari may be filed to the Supreme Court from a circuit court decision is, according to 28 U.S.C. sec. 2101(c), 90 days. This 207 would mean that the decision of the Court of Appeals for the purposes of secton 1313 did not become final until October 16, 1958, when the time for filing a petition for a writ of certiorari expired without such a petition having been filed. The notice of deficiency for the taxable year 1948 was issued on September 28, 1959, within a year following that date. The notice was timely under section 1314 of the Internal Revenue Code of 1954.Because of the fact that October 16, 1958, is the earliest possible date on which the determination could have become final, thus making respondent's notice of deficiency timely, we do not feel it necessary to discuss respondent's contentions that there was no final determination until the District Court entered a monetary judgment for petitioner in pursuance to the Court of Appeals' reversal, or until the time for appeal had expired following the District Court's denial of the Government's motion to vacate such judgment. Nor do we feel it necessary to decide on which of these dates the determination did become final. Cf. Bishop v. Reichel, 127 F. Supp. 750">127 F. Supp. 750, affirmed per 1216 curiam 229 F. 2d 806; Louis Pizitz Dry Goods Company v. United States, 185 F. Supp. 186">185 F. Supp. 186.The 208 Ambassador Hotel Company of Los Angeles v. Commissioner, 280 F. 2d 303 (C.A. 9, 1959), affirming 32 T.C. 208">32 T.C. 208, relied on by petitioner, involved the date of allowance of a refund of excess profits tax so as to reopen the statute for assessment of the related income tax deficiency under section 3807 of the Internal Revenue Code of 1939. The court held that the Tax Court's decision that the taxpayer was entitled to an overpayment of excess profits tax in a specific amount was the "allowance" required by section 3807 of the Internal Revenue Code of 1939.There was no issue raised in that case as to when the decision of this Court became final as the notice of deficiency was issued well within a year of the entry of the decision. The only issue raised was whether there had, in fact, been an allowance of a refund by entry of the decision as distinguished from the authorization of the bookkeeping entries by the Secretary or his delegate providing for the refund or credit of that overpayment. In the instant case no contention is made that the decision of the District Court or circuit court did not become final until the refund for 1949 was allowed or paid by the Commissioner of Internal 209 Revenue, which, as the record shows, was subsequent to April 30, 1959.Petitioner finally argues that if he is in error in his primary contentions, the maximum omitted income for the year 1948 is $ 4,899.95. Petitioner arrives at this figure by subtracting $ 53,713.71, the amount reported as income for 1948, from $ 58,603.66 which is the actual income earned in 1948 when the $ 42,558.92 amount earned from May 1, 1948, through December 31, 1948, is included in 1948 income and the $ 37,668.97, earned from May 1, 1947, through December 31, 1947, is excluded from 1948 income. The parties have stipulated these figures, and the petitioner has, therefore, concluded that in order to have the 1948 income computed properly only a $ 4,899.95 increase in income is necessary.Section 1314(c) of the Internal Revenue Code of 19543 specifically provides that the reopening of an otherwise closed taxable year is for the limited purpose of adjusting for the item of income or deduction which was excluded or included in another year. There is no authority to make any adjustments not directly related to the increase or decrease in income caused by the inclusion or exclusion of such item of 1217 income 210 or deduction. Estate of A. W. SoRelle, supra, and First National Bank of Philadelphia, 18 T.C. 899">18 T.C. 899 (1952), affd. 205 F. 2d 82 (C.A. 3, 1953).Decision will be entered for the respondent. Footnotes1. With interest at 6 percent per annum.↩1. SEC. 1311. CORRECTION OF ERROR.(a) General Rule. -- If a determination (as defined in section 1313) is described in one or more of the paragraphs of section 1312 and, on the date of the determination, correction of the effect of the error referred to in the applicable paragraph of section 1312 is prevented by the operation of any law or rule of law, other than this part and other than section 7122 (relating to compromises), then the effect of the error shall be corrected by an adjustment made in the amount and in the manner specified in section 1314.(b) Conditions Necessary for Adjustment. -- (1) Maintenance of an inconsistent position. -- Except in cases described in paragraphs (3)(B) and (4) of section 1312, an adjustment shall be made under this part only if -- (A) in case the amount of the adjustment would be credited or refunded in the same manner as an overpayment under section 1314, there is adopted in the determination a position maintained by the Secretary or his delegate, or(B) in case the amount of the adjustment would be assessed and collected in the same manner as a deficiency under section 1314, there is adopted in the determination a position maintained by the taxpayer with respect to whom the determination is made,and the position maintained by the Secretary or his delegate in the case described in subparagraph (A) or maintained by the taxpayer in the case described in subparagraph (B) is inconsistent with the erroneous inclusion, exclusion, omission, allowance, disallowance, recognition, or nonrecognition, as the case may be.SEC. 1312. CIRCUMSTANCES OF ADJUSTMENT.The circumstances under which the adjustment provided in section 1311 is authorized are as follows:* * * (3) Double exclusion of an item of gross income. -- (A) Items included in income. -- The determination requires the exclusion from gross income of an item included in a return filed by the taxpayer or with respect to which tax was paid and which was erroneously excluded or omitted from the gross income of the taxpayer for another taxable year, or from the gross income of a related taxpayer; or2. SEC. 1314(b). METHOD OF ADJUSTMENT. -- The adjustment authorized in section 1311(a)↩ shall be made by assessing and collecting, or refunding or crediting, the amount thereof in the same manner as if it were a deficiency determined by the Secretary or his delegate 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 or years with respect to which an amount is ascertained under subsection (a), and as if on the date of the determination one year remained before the expiration of the periods of limitation upon assessment or filing claim for refund for such taxable year or years. * *3. SEC. 1314(c)↩. Adjustment Unaffected by Other Items. -- The amount to be assessed and collected in the same manner as a deficiency, or to be refunded or credited in the same manner as an overpayment, under this part, shall not be diminished by any credit or set-off based upon any item other than the one which was the subject of the adjustment. The amount of the adjustment under this part, if paid, shall not be recovered by a claim or suit for refund or suit for erroneous refund based upon any item other than the one which was the subject of the adjustment.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625020/	RICHARD H. TUNSTEAD and MABEL H. TUNSTEAD, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentTunstead v. CommissionerDocket No. 6079-70.United States Tax CourtT.C. Memo 1973-120; 1973 Tax Ct. Memo LEXIS 167; 32 T.C.M. (CCH) 523; T.C.M. (RIA) 73120; May 31, 1973, Filed Richard H. Tunstead, pro se. Kimball K. Ross, for the respondent. FORRESTERMEMORANDUM FINDINGS OF FACT AND OPINION FORRESTER, Judge: Respondent determined a deficiency in petitioners' Federal income tax for the taxable year 1967 in the amount of $3,365.49. Because of concessions, the only issues remaining for our decision are (1) whether a loss which petitioners sustained in 1967 on a mortgage foreclosure qualifies as a business bad debt deduction, and (2) whether, 2 under the facts of this case, foreclosure expenses are properly includable in determining the amount of that loss. FINDINGS OF FACT Some of the facts have been stipulated and are so found. Petitioners are husband and wife who, at the time of the filing of the petition herein, resided in Mt. Kisco, New York. They filed their joint168 Federal income tax return for the year 1967 with the district director of internal revenue, New York, New York. From 1961 through 1967 petitioners made several investments in real estate. During this period petitioner Richard H. Tunstead (Richard) practiced law, while Mabel H. Tunstead (Mabel) was a housewife. Petitioners maintained neither a separate office nor a telephone for the conduct of their real estate transactions. All the moneys used by petitioners for their real estate transactions came from Richard's law practice. The loss at issue arose from petitioners' investment in a second mortgage on property located on Belmont Avenue, New York City (the Belmont property). 1 On January 4, 1963, 3 petitioners, together with nine other individuals, purchased a second mortgage yielding six-percent interest per annum on this property. The principal owed on the mortgage at the time of purchase was $78,163.59, but petitioners and their co-owners purchased the mortgage at a discount. Petitioners paid $11,700 for a 20-percent interest169 in the Belmont mortgage. They placed this interest in Mabel's name rather than in their joint names for the purpose of minimizing future estate and inheritance taxes. Petitioners' purpose in investing in the Belmont property was to earn interest income on the mortgage. Richard's activities relating to the Belmont property consisted of "discovering it as a prospect for investment," investigating it, and handling the closing. Principal and interest were paid on the Belmont second mortgage until 1967 when it went into default and was foreclosed. At the foreclosure sale no one but the owners of the second mortgage bid for the property and their bid of $1,000 was successful. On December 29, 1967, the fee title to the Belmont property, subject to the existing first mortgage, was conveyed to the owners of the second mortgage. Petitioners and their co-owners incurred foreclosure expenses in the total 4 amount of $1,447.98. These expenses were paid in 1968 by the manager of the Belmont property out of its operating income, but no evidence was submitted as to how these expenses were treated by the manager or accounted for. From 1961 until 1967 petitioners made four other investments170 in real estate. In 1961 they acquired (at a discount) in Mabel's name, a second mortgage on property located on Sullivan Street. This mortgage was never in default. The purchase and sale prices are not shown in the record, but it was sold at a profit by petitioners on December 8, 1965. On April 7, 1961, petitioners, in Richard's name only, purchased a brownstone at East 38th Street along with three other individuals. Richard and his partners purchased equal shares, each paying about $11,200 and buying subject to existing mortgages. They then operated the East 38th Street property, substantially renovated it and attempted unsuccessfully to obtain commercial zoning. This property was sold on December 16, 1965, for an undisclosed amount and the partners took back a second mortgage which was sold by Richard and his partners for an undisclosed amount on June 28, 1968. On January 9, 1964, petitioners, along with nine other individuals, purchased a $35,000 second mortgage on property on East 144th Street for an undisclosed amount. Petitioners' 5 25-percent interest in this mortgage was taken, and is still held, solely in Richard's name. On February 15, 1965, petitioners, 171 in Mabel's name only, acquired a 20-percent interest for an undisclosed amount in an apartment property on Zerega Avenue in the Bronx. Petitioners' interest was subject to a mortgage which was foreclosed in 1972 and petitioners' interest was "abandoned," but the extent of their loss is not disclosed by the record. During the taxable years 1966 and 1967 Richard reported income from his law practice in the respective amounts of $32,377.81 and $31,451.35. Petitioners reported interest income from their real estate in the amount of $1,256.87 for 1966, and $986.37 for 1967. Richard paid self-employment taxes on the income earned from his law practice, but neither petitioner reported any of their real estate income as self-employment income. On their 1967 joint Federal income tax return petitioners claimed a business bad debt deduction in the amount of $11,251.49 resulting from the loss (including their pro rata share of foreclosure expenses in the amount of $289.59) sustained on the Belmont property. It is now stipulated that this loss, exclusive of expenses, was $10,761.90. 6 Respondent determined that petitioners' claimed loss was in the amount of $10,761.90, and that172 it was a nonbusiness bad debt subject to the limitations on capital losses. 2OPINION The first issue for our decision is whether the loss sustained on the foreclosure of the Belmont mortgage is a loss from a business or a nonbusiness bad debt. In order for the petitioners to receive their claimed business bad debt deduction, they must establish that they were in the real estate business. Susan P. Emery, 17 T.C. 308">17 T.C. 308 (1951). The determination of whether a taxpayer is in the realty business is essentially one of fact. Cohn v. Commissioner, 226 F.2d 22">226 F.2d 22, 24 (C.A. 9, 1955). It is our opinion that petitioners have failed to prove that they were engaged in the realty business. We therefore hold that petitioners' loss is a nonbusiness bad debt. Carrying on a trade or business "implies an occupational undertaking to which one habitually devotes time, attention or effort with substantial regularity." Fahs v. Crawford, 7 161 F.2d 315">161 F.2d 315, 317 (C.A. 5, 1947). "The word [business], not withstanding disguise in spelling and173 pronunciation means busyness, that the activity is an occupation." Snell v. Commissioner, 97 F.2d 891">97 F.2d 891, 892 (C.A. 5, 1938). The time and effort which petitioners devoted to their real estate was not sufficiently engrossing to meet this standard. The record does not show that Mabel engaged in activities from which one might conclude that she was engaged in any business. During the entire period under consideration Richard was engaged in the practice of law. While he did devote some time to the properties at East 38th Street and at Zerega Avenue, the record does not disclose the extent of these efforts. The record does disclose, however, that he spent little time on the other properties. The infrequency of petitioners' real estate transactions and the extent of their interests in the properties also vitiate their assertion that they were in the realty business. 3 From 1961 through 1967 petitioners made only five investments and two sales in real estate. They had a limited interest in each property. Such limited realty interests and infrequent transactions are insufficient to be considered a business. 174 Finally, 8 we note that petitioners did not report any of the interest income from their real estate for the taxable year 1966 or 1967 as self-employment income from a trade or business as required by section 1402. This is an indication that petitioners did not consider themselves to be in the realty business. We have found that petitioners' activities considered jointly did not constitute a trade or business and therefore do not reach respondent's argument that, since the Belmont mortgage was held in Mabel's name only, her activities alone should be considered in determining whether a trade or business existed. The second issue for our decision is whether foreclosure expenses incurred by petitioners on the Belmont mortgage should be included as part of the nonbusiness bad debt deductible by petitioners in 1967. Subsequent to this foreclosure a manager operated the Belmont property on behalf of petitioners and their co-owners. Richard testified that the manager paid foreclosure expenses in 1968 out of operating income. No evidence was submitted to indicate how these expenses were treated by the manager. 9 Petitioners have failed to sustain their burden of proof175 and must be denied the claimed deduction on this issue. Decision will be entered under Rule 50. Footnotes1. All properties referred to in the instant case are in New York City and will hereinafter only be referred to by the street address. ↩2. All statutory references are to the Internal Revenue Code of 1954, as amended, unless otherwise specified. ↩3. See and compare Joseph M. Philbin, 26 T.C. 1159">26 T.C. 1159↩ (1956).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625021/	Farrell B. Sumner and Mary C. Sumner v. Commissioner.Sumner v. CommissionerDocket No. 1941-68.United States Tax CourtT.C. Memo 1969-156; 1969 Tax Ct. Memo LEXIS 140; 28 T.C.M. (CCH) 777; T.C.M. (RIA) 69156; July 24, 1969, Filed 140 Held: Petitioners have failed to prove that they provided more than one-half of the support for two of Mary's children in 1966, and, therefore, are not entitled to deductions for personal exemptions. Secs. 151(a), 151(e), and 152(a), I.R.C. 1954. Ottway Burton, Asheboro, N.C., for the petitioners. J. Randall Groves, for the respondent. HOYTMemorandum Findings of Fact and Opinion HOYT, Judge: Respondent determined a deficiency in petitioners' 141 income tax for the calendar year 1966 in the amount of $286.37. The only question presented is whether petitioners provided more than one-half of the total support of Mary's son, Stanley E. Cottrell, and daughter, Linda K. Cottrell, during 1966. A computation under Urle 50 will be necessary due to a concession made by the respondent. Findings of Fact Those facts which were stipulated are found accordingly, and incorporated herein by this reference, together with the stipulated exhibits. Petitioners herein are husband and wife and were residing in Randolph County, North Carolina, at the time the petition was filed. Their joint income tax return for the calendar year 1966 was timely filed with the director of the internal revenue service center at Chamblee, Georgia. Mary C. Sumner was previously married to Harvey C. Cottrell. Stanley E. Cottrell and Linda K. Cottrell were the lawful issue of that marriage. On June 1, 1961, Mary and Harvey were separated. On July 17, 1963, they were divorced, and Mary was given custody of the two children by virtue of a local court order. On July 19, 1963, Farrell B. Sumner and Mary were married. They subsequently had two children, Shawn Renee142 Sumner, born July 17, 1964, and Charlotte Lynn Sumner, born February 8, 1966. During the taxable year 1966, Stanley E. and Linda K. Cottrell were approximately 16 and 13 years of age, respectively. Due to the total disability of the father of these two children, Harvey C. Cottrell, the petioners received the sum of $1,490.40 in social security benefits during 1966, $745.20 being allocated to each child. During the year in issue, Farrell was employed as a truck driver by R. L. Honbarrier, Jr., doing business in High Point, North Carolina, and by Colonial Motor Freight Lines, Inc. He received gross salaries from Honbarrier and Colonial in the respective amounts of $9,247.18 and $182.50. The net salaries received from the abovenamed employers after state and Federal taxes had been withheld were in the amounts of $7,906.65 and $164.30, respectively. During the taxable year Mary received a gross salary from Periodical Publishers' Service Bureau, Inc. in the amount of $16.87. Mary's net salary from this source after taxes were withheld amounted to $15.37. Mary also received $180 as salary from Davis Used Cars. Her net salary from the latter source after taxes were withheld amounted to143 $159.02. 778 Also during 1966, petitioners received a refund of Federal income taxes in the amount of $167.85, and a refund of North Carolina income taxes of $57.10. Petitioners were also reimbursed in the amount of $300 by the Hartford Insurance Company for the loss of certain food products caused by an electrical power failure in their food freezer. Petitioners also received $528.14 during 1966, representing the sum of two separate loan transactions entered into by petitioners with Capital Credit Plan of Asheboro, Inc., a corporation doing business in Asheboro, North Carolina. One of these obligations, the exact amount of which is not disclosed by the record, was incurred for the purpose of purchasing a large quantity of meat for the family. During 1966 petitioners made payments on these two loans totaling $342.94. During the year in issue the petitioners also refinanced a loan with Century Finance Company, located in Asheboro, North Carolina, from which they obtained an additional sum of $209.44. Petitioners made payments totaling $339.40 on this loan account during 1966. On or about May 5, 1966, the petitioners entered into a credit transaction with the First National144 Bank, Asheboro, North Carolina. They received the sum of $537 as net proceeds of the loan. The petitioners made timely installment payments pursuant to the terms of the contract in the total amount of $233.68 during 1966. During the course of the taxable year the petitioners entered into several credit transactions with Sheration Finance Corporation, doing business in Asheboro, North Carolina. In May, 1966, Sheraton financed in full the purchase of a vacuum cleaner which cost $189. Petitioners also entered into an installment contract with Sheraton under which they incurred an obligation representing the purchase price of a farm tractor in the total amount of $1,100. 1 Also during that year petitioners borrowed an additional $500 from Sheraton. The petitioners made payments on five separate obligations to Sheraton Finance Corporation during the year 1966 as follows: SecurityNumber ofPaymentsAmount ofPaymentAmount RepaidTractor3$65.40$ 196.20Chevrolet Truck559.45297.25Cadillac988.15793.35Truck and Cadillac467.30269.20Renault726.20 183.40 $1,739.40145 During the first eight and one-half months of 1966 petitioners lived in a brick home located a few miles east of Asheboro, North Carolina. They had purchased this property, together with three and one-half acres of land, in January 1964 for $10,800. At the time of the purchase, petitioners obtained an $8,000 loan secured by a mortgage on the property from Randoph Savings and Loan Association, Asheboro, North Carolina. As of January 1, 1966, petitioners had reduced the balance due on their loan to $7,361.92. The property was sold during the summer of 1966. After making their final mortgage payment on August 2, 1966, the balance remaining on the loan was $7,112.33. During 1966 petitioners made mortgage payments on the Asheboro property totaling $540.08, which amount includes interest charges of $290.49. The record does not disclose any amount for property insurance premiums paid during the year. Real estate taxes were paid in the amount of $75.60. 2During 1966 petitioners contracted to purchase a farm146 near Franklinville, North Carolina, consisting of a brick house and 29 1/2 acres of land. A down payment was made in September, 1966, consisting of the equity in the Asheboro property plus $1,000. The petitioners obtained the necessary $1,000 by executing a 90-day note payable to the First National Bank in that amount, which note was renewed on December 5, 1966. The first mortgage 779 payment on the new property did not become due until February 1, 1967. At all times during 1966 the petitioners and their four children lived together as a family unit. 3 Mary Sumner, petitioner herein, took on the responsibility of managing the family's financial affairs. She bought most of the food, clothing, and other necessities for the whole family, and paid the bills. She did not keep a record of these purchases and expenditures. With the exception of the social security benefits of $1,490.40 allocable equally to Stanley and Linda, the petitioners provided all of the funds necessary for the support of those two children. Although it appears that more money147 was spent on food and clothing for Stanley and Linda, who were both of teen age, than was spent on the two younger children during the taxable year, the record is devoid of any evidence as to the amounts expended in this regard. Petitioners have not even provided us with estimates of such expenditures. In their joint income tax return for 1966 petitioners claimed dependency exemptions for all four of their children. Respondent disallowed the exemptions claimed for Stanley and Linda. Although respondent originally disallowed $420.59 of the $794.76 of medical expenses claimed by petitioners in their return, it has now been stipulated that these expenditures were fully substantiated. Of the total amount of $794.76 in medical expenses incurred by petitioners, nothing was attributable to Linda and only $31 was expended on behalf of Stanley. Respondent allowed a deduction for out-of-pocket "road expenses" of $1,560 and laundry expenses of $92.50 for uniforms incurred by Farrell Sumner in connection with his employment as a truck driver. Ultimate Finding of Fact Petitioners did not contribute over one-half of the total support of Stanley or Linda during 1966. Opinion The question148 presented for our decision is whether the petitioners are entitled to deductions in 1966 for personal exemptions for Mary's two oldest children, Stanley and Linda, as dependents under section 151(a) and (e)(1). 4Section 152(a) includes in its definition of a "dependent" a son, daughter, stepson, or stepdaughter of the taxpayer over half of whose support was received from the taxpayer. The burden of proof is on the petitioners to prove not only their own expenditures in support of each child, but also that those amounts exceeded one-half of the total support provided in each instance. Aaron F. Vance, 36 T.C. 547">36 T.C. 547 (1961); Bernard C. Rivers, 33 T.C. 935">33 T.C. 935 (1960). Although petitioners need not conclusively prove the exact or precise total cost of the support for each child, they must provide us with convincing evidence establishing that the amounts they provided exceeded one/half of the total support. James E. Stafford, 46 T.C. 515">46 T.C. 515 (1966). During the year in question Mary and Farrell, petitioners herein, provided the total amount of support for Stanley and Linda with149 the exception of $1,490.40 in social security benefits, $745.20 of which was allocated to each of these children. For the purpose of computing the total amount of contributions for the support of an individual, social security benefits received by him, or on his behalf, are considered to be contributed by the individual. Section 1.152-1(a)(2)(ii), Income Tax Regs.5 In order for petitioners to prevail in this case, they must prove that the total amount provided for the support of each child was more than double the $745.20 in social security benefits. We must take into account the entire amount of support which each child has received, including the $745.20 which each child has in effect supplied. Estela De La Garza, 46 T.C. 446">46 T.C. 446 (1966), affirmed per curiam 378 F. 2d 32 (C.A. 5, 1967).150 During the course of the trial of this case, Mary testified that she took on the responsibility of managing the family's financial affairs. She bought most of the food, clothing and other necessities for the whole family, and paid the bills. She did not keep a record of these purchases and expenditures. At the trial, the petitioners did not 780 attempt to estimate the amounts actually expended on behalf of each child for most of the basic support items. In this respect it is significant that the record is totally devoid of evidence as to the amount of any expenditures for food and clothing for these children. Although the record establishes the total amount of mortgage payments made by the petitioners on their Asheboro residence, where they lived with their children during the first eight and one-half months of 1966, we have held in previous cases that the fair rental value of lodging furnished is the proper measure of the amount of support furnished. Eva L. Lindberg, 46 T.C. 243">46 T.C. 243 (1966); Emil Blarek, 23 T.C. 1037">23 T.C. 1037 (1955). Petitioners have made no showing at all in regard to the fair rental value of either of their two residences during the taxable151 year. This Court has held that where no evidence is brought to light concerning the fair rental value of the lodging, petitioner fails in his burden of proof. Richard P. Prickett, 18 T.C. 872">18 T.C. 872 (1952). With the exception of a few small items which could not possibly affect our determination here, the petitioners have failed to produce any evidence of actual or approximate amounts which they contributed toward the individual support of either Stanley or Linda. Instead, petitioners have only shown that they, Mary and Farrell, received a total cash equivalent of $14,324.27 during 1966 from net earnings, cash loans, installment purchase contracts, and social security benefits. Petitioners then claim that the difference between the total amount received and the $1,400.40 in social security benefits, or $12,833.87, was "spone" by them on behalf of the entire family and therefore represents their contribution toward the "support" of the family. Regarding the individual support of the children in issue, petitioners merely allege that Stanley and Linda required more food and clothing than the other members of the family due to the fact that they were growing children who were 16152 and 13 years of age during 1966. Petitioners then urge the Court to find, on the basis of this information alone, that they provided over one-half of the total amount contributed toward the support of these two children. This we cannot do. It is necessary to point out that the $12,833.87 which petitioners claim to have contributed toward the support of the entire family in 1966 represents an unrealistically high estimate of that amount. The record reveals that a large portion of that amount constituted earnings which were used, and obligations which were incurred, for nonsupport items. In order to determine the maximum amount which could have been available for the support of the family members, it would therefore be necessary to exclude those items. Patent examples of such expenditures in this case include the purchase of a tractor, the down payment on the Franklinville farm, and the purchase of a vacuum cleaner, all of which constitute capital expenditures which are not in the nature of support items. It would also be necessary to exclude the mortgage payments made with respect to the Asheboro residence because, as we have previously indicated, the proper measure of support for153 lodging furnished is the fair rental value. We would also have to eliminate almost all of the medical expenses which were obviously not incurred for Stanley or Linda as well as Farrell's "road" and "uniform cleaning" expenses which alone totaled over $1,650 in the year before us. Petitioners have included the proceeds of various obligations incurred by them in 1966 in the total amount which they allegedly received and contributed toward the family's support. Clearly the payments made during 1966 in reduction of these and all other pending obligations do not represent contributions toward the support of the family. Accordingly, these loan repayments should be excluded in determining the maximum amount which could have been available for the support of the entire family. 6Assuming that we could then arrive in our computations at an amount with which we could be satisfied as representing the total value of support provided from all sources for154 the entire family, petitioners then urge us to estimate the total amount specifically allocable to Stanley and Linda. The only guideline which we are given for such estimation is the testimony of Mary that these two children required more food and clothing than the other family members. 781 Petitioners have the burden of proving their right to the exemptions claimed, and the right in this case is contingent upon the total amount of expenditure for the support of the children here involved. The petitioners have produced no substantial evidence in this regard, and therefore have failed to carry their burden of proof. Bernard C. Rivers, supra.At most petitioners have shown that approximately $6,850 was available to support the family of six members in 1966, but other evidence before us indicates that even this amount was not all spent for support nor was it all available for even division among the family members. It is noted that in some situations the Commissioner has mitigated the taxpayer's burden of proving the total amount provided for the support of an individual member of a household. He has ruled that in situations where several members of a household are155 contributing toward the support of the household jointly, and where there is no actual record of the expenses relating to the support of each member, it may be presumed that the expenses were incurred equally for each member. 7 We need not consider the propriety of giving petitioners the benefit of such a presumption in the instant case. We find that to do so would result in a total amount provided for the support of each child which is less than the amount which petitioners are required to prove in order to avail themselves of the dependency exemptions in issue. The petitioners have made no effort to approximate the total amount which was provided for the support of either Stanley or Linda. In addition, they have not produced evidence which would indicate that the total support of either child was, at the least, more than double the amount received by each child in social security benefits. Since we are not at liberty to make approximations or guesses with regard to total support, it is impossible for us to conclude that petitioners have carried their burden of proving that156 they provided more than onehalf of the support of these children. The evidence before us indicates that they did not and that actually and in fact Stanley and Linda each contributed more than one-half of their support by virtue of their own social security benefits of $745.20 apiece. Respondent's determination is presumptively correct; we must hold that the petitioners are not entitled to the exemptions in issue. Decision will be entered under Rule 50. Footnotes1. During the fall of 1966 the tractor was used to clear a piece of their land of underbrush and to plow it in order that it would be ready for planting in the spring of 1967.↩2. It is possible that a portion of this amount is allocable to the property near Franklinville, North Carolina, where petitioners lived during the last few months of 1966.↩3. Since Charlotte was not born until February 8, 1966, she lived with petitioners for only 327 days during the taxable year 1966.↩4. All statutory references are to the Internal Revenue Code of 1954.↩5. Sec. 1.152-1 General definition of a dependent. * * (a)(2)(ii) In computing the amount which is contributed for the support of an individual, there must be included any amount which is contributed by such individual for his own support, including income which is ordinarily excludable from gross income, such as benefits received under the Social Security Act (42 U.S.C. ch. 7). * * *↩6. In making this determination, the interest charges on that portion of the borrowed funds which was used for support purposes would not be excluded. However, the record is devoid of any evidence that would permit a proper allocation.↩7. Rev. Rul. 235, C.B. 1953-2, 23; Rev. Rul. 64-222, C.B. 1964-2, 47↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625022/	Richard A. Ench v. Commissioner.Ench v. CommissionerDocket No. 69685.United States Tax CourtT.C. Memo 1962-161; 1962 Tax Ct. Memo LEXIS 150; 21 T.C.M. (CCH) 894; T.C.M. (RIA) 62161; June 28, 1962150 Held: 1. Respondent's use of increase in net worth and nondeductible expenditures method of computing petitioner's income approved and opening net worth determined. 2. Trade accounts receivable and payable not includible as petitioner's assets and liabilities, respectively, in a net worth computation of a cash basis taxpayer. 3. No part of the deficiency in any year was due to fraud with intent to evade tax and deficiency for the year 1947 is barred by the statute of limitations. 4. Additions to tax under section 291(a) and 294(d)(1)(A), I.R.C. 1939, approved; additions to tax under section 294(d)(2), I.R.C. 1939, not approved. Anthony R. Amabile, Esq., for the petitioner. Arthur Pelikow, Esq., for the respondent. BLACK 151 Memorandum Findings of Fact and Opinion The respondent has determined deficiencies in income tax and additions to tax under sections 291(a), 293(b), 294(d)(1)(A) and 294(d)(2), Internal Revenue Code of 1939, for the taxable years 1946, 1947, and 1948, as follows: Additions to TaxYearDeficiency§ 291(a)§ 293(b)§ 294(d)(1)(A)§ 294(d)(2)1946$25,456.04$2,545.60$12,728.02$2,730.04$1,623.02194779,822.2440,167.708,187.104,852.26194812,468.076,234.04688.08The taxable year 1949 is involved because petitioner sustained a net operating loss in that year, which loss was carried back to 1947 and allowed as a net operating loss deduction. The respondent disallowed part of the net operating loss claimed by petitioner. The issues presented for decision are: (1) Whether the income of petitioner is properly reconstructed by respondent's computation of net worth plus nondeductible expenditures for the years 1946, 1947, 1948, and 1949 and specifically whether trade accounts receivable and trade accounts payable are includible in the net worth of a cash basis taxpayer. (2) Whether152 all or part of the deficiencies in income tax, if any, for each of the years 1946, 1947, and 1948 are due to fraud with intent to evade tax. (3) Whether assessment and collection of any deficiency for the year 1947 is barred by the statute of limitations. Findings of Fact Some of the facts were stipulated and the stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference. Petitioner, an individual residing in Paterson, New Jersey, filed individual income tax returns for the taxable years 1946, 1947, 1948, and 1949 with the collector of internal revenue, Newark, New Jersey. Petitioner, trading as Rae Construction Company, was engaged in the construction of public and private roads and sewers. From 1946 through 1949, petitioner was also the principal officer and major stockholder of Brooks-Ench Ready Mixed Concrete Corporation. In 1949, petitioner formed the Ench Equipment Corporation and transferred certain fixed assets to that corporation. Petitioner operated his business from an office in his home in Paterson until 1949 when he transferred part of his operations to the offices of Brooks-Ench Ready Mixed Concrete Corporation153 in Paterson. The office in his home was partially destroyed by fire in 1955 and certain business records were destroyed. Petitioner employed various bookkeepers to maintain his books and records under the part-time supervision of his sister. The bookkeepers were all qualified to keep simple business records but they were not, at all times, given complete information for recordation concerning petitioner's business operations so that the books and records were not up-to-date and contained certain errors and omissions. Petitioner was grossly negligent in failing to provide necessary information to his bookkeepers so that a proper record of his business activities could be maintained. Petitioner also employed various accountants to prepare his income tax returns. The accountants did not audit his books but prepared his tax returns based on the information contained in petitioner's faulty records. In certain instances omissions in gross income were discovered by the accountants by checking petitioner's bank statements and the additional amounts revealed were included in petitioner's tax returns. Petitioner ignored the advice of his accountants as to the necessity of keeping accurate154 business records and he continued through the periods here involved to permit his books to be maintained in a negligent manner. A cash receipts books, a cash disbursements book, an accounts receivable ledger, checkbooks, deposit slips, and a job file were maintained by petitioner, none of which was accurate and they could not be completely reconciled with each other. Petitioner's income tax returns for 1945 and 1946 were prepared on a cash basis of accounting. For 1947, petitioner's income tax return was prepared and filed on the accrual basis without receiving respondent's permission. Petitioner filed his tax returns for 1948 and 1949 on the cash basis. On occasion petitioner acquired machinery and equipment in exchange for services rendered during the taxable years here involved and the income was not reported. In 1950, petitioner applied for a Reconstruction Finance Corporation loan and he was required to submit a 5-year financial history which included detailed lists of machinery and equipment. As of December 31, 1945, the unadjusted bases for office furniture, and machinery and equipment were $1,253.14 and $57,085.13, respectively. The accumulated depreciation reserves155 with respect to office furniture and machinery and equipment were $603.41 and $37,233.21, respectively, on the same date. Petitioner had an investment in Investors Syndicate in the amount of $2,250 as of December 31, 1945, which he continued to own on December 31, 1949. Loans receivable were due petitioner from employees in the amount of $1,758.28 on December 31, 1945. On December 31, 1949, petitioner had $20 due from employees. Petitioner had approximately $2,500 in U.S. Treasury Bonds, Series E, as of December 31, 1945, which he continued to own on December 31, 1949. The bonds were lost or stolen in 1951. When bidding on municipal construction jobs petitioner was required to accompany his bids with certified bid deposit checks. On December 31, 1945, petitioner had a certified bid deposit check outstanding in the amount of $1,400 which was an asset of petitioner. All other certified checks issued by petitioner in 1945 had been returned to him and were redeposited in petitioner's bank account in that year. In 1946 and 1947, petitioner paid $34,075 to George Brooks as sales commissions; $1,500 was paid in 1946 and the balance in 1947. The commissions constituted ordinary and156 necessary business expenses. The computation of net worth prepared by respondent and attached to the deficiency notice is as follows: COMPUTATION OF NET WORTHDecember 31, 1945December31, 19461. U.S. Trust$ 22,874.87$ 13,465.002. First National Bank3. U.S. Trust - Payroll Acct.4. Bid Deposits1,400.001,250.005. Deposits1,000.0050.006. Employee Loan Acct.7. Accts. Receivable51,306.638. Deferred Income9. Investments10. Investment in Ready Mix Co.29,127.3211. Land Minnisink Road7,000.0012. Land - West Paterson954.19954.1913. Land - Water Street500.00500.0014. Land - Miscellaneous15. Bldgs. - Water Street4,067.804,067.8016. Bldgs. - Depr. reserve$ 603.4117. Furniture & Fixtures1,277.1418. Furniture & Depr.19. Machinery & Equipment58,338.2795,944.1720. Machinery Depr. reserve37,233.2121. Auto Trucks28,232.8033,084.3322. Auto Trucks - Depr. reserve11,933.4423. Prepaid License24. Prepaid Insurance25. Prepaid Expense26. Exchange27. Exchange Ready Mix28. Suspense29. Due from Ench Equip. Co.30. Loans Rec. - Ready Mix #131. Loans Rec. - Ready Mix #232. Loans Rec. - Ready Mix #333. Loans Rec. - Ready Mix #434. Loans Rec. - Ready Mix #535. Deposits Payable2,200.0036. Employees Withholding758.2637. Social Security accrued179.3238. Unemployment Insurance accrued179.3239. Accrued F.U.T.A.40. Accounts payable41. Notes payable4,875.0042. Land & Bldgs. - Belmont Ave. 66,995.3043. Land & Bldgs. - Belmont Ave., Depr.reserve1,036.7544. Land & Bldgs. - Marshall St.7,000.0045. Land & Bldgs. - Marshall St., Depr.reserve500.0046. Capital - December 3171,824.52$131,323.23$131,323.23$238,026.58157 COMPUTATION OF NET WORTHDecemberDecember 31, 194731, 19461. U.S. Trust$ 28,845.962. First National Bank3. U.S. Trust - Payroll Acct.1,781.924. Bid Deposits9,104.445. Deposits50.006. Employee Loan Acct.175.007. Accts. Receivable50,308.558. Deferred Income$ 51,306.639. Investments10. Investment in Ready Mix Co.29,127.3211. Land Minnisink Road12. Land - West Paterson954.1913. Land - Water Street500.0014. Land - Miscellaneous15. Bldgs. - Water Street4,067.8016. Bldgs. - Depr. reserve698.320$ 793.2317. Furniture & Fixtures1,715.6018. Furniture & Depr.612.33802.6919. Machinery & Equipment103,186.9220. Machinery Depr. reserve43,981.5856,098.3521. Auto Trucks42,928.3422. Auto Trucks - Depr. reserve15,601.5521,269.9323. Prepaid License24. Prepaid Insurance25. Prepaid Expense26. Exchange112.3327. Exchange Ready Mix28. Suspense270.5629. Due from Ench Equip. Co.30. Loans Rec. - Ready Mix #131. Loans Rec. - Ready Mix #232. Loans Rec. - Ready Mix #333. Loans Rec. - Ready Mix #447,321.8734. Loans Rec. - Ready Mix #54,000.0035. Deposits Payable36. Employees Withholding1,801.30490.7037. Social Security accrued300.31534.5538. Unemployment Insurance accrued300.30988.7139. Accrued F.U.T.A.303.3440. Accounts payable30,078.0341. Notes payable42. Land & Bldgs. - Belmont Ave. 643. Land & Bldgs. - Belmont Ave., Depr.reserve44. Land & Bldgs. - Marshall St.45. Land & Bldgs. - Marshall St., Depr.reserve46. Capital - December 31123,424.26213,091.27$238,026.58$324,450.80$324,450.80158 COMPUTATION OF NET WORTHDecember 31, 1948December31, 19491. U.S. Trust$ 16,253.87$ 652.582. First National Bank62.003. U.S. Trust - Payroll Acct.1,360.591,015.414. Bid Deposits12,000.00500.005. Deposits1,050.0085.006. Employee Loan Acct.175.0020.007. Accts. Receivable75,017.8761,063.578. Deferred Income9. Investments1,100.0010. Investment in Ready Mix Co.29,127.3229,127.3211. Land Minnisink Road12. Land - West Paterson954.19954.1913. Land - Water Street500.0014. Land - Miscellaneous2,690.41Metal -3,000.0015. Bldgs. - Water Street4,067.80Buildings16. Bldgs. - Depr. reserve$ 888.1417. Furniture & Fixtures1,715.602,010.6018. Furniture & Depr.991.4319. Machinery & Equipment118,677.1220. Machinery Depr. reserve61,536.1821. Auto Trucks46,591.7222. Auto Trucks - Depr. reserve28,328.3223. Prepaid License271.5024. Prepaid Insurance1,027.9625. Prepaid Expense140.0026. Exchange112.3327. Exchange Ready Mix228.3428. Suspense29. Due from Ench Equip. Co.78,280.3330. Loans Rec. - Ready Mix #124,683.0132,683.0131. Loans Rec. - Ready Mix #27,000.004,200.0032. Loans Rec. - Ready Mix #33,650.4112,574.7133. Loans Rec. - Ready Mix #447,061.5724,370.4534. Loans Rec. - Ready Mix #59,049.313,141.7135. Deposits Payable36. Employees Withholding1,414.2037. Social Security accrued697.2838. Unemployment Insurance accrued347.4439. Accrued F.U.T.A.394.0340. Accounts payable61,417.3141. Notes payable42. Land & Bldgs. - Belmont Ave. 643. Land & Bldgs. - Belmont Ave., Depr.reserve44. Land & Bldgs. - Marshall St.45. Land & Bldgs. - Marshall St., Depr.reserve46. Capital - December 31247,023.25$403,037.58$403,037.58$255,209.22159 COMPUTATION OF NET WORTHDecember31, 19491. U.S. Trust2. First National Bank3. U.S. Trust - Payroll Acct.4. Bid Deposits5. Deposits6. Employee Loan Acct.7. Accts. Receivable8. Deferred Income9. Investments10. Investment in Ready Mix Co.11. Land Minnisink Road12. Land - West Paterson13. Land - Water Street14. Land - Miscellaneous15. Bldgs. - Water Street16. Bldgs. - Depr. reserve17. Furniture & Fixtures18. Furniture & Depr.$ 1,194.9219. Machinery & Equipment20. Machinery Depr. reserve21. Auto Trucks22. Auto Trucks - Depr. reserve23. Prepaid License24. Prepaid Insurance25. Prepaid Expense26. Exchange27. Exchange Ready Mix28. Suspense29. Due from Ench Equip. Co.30. Loans Rec. - Ready Mix #131. Loans Rec. - Ready Mix #232. Loans Rec. - Ready Mix #333. Loans Rec. - Ready Mix #434. Loans Rec. - Ready Mix #535. Deposits Payable36. Employees Withholding120.0037. Social Security accrued228.4038. Unemployment Insurance accrued348.3239. Accrued F.U.T.A.176.7940. Accounts payable10,984.8841. Notes payable1,500.0042. Land & Bldgs. - Belmont Ave. 643. Land & Bldgs. - Belmont Ave., Depr.reserve44. Land & Bldgs. - Marshall St.45. Land & Bldgs. - Marshall St., Depr.reserve46. Capital - December 31240,655.91$255,209.22160 As of December 31, 1945, petitioner had $152,636.79 in trade accounts receivable for construction services rendered by him in 1945 and prior years. On the same date petitioner owed $8,367.96 as trade accounts payable. On December 31, 1948, petitioner had loans receivable of $12,971.59 due from Brooks-Ench Ready Mixed Concrete Corporation which were incorrectly included by respondent in petitioner's trade accounts receivable for that year. For the years 1946 and 1948 the parties executed valid waivers extending the period of limitation within which an assessment of income tax could be made beyond the date on which the notice of deficiency herein was mailed to petitioner. No waiver was executed for the year 1947. No part of any deficiency in income tax for the years 1946, 1947, and 1948 is due to fraud with intent to evade tax. Opinion Net Worth Computation BLACK, Judge: The deficiencies determined herein by respondent result from a reconstruction of income by the net worth and nondeductible expenditures method. As we have stated in our Findings of Fact, petitioner's books and records were negligently maintained and there can be no question whatsoever, we think, of respondent's161 right to determine petitioner's income by the net worth method. The testimony established that certain books and records kept by petitioner would have been sufficient to satisfy normal business record standards except for the fact that petitioner neglected and failed to present necessary information to his bookkeepers. The records were unreliable at best. Consequently, we find that respondent had the right to determine petitioner's income by a computation of net worth plus nondeductible expenditures. Certain adjustments to respondent's computation, however, are in issue. Respondent concedes that petitioner is entitled to an additional amount of $500 as an asset in the opening net worth on December 31, 1945. This $500 represents a deposit for the purchase of land on Minnisink Road. In addition, we have set forth in the Findings of Fact our conclusions as to certain disputed valuations of assets and liabilities to be included in the computation. We have found that respondent's determinations of the amounts for machinery and equipment, office furniture, bid deposit checks outstanding, petitioner's investments in Series E bonds and in Investors Syndicate, and depreciation reserves for162 machinery and equipment and office furniture were correct. We accept petitioner's evidence to the effect that petitioner had made a number of small personal loans to his employees and that the outstanding amount of the loans on December 31, 1945, totaled $1,758.28. We also find that the payments made by petitioner to George Brooks as sales commissions in 1946 and 1947 constituted ordinary and necessary business expenses in the respective amounts paid in those years. The only other issue with respect to the computation of income by the net worth method concerns petitioner's trade accounts receivable and trade accounts payable. Petitioner had $152,636.79 in trade accounts receivable due him on December 31, 1945, for prior services rendered by him in his construction business. Petitioner also shows accounts payable in the amount of $8,367.96 owing on the same date. Petitioner contends that these trade accounts should be included in the opening net worth as assets and liabilities, respectively. Respondent in his computation of net worth accompanying the notice of deficiency includes accounts receivable and accounts payable in all the years except in the opening net worth. Respondent163 now contends that accounts receivable and accounts payable should not be included in any year and to this extent concedes certain adjustments in the net worth computation. At the hearing of this proceeding respondent's counsel made the following statement: The net worth statements show, for the years 1947, 1948 and 1949, trade accounts receivable and trade accounts payable. With respect to these items, respondent at this time will concede that they should not be included in the net worth computation with one exception: For the taxable year 1948, the item of $75,017.87 should read $62,046.48. That item of seventy-five thousand dollars includes a loan receivable of $12,971.39 which should not be eliminated from the net worth computation. Effect will be given to this concession of respondent under Rule 50. Petitioner argues that a net worth computation is technically an accrual basis of accounting and that all of petitioner's assets and liabilities should be considered in the computation regardless of the method of accounting employed. Respondent now contends that petitioner filed his returns for the years 1945 and 1946 on the cash basis and that inclusion of trade accounts receivable164 and trade accounts payable would have the effect of converting petitioner's cash basis of accounting to an accrual basis. We hold for the respondent on this issue. Petitioner was a cash basis taxpayer and filed his returns on the cash basis except for 1947, when he filed on the accrual basis without applying for permission to change his method of accounting. A net worth computation is not a method of accounting; it is not a substitute for either the cash or the accrual basis of accounting or any other recognized method of keeping books, Morris Lipsitz, 21 T.C. 917">21 T.C. 917 (1954), affd. 220 F. 2d 871 (C.A. 4, 1955), certiorari denied 350 U.S. 845">350 U.S. 845 (1955). The net worth analysis should utilize an accounting method consistent with the taxpayer's system. This view was adopted by the First Circuit in Scanlon v. United States, 223 F. 2d 382 (C.A. 1, 1955), wherein the court stated: This court agrees that it is not improper to exclude from such net worth estimate such items as accounts receivable and accounts payable, which are not attributable to the defendant's current income (income being that income which is reportable by a taxpayer on a cash165 basis). * * * The respondent is justified in applying the net worth method, not to change the taxpayer's accounting method but to obtain a measurement of his income, cf. Charles F. Bennett, 30 T.C. 114">30 T.C. 114 (1958); Clark v. Commissioner, 253 F. 2d 745 (C.A. 3, 1958); and United States v. O'Connor, 273 F. 2d 358 (C.A. 2, 1959). We hold that trade accounts receivable and trade accounts payable should be excluded from the net worth computation for all the years here involved as the respondent concedes. Petitioner's loans receivable, however, are attributable to his current income and should be included in the net worth computation. Petitioner orally conceded at trial that the amounts determined by respondent for other assets and liabilities shown in the computation were correct and there is no dispute as to the amounts determined by respondent for personal living expenses. Fraud We come next to the issue of fraud. The computation166 of increases in net worth plus nondeductible expenditures for the taxable years here involved shows substantial yearly net worth increases in excess of reported income. However, the additions to tax for fraud determined by the respondent can only be imposed if there is an intentional wrongdoing with the intent to evade a tax believed to be owing. Based on the record presented here, we are of the opinion that the petitioner was grossly negligent in the supervision and maintenance of his record-keeping system. He left the preparation of his tax returns to accountants who did nothing more than rely on his faulty records. Certainly, petitioner was at fault and his business suffered because of his careless maintenance of records. But we are convinced that petitioner's tax difficulties arose solely from his faulty records and we do not find sufficient evidence to support the imposition of additions to tax for fraud. Lax methods of bookkeeping do not necessarily indicate fraud, Williamson Milling Co., 5 B.T.A. 814">5 B.T.A. 814 (1926), and Walter M. Ferguson, Jr., 14 T.C. 846">14 T.C. 846 (1950), nor is proof of negligence in any degree a substitute for specific evidence of wrongdoing, Mitchell v. Commissioner, 118 F. 2d 308167 (C.A. 5, 1941), reversing 40 B.T.A. 424">40 B.T.A. 424, followed on remand, 45 B.T.A. 822">45 B.T.A. 822 Supp. Op. (1941). Petitioner was haphazard and careless in his business responsibilities and his approach to his responsibilities for filing accurate income tax returns was equally careless. We believe that all of the income he failed to report was due to this careless approach without any specific fraudulent intent to evade tax. Accordingly, we do not approve the additions to tax for fraud determined by respondent. Since no waiver was executed by petitioner for 1947 and in the absence of a finding of fraud, the statute of limitations bars the collection of deficiencies for that year. For the years 1946 and 1948 where petitioner did execute waivers we approve the assessment of deficiencies as modified by the findings presented herein. With reference to the addition to tax under section 291(a), I.R.C. 1939, for delinquent filing of return in the amount of $2,545.60 for 1946, the Commissioner states in his deficiency notice as follows: It has been determined that the penalty shown herein for failure to make and file a return within the time prescribed by law, provided by section168 291(a) of the 1939 Internal Revenue Code, is applicable for the taxable year ended December 31, 1946. There is no evidence in the record to show that the Commissioner erred in imposing this addition to tax; the Commissioner is therefore sustained. With respect to the additions to tax determined under section 294(d) of the 1939 Code only those additions owing under section 294(d)(1)(A) are approved and those under section 294(d)(2) are disapproved in accordance with Commissioner v. Acker, 361 U.S. 87">361 U.S. 87. Decision will be entered under Rule 50. Footnotes*. The words "not attributable" were replaced by the word "attributable" and the words "net worth" were added to this sentence by an official order of the Tax Court dated July 30, 1962, and signed by Judge Black.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625024/	SOUTHERN PRESS CLOTH MANUFACTURING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Southern Press Cloth Mfg. Co. v. CommissionerDocket No. 13004.United States Board of Tax Appeals10 B.T.A. 303; 1928 BTA LEXIS 4142; January 27, 1928, Promulgated 4142 Purchases of parts and supplies for machinery during a fiscal year determined to have been repair items rather than capital items. Geo. M. Stanton, Esq., for the petitioner. W. H. Lawder, Esq., for the respondent. MORRIS304 This proceeding is for the redetermination of a deficiency in income and profits taxes for the fiscal year ended May 31, 1919, which is less than $10,000. The respondent originally determined a deficiency of $6,880.43 but reduced this amount after considering petitioner's claim in abatement to $5,497.40. The petitioner alleges that the deficiency should be further reduced because respondent has erred in the disallowance of a deduction of $5,120.15 covering alleged supplies and repair parts. FINDINGS OF FACT. The petitioner was incorporated in 1916 for the purpose of manufacturing press cloth from human hair. It is one of the few concerns in this country engaged in the manufacture of human hair yarn and human hair press cloth. The press cloth is used in the cottonseed oil industry in the pressing of oil from the cottonseed meal. The process of development in the petitioner's plant in manufacturing its products4143 is as follows: The human hair is first put through a cleansing process, after which it is put through the preparing department. Thereafter, it goes successively through the drawing, spinning, twisting and sizing departments. By the time the latter department is reached the hair has become yarn which is sent to the weaving department. After the yarn has been woven into cloth it is inspected and put into rolls preparatory to shipment. Upon incorporation in 1916 the petitioner took over the machinery and business which prior thereto had been conducted by W. A. Lee, as a sole proprietorship. Practically all of the machinery which was taken over was secondhand, some of it being 20 years old. The machinery was of the heavy high-speed type so that replacements and repairs were constantly being made to continue operations. Unsettled labor conditions and the fact that most of the employees were negroes, unskilled and inexperienced in operating such machinery, resulted in frequent breakdowns, large repair bills, and loss of time. In order to maintain production, petitioner operated a day and night shift, using the more experienced help in the day time and the less experienced labor4144 at night. The petitioner carried on its books during the fiscal year a machinery, supply and repair account, to which it charged its numerous purchases. The total purchases for the fiscal year, including cashbook items, amounted to $20,537.17. This amount was reduced by $1,087.37 for sales, a railroad claim, and inventory, leaving a so-called general ledger balance of $19,449.80, which was deducted on petitioner's return as ordinary and necessary repairs. An analysis of the machinery, supply and repair account was offered and admitted in evidence. This analysis shows the dates, amounts, and concerns 305 from whom purchases were made, and consisted of a large number of purchases for repair items, for drayage on repair parts, and for welding. A revenue agent, after auditing the petitioner's books, reduced the deduction for ordinary and necessary repairs by $5,120.15. The agent disallowed the items making up the latter amount because from his experience and observation in the cotton mill industry such items were, in his opinion, in the nature of capital additions rather than repair parts. At the time the revenue agent audited the petitioner's books he checked the entries4145 in the machinery, supply and repair account with the invoices showing purchases of repair parts and freight and drayage on such parts. The respondent sustained the action of the agent with respect to this disallowance. OPINION. MORRIS: Only that portion of the deficiency resulting from the disallowance of $5,120.15 is in controversy, which amount is included in the $19,449.80 deduction taken by the petitioner in its return as an ordinary and necessary expense. The petitioner was unable to segregate the particular items disallowed but alleges that all the items making up the deduction claimed were properly deducted. In proof thereof the petitioner called upon its superintendent, a man who had been engaged in manufacturing human hair press cloth for a period of 20 years, who testified with respect to the various purchases shown in the machinery, supply and repair account. We are satisfied from his testimony that these purchases were for ordinary and necessary repairs and were not in the nature of capital additions. He testified item by item as to the parts and repair work purchased from the numerous concerns making up the total expenditure of $19,449.80. His detailed testimony4146 showed the character of the purchases which were made and charged to the machinery, supply and repair account to be as follows: Drayage, welding, castings, heddle wires, spinning supplies, belting, weaving supplies, leather aprons, supply parts for machine shops, sprockets, wheel chains, canvas aprons, conveying aprons, loom supply parts, parts for automatic feed box, leather sectional roller supplies, reeds for use in looms, pipes or tubes for creels to wind yarn on, parts for spinning frames such as flyers, wipers, weights, and gears, bolts, screws, pulleys, electrical equipment such as fuses for motors, supply parts for copper winding machine, supplies for retwisting department, window repairs, bushings, shuttle and bobbin head repairs, and supply parts for the sizing machine. Due to the high speed type of machinery used, a 24-hour operation and the character of labor available, such purchases and repairs were of frequent occurrence. 306 As to come few items the superintendent was unable to recall the character of the purchase, but the evidence shows that when additions were made, they were charged to some permanent investment account and not to the account in question. *4147 We are of the opinion that the entire amount of $19,449.80 constitutes an allowable deduction. Judgment will be entered on 10 days' notice, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625025/	Joseph Paul Glimco and Lena Glimco v. Commissioner.Glimco v. CommissionerDocket No. 94562.United States Tax CourtT.C. Memo 1967-119; 1967 Tax Ct. Memo LEXIS 138; 26 T.C.M. (CCH) 547; T.C.M. (RIA) 67119; May 31, 1967Edward J. Calihan, Jr., 53 W. Jackson Blvd., Chicago, Ill., and Gene M. Zafft, for the petitioners. George G. Young, for the respondent. WITHEYMemorandum Findings of Fact and Opinion WITHEY, Judge: Deficiencies in the income tax and additions to the tax have been determined by respondent as follows: Additions to taxSec.Sec.6653(b)294(d)(2)Income taxI.R.C.I.R.C.Yeardeficiency195419391954$26,946.82$13,473.41$1,710.96195523,638.6011,819.30195627,338.4813,669.24195717,699.628,849.81Some of the issues raised by the pleadings have been disposed of by stipulation and such disposition will be given effect under Rule 50. The remaining issues are (1) whether139 legal fees and costs paid by the employer of petitioner Joseph P. Glimco are includable in the taxable income of petitioners, and if so, are such payments deductible by petitioners as ordinary and necessary business expenses, (2) whether petitioners understated on their 1956 return net long-term capital gain realized from the sale of real estate in the amount of $4,074.20, and (3) whether petitioners realized and failed to report dividends from American Telephone and Telegraph stock in the years 1956 and 1957 in the respective amounts of $244.75 and $319.00. General Findings of Fact All stipulated facts are found accordingly. On the date of filing of the petition herein, petitioners Joseph P. and Lena Glimco were husband and wife who resided at Riverside, Illinois. For each of the calendar years 1954 through 1957, petitioners filed joint income tax returns upon the basis of the calendar year and upon the cash receipts and disbursements method of accounting with the office of the district director of internal revenue at Chicago, Illinois. Issue 1 Findings of Fact During the period from sometime in 1940 through the taxable years in question, petitioner Joseph Glimco140 (hereinafter sometimes referred to as petitioner) was employed by the Taxicab Drivers, Maintenance and Garage Helpers Union, local 777 (hereinafter referred to as the union, local 777, or the local), at Chicago, Illinois. The local claimed jurisdiction over all taxi drivers in the city of Chicago. Its officers consisted of a president, vice president, secretary-treasurer, recording secretary, and three trustees. During the early period of petitioner's employment with local 777 he held the position of assistant business agent. Commencing sometime in 1952 and continuing thereafter to February 3, 1958, he was a trustee of the local. On February 3, 1958, he became president, which position he now holds. Throughout the period in question petitioner held no position with any labor union other than with local 777. Sometime subsequent to becoming trustee of local 777, by virtue thereof, he became a member of Joint Teamsters Council No. 25. On October 7, 1954, petitioner and four others were indicated by a Federal Grand Jury at Chicago for alleged acts in violation of the so-called Hobbs or Anti-Racketeering Act (Section 1951, Title 18, United States Code). The indictment charged, in part, 141 that commencing on or about March 1944 and continuing thereafter to and until the date of the indictment, petitioner did willfully and feloniously combine, conspire, and agree with his codefendants and certain named coconspirators to obstruct, delay, and affect interestate commerce between the several states of the United States, and the movement of live poultry, including chickens, ducks, turkeys, and other fowls, by extortion, to wit, obtaining money and property from poultry merchants and their agents through wrongful use of actual and threatened force, violence, and fear. The indictment further charged that as a part of the conspiracy petitioner collected some of the moneys which had been given with the consent of the poultry merchants, induced by the wrongful use on the part of the defendants of actual and threatened force, violence, and fear; that the defendants instilled and implanted in the minds of the poultry merchants fear that if defendants' demands for money were not complied with, personal physical violence would result to the merchants and economic loss as a result of labor stoppages, slowdowns, wrongful strikes, and property damage to their places of business and142 equipment. Local 777 was not a party defendant in the criminal proceeding against the petitioner; it was not named as a defendant in the indictment, nor was it separately charged with any criminal offense. The indictment contained no charge against petitioner with respect to any acts in connection with his employment at local 777. Petitioner entered a plea of not guilty to the charge in the indictment and he was tried by a jury in Federal District Court at Chicago, beginning March 15, 1957. The trial concluded on March 25, 1957, and the jury found petitioner not guilty of the charge in the indictment. On October 4, 1954, 3 days prior to the return of the indictment against petitioner, the membership of local 777 held its regular monthly meeting. The minutes of that meeting state, in part, as follows: Brother Joseph Coca opened the meeting and then turned the Chair over to Bro. Geo. Marcie. Bro. Marcie spoke on the fact that our union has received considerable unfavorable publicity by the press. * * * As a result of these write-ups the executive board immediately asked for an audit of the books of the union to show that these attacks were strictly the imagination of some reporters143 who probably were instructed to paint it up good, which they did. * * He then brought out that instead of him telling about answering these attacks he thought it would be better if he turned over the floor to the members so that they could ask questions on any particular article that they read especially those regarding Brother Glimco. This was agreed on and before the first member took the floor, Bro. Marcie brought out the fact that he thought these attacks would continue and if this trial by newspaper kept on that we, the officers of this union, would have to defend ourselves both by ads and by legal counsel. * * * Brother Marcie brought out the fact that the audit has shown that there is over $750,000 in cash in the banks, and the membership was very gratified to hear this fact. As soon as Bro. Marcie brought this out, Bro. Winnick asked for the floor and that as a member of long standing that he had nothing but good things done for him while a member of this union and that he believed that all members must stick with and uphold their unions, and that there was no point in asking a lot of questions and turning our meeting into a question and answer program. Bro. Winnick then144 made a motion that the local union take care of their officers and legal fees, and give the entire executive board a vote of confidence so that they could continue the good work that has been done by the executive board. Seconded by Bro. Ruggiero and after a lengthy discussion in which there was just one member dissenting the motion was passed unanimously. * * On April 1, 1957, subsequent to the conclusion of the criminal proceedings, the membership of local 777 held a regular meeting. The minutes of that meeting state, in part, as follows: Bro. Glimco asked for the floor and thanked the rank and file for all support give him during his trial. Bro. Chernin then took the floor and called for a motion to reaffirm the position taken to support Bro. Glimco when these anti labor proceedings were started, and to approve all action taken in his defense by the local executive board and officers since the beginning of the public attack upon our union and its officers in the fall of 1954. The above motion was seconded by Bro. Siewert and was unanimously carried. * * * The services of attorneys were obtained by the local for the defense of petitioner upon the charges contained in the145 criminal indictment and such services were acquiesced in and accepted by petitioner. Fees and expenses pertaining to the defense of petitioner were paid by local 777 in the years and amounts as follows: YearAmount1954$35,250.00195534,125.92195633,800.45195721,445.08None of the payments in question were made to or through the petitioner; the local paid the various lawyers who worked on the case for their fees and expenses directly by its checks. Petitioner did not report any of the amounts paid by local 777 to his lawyers and others as income in his income tax returns for any year. For many years the Chicago poultry dealers have concentrated within a certain section of Chicago. Most of the employees of the poultry merchants are members of the Poultry Handlers Union, local 650, an affiliate of the AFL-CIO. Between on or about June 1937 and on or about January 1939 petitioner was employed by local 650 as an organizer. In addition to the Poultry Handlers Union, various Teamster locals also operate on the market due to the fact that a good deal of the poultry moves into and out of the market by truck. Petitioner reported no income as a146 result of his activities on the Chicago Poultry Market during the years 1944 through 1954. Joint Teamsters Council No. 25 is composed of all Teamster locals in the city of Chicago. During the years in question there were approximately 42 such locals in Chicago. The seven officers of each local constituted the local's delegates to the Joint Council. During the years in question local 777 was a member of the Joint Council and petitioner became a delegate to the Joint Council by virtue of the fact that he was made a trustee of the local. Ultimate Findings The payments by local 777 of the attorney fees and expenses of petitioner's defense upon the charges contained in the indictment referred to above were made because of expected benefit to the local as a part of organized labor and not from a disinterested sense of generosity toward petitioner. In carrying on his poultry market activities, petitioner was not engaged in a trade or business for profit. Opinion Petitioners here make the primary contention that the expenses and attorney fees connected with petitioner's defense upon an indictment charging him with a criminal conspiracy which were directly paid by the local union147 of which he was an officeremployee constituted gifts to him by the local. We find that the payment of such expense by the local union was not motivated by a sense of detached and disinterested generosity on its part, Commissioner v. Duberstein, 363 U.S. 278">363 U.S. 278, or out of affection, respect, admiration, charity, or like impulses, Mary B. Heyward, 36 T.C. 739">36 T.C. 739. On the contrary, it is clear from the record that the local was motivated by the feeling that the labor movement generally was under attack by the press through sought-for indictment of its officials and that indictment, and particularly trial and conviction of petitioner as such an official, would work a harm upon labor generally and petitioner's local union itself. Clearly the local resolved to pay these expenses because it wished to benefit by mitigation or avoidance of this harm. Because the local union thus may not be said to have had a donative intent, we find no gift was made in the payment of the involved expenses. Petitioner, however, has taken the alternative position that should we hold as above, then such expenses, even though income to petitioner when paid by his employer, constitute deductible148 ordinary and necessary business expense under Section 162(a), Internal Revenue Code of 1954. 1 He relies heavily upon Commissioner v. Tellier, 383 U.S. 687">383 U.S. 687, affirming 342 F. 2d 690 (C.A. 2), which had reversed a Memorandum Opinion of this Court. We find Commissioner v. Tellier, supra, to be distinguishable from this case on the facts. In Tellier, supra, there was no question but what the expenses of defense of the criminal charge there in question would constitute business expense. The only issues decided were that they also were ordinary and necessary to the conduct of the taxpayer's business and that the argument of the Commissioner that the allowance of such expenses as a deduction would be contrary to well-defined public policy was to no avail. This case, on the other hand, presents the immediate question whether the expenses paid to defend petitioner upon the indictment for conspiracy149 to extort money were in any way connected with his business. The record discloses no business activity on the part of petitioner other than that of officer-employee of local 777, Taxicab Drivers, Maintenance and Garage Helpers Union. This, together with activity resulting in amounts received as salary from the local, salary from the local's Health and Welfare Fund, and salary from Automatic Phonograph Distributing Co., constituted his only activity shown by the evidence to have had a profit-making objective. We are not shown what those activities are with the exception of the former. The record does disclose that petitioner spent generally until noon attending to the business of local 777 and that thereafter he spent the remainder of each day at a restaurant in the poultry-market area of Chicago where he discussed labor matters with various market dealers and others interested in poultrymarket operations. Petitioner's own testimony makes it clear that these discussions were carried on by him not as an officer of local 777, but as a "labor boss" who had influence with the Teamsters Union. We cannot find from any evidence before us that the latter activities had any bearing upon petitioner's150 duties as an officer-employee of local 777 which was a union representing the interests of taxicab operators. We also have no evidence which indicates petitioner at any time acted as "labor boss" with any idea in mind of being compensated for such activities. Indeed, there is no showing here but that such activities were carried on other than for his personal aggrandizement. He certainly had no employer who required such activities of him. The charges upon which he was tried and acquitted grew out of his activities as "labor boss," not from his labors as officer-employee of local 777 which paid the expenses here in question. Cf. Frank J. Matula, 40 T.C. 914">40 T.C. 914; Irving Sachs, 32 T.C. 815">32 T.C. 815, affd., 277 F. 2d 879 (C.A. 8), certiorari denied 364 U.S. 833">364 U.S. 833. On this issue also we find for respondent. Issue 2 Findings of Fact Petitioners reported on their 1956 return a long-term capital gain of $796.25 from the sale of property located at 1215 Oak Park Ave., Chicago, Illinois, as follows: 1953 purchase price$39,050.001956 sold for$40,000.00Less: Expenses153.7539,846.25Long-term capital gain796.25151 Respondent determined that the cost basis of the property was $30,901.60 and, accordingly, increased the long-term capital gain as reported by the amount of $8,148.40. Ultimate Finding The cost basis of the property in question was $30,901.60. Opinion In 1967 the hearing of this issue was held. Petitioner, on cross-examination, has stated unequivocally that his memory is extremely poor. The evidence he had offered in support of his contention that the proper cost basis for the property sold is $39,050 is meager to the extreme and entirely insufficient to overcome the presumption that respondent's determination is correct. Such testimony as he gave is inconsistent with his professed poor memory in that the events concerned occurred in 1956 and prior thereto yet, without written record of them, he now recalls exact amounts of cash payments made by him to specific payees and the reasons for each payment. He has offered no proof at all regarding the kind of property involved in order that a finding can be made as to its depreciability. He has failed to substantiate his oral testimony regarding payments made in cash for improvements made upon the property. Where the record152 indicates the availability of substantiating evidence, such as the testimony of payees or at least the receipts which would, in the ordinary course of business, have been obtained for such cash payments as were testified to, and the absence of such testimony or evidence is unexplained, we must conclude that the same is either nonexistent or, if produced, would have failed to support petitioner's oral testimony. Wichita Terminal Elevator Co., 6 T.C. 1158">6 T.C. 1158, 1165, affirmed, 162 F. 2d 513 (C.A. 10); W. A. Shaw, 27 T.C. 561">27 T.C. 561, 573, affirmed, 252 F. 2d 681 (C.A. 6). We do not believe petitioner's oral testimony with respect to the cash payments made and therefore find that he has failed to sustain the burden of proof resting upon him. He has shown no greater basis for the property in question than that determined by respondent and for that reason we find for respondent on this issue. Issue 3 Findings of Fact In his amended answer, respondent has indicated that a portion of the unreported income referred to in his notice of deficiencies consists153 of dividend income from American Telephone and Telegraph Company stock in the amount of $244.75 for 1956 and $319.00 for 1957. Petitioner's reply makes denial of this allegation. Ultimate Findings In the taxable year 1956 petitioners had unreported dividend income of $244.75 and for 1957, $319.00. Opinion We again find that petitioner has failed to produce sufficient evidence to overcome the presumption of correctness of responent's determination on the issue presented. We do have his oral, but unsubstantiated, testimony that neither he nor his wife owned the stock upon which respondent has determined petitioners received dividends. This testimony is not supported by either that of his wife or the children whom he contends actually held title to the stock. No stock certificates were produced which might so indicate and no evidence is offered which would indicate the names of titleholders upon the books of the issuing corporation. The absence of such testimony and evidence being unexplained on this record we must again conclude that, when produced, it would fail to support petitioner's position. For failure on the part of petitioners to sustain their burden of proof, we also154 find for respondent on this issue. Decision will be entered under Rule 50. Footnotes1. SEC. 162. TRADE OR BUSINESS EXPENSES. (a) In General. - There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * ↩. By order of Tax Court, dated June 9, 1967, "correct" was substituted for "in error".↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625026/	DONAL C. NOONAN and RUTH H. NOONAN, ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Noonan v. CommissionerDocket Nos. 16879-83, 31318-84, 34490-84, 126-85, 6123-85, 8339-85, 10859-85, 12358-85, 13473-85, 15725-85, 18606-85, 24858-85, 35031-85, 4957-86, 8227-86.United States Tax CourtT.C. Memo 1986-449; 1986 Tax Ct. Memo LEXIS 158; 52 T.C.M. (CCH) 534; T.C.M. (RIA) 86449; September 17, 1986. Martin N. Gelfand and William M. Weintraub, for the petitioners. Martin D. Cohen and William H. Quealy, Jr., for the respondent. COHENMEMORANDUM FINDINGS OF FACT AND OPINION COHEN, Judge: These consolidated "test case petitioners" were selected by counsel and approved by the Court to serve as test cases for resolving numerous issues common to a much larger group of petitioners who invested during 1980 through 1982 in refrigerated intermodal containers marketed by or on behalf of FoodSource, Inc. Appendix A sets forth petitioners by name and docket number, the tax years involved, the deficiencies and additions to tax for each year, and the place of residence of each individual test case petitioner. The issues presented are whether petitioners are entitled to investment tax credits and depreciation or other deductions claimed with respect to the containers. FINDINGS OF FACT Some of the facts have been stipulated, and the stipulated facts and attached exhibits are incorporated in our findings by this reference. Background of FoodSource161 FoodSource, Inc. (FoodSource) was a California corporation formed in late 1979 by David A. Dixon (Dixon) and Marshall Boyar to manufacture and sell controlled atmosphere containers for post-harvest preservation and transportation of perishable agricultural commodities. At all times relevant to the present cases, Dixon either owned or controlled a majority of the outstanding common stock of FoodSource. Dixon, an engineer, began researching the preservation of perishables in approximately 1960, when he was West Coast regional manager of the Cryogenics Division of Union Carbide Corporation. Between 1964 and 1971 Dixon applied for and, as assignor to certain corporations employing him, received five patents relating to a controlled atmosphere process that he developed. This process involved placing perishable products into a compartment; rapidly reducing the temperature and, by introducing inert gases, reducing the oxygen level within the compartment; and monitoring and maintaining precisely the level of oxygen. Dixon's research and other scientific studies indicated that fresh fruits and vegetables ripened and decayed more slowly in this reduced oxygen atmosphere (between one quarter162 of 1 percent and 4 percent oxygen, depending upon the commodity) than in normal atmosphere. The five patents became known as the Oxytrol patents. On February 11, 1977, Furukawa Oxytrol, Inc. (FOI), then owner of the Oxytrol patents, granted a nonexclusive license to Senter & Corgan, Inc. (Senter) to use and furnish to customers the Oxytrol system. The term of the license extended until expiration of the last patent, unless the agreement was earlier terminated by Senter. Senter also acquired hardware necessary for equipping 40 or 50 refrigerated transportation containers with the Oxytrol system. Such hardware consisted primarily of a tank of liquid nitrogen to be placed in the nose of the container and a controller to maintain a selected oxygen level by releasing the nitrogen into the container as needed. Senter offered to sell such systems to container owners for $10,000 (including installation). Despite the substantial sales efforts of Senter and Trans Fresh Corporation (Trans Fresh), a related corporation that continued marketing the systems after Senter was reorganized in 1981 or 1982, no systems had been sold as of the time of trial of this case in October and December 1985. 163 2Contemporaneously with the unsuccessful efforts to sell the Oxytrol system, Trans Fresh was quite successful in selling its Tectrol modified atmosphere system, for which it charged $250. A modified atmosphere system differs from a controlled atmosphere system (such as the Oxytrol system) in that inert gases are introduced into the sealed container only immediately after loading; the level of oxygen in the container is not monitored or controlled thereafter. On December 22, 1977, Dixon obtained from Furukawa International USA, Inc. (Furukawa) an exclusive license to make, use and sell any device utilizing one or more of the five Oxytrol patents. The grant of the license to Dixon was subject to the license164 previously granted to Senter by FOI. In exchange for the license, Dixon agreed to pay Furukawa royalties of $1,000 for each device sold or leased by Dixon. The agreement also provided for minimum royalties of $5,000 per month. On December 23, 1977, Dixon granted to Nitrol Corporation an exclusive sub-license to make, use, and sell any device utilizing the Oxytrol patents. Nitrol Corporation sold controlled atmosphere refrigerated highway freight trailers purchased by the taxpayers as described in detail in Sutton v. Commissioner,84 T.C. 210">84 T.C. 210 (1985), affd. per curiam 788 F.2d 695">788 F.2d 695 (11th Cir. 1986). The trailers sold by Nitrol Corporation used United States Patent No. 3,962,477 issued to Dixon in 1976 (the "477 patent") and subsequently licensed by him to Nitrol Corporation. The 477 patent involved the maintenance of controlled atmosphere through the premixing of liquid oxygen and nitrogen in a storage tank and the continuous introduction of gas from the mixture into the storage container. In the application for this patent, Dixon stated: Control of oxygen concentration in conventional storage compartments is presently accomplished in a number of165 ways, the most common being the use of an oxygen sensing device in combination with separate sources of nitrogen and oxygen. In operation, when the oxygen concentration rises above the desired maximum, the sensing device, disposed within the storage compartment, activates a valve controlling the nitrogen source. As a result, a sufficient quantity of nitrogen is introduced to reduce the oxygen concentration to within the desired range. Conversely, when the oxygen concentration falls below the minimum required, the sensing device either similarly activates a value controlling the oxygen source or deactivates the nitrogen source. In the latter case, and through utilization of a permeable storage unit, the oxygen source can be ambient air that diffuses into the compartment when the nitrogen source is deactivated. In this manner, increments of oxygen or nitrogen are provided to the storage compartment in response to the appropriate signal from the sensing device to maintain the oxygen concentration in the desired range. However, such prior art procedures are of limited application as they are by necessity of elaborate and costly construction and somewhat unreliable. Although systems166 utilizing either a single storage tank containing a pre-mixture of oxygen and an inert gas such as nitrogen, or separate oxygen and inert gas tanks have been developed, the high pressure storage tanks required are very heavy and greatly increase the weight and space burden when used in in-transit applications. In addition, such systems suffer from the inherent problems associated with operation at high pressure. The sub-license for the Oxytrol patents granted to Nitrol Corporation terminated when Nitrol Corporation defaulted on its obligations under the December 23, 1977 agreement. On April 1, 1980, Dixon and Furukawa terminated their December 22, 1977 agreement. On April 7, 1980, Furukawa and FoodSource entered into an exclusive license agreement that was identical in all material respects to the agreement between Furukawa and Dixon. The FoodSource ContainersDuring 1980, 1981, and 1982, FoodSource sold interests in controlled atmosphere refrigerated containers to various investors, including petitioners. 3 FoodSource allowed each investor to purchase as little as a 10 percent undivided interest in a container. Independent sales representatives, to whom FoodSource paid167 sales commissions, generated substantially all of the approximately 5,000 sales of contrainer interests. FoodSource used at least eight different versions of offering memoranda in connection with the containers, which FoodSource marketed under the name Nitrol. Each version contained the following description of the Nitrol system: The Nitrol system of controlled atmosphere transportation of perishable products is technically correct, simply to operate, and safe from practical failure. Under a number of patents, it operates in one of two different ways, depending upon the general application. In the first mode the Nitrol tank is filled with liquified nitrogen and oxygen precisely mixed so that exactly the right level of oxygen will be maintained in the trailer during transit. Following an initial purging of the interior air, the gas mixture, say 1% oxygen and 99% nitrogen, flows continuously into the trailer to maintain the oxygen level constant168 while forcing out the harmful by-products of respiration such as carbon dioxide and ethylene. There is nothing for the carrier to adjust during transport, as the proper gas atmosphere is chosen and mixed at the time of loading, and there are no moving parts to fail. The second Nitrol mode uses only liquified nitrogen and calls for it on demand, using a solid-state pre-set oxygen level control to rapidly reduce oxygen level in the transport compartment to the proper level. Additional nitrogen continues to flow slowly into the compartment during transit to purge respiratory by-products, and of course "live" cargo such as produce continues to use some of the remaining oxygen in the van. The controller then lets air flow into the compartment when the oxygen level gets too low. A typical oxygen control level is 1%, around which the controller will allow 1/2% deviation. FoodSource employed experts in post-harvest technology, who researched and designed the container unit that it sold. Each container sold by FoodSource consisted of a 40-foot insulated container box, an electric refrigeration unit, and an oxygen analyzer, each of which FoodSource purchased from independent manufacturers. 169 FoodSource paid approximately $17,000 to $18,000 for each container box, $10,000 for each refrigeration unit, and $1,000 for each oxygen analyzer. As sold by FoodSource, the container did not include a chassis for road and "piggyback" rail transportation, a diesel-powered generator to run the refrigeration unit, or a tank to hold the gases necessary for the controlled atmosphere process, although pictures of the container in the offering memoranda included these items. FoodSource charged $260,000 per container (or a prorated amount for less than an entire interest); however, the form of payment varied substantially among the eight offering memoranda. The terms of the initial offering in 1980 were $26,000 down and a $234,000 nonrecourse note bearing 6 percent simple interest and payable in 180 equal monthly installments. In the second and third memoranda, FoodSource changed these terms to $39,000 down and a $221,000 nonrecourse note. The fourth offering called for $45,000 down and a $215,000 note bearing 9 percent simple interest and payable in 240 equal monthly installments. Although the note was labeled recourse as to principal, any purchaser who allowed FoodSource to take170 possession of and operate his container could limit the payments of the note during the 20-year period to the operating profit generated by the container. The terms in the fifth offering were as follows: Purchase terms are Forty-Five Thousand Dollars ($45,000.00) down and a partial recourse promissory note for the balance of Four Hundred Ninety-Two Thousand Three Hundred Two and 40/100 Dollars ($492,302.40), i.e., the buyer is personally liable for the first Two Hundred Fifteen Thousand Dollars ($215,000.00) of such promissory note, payable in 240 equal monthly installments of Two Thousand Fifty One and 27/100 Dollars ($2,051.26) [sic] each, without interest. Said installment payments commence as of the first day of the third month following the purchase of the Container. Even though the note does not provide for the payment of interest, under the applicable provisions of the Internal Revenue Code of 1954, as amended, a portion of certain of the installments will be treated as interest. Under the applicable rules, no portion of the first four installment payments will be treated as interest; however, as to each installment payment thereafter, i.e., the final 236 payments, Eleven171 Hundred Seventy-Five and 01/100 Dollars ($1,175.01) thereof will be treated as interest. Based upon the tables published by the Internal Revenue Service, the principal amount of the note is Two Hundred Fifteen Thousand Dollars ($215,000.00) and the remainder of the total installment payments, or Two Hundred Seventy-Seven Thousand Three Hundred Two and 40/100 Dollars ($277,302.40), is interest. Thus, the total principal amount being paid for a Container is Two Hundred Sixty Thousand Dollars ($260,000.00); Forty-Five Thousand Dollars ($45,000.00) down payment plus Two Hundred Fifteen Thousand Dollars ($215,000.00) principal portion of the note. * * As with the fourth offering, the purchaser could defer out-of-pocket note payments during the 20 years after purchase by allowing FoodSource to operate the container. In the Sixth format, FoodSource offered similar terms but increased the down payment to $52,000. The seventh and eighth offering memoranda were identical to the sixth, except that no provision was made for the deferral of loan payments through FoodSource's operating the container, and FoodSource could sell the container and collect from the owner any balance remaining172 on the debt in excess of the sales proceeds. Each of the notes without stated interest provided that payments received thereon would be allocated first to the recourse portion of the note. The notes used in connection with the seventh and eighth offerings stated that they could not be assigned by FoodSource without prior written consent of the purchaser. In the contract of sale between FoodSource and the container purchaser (entitled Purchase and Security Agreement), FoodSource agreed to make available to the purchaser without cost "any other products of * * [FoodSource] constituting improvements to the [Nitrol] System resulting from patents derived from the technology which created the System." The Purchase and Security Agreement required the purchaser of any container to maintain a commercial material damage insurance policy in the amount of $260,000. FoodSource arranged for independent insurance companies to provide such a policy for $75 per month (per container). During the years in issue, the liability of the insurance companies under the policies was limited to repair or replacement cost of the containers. The contract of sale also required the purchaser to repair173 and maintain the container until full payment on the note to FoodSource. The offering memoranda contained an optional agreement through which the purchaser could engage Container Maintenance Company to perform necessary repair and maintenance services for $340 per month. The first two offering memoranda, used in 1980, contained an optional agreement through which the purchaser could lease his container to Controlled Atmosphere Transportation Company (CATCO) for $2,700 per month. CATCO was formed by Dixon in 1980 when he temporarily lost effective control of FoodSource to co-founder Marshall Boyar. During the years in issue, all substantial functions associated with the leases were performed by FoodSource, not by CATCO. Each offering memorandum contained projections of the financial consequences of purchasing a container. Summaries of such projections in the initial 1980 memorandum and the final 1982 memorandum appear in Appendix B (Charts 1 and 2, respectively). In addition to the offering memoranda, FoodSource printed high quality color advertising brochures to stimulate container sales. Both the memoranda and the brochures stated that container purchasers would receive174 generous tax benefits, including depreciation and investment tax credits. The advertising material also represented that the Nitrol system was a breakthrough in storage technology and that purchasers should realize large economic returns from the increased storage life of perishables. The material stated, for example, that produce could be stored in a Nitrol container upon harvest and then sold after the harvest season for substantial profit. According to the materials, the Nitrol containers could transport perishables long distances with condition upon arrival comparable to, but for a small fraction of the cost of, aircraft shipments. Through the CATCO leases or other arrangements with purchasers, FoodSource intended to operate a large fleet of containers for transcontinental and world-wide transport of perishables. During 1981 and 1982, FoodSource sent at least six newsletters to container owners that represented that FoodSource was making significant progress toward this goal. In July 1982, Juhn Thomson (Thomson) of Marshall and Stevens, Inc., prepared an appraisal of the container for FoodSource. Thomson concluded that the fair market value of a new Nitrol container was175 $220,000 on March 1, 1982. Thomson reached this valuation after applying three different approaches to value the container. The first approach used by Thomson was what he termed the "cost" approach. Thomson relied on a survey by Townsend and Townsend, a patent law firm, of its clients indicating that patented products could reasonably sell for 5 to 10 times the cost to manufacture depending on the degree of technological breakthrough, the desirability and acceptance of the product, and the degree of monopoly on the technology. Under this approach Thomson concluded that $260,000 was a reasonable value for the Nitrol container because this value represented 8.38 times the total manufacturing cost (materials and labor) of approximately $31,000, and "although high," was within the range indicated by the Townsend and Townsend survey. The second method employed by Thomson was the "market" method. In applying this approach, Thomson first assumed that the Nitrol container would sell for at least as much per cubic foot of cargo capacity as the Grumman Dormavac container, the only other controlled atmosphere unit then "on the market," which sold at $127,000. Thomson ultimately determined176 a value of $184,000 for the Nitrol container under this approach, which equaled the offering price of the Dormavac divided by its cubic footage times the cubic footage of the Nitrol container. The final method employed by Thomson was the "income" method. Here Thomson discounted the earnings projected over an assumed 20-year life of the container. Thomson computed the projected earnings as follows: We projected revenues based on FoodSource's recorded operating data, which indicated revenues from a low of $1,700 per month on the New Zealand operations to a high of $4,800 per month in domestic storage. The most consistent monthly income ranged between $2,500 to $3,000 per month. We have used $2,500 per month in year 1 of our projection to give some allowance for down time, since a container cannot reasonably be expected to have 100 percent utilization. Expenses consisted of insurance, maintenance, and management cost. * * * Manufacturing and Operating ProblemsFoodSource engaged the Budd Company (Budd) to manufacture the containers.The original order was for 100 containers, but that was increased to 1,000 container boxes for delivery in 1981. Under the contract, Budd, 177 the largest domestic manufacturer of refrigerated containers, was obligated to install the refrigeration unit (manufactured by another company) in each completed container box. Budd was not, however, to make the piping and electrical connections or to evacuate and charge the unit. These operations required approximately 10 hours labor and were necessary for operation of the refrigeration unit. Moreover, the contract did not call for Budd to install the oxygen analyzer, which was necessary for operation of the controlled atmosphere system. The analyzer was not in Budd's possession but was to be installed in FoodSource's California facility because of "security" problems. Delivery terms were F.O.B. Budd's plant in Pennsylvania. Title to the container was to pass to FoodSource upon completion of each container box, regardless of when FoodSource took delivery. Risk of loss remained with Budd until tender of delivery to FoodSource. Budd completed most of the containers in 1981. Because of a dispute with FoodSource over payment, however, Budd refused to release possession of 658 completed containers to FoodSource. FoodSource nevertheless sold such containers to investors in connection178 with its Nitrol program and represented to the purchasers that FoodSource or its representative had taken delivery of the containers on behalf of the purchasers. Interests in such containers retained in the possession of Budd were sold to test case petitioners Noonan, Brohmer, Graham, Baumann, Condiotti, Field, Keane, Hulsman, Hillendahl, McKee, and Todd. (Some of these petitioners also acquired interests in containers not so held by Budd.) On November 12, 1982, FoodSource sued Budd in the United States District Court for the Northern District of California, and Budd named the purchasers from FoodSource as cross-defendants in a cross-claim. The parties entered into a stipulated settlement on September 1, 1983, which included the following terms: (1) The purchasers from FoodSource owned the containers subject to a security interest of Budd in each container equal to a pro rata portion of the amount owed Budd by FoodSource (approximately $18,000 per container); (2) Budd must release this security interest in any container upon payment of such amount by the owner; and (3) Budd would lease or otherwise operate all containers upon which there remained an amount owing, and a portion179 of container earnings would be used to repay such amount. Budd maintained records showing when release of each container occurred, and those records, and not FoodSource records or transfer documents, may be relied on in determining when each petitioner's container was actually delivered to FoodSource or to someone else on behalf of a petitioner. 4Although FoodSource operated most of the containers actually in service during 1981 and 1982, FoodSource experienced shortages of chassis, diesel generators, and operational nitrogen tanks during this period. Operations further suffered from an inadequate accounting system and insufficient qualified personnel. Due to the dimensions of the container box, FoodSource containers were not suitable for land transportation in certain foreign countries, and due in part to certain newspaper articles, 180 the containers acquired a negative image in the transportation industry. Because of these factors, the containers operated by FoodSource were idle 30 to 40 percent of 1981 and 1982. Moreover, leases to steamship companies for use as standard refrigerated containers (i.e., without controlled atmosphere) constituted the only substantial use of the containers during this period. Only infrequently was FoodSource able to lease containers for use in controlled atmosphere transportation. 5 Finally, several of the steamship companies experienced functional problems with the FoodSource containers, which further contributed to their image problem. Rental rates in the leases with the steamship companies typically were $15 to $22 per day, 181 which were normal rates for standard refrigerated containers. The leases provided that the lessees were liable for loss of the containers and typically stated: "The replacement value of containers * * shall be U.S. $260,000.00 per container; but not to exceed $29,500.00 repair cost." The containers retained by Budd remained idle until the settlement date. After September 1, 1983, some of the container owners paid Budd the balance due and thereby gained possession of their containers. The vast majority, however, made no payment to Budd and allowed Budd to operate the containers. Budd leased the containers to steamship companies for use as standard (not controlled atmosphere) refrigerated containers at rates similar to those charged by FoodSource in the leases with steamship companies. FoodSource sent container owners periodic statements purporting to show revenues earned by and expenses associated with the containers that it operated. With respect to containers operated through CATCO leases, the statements reported lease payments, which in certain cases were less than the amounts provided for in the leases, and deducted insurance of $75 per month, maintenance of $340 per month, 182 and the applicable debt service to arrive at payments purportedly made to the owners during the period. Beginning at least as early as 1983, however, FoodSource adjusted either the lease payment or the debt service figures so that purported revenues exactly equaled purported expenses. With respect to the containers retained by Budd, the statements generated by FoodSource falsely reported revenues and expenses as if the containers were in operation, notwithstanding that Budd had not yet released the containers to FoodSource. During this period of idle storage, the quarterly statements contained explanations such as the following: "FoodSource Inc. rented your container * * and will continue to do so until it first enters revenue service with an independent third-party user"; "The above quarterly figure represents the use of your container by FoodSource Inc."; and "The above revenues and/or expenses were allocated to you by FoodSource on account of your container while stored on the manufacturer's premises." In certain other instances, the statements similarly reported revenues with respect to containers that were not actually producing revenue. According to Dixon, these allocations, 183 which reduced the note balances owed FoodSource, were made where FoodSource contributed to the failure of the container to earn revenue. Although the periodic statements reported $340 per month maintenance expenses (per container) paid to Container Maintenance Company, Container Maintenance Company was never organized. Maintenance functions actually performed, if any, were performed by FoodSource. Through the time of trial in 1985, the only commercially successful application of controlled atmosphere technology was the stationery storage of apples and pears. This process used nonportable devices to generate inert gases and hence was not feasible for applications in transit. As of the years in issue, it was not reasonably likely that the Nitrol containers sold by FoodSource would generate earnings significantly higher than those of standard (without controlled atmosphere) refrigerated containers. During those years, the fair market value of a NitrolContainer was between $52,000 and $60,000. "Refinancing"On December 21, 1983, after participating in the trial of Sutton v. Commissioner,84 T.C. 210">84 T.C. 210 (1985), affd. per curiam 788 F.2d 695">788 F.2d 695 (11th Cir. 1986),184 Dixon sent the following letter to container owners that he considered "delinquent" on their note payments: Last week I participated in a U.S. Tax Court trial in Florida, and witnessed first hand the government's inability to poke any holes in the valuation of NITROL trailers that were sold in 1977 for $275,000 each, as that valuation applied to the owners involved who considered their promissory notes to be true full-recourse obligations and made payments on themaccordingly.We expect to obtain a similar result with your container valuation in Tax Court, provided that you also treat your note to FoodSource as a true obligation and keep it current. Please, therefore, send in the * * * [dollar amount] by December 31st that is necessary to show that your promissory note was paid up and current as of the close of the 1983 tax year. I would hate to see us lose a container valuation argument over a small point like this. On May 30, 1984, Dixon sent a container owner a letter, which stated in part: If you pay additional money into FoodSource * * , it should do two things: 1) Make it almost impossible for the IRS, in front of the Tax Court judge, to maintain185 that the tax basis of your FoodSource container for the year in which you purchased it is substantially less than its $260,000 value (for a whole container). 2) Provide extra money to be used by FoodSource * * * to pay for the work that has to be done between now and the Tax Court case, which should be in about two years, in order to defeat the IRS in their attempt to intimidate container buyers with false statements, improper threats, and totally unjustified harassment. In 1983 Dixon sent a number of container owners a letter that stated in part: You previously entered into a Purchase and Security Agreement with FoodSource * * * to purchase a patented container. Since the date of entering into that agreement, the Internal Revenue Service issued Revenue Ruling 82-224 on December 27, 1982, concerning a food storage container purchase. We have analyzed that ruling in conjunction with legal counsel. As a result, we are suggesting a course of action which we believe will strengthen your position in the face of the Revenue Ruling with respect to your claim of a tax basis of * * * [$260,000 times the percentage owned] for your container interest. Towards that end, 186 for your review and signature, we are enclosing a secured promissory note which will supersede that previously signed by you and delivered as part of the consideration for the purchase of your FoodSource container. We are proposing that the enclosed note merely be substituted for the previously executed one, as exhibit B to your previously signed Purchase and Security Agreement. * * By signing and returning this letter and the enclosed secured promissory note as indicated immediately above, you are acknowledging that there has been fair and adequate consideration for the reexecution of the promissory note. This consideration consists of an overall reduction of your total obligations to FoodSource, a reduction in the monthly payments for the first twelve years and a cancellation of all amounts due under the note, in exchange for your agreement to assume this new liability. The accompanying note stated that FoodSource could demand payment of the entire unpaid balance (principal and interest) if the owner failed to pay any monthly installment within 6 months of its due date. FoodSource could not assign the note without prior written consent of the owner. FoodSource filed187 a bankruptcy petition in 1984. In or about August 1985, FoodSource's trustee in bankruptcy sent a letter to container owners in default under the substitute notes, which declared the entire balances of the notes due and payable. Investor ActivitiesFew, if any, of the container investors other than the petitioners specifically discussed below conducted independent inquiries into the reasonableness of the projections used by FoodSource in its offering materials; the reasonableness of the purchase price; the feasibility of operating a fractional interest in the container; or the commercial viability of the FoodSource program. Few, if any, had experience in the trucking, shipping, or produce distribution industry, or other relevant business experience or consulted with anyone who had such experience. Few, if any, obtained appraisals; inspected a container; or entered into any separate agreements or engaged in any activity to ensure that the container was completely manufactured, paid for, delivered, and placed in operation. 6188 HillendahlPetitioner Wesley H. Hillendahl (Hillendahl) was a consulting economist living in Hawaii when he first learned of the FoodSource Nitrol containers. He was Chief Economist at the Bank of Hawaii from 1966 through 1981 and possessed substantial knowledge of the economy and agriculture of Hawaii. Due to the remoteness of the State, Hillendahl believed that Havaiian agricultural products, particularly pineapple and papays, were particularly well-suited for shipment in Nitrol containers. He decided to invest in the containers after discounting the earnings stream that he believed the containers would generate in such usage. Hillendahl and co-petitioner Marilyn G. Hillendahl (the Hillendahls) purchased interests, varying from 25 percent to 80 percent, in three Nitrol containers through Purchase and Security Agreements dated December 8, 1980, June 15, 1981, and December 20, 1981. The Hillendahls signed (1) a nonrecourse note, (2) a recourse note allowing deferral of out-of-pocket payments during FoodSource's operation of the container, and (3) a recourse note providing that FoodSource could demand the balance due after sale of the container, in connection with the189 purchase of the three interests, respectively. On June 20, 1981, the Hillendahls substituted a recourse note for the nonrecourse note used in connection with the December 8, 1980, purchase of the initial container interest. The recourse note had a principal balance equal to that of the nonrecourse note for which it substituted, but was virtually identical in form to the notes used in connection with the fourth offering by FoodSource. They signed the substitute note because Hillendahl believed, after a conversation with his tax advisor, that their basis for depreciation and investment tax credit purposes otherwise would be limited to their cash down payment. The Hillendahls entered into a lease with CATCO for the first container interest purchased. As was their option under the lease, they canceled the lease on August 1, 1981. The first two containers in which the Hillendahls purchased an interest were operated by FoodSource and were placed in service in 1981 and 1982, respectively. The third container was not; it was retained by Budd in connection with the dispute with FoodSource and remained in Budd's possession as of the time of trial. After the Hillendahls purchased190 their interests in the containers, FoodSource engaged Hillendahl to research the market for Nitrol containers. His activities included writing numerous letters seeking both data and opportunities to employ the containers, particularly in shipping among Pacific Ocean nations. ToddPetitioner Richard J. Todd (Todd) was president of three subsidiaries of Santa Fe International involved in various aspects of the transportation industry. Prior to purchasing any Nitrol containers, Todd conferred with several supermarket executives who were enthusiastic about the containers. Todd and co-petitioner Denese W. Todd (the Todds) purchased entire interests in two containers through Purchase and Security Agreements dated December 8, 1981, and a third through an agreement dated October 14, 1982. The terms with respect to each purchase were as prescribed in the seventh and eighth offering memoranda. The Todds subsequently executed three of the notes sent by Dixon in 1983 (with the cover letter referencing Rev. Rul. 82-224) in substitution of the notes initially executed in connection with the purchases. Each of the containers purchased by the Todds was involved in the191 dispute with Budd and was retained by Budd until after settlement of that dispute. Todd learned of Budd's retention of the containers and questioned FoodSource repeatedly concerning their release. With respect to the first two containers purchased by the Todds, the periodic statements from FoodSource reported 1982 revenues of approximately $13,600 per container, an amount almost sufficient to cover debt service reported for the year. On November 29, 1983, the Todds paid Budd approximately $49,200 for release of their three containers. On December 19, 1983, the Todds contracted for FEX Leasing Corporation (FEX) to manage their containers. The Todds' containers were not placed in service during the years in issue in these cases. Activities engaged in by Todd subsequent to those years, therefore, have no bearing on our decision in these cases. HenricksWhen petitioner James W. Henricks (Henricks) learned of the Nitrol containers offered by FoodSource in 1981, he was a retired commercial airline pilot. Henricks asked persons involved in various aspects of the food industry about the commercial viability of the containers. These persons told Henricks that the Nitrol process192 could be profitable, if the container performed as represented in the offering materials. Henricks and co-petitioner Shirley Henricks (the Henricks) executed a Purchase and Security Agreement for an entire container on May 30, 1981. The payment terms were those prescribed in the fourth FoodSource offering memorandum. On January 1, 1983, the Henricks executed the substitute note sent by Dixon. Although in 1981 FoodSource took delivery of and placed in service the Henricks' container, Henricks was unable to determine the location or use of the container. Aware of the operational problems facing FoodSource and concerned that their container might be among those idled due to insufficient support equipment (chassis, etc.), Henricks persistently questioned Dixon and other FoodSource employees, both orally and in writing. Henricks received inaccurate and evasive answers from FoodSource through 1982. During this period, however, the periodic statements from FoodSource reported revenues of approximately $14,000 earned by the Henricks' container. On August 20, 1982, the Henricks paid $28,700 for a chassis, a diesel generator, and a nitrogen tank to be used with their container. They193 subsequently leased the support equipment to FoodSource for such use for $400 per month. Sometime in 1983 Henricks was involved in founding FEX as a vehicle for exploitation of the Nitrol containers after the impending demise of FoodSource and arranged for FEX to manage the Henricks' container. In 1985, he joined a venture to develop a nitrogen generator based on research by Dr. George L. Staby, president of Perishables Research Organization and highly respected in post-harvest technology. At that time, Henricks believed that the Nitrol process was unnecessary for virtually all domestic shipments and that the nitrogen generator was essential for international transportation under controlled atmosphere. OPINION Each of the petitioners purchased an interest in a Nitrol controlled atmosphere container from FoodSource and claimed depreciation and investment tax credits on their respective Federal income tax returns reflecting the $260,000 price per container charged by FoodSource.These petitioners were chosen as test cases to resolve issues involving the container investment with respect to numerous other petitioners. As to each issue, petitioners must prove that respondent's determination194 is incorrect. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rockwell v. Commissioner,512 F.2d 882">512 F.2d 882 (9th Cir. 1975), affg. a Memorandum Opinion of this Court; Rule 142(a), Tax Court Rules of Practice and Procedure. To the extent that expenses other than depreciation are in issue, petitioners have not established actual payments and have failed to satisfy their burden of proof. To establish their entitlement to investment tax credits and depreciation deductions, petitioners must establish that the property was placed in service during the taxable year, that the taxpayer had a profit objective in acquiring and holding the property, and that the taxpayer had a particular basis in the property for tax purposes. When Containers Held by Budd Were Placed in ServicePetitioners claim that the containers retained by Budd in connection with the dispute with FoodSource were subject to depreciation deductions and investment tax credit in the year that FoodSource transferred title to the container purchasers (i.e., in 1981 or 1982), notwithstanding that these containers remained in idle storage with Budd until at least September 1, 1983. Depreciation and195 the investment credit are allowed in the year in which the qualifying property is placed in service by the taxpayer. Sections 38(a), 46(a)(1), 46(a)(2), 46(c)(1); sections 1.46-3(a)(1), 1.167(a)-10(b), 1.167(a)-11(e)(1)(i), Income Tax Regs. Property is placed in service when it is "placed in a condition or state of readiness and availability for a specifically assigned function, whether in a trade or business, in the production of income, in a tax-exempt activity, or in a personal activity." Sections 1.46-3(d)(1)(ii) and 1.167(a)-11(e)(1)(i), Income Tax Regs. See also Piggly Wiggly Southern, Inc. v. Commissioner,84 T.C. 739">84 T.C. 739, 745-748 (1985), on appeal (11th Cir., Dec. 23, 1985). In support of their argument that the containers were placed in service in the years claimed on their returns, petitioners rely upon Sears Oil Co. v. Commissioner,359 F.2d 191">359 F.2d 191, 198 (2d Cir. 1966), revg. on this issue a Memorandum Opinion of this Court, and SMC Corp. v. United States, an unreported case ( E.D. Tenn. 1980, 46 AFTR2d 80-5827, 80-2 USTC par. 9642), affd. per curiam 675 F.2d 113">675 F.2d 113 (6th Cir. 1982). In each of those cases operational196 assets in the taxpayers' possession were found to be placed in service, even though circumstances beyond the taxpayers' control precluded their actually using the assets until the following year. See also Schrader v. Commissioner,582 F.2d 1374">582 F.2d 1374 (6th Cir. 1978), affg. a Memorandum Opinion of this Court. As the court stated in Sears Oil Co.: "[D]epreciation may be taken when depreciable property is available for use 'should the occasion arise,' even if the property is not in fact in use." 359 F.2d at 198. Similarly, in Waddell v. Commissioner,86 T.C. 848">86 T.C. 848, 896-898 (1986), we concluded that property held for lease was placed in service in the year that the taxpayers "had the right to direct delivery of the * * * [property] (whether to themselves, to their distributors, or to their ultimate users)." Petitioners seize upon this language in Waddell and argue that the container owners here had the right to control the containers when they purchased them from FoodSource. According to petitioners, at that time they were the legal owners of the containers, free of any security interest of Budd, under the California Commercial Code. 197 Petitioners thus construe Waddell as implying that the taxpayer's acquiring mere title to the property is sufficient for the property to be placed in service. Petitioners have taken our statement in Waddell out of context and, in focusing solely upon legal title, attempt to exalt form over substance. The taxpayers in Waddell possessed the power as well as the right to direct delivery of the property (and actually exercised this power in the year in issue). Thus the property in Waddell was "placed in a condition or state of readiness andavailability."Sections 1.46-3(d)(1)(ii) and 1.167(a)-11(e)(1)(i), Income Tax Regs. (Emphasis supplied.) In the present case, by contrast, Budd's retention of the containers precluded petitioners from directing delivery of or otherwise exercising control over the containers before September 1, 1983. While the containers were in Budd's possession, petitioners couldnot hold them out for lease, to FoodSource or any other party. Whether petitioners had clear legal title to the containers and whether Budd's retention of them was unjustified are simply irrelevant to the issue. The present case is thus indistinguishable198 from Cooper v. Commissioner,542 F.2d 599">542 F.2d 599 (2d Cir. 1976), affg. a Memorandum Opinion of this Court. In Cooper,undelivered property was found not placed in service in the year for which delivery initially was contracted, even though the taxpayer paid a substantial portion of the purchase price. Neither we nor the Court of Appeals discussed the legal rights of the taxpayer against the seller or whether the seller's refusal to tender delivery was wrongful. Petitioners attempt to distinguish Cooper by arguing that in Cooper the property was never delivered. The crux of Cooper, however, was that delivery was not made, and hence the property was not availableforuse, by the end of the years in issue. See 542 F.2d at 601. Indeed, it is quite possible that the taxpayer in Cooper received the property after the date of trial. Arguing that the containers were available for use by petitioners "should the occasion arise," petitioners imply that Budd would have allowed them to take possession in the years of purchase. This implication is not supported by any evidence in the record and is negated by the unambiguous and199 uncontradicted testimony of Carl H. Wheeler, the Budd executive in charge of the FoodSource order. Moreover, it is inconsistent with FoodSource's claims in the lawsuit against Budd. Our holding herein is supported by the reasoning of the Court in Sears Oil Co. v. Commissioner,supra, that depreciation deductions were proper with respect to the period between the taxpayer's receipt of the asset and its first use "to reflect the gradual deterioration of the completed asset that was taking place during this period." 359 F.2d at 198. See also Cooper v. Commissioner,542 F.2d at 601 (quoting Massey Motors, Inc. v. United States,364 U.S. 92">364 U.S. 92 (1960)). In the present case, risk of loss with respect to the containers remained with Budd until Budd tendered delivery to FoodSource. Similarly if, as petitioners argue, Budd's retention of the containers was wrongful, Budd presumably would be liable to petitioners for any decline in value of the containers during the period of retention. In addition, while the containers were stored by Budd, they were not in a condition or state of readiness for their "specifically assigned200 function." Sections 1.46-3(d)(1)(ii) and 1.167(a)-11(e)(1)(i), Income Tax Regs. The function of the containers was refrigerated controlled atmosphere transportation. There is no evidence that Budd made the piping and electrical connections necessary for operation of the refrigeration units before it began operating the containers in accordance with the 1983 settlement, and Budd never even possessed the oxygen analyzers necessary for controlled atmosphere operation. Petitioners argue that completion of the containers required minimal work and that the containers couldhavebeenused to haul nonperishable cargo when Budd completed manufacture. Petitioners' argument would be more persuasive if the containers were actually completed or so used. It is meritless here in the context of mere potential use. Tax consequences are determined on the basis of what happened in fact, not what might have happened. We thus conclude that the containers were placed in service when released by Budd, which, in the case of the containers involved in the dispute, was no earlier than September 1, 1983. For example, none of the container interests acquired by the Todds or certain201 other test case petitioners identified in our findings were placed in service during the years in issue, and they are not entitled to investment tax credits or depreciation in those years. We do not have in the record adequate evidence for determining carrybacks, if any, that they may claim from subsequent years. Budd's records, Exhibit DF, establish the earliest date on which a container was released and thus placed in service, and those records should be the source of determinations on a case-by-case basis. To the extent that petitioners claimed investment tax credits or depreciation prior to that time, in years in issue in these cases, the credits and deductions cannot be allowed. Profit ObjectiveTo qualify for depreciation and other expense deductions with respect to the containers, each petitioner must demonstrate that his or her container was used in a trade or business or was held for the production of income. Sections 162, 167, and 212.7 Under section 48(a)(1), the investment tax credit is allowable only for property for which depreciation (or amortization in lieu thereof) is allowable. Thus, petitioners' respective rights to the deductions and investment credit202 depend on their showing that the activity constituted a trade or business or was undertaken and carried on for the production of income. See, e.g., Beck v. Commissioner,85 T.C. 557">85 T.C. 557, 569 (1985). Essential to such a showing is a demonstration by each petitioner that he or she had "an actual and honest objective of making a profit." Beck v. Commissioner,supra;Estate of Baron v. Commissioner,83 T.C. 542">83 T.C. 542, 553 (1984), affd. 798 F.2d 65">798 F.2d 65 (2d Cir. 1986); Dreicer v. Commissioner,78 T.C. 642">78 T.C. 642, 646 (1982), affd. without opinion 702 F.2d 1205">702 F.2d 1205 (D.C. Cir 1983). A reasonable expectation of making a profit is not required; however, petitioners' objective of making a profit must be bona fide. Beck v. Commissioner,supra;Estate of Baron v. Commissioner,supra;Fox v. Commissioner,80 T.C. 972">80 T.C. 972, 1006 (1983), affd. without published opinion 742 F.2d 1441">742 F.2d 1441 (2d Cir. 1984), affd. sub nom. Barnard v. Commissioner,731 F.2d 230">731 F.2d 230 (4th Cir. 1984),203 affd. without published opinion sub nom. Zemel v. Commissioner,734 F.2d 9">734 F.2d 9 (3d Cir. 1984), affd. without published opinion sub nom. Rosenblatt v. Commissioner,734 F.2d 7">734 F.2d 7 (3d Cir. 1984), affd. without published opinion sub nom. Krasta v. Commissioner,734 F.2d 6">734 F.2d 6 (3d Cir. 1984), affd. without published opinion sub nom. Leffel v. Commissioner,734 F.2d 6">734 F.2d 6 (3d Cir. 1984), affd. without published opinion sub nom. Hook v. Commissioner,734 F.2d 5">734 F.2d 5 (3d Cir. 1984). In this context, "profit" means economic profit, independent of tax savings. Beck v. Commissioner,supra, and cases cited therein. If the activity is not engaged in for profit, the deduction of petitioners' expenses relating to the activity is allowable only to the extent provided in section 183(b). Whether petitioners possessed the requisite profit motive is a question of fact to be determined on the basis of all the facts and circumstances.8Beck v. Commissioner,85 T.C. at 570; Estate of Baron v. Commissioner,supra. No one factor is determinative; however, greater weight will204 be given to objective facts than to petitioners' statements of intent. Beck v. Commissioner,supra;section 1.183-2, Income Tax Regs.On the record it appears that most of the FoodSource investors did very little that would convince us that205 they had an actual and honest profit objective under the tests enunciated in the above cases and specifically applied to comparable property in Sutton v. Commissioner,84 T.C. 210">84 T.C. 210, 222-226 (1985), affd. per curiam 788 F.2d 695">788 F.2d 695 (11th Cir. 1986). In view of their special backgrounds and specific activities in relation to the containers, however, we conclude that petitioners Henricks and Hillendahl have demonstrated that they possessed an actual and honest profit objective with respect to their container interests. Both petitioners consulted parties knowledgeable in the food industry prior to purchasing their respective interests. Henricks repeatedly questioned FoodSource regarding the use of and accounting for his container, and he expended substantial effort and money in attempting to profitably employ his containers. We do not think that such expenditures were undertaken merely to secure the large tax benefits claimed on their returns, as was the case with the taxpayers in Sutton v. Commissioner,84 T.C. at 225-226. We also conclude that execution of the substitute notes in 1983, which subjected petitioners to greater personal liability206 than the original notes, is not fatal to Henrick's claim of profit motive. Unlike the substitute note executed by Hillendahl in 1981, the 1983 note required lower initial payments than its predecessors. Moreover, even if execution of the substitute notes was motivated solely by tax considerations, as Hillendahl admitted was true with respect to his substitution, in the context of Henrick's entire course of action we conclude that his desire to maximize tax benefits was ancillary to his desire for economic profit. See Waddell v. Commissioner,86 T.C. 848">86 T.C. 848, 894 (1986). Although Hillendahl presents a closer case, we conclude that he too was motivated by economic profit apart from tax benefits. Like Henricks, Hillendahl did not blindly rely upon the attractive economic projections in the offering material; he undertook his own discounted cash flow analysis. Through his knowledge of the Hawaiian economy and agriculture, Hillendahl discovered what he believed was a nuique opportunity profitably to employ the containers. He similarly continued attempting to open new markets for the containers after their acquisition. In this case, as contrasted to many of the so-called207 "tax shelter" cases in which we have determined that investors did not have an actual and honest profit objective, the subject property was actually produced and the plan of operation had some commercial potential. As discussed below, the terms agreed to by the parties reflected "financial fantasies" (see Saviano v. Commissioner,765 F.2d 643">765 F.2d 643, 654 (7th Cir. 1985), affg. 80 T.C. 955">80 T.C. 955 (1983)), and were designed to engender tax benefits to which they were not entitled. As we said in Beck v. Commissioner,supra:it is apparent that bona fide business enterprises * * may find a sideline of marketing tax benefits to provide a useful means of raising venture capital. To some extent tax incentives, such as accelerated depreciation and investment tax credit, are designed to stimulate the formation of venture capital. Such incentives are not intended, however, to create a new economy consisting of paper transactions having no relationship to the real value of goods and services. Thus, the mere presence of a valid business enterprise at some levels of a transaction does not automatically entitle passive investors distant from day-to-day208 operations of the enterprise to the associated tax benefits. * * [85 T.C. at 579-580.] At the same time, it is thus not surprising that some active investors, who have demonstrated an intention to achieve a profit from the underlying activity, will be entitled to the deductions and credits claimed. The manufacture of the FoodSource containers and their use in commerce were the types of activities that tax incentives were intended to encourage. Under these circumstances, some taxpayers are entitled to realize those incentives. See, e.g., Leahy v. Commissioner, 87 T.C. (July 3, 1986) (at 25 of slip opinion), in which we said: As important, we should not disregard the existence of an asset for which Congress intended tax advantages merely because the parties attempted to maximize the advantage of those benefits for one of the parties to a transaction. Respondent should recognize that in instances where there are no shams and depreciable assets exist, some person or entity is entitled to the intended tax advantages. 17 See Estate of Thomas v. Commissioner,84 T.C. 412">84 T.C. 412, 433-440 (1985).* * * This does not mean, of course, that209 we cannot separate the real and the unreal aspects of the transactions to adjust the tax benefits to reality and deter abuse. See Tolwinsky v. Commissioner,86 T.C. 1009">86 T.C. 1009, 1062 (1986). In the context of these cases, the reality is that for over 15 years Dixon worked on an invention without commercial success. Only when he redirected his activities at the tax shelter market did he generate substantial revenues. Although it is not surprising that the FoodSource program was a commercial failure, it was not so improbable as to negate any profit objective in any taxpayer. With respect to Henricks and Hillendahl, we conclude that they have satisfied the initial inquiry into profit objective, and that we must, therefore, determine their adjusted basis for purposes of investment tax credit and depreciation deductions. Petitioners' Basis in the ContainersIn this case, the primary question concerning basis is whether the notes given to FoodSource by petitioners constituted valid indebtedness. Although basis for purposes of depreciation210 and the investment tax credit normally includes valid purchase money debt, a liability is not includable in basis unless its repayment is reasonably certain. In this context, as in others, the substance of an alleged debt, and not its form, determines the tax consequences, and illusory debt will be disregarded. See Waddell v. Commissioner,86 T.C. 848">86 T.C. 848, 898-903 (1986), and cases cited therein.9With the exception of the initial FoodSource offerings, notes used by FoodSource were labeled "recourse" and purported to subject the debtor to some form of personal liability, i.e., liability for repayment without regard to the value of or earnings generated by the containers. On the entire record, however, we are not convinced that the parties intended that the notes in fact be recourse or that, in any event, repayment of the notes was likely. Comparing the face value of the notes with the revenues211 reasonably to be expected from operations of the containers (as contrasted to the unrealistic projections in the FoodSource promotional materials), we conclude that it was highly unlikely that the notes would be repaid from funds generated by the containers. As appears more fully below in our discussion of fair market value, the parties could not have realistically believed that the containers could be sold to make substantial payments on the notes. We are unpersuaded that petitioners intended to pay the notes out of separate assets, as is required to find that they had "personal liability," or that FoodSource intended to enforce the notes according to their terms. The overwhelming weight of the evidence is that the terms of purchase of a container were designed only to maximize purported tax benefits associated with owning a container. Dixon's communications to the investors and his testimony at trial, as well as the testimony of Todd, Henricks, and Hillendahl, are substantial support for this generalization. Other testimony is to the same effect. For example, Gerri Habermeyer testified that in June 1980, as proprietor of Executive Financial Services, she became a sales representative212 for FoodSource and that, over the next 3 years, she sold in excess of 1,400 interests in FoodSource containers. When she was asked about the terms of the note relating to her purchase of a container, she testified as follows: A I signed a recourse note. Q A recourse note in 1980? A Well, I requested a recourse note. Q And when did you request that? A At the time I made my purchase. * * * Q And you say you requested a recourse note; was the note which you offered to your investors in 1980, or the note which FoodSource offered to its investors in 1980, a nonrecourse note? A Yes, it was. Q And when did you request that a recourse note be given to you? A I don't recall the date, but at the time I made my purchase, I signed the package; it contained a nonrecourse note. And I don't recall whether I signed the nonrecourse and sent it in and asked for a recourse, or whether I did not sign it and asked that a recourse note be sent to me right away. * * * Q Aside from the credits which you have received from CATCO, have you made any payments on this note? A No, because it's paying for itself. Q The note pays for itself? A The lease payments. Q From CATCO pay for213 itself? A Yes. Q And why did you insist upon a recourse note for 1980? A Well, I felt that I could handle the risk of a recourse note, plus the fact that it did have better tax advantages. Q Better tax advantages than a nonrecourse note? A Yes. Q Did you advise your clients, who purchased interest from you in 1980, to sign a recourse note as opposed to a non-recourse note? A No, I did not. Q Did you distinguish in any way the income tax benefits that are available to them from those which are represented in the prospectus? A I don't recall that anyone was interested in a recourse note, and the subject was never brought up. I think the only reason that I had a recourse note is that I personally talked to Mr. Dixon and asked him if I could have a recourse note. I don't think it was a form that was available. I don't know but I just felt that -- Habermeyer went on to state that on the tax returns she prepared for her clients who purchased container interests, investment tax credits and depreciation were claimed on the basis of a $260,000 purchase price for each container, regardless of whether the notes were recourse or nonrecourse in 1980. She testified: 214 Q My question is, when you advised your clients whether or not to invest in a FoodSource container in 1980, did you attempt to distinguish for them the tax benefits available, using a recourse note, versus a nonrecourse note? A I never even mentioned a recourse note to them, because it was not available to them. So, there was no point in bringing it up. The only reasonable inference from this testimony by a person actively involved in the FoodSource sales program and purporting to be sophisticated in tax matters was that she knew that her tax position would be improved if she signed a note recourse in form, although her transaction was otherwise apparently identical to those of her numerous investor-clients. It defies reason to believe that under these circumstances petitioners had a nontax motive for choosing a recourse note over a nonrecourse note, or that the notes should be respected because they were recourse in form. Shortly after the 1980 transactions, all of the FoodSource offerings changed the terms to require "recourse notes." There is neither evidence nor reason to believe that the value of a container changed during this time or that FoodSource intended to increase215 the purchase price. If the recourse notes represented true indebtedness, however, their use would represent a substantial increase in the value of the consideration required to purchase a container. Indeed, the same can be said about the various forms of recourse notes used. Each successive version purported to subject the debtor to successively greater personal liability, particularly considering the time value of money and the ability of the debtor to defer out-of-pocket payments for 20 years under the initial recourse notes. The changes in the note terms thus appear to be an attempt to stay "one step ahead" of the Internal Revenue Service and to secure tax benefits at the expense of minimum personal liability. Any doubts in this regard are dispelled by the various letters sent by Dixon, including the proposal of the substitute note in 1983 after the Internal Revenue Service issued Rev. Rul. 82-224, 2 C.B. 5">1982-2 C.B. 5. Regardless of the purpose of the purported recourse notes and the various forms that they took, the only reliable inference from the record is that there was no actual intention by any party to respect the terms of the notes. In the periodic statements216 to container owners, FoodSource often assigned revenues to containers that were not even in operation. It thereby reduced the balances "owed" on the notes, although the owners made no payment on the notes, through container earnings or otherwise. In the face of such practices, statements such as those made by Todd and Habermeyer that they made periodic payments on and were "current" with respect to all substituted notes any by Henricks that he always intended to repay his debts possess little significance. 10 We seriously doubt, and in any event the record does not suggest, that the recipients of the fictitious credits would object to FoodSource's reducing the balances of their notes. Although the record indicates that some purchasers made cash payments on their notes beginning in 1983, it also indicates that virtually none made all payments "required" under the notes. Yet there exists no217 evidence that FoodSource ever attempted to enforce any of the notes according to their terms, even the 1983 substitute notes, which provided that FoodSource could declare the entire balances payable immediately if the debtor was in default. Indeed, the very structure of the other "recourse" notes made it unlikely that FoodSource would exploit the personal liability of the debtors. The initial recourse notes allowed deferral of payment for 20 years, and the subsequent notes required FoodSource first to sell the container. We wonder how, under the latter requirement, FoodSource would have proceeded against a delinquent owner of a partial interest in a container if the other owners were not in default. The only evidence in the record of FoodSource even requesting payments on the notes are the letters from Dixon purporting to help the debtor secure claimed tax benefits. In light of this objective openly declared by Dixon, 11 we conclude that payments made significantly after the years in issue are not persuasive evidence of a valid obligation as of those years. Cf. Sutton v. Commissioner,84 T.C. 210">84 T.C. 210 (1985), affd. per curiam 788 F.2d 695">788 F.2d 695 (11th Cir. 1986).218 Letters sent by the trustee of FoodSource's bankruptcy estate are similarly entitled to little weight, especially in view of the potential for cross-claims and defenses by the investors. Both the last note offered in connection with container sales and the 1983 substitute note, by their terms the "most" recourse of the notes used, precluded FoodSource from assignment without the debtor's written consent. FoodSource thus attempted to ensure that another party could not enforce what on its face appeared to be a legal obligation, although FoodSource had not treated it as such. We thus conclude that payment on none of the notes was sufficiently certain as of the years in issue to219 justify their treatment as valid debt for tax purposes. Cf. Coleman v. Commissioner, 87 T.C. (July 23, 1986); Law v. Commissioner,86 T.C. 1065">86 T.C. 1065 (1986); Tolwinsky v. Commissioner,86 T.C. 1009">86 T.C. 1009 (1986). 12Petitioners contend that, if we hold that the notes are not includable in basis, they are entitled to deductions when they make actual payments on the notes. According to petitioners, "[S]uch payments are more properly characterized as either management fees or as payments made pursuant to the Improvements in Production clause under the Purchase and Security Agreements." Nothing indicates, however, that petitioners were obligated to pay management fees to FoodSource and, as we conclude infra, the Improvements in Production clause possessed little or no value. Petitioners have not demonstrated that they acquired any assets possessing substantial value other than the containers. Compare Lemmen v. Commissioner,77 T.C. 1326">77 T.C. 1326, 1350-1351 (1981). Any payments on the notes during the years in issue therefore increase petitioners' bases in the220 containers, to the extent of their fair market value. See section 1.46-3(d)(4)(ii), Income Tax Regs. (allowing an increase in the investment tax credit in the year the taxpayer makes payment). Cf. Seligman v. Commissioner,84 T.C. 191">84 T.C. 191, 200-203 (1985), affd. 796 F.2d 116">796 F.2d 116 (5th Cir. 1986). On the record before us, it is likely that any cash payments in excess of fair market value of the containers are nondeductible payments for the anticipated substantial tax benefits projected in the offering memoranda. See Bryant v. Commissioner,790 F.2d 1463">790 F.2d 1463 (9th Cir. 1986), affg. a Memorandum Opinion of this Court; Rice's Toyota World v. Commissioner,81 T.C. 184">81 T.C. 184, 210 (1983), affd. in part and revd. in part 752 F.2d 89">752 F.2d 89 (4th Cir. 1985); Grodt & McKay Realty v. Commissioner,77 T.C. 1221">77 T.C. 1221, 1243 (1981). 13221 Petitioners argue that they are entitled to have the transaction respected and the notes included in basis because the FoodSource container had a value of $220,000, as testified to by Thomson, or somewhere near that. This valuation is based on the claim that the container is "unique" and "state-of-the-art technology." We are totally unpersuaded by these claims for a variety of reasons. Fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of all relevant facts. Cartwright v. United States,411 U.S. 546">411 U.S. 546, 551 (1973). Before examining the conclusions of the expert witnesses who testified and whose valuation reports were received in evidence, several general observations concerning the containers are appropriate. First, Dixon testified that the Nitrol container involved used a completely different technology and was much more valuable than the trailers sold by Nitrol Corporation, which were the subject of Sutton v. Commissioner,84 T.C. at 225-226. Dixon repeatedly attempted to minimize his involvement222 in Nitrol Corporation by saying, for example, that the corporation did not follow his design in making the trailers. Based upon Dixon's letter of December 21, 1983, and our findings of fact in Sutton, however, we think that Dixon's involvement therein was not so minimal. More importantly, the Oxytrol patents do not specify the precise means of maintaining a controlled atmosphere. The 477 patent used by Nitrol Corporation, which Dixon now disparages, was granted after the Oxytrol patents and provided for a specific means of maintaining controlled atmosphere. Indeed, statements in Dixon's application for the 477 patent and in the FoodSource offering materials implied that the 477 patent was at least as viable as, if not superior to, the unmixed nitrogen method of controlling atmosphere used by FoodSource. Second, various witnesses, including petitioners' experts, mentioned the Dormavac container marketed by Grumman Corporation (Grumman) as the only "competitor" to the Nitrol container. Grumman offered the Dormavac for sale for approximately $120,000, but as indicated in a report prepared by Dr. George L. Staby, witness for petitioners, Grumman made only two sales of the Dormavac223 before abandoning it after eight years of sales efforts. Although several witnesses testified that the Nitrol container was "superior" to the Dormavac, any attempts to extrapolate the value of the Nitrol container from the price charged for the Dormavac would be unreliable. Third, as is illustrated by the testimony regarding the Dormavac, petitioners' experts were unable to demonstrate the commercialviability of the Nitrol container. Petitioners called respected experts such as Robert McKee and Russell H. Hinds, who extolled the technical virtues of the container and the controlled atmosphere process that it employed. Petitioners' experts did not demonstrate, however, that it was reasonably likely that the containers would generate earnings remotely justifying the $260,000 asserted value. The record, including the experience of Senter and FoodSource as well as the frank testimony of Henricks and Todd, indicates that controlled atmosphere is not necessary, and certainly not cost effective, for use in domestic transport. Petitioners contend that the poor earnings record of the FoodSource containers, i.e., no greater revenues than conventional refrigerated containers, was224 caused by unforeseen operational problems at FoodSource. Yet after Todd and Henricks began operating their containers through FEX, they too were unable to command the higher revenues initially forecast by FoodSource and necessary to satisfy the notes used in purchasing the containers. Like Todd and Henricks, we must conclude that the only prospect for "premium" earnings lay in international shipments. Yet according to both Henrick's and Todd's testimony, successful use of the process internationally required development of a nitrogen generator. Nothing in the record indicates that such development was commercially feasible as of the years in issue. Fourth, the record indicates that it was not economically feasible to use the Nitrol container as a storage facility. The Nitrol container as sold by FoodSource did not include basic support equipment virtually essential for operation with or without controlled atmosphere. In light of all of these factors, as of the years in issue, it was unlikely that the containers would generate earnings significantly exceeding those for standard containers. Needless to say, in cases such as this, the price established by the seller has little, 225 if any, probative value. When asked how he arrived at the price, Dixon testified: A I took a look at what the technology could do from my experience in the fresh fruit and vegetable business itself, and, which was quite extensive in international shipping of fresh fruits and vegetables. Knowing what difference there was in market price of the product if it arrived in good condition from California to Paris or California to Hong Kong versus what it would bring if it did not arrive in good condition, knowing what it would cost to fly these products versus sending them by ship, I figured that these boxes could make a certain number of dollars per month for any owner. I capitalized a portion of those earnings in front, like you do with any patented, high technology equipment, and arrived at a -- what I felt was a reasonable sale price of approximately $500,000.00. Q And the -- the price ultimately charged to the container purchaser was what amount? A $260,000.00. Q And why did you sell for less than the $500,000.00? A I didn't want to meet that much price resistance in the market. I thought -- even though I felt it was my only chance to -- to capitalize on the patented technology,226 a -- I thought the additional profits probably at that point belonged to the owners. For the reasons mentioned above, however, we have little confidence in Dixon's assumptions as to the potential earnings of a single container, and there is no evidence of a market in fact for 1,000 containers in the use assumed by Dixon. Senter had been unsuccessful in its attempts to sell hardware for 40 or 50 units, and Nitrol Corporation had anticipated only 100 trailers. FoodSource originally ordered 100 containers. Its order was later increased to 1,000, apparently in response to sales of investments and without regard to actual use for the containers. Cf. Skripak v. Commissioner,84 T.C. 285">84 T.C. 285, 325 (1985). Looking at the situation without the benefit of hindsight, which in fairness we should do, we are still left with no reason to believe the predictions made by Dixon, which were contradicted by his prior experience with the patent, the experience of Nitrol Corporation, and the experience of Grumman. Thomson's report adds almost nothing to the valuation process to the extent that he purported to use a cost approach and a multiple. His report states: Townsend and227 Townsend, a well known patent attorney firm, conducted a survey of their clients which indicated that patented products could reasonably sell at prices five to ten times the cost to manufacture, depending on the degree of technological breakthrough, the desirability and acceptance of the product and the degree of monopoly on the technology. Some products, such as drugs, often sell at prices more than ten times the cost to manufacture them. Other patented products, such as an ammonia purification process, may sell at a price well below five times the cost to manufacture them. For example Xerox copiers initially sold at a price eleven times the cost to manufacture. This multiple decreased gradually as competitive brands were marketed. Today, certain Xerox copiers sell at prices approximately six to seven times the cost to manufacture even though the basic patents have expired. The multiple above the cost to manfacture indicated by the selling price of the FoodSource nitrol controlled atmosphere intermodal container is calculated below: $260,000 (Selling Price) / $31,000 (Cost to Manufacture) = 8.38 Although high, this multiple is within the range indicated by the Townsend and228 Townsend survey. Therefore considering that two containers sold for all cash and the aforementioned factors, it is our opinion that the fair market value of the patented container, according to the cost approach is $260,000. It is hard to imagine more circular reasoning. The weakness in this method was not improved when an attorney from Townsend and Townsend testified with respect to various legal aspects of the patent but offered no information or opinion as to the use of multiples in valuing patented products. There is no evidence as to how the mere process of patenting the product adds to value regardless of the use or income potential of the product. Townsend's assumptions ignore worthless patented products and those that can recover a multiple of their cost only after achieving a volume of sales sufficient to achieve economies of scale. In addition, when he determined cost, Thomson assumed that the total product was eligible for a patent multiple, whereas neither the containers themselves nor their design were patented; only the process used was patented. 14229 Thomson's "market" approach was based exclusively upon the asking price for the Dormavac, which he stated was $127,000. As previously indicated, we do not think that such price, which was never accepted in the market, is a reasonable basis for determining the value of the Nitrol container. Finally, Thomson's "income" approach utilized projected revenues that were unsupported and contradicted by the balance of the evidence in the record. Even if the containers on a few isolated occasions generated the revenues relied upon by Thomson, such levels were never sustained during the years in i ssue nor were they reasonably likely to occur consistently. Moreover, the record indicates that such premium revenues could conceivably be achieved only through international shipments, which the record indicates entailed both substantial shipping charges and the development of a nitrogen generator. Thomson's projections contained no provisions for these expenditures. Although his income approach purported to take account of expenses, and Thomson emphasized the importance of marketing and making a commercial success of the FoodSource containers, Thomson allowed nothing for marketing expenses. 230 15 Although his report was dated in 1982, it contained no reference to the actual problems of FoodSource encountered in 1981. Using exaggerated income assumptions of $2,500 per month per container in the first year, growing by a compound rate of 3 percent per year, Thomson computed a value of only $184,000 for the container, which was the equivalent of his market approach. In reaching the value of $220,000, he gave the greatest weight to the cost approach that, as indicated above, merely incorporated the sales price. At trial Thomson implied that the difference between the $260,000 charged by FoodSource and the $220,000 value that he determined for the container might be attributable to the value of the obligation of FoodSource to make improvements available to container owners without charge. While petitioners similarly argue on brief, there exists no reliable231 evidence in the record that this obligation possessed any value. For the above reasons, we find Thomson's appraisal unreasonable and not reflective of the value of the Nitrol container. Bruce E. Kann (Kann) was respondent's primary valuation expert at trial. Kann concluded that the value of a new Nitrol container was its replacement cost, which Kann determined to be $37,000. Kann based this figure on cost data that he received from Budd.Kann concluded that under the income approach to value, the value of the Nitrol container would be no greater than that of a standard refrigerated container, which was less than $37,000. On cross-examination, Kann acknowledged that a 50 percent profit margin in connection with the sale of the FoodSource container would be reasonable. Kann's determination of replacement cost appears reasonable, in light of the $31,000 manufacturing cost used by Thomson and the costs paid by FoodSource for the container box, the refrigeration unit, and the oxygen analyzer. Moreover, we have concluded that, as of the years in issue, the potential of the containers to generate earnings significantly exceeding those of standard containers was extremely speculative. 232 Respondent's other valuation expert, William P. Sablan, was an engineer employed by the Internal Revenue Service. Sablan inquired into the patents and the Dormavac container. He too concluded that he could not make a determination of value based on the income approach unless it was based on the revenues of a standard container. Thus calculations made under the income approach would approximate the cost or replacement value of a standard container, i.e., one that would rent at $22 per day of actual use. That rate was approximately 25 percent of the income assumed by Thomson. We are persuaded that the methods used by respondent's appraisers are much more reliable than those of petitioners', and that the actual fair market value is by far closer to respondent's valuation than petitioners'. Nonetheless we believe that the Nitrol container possessed some premium or speculative value reflecting the possibility (however remote) for premium revenues based on the FoodSource program -- at least at the time that the containers were sold to petitioners. Using our best judgment on the entire record, we conclude that the fair market value of the Nitrol container was not less than the highest233 cash down payment required, $52,000, but not more than $60,000 during the years in issue. Additions to TaxRespondent determined additions to tax under section 6659 with respect to most, if not all, of petitioners. In the years in issue, section 6659 provided in pertinent part: (a) Addition to the Tax. -- If -- (1) an individual, or (2) a closely held corporation or a personal service corporation, has an underpayment of the tax imposed by chapter 1 for the taxable year which is attributable to a valuation overstatement, then there shall be added to the tax an amount equal to the applicable percentage of the underpayment so attributable. (b) Applicable Percentage Defined. -- For purposes of subsection (a), the applicable percentage shall be determined under the following table: If the valuation claimed is theThe applicablefollowing percent of the correctpercentage is: valuation --150 percent or more but not more than 200 percent10More than 200 percent but not more than 250 percent20More than 250 percent30(c) Valuation Overstatement Defined. -- (1) In general. -- For purposes of this section, there is a valuation overstatement234 if the value of any property, or the adjusted basis of any property, claimed on any return is 150 percent or more of the amount determined to be the correct amount of such valuation or adjusted basis (as the case may be). * * * (d) Underpayment Must Be at Least $1,000. -- This section shall not apply if the underpayment for the taxable year attributable to valuation overstatements is less than $1,000. (e) Authority to Waive. -- The Secretary may waive all or any part of the addition to the tax provided by this section on a showing by the taxpayer that there was a reasonable basis for the valuation or adjusted basis claimed on the return and that such claim was made in good faith. Petitioners argue generally that respondent was unreasonable in refusing to waive the additions to tax in this case because petitioners had a reasonable basis for the amount claimed on their return, to wit, investment tax credits and deductions based on a sales price of $260,000 per container. The parties assume that the Commissioner's refusal to waive the addition to tax could be reviewed by the Court for abuse of discretion. No petitioner has shown that he or she relied on anything other than the235 FoodSource promotional materials in using $260,000, or a pro rata portion of that amount, as basis on a subject tax return, and we have discussed at length our reasons for concluding that the values and projected earnings in those materials have no basis in reality. Under these circumstances, we reject the argument that refusal to waive the additions to tax is an abuse of discretion. Certain of the petitioners, including the test case petitioners identified in our findings, will have their investment tax credits and depreciation deductions disallowed during the years in issue because the containers in which they invested were detained by Budd and not placed in service during the years in issue. Other petitioners may or may not have their deductions disallowed upon application of section 183 after further hearings. With respect to petitioners Henricks and Hillendahl, however, their respective claimed investment tax credits and depreciation deductions will be reduced in accordance with our finding that their adjusted basis for purposes of the investment tax credit must be reduced by the amounts of the notes and, to the extent represented by cash, limited to the maximum fair market236 value of the container interest. Once those adjustments to basis have been made in the individual cases, the additions to tax under section 6659(a), presumably in the amount of 30 percent under section 6659(b), will apply to the portion of the underpayment of each petitioner attributable to the difference between the adjusted basis claimed on the petitioner's return and the amount determined to be the correct adjusted basis. See section 6659(c)(1). Respondent further claims additional interest under section 6621(d). Once the amount of an underpayment to which section 6659 applies has been calculated, that amount will be subject to interest after December 31, 1984, at the rate of 120 percent of the normal rate applicable to deficiencies. Section 6621(d)(1), (2), and (3)(A)(i). 16237 On the present record, we have not determined all of the issues that may exist with respect to any petitioner, and therefore we do not express an opinion on whether section 6659 or section 6621(d) applies to any underpayments other than those resulting from reduction of basis for petitioners Henricks and Hillendahl. The parties have also made arguments concerning additions to tax under section 6661, but the evidence does not disclose the assertion of such addition with respect to any petitioner whose liability can otherwise be determined on the present record. We decline to discuss the application of a technical provision of the statutes in the abstract. Finally, various arguments have been raised by the parties in a series of briefs. Some were raised in reply to an adverse party's arguments in an earlier brief. We have considered all of the arguments but have not discussed in this opinion those that are unpersuasive, unnecessary to our decision, or not timely raised. Appropriate orders will be entered.APPENDIX A Additions to TaxDocketSec.Sec.Sec.No.YearDeficiency6651(a)6653(a)(1)6653(a)(2)Donal C. and Ruth H. Noonan16879-831979$22,916.00198028,694.00198112,016.00Martha Peterson31318-841981$ 4,037.00$ 201.851Laurence R. Clarke34490-841980$35,457.00$1,773.0019819,772.00489.002Paul O. Brohmer126-851978$ 5,848.45$ 292.4219795,221.22261.0619801,286.2264.3119816,292.00314.601William I. and Glenna F. Graham126-851983$20,748.00$1,620.57Jean A. Baumann6123-851982$ 2,202.00$246.60$ 126.153David K. and Peggy S. Hughes8339-851981$ 4,415.00$ 220.754Paul R. and Phyllis J. Douglass10859-851979$12,563.00$ 628.00198232,116.001,606.001Mearl W. and Verna J. Chapman12358-851977$ 9,310.00$ 465.50197810,995.00549.7519797,657.30382.87198011,785.07589.25198111,659.00582.951Edward and Joan Condiotti12358-851978$ 7,320.00$ 366.00197922,773.001,138.6519813,155.00157.751James M. and Betty J. Field13473-851978$ 8,154.00$ 407.7019798,214.44410.7219801,293.0064.6519815,294.00264.701198214,435.80721.791Glenn D. and Nancy R. Johnson13473-851981$ 5,183.00$ 259.155Virginia G. Keane15725-851978$ 2,265.00$ 113.2519815,941.00297.056Norbert A. and Virginia P. Hulsman18606-851978$ 3,633.32$ 181.6719798,313.76415.69198010,495.55524.78198164,060.863,203.041Wesley H. and Marilyn G. Hillendahl24858-851978$10,342.00$ 517.00197912,174.00609.00198144,648.00$7,262.802,303.007198212,015.00600.758198312,475.00623.759Robert and Loriel McKee35031-851978$ 7,624.00$ 381.0019812,302.00115.00119822,714.00136.001James W. and Shirley Henricks4957-861982$41,981.00Richard J. and Denese W. Todd8227-861979$ 9,925.00$ 496.00198011,881.00594.00198192,255.004,613.001019828,615.00431.0011238 Additions to TaxDocketSec.Sec.Sec.Residence WhenNo.Year6621(d)66596661Petition FiledDonal C. and Ruth H. Noonan16879-831979Laguna Niguel,1980California1981Martha Peterson31318-841981$1,211.10Novato,CaliforniaLaurence R. Clarke34490-841980Glendale,1981CaliforniaPaul O. Brohmer126-851978$1,754.54Los Altos,19791,566.37California1980385.8719811,887.60William I. and Glenna F. Graham126-851983$2,074.80Oklahoma City,OklahomaJean A. Baumann6123-851982$ 660.60San Diego,CaliforniaDavid K. and Peggy S. Hughes8339-851981$1,324.50Poway,CaliforniaPaul R. and Phyllis J. Douglass10859-8519791$3,769.00Fort Myers,198219,634.00FloridaMearl W. and Verna J. Chapman12358-8519771Chula Vista,19781$1,311.00California197912,297.1919801198113,187.20Edward and Joan Condiotti12358-8519781$2,196.00Orange,197916,831.90California19811946.50James M. and Betty J. Field13473-8519781$2,445.60El Paso,197912,464.20Texas19801387.60198111,588.20198214,330.74Glenn D. and Nancy R. Johnson13473-851981$ 661.80Santee,CaliforniaVirginia G. Keane15725-8519781$ 679.50Spring Valley,198111,716.60CaliforniaNorbert A. and Virginia P. Hulsman18606-8519781$ 1,090.00Solana Beach,197912,494.13California198013,148.671981119,218.25Wesley H. and Marilyn G. Hillendahl24858-8519781$ 3,103.00Santa Rosa,197913,652.00California1981112,655.50198213,604.50198313,742.50Robert and Loriel McKee35031-8519781$ 2,287.00Brentwood,19811691.00California19821814.00James W. and Shirley Henricks4957-8619821$12,594.00Novato,CaliforniaRichard J. and Denese W. Todd8227-8619791$ 2,978.00Houston,198013,564.00Texas1981127,676.00198212,584.00239 APPENDIX BSTATEMENTS OF PROJECTED TAXABLE INCOME OR (LOSS);PROJECTED CASH FLOW FROM OPERATIONS(BEFORE TAX); AND PROJECTED CASH FLOW(AFTER TAX) FOR THE PERIODDECEMBER 14, 1980, TO DECEMBER 31, 1995, FOR A MARRIEDINDIVIDUAL FILING A JOINT RETURNAND PURCHASING ONE UNIT1980198119821983PROJECTED TAXABLE INCOMEOR (LOSS)Lease Revenue$29,700 $32,400 $32,400 Expenses: Maintenance (4)0 3,740 4,080 4,080 Insurance (5)75 937 900 900 Interest (6)0 12,645 13,210 12,564 Depreciation (7)21,333 16,459 16,459 16,459 Total expenses21,408 33,781 34,649 34,003 PROJECTED CASH FLOW(AFTER TAX)Taxable income or (loss)($21,408)($ 4,081)($ 2,249)($ 1,603)Tax benefit or (cost)at 50% federal incometax rate10,704 2,041 1,125 802 (Deferred) (9)(870)(802)Cash flow from operations(before tax)(75)3,303 3,725 3,725 Investment(26,000)Investment tax credit (10)26,000 Projected cash flow(after tax)$10,629 $ 5,344 $ 3,980 $ 3,725 240 STATEMENTS OF PROJECTED TAXABLE INCOME OF (LOSS);PROJECTED CASH FLOW FROM OPERATIONS(BEFORE TAX); AND PROJECTED CASH FLOW(AFTER TAX) FOR THE PERIODDECEMBER 14, 1980, TO DECEMBER 31, 1995, FOR A MARRIEDINDIVIDUAL FILING A JOINT RETURNAND PURCHASING ONE UNIT198419851986PROJECTED TAXABLE INCOMEOR (LOSS)Lease Revenue$32,400 $32,400 $32,400 Expenses: Maintenance (4)4,080 4,080 4,080 Insurance (5)900 900 900 Interest (6)11,877 11,148 10,374 Depreciation (7)16,459 16,459 16,459 Total expenses33,316 32,587 31,813 PROJECTED CASH FLOW(AFTER TAX)Taxable income or (loss)($ 916)($ 187)$ 587 Tax benefit or (cost)at 50% federal incometax rate458 94 (294)(Deferred) (9)(458)(94)294 Cash flow from operations(before tax)3,725 3,725 3,725 InvestmentInvestment tax credit (10)Projected cash flow(after tax)$ 3,725 $ 3,725 $ 3,725 STATEMENTS OF PROJECTED TAXABLE INCOME OR (LOSS);PROJECTED CASH FLOW FROM OPERATIONS(BEFORE TAX); AND PROJECTED CASH FLOW (AFTER TAX) FOR THE PERIODDECEMBER 14, 1980, TO DECEMBER 31, 1995, FOR A MARRIEDINDIVIDUAL FILING A JOINT RETURN AND PURCHASING ONE UNIT19871988198919901991PROJECTED TAXABLE INCOMEOR (LOSS)Lease Revenue$32,400 $32,400 $32,400 $32,400 $32,400 Expenses: Maintenance (4)4,080 4,080 4,080 4,080 4,080 Insurance (5)900 900 900 900 900 Interest (6)9,552 8,680 7,754 6,771 5,727 Depreciation (7)16,459 16,459 16,459 16,459 16,459 Total expenses30,991 30,119 29,193 28,210 27,166 PROJECTED CASH FLOW(AFTER TAX)Taxable income or (loss)$ 1,409 $ 2,281 $ 3,207 $ 4,190 $ 5,234 Tax benefit or (cost)at 50% federal incometax rate(705)(1,141)(1,604)(2,095)(2,617)(Deferred) (9)705 1,141 84 Cash flow from operations(before tax)3,725 3,725 3,725 3,725 3,725 InvestmentInvestment tax credit (10)Projected cash flow(after tax)$ 3,725 $ 3,725 $ 2,205 $ 1,630 $ 1,108 241 STATEMENTS OF PROJECTED TAXABLE INCOME OR (LOSS);PROJECTED CASH FLOW FROM OPERATIONS(BEFORE TAX); AND PROJECTED CASH FLOW (AFTER TAX) FOR THE PERIODDECEMBER 14, 1980, TO DECEMBER 31, 1995, FOR A MARRIEDINDIVIDUAL FILING A JOINT RETURN AND PURCHASING ONE UNIT1992199319941995PROJECTED TAXABLE INCOMEOR (LOSS)Lease Revenue$32,400 $32,400 $32,400 $32,400 Expenses: Maintenance (4)4,080 4,080 4,080 4,080 Insurance (5)900 900 900 900 Interest (6)4,619 3,442 2,193 866 Depreciation (7)16,459 16,459 16,459 8,241 Total expenses26,058 24,881 23,632 14,087 PROJECTED CASH FLOW(AFTER TAX)Taxable income or (loss)$ 6,342 $ 7,519 $ 8,768 $18,313 Tax benefit or (cost)at 50% federal incometax rate(3,171)(3,760)(4,384)(9,157)(Deferred) (9)Cash flow from operations(before tax)3,725 3,725 3,725 3,725 InvestmentInvestment tax credit (10)Projected cash flow(after tax)$ 554 ($ 35)($ 659)($ 5,432)ANALYTICAL MODEL OF TAXABLE INCOME OR (LOSS);CASH FLOW FROM OPERATIONS (BEFORE TAX); AND CASH FLOW(AFTER TAX) FOR THE PERIOD OCTOBER 1, 1982, TODECEMBER 31, 2002, FOR AN INDIVIDUAL PURCHASING ONE UNIT1982198319841985Taxable Income (loss)Assumed revenuesBeginning October 1, 1982$ 7,500 $38,160 $47,191 $50,022 Expenses: Maintenance680 4,080 4,080 4,080 Insurance225 900 900 900 Imputed Interest9,227 13,841 13,841 Depreciation39,000 57,200 54,600 54,600 Total Expenses39,905 71,407 73,421 73,421 Taxable income (loss)($32,405)($33,247)($26,230)($23,399)Cash Flow (After Tax)Taxable income (loss)($32,405)($33,247)($26,230)($23,399)Tax benefit (cost) at 50%Federal income tax rate16,202 16,623 13,115 11,699 Cash flow from operations(before tax)6,595 9,164 18,201 21,032 Investment(52,000)Investment tax credit26,000 Cash flow (after tax)($ 3,203)$25,787 $31,316 $32,731 242 ANALYTICAL MODEL OF TAXABLE INCOME OR (LOSS);CASH FLOW FROM OPERATIONS (BEFORE TAX); AND CASH FLOW(AFTER TAX) FOR THE PERIOD OCTOBER 1, 1982, TODECEMBER 31, 2002, FOR AN INDIVIDUAL PURCHASING ONE UNIT19861987198819891990Taxable Income (loss)Assumed revenuesBeginning October 1, 1982$53,024 $56,205 $59,577 $63,152 $66,941 Expenses: Maintenance4,080 4,080 4,080 4,325 4,584 Insurance900 900 900 900 900 Imputed Interest13,841 13,841 13,841 13,841 13,841 Depreciation54,600 Total Expenses73,421 18,821 18,821 19,066 19,325 Taxable income (loss)($20,397)$37,384 $40,756 $44,086 $47,616 Cash Flow (After Tax)Taxable income (loss)($20,397)$37,384 $40,756 $44,086 $47,616 Tax benefit (cost) at 50%Federal income tax rate10,198 (18,692)(20,378)(22,043)(23,808)Cash flow from operations(before tax)24,034 27,215 30,587 33,917 37,447 InvestmentInvestment tax creditCash flow (after tax)$34,232 $ 8,523 $10,209 $11,874 $13,639 ANALYTICAL MODEL OF TAXABLE INCOME OR (LOSS);CASH FLOW FROM OPERATIONS (BEFORE TAX); AND CASH FLOW(AFTER TAX) FOR THE PERIOD OCTOBER 1, 1982, TODECEMBER 31, 2002, FOR AN INDIVIDUAL PURCHASING ONE UNIT19911992199319941995Taxable Income (loss)Assumed revenuesBeginning October 1, 1982$70,958 $75,215 $79,728 $84,512 $89,582 Expenses: Maintenance4,859 5,151 5,460 5,788 6,135 Insurance900 900 900 900 900 Imputed Interest13,841 13,841 13,841 13,841 13,841 DepreciationTotal Expenses19,600 19,892 20,201 20,529 20,876 Taxable income (loss)$51,358 $55,323 $59,527 $63,983 $68,706 Cash Flow (After Tax)Taxable income (loss)$51,358 $55,323 $59,527 $63,983 $68,706 Tax benefit (cost) at 50%Federal income tax rate(25,679)(27,661)(29,763)(31,991)(34,353)Cash flow from operations(before tax)41,189 45,154 49,358 53,814 58,537 InvestmentInvestment tax creditCash flow (after tax)$15,510 $17,493 $19,595 $21,823 24,184 243 ANALYTICAL MODEL OF TAXABLE INCOME OR (LOSS);CASH FLOW FROM OPERATIONS (BEFORE TAX); AND CASH FLOW(AFTER TAX) FOR THE PERIOD OCTOBER 1, 1982, TODECEMBER 31, 2002, FOR AN INDIVIDUAL PURCHASING ONE UNIT1996Taxable Income (loss)Assumed revenuesBeginning October 1, 1982$94,957 Expenses: Maintenance6,503 Insurance900 Imputed Interest13,841 DepreciationTotal Expenses21,244 Taxable income (loss)$73,713 Cash Flow (After Tax)Taxable income (loss)$73,713 Tax benefit (cost) at 50%Federal income tax rate(36,856)Cash flow from operations(before tax)63,544 InvestmentInvestment tax creditCash flow (after tax)$26,688 ANALYTICAL MODEL OF TAXABLE INCOME OR (LOSS);CASH FLOW FROM OPERATIONS (BEFORE TAX); AND CASH FLOW(AFTER TAX) FOR THE PERIOD OCTOBER 1, 1982, TODECEMBER 31, 2002, FOR AN INDIVIDUAL PURCHASING ONE UNIT199719981999200020012002Taxable Income(loss)Assumed revenuesBeginning October1, 1982$100,655 $106,694 $113,096 $119,882 $127,075 $147,700 Expenses: Maintenance6,893 7,307 7,745 8,210 8,702 9,225 Insurance900 900 900 900 900 900 Imputed Interest13,841 13,841 13,841 13,841 13,841 13,841 DepreciationTotal Expenses21,634 22,048 22,486 22,951 23,443 23,966 Taxable income(loss)$ 79,021 $ 84,646 $ 90,610 $ 96,931 $103,632 $123,734 Cash Flow(After Tax)Taxable income(loss)$ 79,021 $ 84,646 $ 90,610 $ 96,931 $103,632 $123,734 Tax benefit(cost)at 50%Federal incometax rate(39,510)(42,323)(45,305)(48,465)(51,816)(61,867)Cash flow fromoperations(before tax)68,852 74,477 80,441 86,762 93,463 113,565 InvestmentInvestment taxcreditCash flow(after tax)$ 29,342 $ 32,154 $ 35,136 $ 38,297 $ 41,647 $ 51,698 244 Footnotes1. The "test case petitioners' listed below are consolidated herewith. Because of the use of joint petitions in these proceedings, the test case petitioner(s) in each docket number are not necessarily the first petitioner(s) listed in their respective petitions. They are set forth below in all capital letters and are listed by caption of the first petitioner(s) in each petition followed by a parenthetical of the test case petitioner(s), if the first petitioner(s) in that docket number are not the test case petitioner(s), and by the docket number. The test case petitioners consolidated herewith are as follows: Donald M. Angotti and LaVerne M. Angotti, et al. (as to MARTHA PETERSON only), docket No. 31318-84; LAURENCE R. CLARKE, docket No. 34490-84; Ralph W. Armstrong and Bonnie J. Armstrong, et al. (as to PAUL O. BROHMER and as to WILLIAM I. GRAHAM and GLENNA F. GRAHAM only), docket No. 126-85; Walt W. Ankerman and Gerri L. Ankerman, et al. (as to JEAN A. BAUMANN only), docket No. 6123-85; Ralph Q. Adams and Jo D. Adams, et al. (as to DAVID K. HUGHES and PEGGY S. HUGHES only), docket No. 8339-85; Paul O. Allen and Leslie G. Allen, et al. (as to PAUL R. DOUGLASS and PHYLLIS J. DOUGLASS only), docket No. 10859-85; Jeanette E. Andrews, et al. (as to MEARL W. CHAPMAN and VERNA J. CHAPMAN and as to EDWARD CONDIOTTI and JOAN CONDIOTTI only), docket No. 12358-85; Frederick B. Adair and Twyla J. Adair, et al. (as to JAMES M. FIELD and BETTY J. FIELD and as to GLENN D. JOHNSON and NANCY R. JOHNSON only), docket No. 13473-85; Sylvia Altman, et al. (as to VIRGINIA G. KEANE only), docket No. 15725-85; Joshua Alpern and Ronny Alpern, et al. (as to NORBERT A. HULSMAN and VIRGINIA P. HULSMAN only), docket No. 18606-85; Eugene C. Bowser and Louise M. Bowser, et al. (as to WESLEY H. HILLENDAHL and MARILYN G. HILLENDAHL only), docket No. 24858-85; Raymond H. Steinhardt and Fleur Steinhardt, et al. (as to ROBERT McKEE and LORIEL McKEE only), docket No. 35031-85; Max Alper and Florence Alper, et al. (as to JAMES W. HENRICKS and SHIRLEY HENRICKS only), docket No. 4957-86; and Thomas A. Blake and Shirley Blake, et al. (as to RICHARD J. TODD and DENESE W. TODD only), docket No. 8227-86.↩2. Petitioners argue that the license agreement between FOI and Senter did not give Senter the right to sell the Oxytrol systems. Although this may be correct as a matter of patent law, the president of Senter testified in detail regarding its efforts to sell the systems. His testimony indicated that Senter's lack of success was due to the unwillingness of potential buyers to pay $10,000 for the Oxytrol system and not the inability of Senter legally to sell such systems.↩3. Beginning in May 1981, container sales were actually made by FoodSource Sales, Inc., a corporation wholly owned by Dixon. For simplicity, both FoodSource and FoodSource Sales, Inc., are hereinafter referred to as FoodSource.↩4. Respondent's Exhibit DF contains Budd's records indicating when such release occurred. The records were prepared by or at the direction of Carl H. Wheeler (General Manager of Budd), and he authenticated them at trial. Petitioners do not dispute their factual accuracy, although they contest the legal significance of the release dates.↩5. FoodSource's chief of operations testified that 20 percent of the containers operated by FoodSource were actually used as controlled atmosphere containers. The only specific and reliable evidence in the record with respect to commercial↩ usage of the containers, however, were the leases between FoodSource and the container users. Those leases indicate that controlled atmosphere usage was de minimis relative to noncontrolled atmosphere usage.6. For various reasons, including time constraints, not all test case petitioners testified at trial. Hillendahl, Todd, and Henricks did testify, and we have thus made specific findings of fact with respect to them. They are, in the view of respondent and the Court, atypical for reasons appearing below. Petitioners do not assert that these three are representative investors. Although petitioner Robert McKee (McKee), who was primarily responsible for design of the Nitrol container, testified at trial, his testimony did not relate to his own purchases of container interests. The Court indicated during trial that we would not decide the profit objective issue adversely to any petitioner without affording him or her a later opportunity to testify on that issue. Thus this opinion may be supplemented at a later time with specific findings as to other petitioners whose tax liability is not resolved by application of our general findings and the reasoning in this opinion. The profit objective issue, however, may be resolved on a case-by-case consideration of the ways in which a petitioner's circumstances are similar to or different than those of Hillendahl, Todd, and Henricks.↩7. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended.↩8. Sec. 1.183-2(b), Income Tax Regs; lists some of the factors to be considered in determining whether an activity is engaged in for profit. The factors listed in the regulation are as follows: (1) Manner in which the taxpayer carries on the activity. * * * (2) The expertise of the taxpayer or his advisors. * * * (3) The time and effort expended by the taxpayer in carrying on the activity. * * * (4) Expectation that assets used in activity may appreciate in value. * * * (5) The success of the taxpayer in carrying on other similar or dissimilar activities. * * * (6) The taxpayer's history of income or losses with respect to the activity. * * * (7) The amount of occasional profits, if any, which are earned. * * * (8) The financial status of the taxpayer. * * * (9) Elements of personal pleasure or recreation.↩ * * 17. The tax advantages may, of course, be limited or unallowable because of statutory provisions. See, for example, sec. 183↩.9. Similarly, no interest deduction is allowable with respect to illusory debt. We cannot tell from the record or from the briefs of the parties to what extent, if any, interest expense of the notes in issue was disallowed by respondent or actually paid by petitioners.↩10. A stipulated exhibit filed after trial purporting to show all payments on the substitute notes indicated that the only credits with respect to Todd's notes were for "revenues" and that the aggregate amount of such credits was less than the payments purportedly required by the notes.↩11. At a meeting of sales representatives, in response to a question regarding the notes, Dixon stated: If we were going to -- frankly, if we were going to foreclose on people, we would have already done it. I mean, that isn't the way that we're set up to do it. We have no economic advantage in doing it that way. What we are trading with the new note program, what we are trading with the new note program is we are asking for some income now, to tie down a container owner's tax benefits. * *↩12. Cf. Chester v. Commissioner,T.C. Memo. 1986-355↩.13. Our holding on this issue does not preclude, however, an increase in basis attributable to additional expenditures incurred during the years in issue (if any), such as improvements to the containers, that otherwise would properly be added to basis. Henricks' expenditures in 1982 are an example.↩14. As support of the $260,000 value computed using the multiple of cost, Thomson alluded to two instances in which containers purportedly sold for $260,000 cash. The record, however, contains no reliable evidence of the terms, or even the existence, of the purported cash sales. Although at one point respondent's counsel apparently conceded that one investor purchased a container for cash, his statement included a representation that the purchaser was given a guaranteed return of income and contemplated all of the tax benefits promised by FoodSource.↩15. In explaining the problems encountered by FoodSource in one of his reports to investors, Dixon described substantial expenditures for advertising. It appears, however, that those expenditures were directed at selling investments in the containers rather than promoting actual use of containers by the industry.↩16. Sec. 6621(d) provides in part as follows: (d) Interest on Substantial Underpayments Attributable to Tax Motivated Transactions. -- (1) In general. -- In the case of interest payable under section 6601 with respect to any substantial underpayment attributable to tax motivated transactions, the annual rate of interest established under this section shall be 120 percent of the adjusted rate established under subsection (b). (2) Substantial underpayment attributable to tax motivated transactions. -- For purposes of this subsection, the term "substantial underpayment attributable to tax motivated transactions" means any underpayment of taxes imposed by subtitle A for any taxable year which is attributable to 1 or more tax motivated transactions if the amount of the underpayment for such year so attributable exceeds $1,000. (3) Tax motivated transactions. -- (A) In general. -- For purposes of this subsection, the term "tax motivated transaction" means -- (i) any valuation overstatement (within the meaning of section 6659(c)↩), [Illegible Paragraph]1. Amount to be determined. ↩2. 50 percent of the interest due on $9,772.00. ↩3. 50% of the interest due on $2,202.00. ↩4. 50% of the interest due on $4,415.00. ↩5. 50 percent of the interest due on $5,183.00. ↩6. 50% of the interest due on $5,941.00. ↩7. 50% of the interest due on $44,648.00. ↩8. 50% of the interest due on $12,015.00. ↩9. 50% of the interest due on $12,475.00. ↩10. 50% of the interest due on $92,255.00. ↩11. 50% of the interest due on $8,615.00.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625028/	FREMONT C. PECK, ET AL., EXECUTORS OF THE WILL OF CLARA S. PECK, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Peck v. CommissionerDocket Nos. 61520, 61521.United States Board of Tax Appeals31 B.T.A. 87; 1934 BTA LEXIS 1164; August 14, 1934, Promulgated 1164 1. Where stock is loaned in exchange for the promises of borrower (1) to pay the lender any dividends paid thereon during the loan, or the equivalent if the stock were sold, and (2) to return upon a date certain, or before, on notice, the same or an equal number of shares of the same stock, held, such dividends are legally includable in lender's income for the year in which paid to borrower, although not actually received by lender who is on a cash basis. 2. Held, further, sale of such stock by borrower results in no taxable gain to lender. J. Sterling Halstead, Esq., for the petitioners. George D. Brabson, Esq., for the respondent. LEECH88 The respondent has determined income tax deficiencies against petitioners for the period January 1 to April 17, 1928, in the sum of $3,934.23, and for the period April 18 to December 31, 1928, in the sum of $8,840.26. In determining these deficiencies, respondent has included in the income of petitioners' decedent, and petitioners, certain dividends and profit on sales of stock during the periods mentioned, resulting in the contested deficiencies, both of which actions petitioners here1165 assign as error. FINDINGS OF FACT. Petitioners are executors of the estate of Clara S. Peck, who died on April 17, 1928. On or prior to January 5, 1927, petitioners' decedent transferred to the Brooklyn Daily Times (hereinafter called Times), a newspaper corporation engaged in the publication of a newspaper in Brooklyn, New York, 8,800 shares of F. W. Woolworth Co. (hereinafter called Woolworth) stock, under the following agreement: Brooklyn, N.Y., January 5, 1927.The Brooklyn Daily Times hereby acknowledges the receipt from Mrs. Carson C. Peck, of eighty-eight hundred (8,800) shares of the stock of F. W. Woolworth Co., certificates Nos. WO-43112/19, incl., W-15844/48 incl., W/20981, and W-20968/69, incl., which have been loaned to it by her, for its accommodation, and to assist it in financing and conducting its business; to be used as colllateral, or sold, as may be needed for temporary requirements; and, for value received, hereby agrees to return such stock to Mrs. Carson C. Peck, or replace it with an equal number of shares, on or before January 1st, 1931, or at any previous date, upon thirty days written demand. Any dividends declared on such stock, in the1166 meantime to belong to her. In case the stock, or any part of it, is sold, the amount of the dividends that would have been received on such stock, if not sold, will be paid to her on January 1st, 1931, with interest from the date each such dividend would have been payable. THE BROOKLYN DAILY TIMES JOHN N. HARMAN, Vice-President.On or prior to January 2, 1928, 8,000 shares of stock of the same company were transferred under the following agreement: BROOKLYN, N.Y., January 2, 1928.The Brooklyn Daily Times, Inc. hereby, acknowledge receipt from Mrs. Carson C. Peck of eight thousand shares of the stock of the F. W. Woolworth Co. certificates numbered WO-43120/27, inclusive, which have been loaned to it by her for its accommodation and use in financing its business as may be needed for current requirements, and for value received, hereby agrees to return said stock to her, or if transferred, replace it with an equal number of shares on or before January 1st, 1933. 89 It is further agreed that in case the stock or any part of it is transferred, the amount of the dividends that would have been received on said stock if not transferred, shall be paid to her1167 on January 1st, 1933. THE BROOKLYN DAILY TIMES, INC. JOHN N. HARMAN, Vice-President.The Times was organized in 1910, and has been engaged since then in publishing a daily newspaper under that name in Brooklyn. This paper continued the publication of another daily newspaper which had been published under other names in the same place for approximately 63 years at that time. The entire stock of this present corporation, except qualifying shares, was owned by Clara S. Peck and Fremont C. Peck, the two children of Mrs. Clara S. Peck, who were also two of the three executors of petitioners' decedent. Fremont C. Peck, one of the petitioners herein, was secretary and treasurer of the Times during the year 1928. The above mentioned transfers were made in order to assist the corporation in its financing, since it had suffered very substantial losses which had progressively increased during the preceding several years. The books of the corporation show such losses to have been as follows: 1923$418,646.511924634,437.131925886,468.611926818,562.03The following dividends were paid by Woolworth to the Times on the dates and in the amounts as1168 follow: March 1, 1928$11,000.00June 1, 192820,375.00September 1, 192818,812.50December 1, 192817,375.0067,562.50On April 13, 1928, the Times sold 100 shares of the above mentioned Woolworth stock for $18,824. This stock had a cost basis to decedent of $17,485. Subsequent to the death of petitioners' decedent in 1928, 3,600 shares of the same stock were sold by the Times for $699,687.59. The cost basis of this stock was $187 per share. After the transfer of the stock, pursuant to the agreements detailed above, the Times had new certificates of Woolworth stock issued in its name, and the old certificates were canceled by the transfer agent. The respondent, in computing the income tax liability of petitioners' decedent, and also of her estate, for 1928, included the profit 90 on the sale of the Woolworth stock, together with the dividends paid thereon, as income, respectively, to her and her estate. Petitioners' decedent filed her income tax returns on the cash receipts and disbursements basis. OPINION. LEECH: The propriety of including the dividends and a part of the proceeds of the sale of the Woolworth stock, as gain thereon, 1169 in the income of petitioners' decedent, and petitioners, for 1928, rests upon the relationship between petitioners' decedent and the Times, existing, by virtue of the written agreements appearing in the findings of fact, at the receipt of these funds by the Times. Although these two agreements are not identically worded, we have no hesitation in concluding, as apparently the parties here concluded, that their meaning and intent was the same. Whether the transfer of the Woolworth stock was a loan, as respondent contends, or a sale, which petitioners urge, petitioners' decedent, Clara S. Peck, legally could, and actually did, by the recited agreements, reserve to herself the right to the dividends paid thereon. . Although the contested dividends were undoubtedly received by the Times, they were "derived" - which is the word used in the applicable statute 1 - by decedent and petitioners. Cf. ; . 1170 The Times received these dividends, either as agent for Mrs. Peck, or the petitioners, in their collection, or as trustee for the same purpose. Cf. If the former construction is accepted, petitioners' decedent, Mrs. Peck, and petitioners, are clearly liable as the taxpayers deriving the income therefrom, even though neither she nor petitioners actually received it from the Times. The receipt of income by an agent for that purpose is receipt by the principal. ; ; . If the status of the Times be construed as that of a trustee, then these dividends, immediately upon their receipt, became distributable under the terms of the express trust within which they were collected, and were thus taxable to the distributees thereunder, though never actually distributed. Revenue Act of 1926, section 219(b)(2). Cf. Accordingly, petitioners' 91 assignment of error in reference to respondent's inclusion of the1171 dividends in computing the contested deficiencies, is overruled. But this controlling relationship between the Times and petitioners' decedent, in its effect here upon any profits on, or proceeds from, the sale of the Woolworth stock by the Times, was different from that relating to the dividends. Certainly, if the controverted transfer of the stock to the Times were a sale, no income could have been derived by petitioners' decedent, or petitioners, in its later sale by the Times. Though not a sale, the same result follows upon the present record. The purpose of the transfer to the Times was merely to relieve its financial difficulties, in accomplishing which, Mrs. Peck was obviously deeply interested. In effectuating this purpose by the transfer of the Woolworth stock under the terms of these agreements, no idea of securing pecuniary profit to her is apparent. No agency or trust was created under which this stock was to be sold for petitioners' decedent, or petitioners. She intended to and did provide for the return to her of an equal number of shares of the same stock borrowed and the payment to her of any dividends paid thereon in the meantime, or, in the event1172 of the sale of the stock, the equivalent thereof. However, no obligation upon the Times to account to petitioners' decedent, or petitioners, for any part of the proceeds of their sale of this stock, directly or indirectly, resulted from these agreements, or otherwise. Under the terms of the recited agreements, decedent loaned this stock, not money, as in the case of In exchange for the promises of the Times contained in these agreements, petitioners' decedent transferred the stock, together with all incidents of ownership therein, except the right to enjoy the dividends thereon. These incidents of ownership, so transferred, included the right to sell or hypothecate the stock for its own account. The Times exercised this right. No gain was derived by petitioners' decedent, or petitioners, in such sale. ; . The assignment of error directed to the inclusion of such gain in the computation of the disputed deficiencies, is sustained. Decision will be entered under Rule 50.Footnotes1. Sec. 213(a), Revenue Act 1926. The term "gross income" includes gains, profits, and income derived * *. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625029/	Robert E. Zimmerman and Helen E. Zimmerman v. Commissioner.Zimmerman v. CommissionerDocket No. 73389.United States Tax CourtT.C. Memo 1960-257; 1960 Tax Ct. Memo LEXIS 33; 19 T.C.M. (CCH) 1456; T.C.M. (RIA) 60257; November 30, 1960J. Bruce Donaldson, Esq. and Wm. D. Cohan, Esq., for the petitioners. John J. Yurow, Esq. and Robert J. Fetterman, Esq., for the respondent. MULRONEY Memorandum Findings of Fact and Opinion MULRONEY, Judge: The respondent determined the following deficiencies in income tax and additions to tax: Additions to TaxSectionSectionSectionSectionTaxable293(b)294(d)(2)294(d)(1)(A)6653(b)Year EndedDeficiencyI.R.C. 1939I.R.C. 1939I.R.C. 1939I.R.C. 195412/31/47$1,387.21$ 693.61$ 83.23$254.8112/31/48334.52167.2620.0796.4512/31/492,448.821,224.41134.3912/31/502,201.441,100.72132.0912/31/511,851.46925.73106.23166.9712/31/52832.24416.1245.0712/31/531,712.70856.3562.0212/31/545,631.88331.43$2,815.9412/31/553,230.301,615.1534 The issues are: 1. Whether petitioners understated their income for the years 1947 through 1955 in amounts as computed by respondent under the net worth plus nondeductible expenditures method. 2. Whether a part of the deficiency for each of the years 1947 through 1955 was due to fraud with intent to evade tax. 3. Whether the income tax returns for the years 1947 through 1952 were false and fraudulent with intent to evade tax within the meaning of section 276(a), Internal Revenue Code of 1939. Findings of Fact Some of the facts have been stipulated. They are found accordingly. Petitioners Robert E. and Helen E. Zimmerman are husband and wife and reside in Defiance, Ohio. They filed joint Federal income tax returns for the years 1947 through 1955 with the then collector or district director of internal revenue at Toledo, Ohio. Robert was born in Ohio in 1918 and spent his childhood on the family farm. In 1935 he and his wife were married. They lived with their family for some time after their marriage, then in 1937 moved to Dayton, Ohio, where Robert worked for a local power and light company as a truck driver. During the evenings in Dayton he began to repair watches35 and clocks at home. In 1939 Robert and his wife moved to Michigan where he worked for his cousin as an apprentice learning fine watch repairing. After his apprenticeship ended he was employed as a watch repairman, first in Michigan and then in Dayton. During at least a part of this time he continued to do repair work on watches and clocks in his home. During the period from 1935 to 1945 two children were born to Robert and his wife During this period his earnings were modest and he and his family lived frugally. In 1945 Robert moved with his family to Defiance, Ohio, where he purchased an operating retail jewelry store. This store, known as Zimmerman's Jewelry, and hereafter sometimes called the Defiance store, opened for business under Robert's proprietorship in September 1945. The purchase price of this business was $7,500. To pay this amount he borrowed $2,500 from his father, $2,500 from a bank and supplied $2,500 from his own funds. At about this time petitioners also purchased a house in Defiance for about $7,500. To pay for it, $5,500 was borrowed from a bank and the remainder was supplied from their own funds. Robert operated the Defiance store as a sole proprietorship36 during all the years in question. It sold watches, jewelry, electric shavers and other small appliances. He devoted most of his time to the store. During business hours at least three persons were normally present: a salesgirl, a watch repairman and Robert. At the store he spent most of his time repairing watches and jewelry, but he sometimes made sales to customers as well. His wife worked in the store on less than a full-time basis. Although she sometimes waited on customers, her main functions were supervising the sales girls and maintaining the store's books and records. Robert and his wife did all of the buying for the store and often traveled to the larger midwestern cities on buying trips. When Robert took over operation of the store in 1945 he hired an accountant to set up a bookkeeping system and supervise the store's records. In 1947 petitioners began keeping the records themselves using the system which had been set up for them. In 1949 they retained an accountant who supervised the record keeping, although Robert's wife continued to make the bookkeeping entries. This arrangement was continued through 1955. For cash sales a sales slip was made out in duplicate showing37 the amount of the sale and any sales tax involved. The second copy of the slip was retained and the amount of the sale was rung up on the cash register which printed the amount on paper tape. Credit sales were handled in the same manner, except that only the amount of cash then received was rung up. After the sale, a credit card showing the amount of the sale, the cash payment and the balance due was made out and filed under the customer's name. As payments were made on the balance due, the amount of the payment was rung up on the cash register and later entered on the customer's credit card. Amounts received from watch repair transactions were recorded in the same manner as sales of merchandise. Disbursements for expenses of the business were usually paid by check. A check register was maintained and cancelled checks were retained. When small petty cash disbursements were made from the cash register a withdrawal slip was filled out with the amount involved. Amounts expended by check or by cash for petitioners' personal expenses were recorded in the same manner. Twice each month a summary sheet reflecting cash receipts and disbursements was prepared from the cash register tapes38 and withdrawal slips. The summary sheets were placed in a monthly folder along with their supporting data and were maintained as a part of the business records. The amounts on the summary sheets and data from the check register were posted to permanent journals which were kept on a yearly basis. All subsidiary records were kept for five years and then destroyed. These journals accurately reflected the underlying data from which they were prepared. Journals for the years 1947 through 1955 and all underlying data for the years 1952 through 1955 were made available for respondent's audit and were present in the courtroom during the hearing of this case. At year end the merchandise inventory of the store was taken by a physical count and was valued at cost. At the end of each year some portion of the inventory had not as yet been paid for. In 1951 petitioners opened a retail woman's apparel shop in nearby Van Wert, Ohio, which was managed by Schlatter. An accountant set up a double entry bookkeeping system on an accrual basis for this store. The manager perpared daily summary sheets which showed gross receipts and petty cash expenses. The expenses of the business were paid by check39 and supported by invoices. All entries in the records were under the general supervision of the accountant. The records of this business accurately reflected all gross receipts and expenses of the business and petitioners' income tax returns accurately reported income as shown on its books. Petitioners spent little time with the Van Wert apparel shop. It had a loss from its operations in 1951 and petitioners sold it early in 1952. In October 1953 Robert started a retail jewelry store in Van Wert and employed Killion to manage the business. Robert's accountant set up a double entry bookkeeping system on an accrual basis, supervised the records of the business and prepared balance sheets and profit and loss statements. Killion received a weekly salary and a share in net profits from the store. He kept daily summary sheets of transactions and Robert's wife periodically posted gross receipts, expenses and other data to permanent ledgers. Robert took no part in the normal day-to-day operation of this business and handled none of its sales. The records of the business accurately reflected gross receipts and expenses of the business and petitioners' income tax returns accurately reported40 income as shown on its books. Respondent determined deficiencies in petitioners' income by the net worth and expenditures method for the years 1947 through 1955. A summary of the understatements of income determined thereby appears below: 19471948194919501951Correct Adjusted$16,182.55$9,859.68$15,652.32$15,246.62$9,948.01Gross IncomeAdjusted Gross Income9,057.927,818.833,796.105,980.512,785.68ReportedUnderstatements$ 7,124.63$2,040.85$11,856.22$ 9,266.11$7,162.33Percentage of79%26%312%155%257%UnderstatementTotal for1952195319541955PeriodCorrect Adjusted$15,841.80$12,873.77$16,652.77$25,157.20$137,414.72Gross IncomeAdjusted Gross Income9,757.564,274.167,525.0113,272.1364,267.90ReportedUnderstatements$ 6,084.24$ 8,599.61$ 9,127.76$11,885.07$ 73,146.82Percentage of62%201%121%89%114%UnderstatementDuring Robert's childhood on the farm his father kept the family savings in a box which he kept in the house. When Robert married and moved away from the farm he followed the same practice and kept41 his savings in cash in a green fishing tackle box which he usually kept in the bedroom. From time to time in the years before they moved to Defiance, amounts were added to the cash savings but seldom were any sums taken out. In 1947 petitioners installed a small wall safe in the basement of their house and thereafter the cash savings were kept in it. When in later years they moved to other houses they took the safe with them. After moving to Defiance, occasionally amounts were taken out of the cash savings. In 1945 Robert used about $2,500 in cash in the purchase of the Defiance store and about $2,000 to buy a house. In 1946 he loaned about $600 in cash to his brother. Early in 1947 he made a loan of $5,000 in cash to a friend and later in the same year loaned $1,000 in cash to his brother. During 1949 and 1950 he used about $5,000 or $6,000 in cash in the construction of a house. In 1951 about $5,000 in cash was invested in the Van Wert dress shop and later when the Van Wert jewelry store was started, $4,000 to $5,000 in cash was used. When the objects in which the cash was invested were sold, or when the loans were repaid, cash was returned to the box or to the safe. Petitioners42 had between $10,000 and $15,000 of undeposited cash on hand on December 31, 1946. Respondent did not include any amount in the net worth statement for petitioners' personal undeposited cash. Petitioners maintained a bank account with a Defiance bank in which the receipts from the Defiance store were deposited. Their only other bank account was the business account of the Van Wert jewelry store in a Van Wert bank in which the receipts and deposits of that business were segregated and kept. The following schedule shows the total deposits in the Defiance bank and the total funds available for deposit for the years 1953, 1954 and 1955. The latter amounts include gross receipts from the Defiance store, other items reported as income on petitioners' tax returns, funds from non-taxable sources such as collections of Federal excise taxes and State sales taxes and the proceeds of several loans. Year195319541955Gross Deposits$84,650.30$89,687.15$111,505.18Total Funds Available for Deposit84,179.5687,266.42114,217.30The accountant who had set up the bookkeeping system for the Defiance store prepared petitioners' income tax returns for the years43 1945 and 1946. In 1947 and 1948 petitioners kept their own books and records without assistance from an accountant. In 1948 and again in 1949, Robert took his business records to the local internal revenue service office, requested and was given assistance in making out his tax returns for 1947 and 1948. Early in 1949 a revenue agent from the local office audited petitioners' 1946 return. In their 1946 return petitioners had reported income from the Defiance store by subtracting merchandise purchases and business expenses from gross receipts. The agent changed the method of reporting income from the Defiance store by taking gross receipts and subtracting therefrom cost of goods sold (beginning inventory plus purchases less ending inventory) to arrive at gross profits. This method of reporting income from the Defiance store was thereafter followed in all succeeding years here in question. The revenue agent's 1949 report contained the following statement: It was found that the records had been poorly kept but the required information could be obtained by checking and assimilation of the items. The books had been kept by an accountant. Mr. Zimmerman now keeps his own records and same44 were found to be in good shape. In 1949 petitioners retained an accountant who supervised the keeping of their business records and who prepared their tax returns for the years 1949 through 1955 from their books and records. In November 1956 a revenue agent from the local office who had joined the revenue service sometime in 1955, noticed that petitioners owned a $20,000 home and an airplane. After checking petitioners' income tax returns for 1953 and 1954 which reported taxable income of $4,274.16 and $7,525.01, respectively, he initiated an audit of their books and records. Petitioners filed their income tax returns for the years 1951 through 1955 in January of the following years. On December 14, 1956 they signed consent agreements for the years 1951 and 1953, extending the period for assessment to June 30, 1958. Respondent mailed the statutory notice for all the years herein on March 14, 1958. Petitioners pleaded the statute of limitations for the years 1947 through 1953. No part of the deficiencies for any of the years was false and fraudulent with intent to evade tax. None of the returns filed by petitioners for the years 1947 through 1955 was false or fraudulent with45 intent to evade tax. Petitioners' books and records accurately reflected their income for all of the years 1947 through 1955. Opinion While this case presents issues of fraud, statute of limitations and deficiencies determined by the net worth method, they are all resolved by our affirmative finding of fact that petitioners' books and records correctly showed petitioners' income during the years in question. Respondent does not assail petitioners' method of bookkeeping by which they recorded their receipts and disbursements and he admits petitioners' income tax returns accurately reflected the information which appeared on the books, and returned the income as shown by the books. Respondent agrees that the books of the two Van Wert stores correctly reflected receipts and expenditures and that the net income for these stores was correctly reported. Respondent theorizes, solely on the basis of the spread between his net worth computation and petitioners' reported income, that petitioners received income from sales in the Defiance store, which were not rung up on the cash register, not received on the books and not reported in the returns. We recognize, of course, that the net worth*46 method can be employed as circumstantial evidence of unreported income and as evidence that the books and records are inadequate, inaccurate, or false. Morris Lipsitz, 21 T.C. 917">21 T.C. 917. However, we believe the testimony of petitioner, his wife and the several employees of the store during all of the years involved that there were no unrecorded sales. Petitioners also introduced much evidence attacking the correctness of certain items of respondent's net worth computation. There is no need for extended discussion of such evidence though we can comment petitioners were able to show a significant number of errors in the net worth computation. As we view the record here, the affirmative finding of fact that is amply sustained by the evidence is that petitioners' books and records for all of the years involved were correct and complete and they correctly recorded all sales transactions. Cf. Thomas A. Talley, 20 T.C. 715">20 T.C. 715. Our finding of fact in this respect disposes of all issues in favor of petitioners. Decision will be entered for the petitioners.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625031/	H. F. MARIE CLAUSEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Clausen v. CommissionerDocket No. 51706.United States Board of Tax Appeals28 B.T.A. 559; 1933 BTA LEXIS 1098; June 28, 1933, Promulgated 1098 The petitioner and her five sisters were named residuary legatees under the will of their brother who died in 1917, a resident of the State of New Jersey. The residuary estate consisted principally of real estate situated in New York. The petitioner and one sister were citizens of the United States, while the other four sisters were subjects of Germany and were alien enemies at the time of the decedent's death. The petitioner and her American sister claimed, and the courts of the State of New York later held, that the foreign sisters, being alien enemies, were barred from taking title to the real estate situated within the State of New York. Prior to such judicial determination, the petitioner and the other legatees and the executor of the decedent's estate entered into a written agreement that the real estate or proceeds from the sale thereof should be distributed among the legatees in certain proportions. In an action brought by the petitioner and others for a distribution of the estate, the Supreme Court of the State of New York entered an interlocutory judgment directing that the proceeds from the sale of the real estate be distributed in accordance with the said agreement. 1099 The distributions were so made and the report of the executor and others showing such distributions was approved by the court. Held, that the petitioner is taxable upon such portions of the profits from the sales of the real estate as are attributable to her proportionate ownership of the properties sold. Saul I. Radin, Esq., and Frederick L. Cramer, Esq., for the petitioner. W. F. Wattles, Esq., for the respondent. SMITH 560 The respondent has asserted deficiencies in petitioner's income tax for the calendar years 1925 and 1928 in the amounts of $437.41 and $3,763.08, respectively, and a delinquency penalty for 1925 in the amount of $109.35. The only question at issue is the amount of taxable gain derived by the petitioner upon the sales in those years of certain interests in real estate which she acquired under the will of her brother, who died in 1917. FINDINGS OF FACT. The petitioner is one of the devisees under the last will and testament of Godfrey Knoche, who died November 18, 1917, a resident of the State of New Jersey. The decedent's will, a copy of which was received in evidence in this proceeding as exhibit No. 1100 1, was duly admitted to probate by the surrogate's court of Bergen County, New Jersey, on December 3, 1917. Henry Seib and Ott Onken were named and duly appointed as executors. Ott Onken died February 20, 1920, and since that date Henry Seib has been the sole surviving executor. By his will, Godfrey Knoche - after making certain bequests and devises not material here - bequeathed and devised or sought to bequeath and devise all of the residue of his estate, both real and personal, in certain proportions to his six sisters, of whom petitioner herein and one Elfriede Siebrecht were citizens and residents of the United States and the remaining four, Louise Lueckhoff, Adelheid Knoche, Auguste Mosler, and Anna Schnitzer (Roth), were German subjects and nonresident alien enemies at the time of the death of Godfrey Knoche. Shortly after the death of Goldfrey Knoche, the United States Alien Property Custodian served demands upon the executors of the estate of Godfrey Knoche that the executors convey, transfer, assign and deliver to the Alien Property Custodian every right, title, and interest of the four alien enemies, sisters of the decedent, in the estate of Godfrey Knoche. Neither1101 the executors nor the devisees nor anyone else ever complied with these demands to convey to the Alien Property Custodian any interest in the decedent's real estate and the Alien Property Custodian did not make actual seizure of the real estate, and in 1927 withdrew all claims thereto previously made by him and the United States Government. After the death of their brother, the American sisters claimed that their nonresident alien sisters were not entitled to take real 561 estate by inheritance or devise and that therefore the petitioner and her sister, Elfriede Siebrecht, were entitled to the entire real estate of the decedent to the exclusion of their nonresident alien sisters. The foreign sisters disputed the claim of their American sisters. During the year 1923 the sister, Anna Schnitzer (Roth), for a valuable consideration conveyed to Elfriede Siebrecht all her right, title, and interest in and to the real properties left by her brother and also assigned to Elfriede Siebrecht all her right, title, and interest in and to the estate of Godfrey Knoche. Early in the year 1924 the petitioner and her sisters, Elfriede Siebrecht, Louise Lueckoff, Adelheid Knoche, and1102 Auguste Mosler, entered into an agreement, a copy of which was introduced in evidence as petitioner's exhibit No. 2. This agreement provided in part as follows: WHEREAS, it is the wish of the American Heirs that their interest in the estate of the said Godfrey Knoche shall not be increased because of the status of the foreign heirs, as alien enemies, and at the expense of said foreign heirs, but that except for the claim of the Alien Property Custodian the foreign heirs should take the same proportion of the estate of said Knoche that they would have taken if they had not been alien enemies; and WHEREAS, it is the wish and intent of Adelheid Knoche that her brother's wishes set forth in the letter above referred to should be complied with and that out of the nine-twenty-seconds devised to her by her brother's will three-twenty-seconds should go to her sister, Marie C. Clausen. Now, in order to facilitate a sale or sales of such real property and to adjust and compromise all outstanding questions and claims between the parties hereto, and in consideration of the mutual covenants herein contained, the parties hereto covenant and agree as follows: * * SECOND: In the event1103 that the Alien Property Custodian or any other person, court or other tribunal having jurisdiction shall determine that the said foreign heirs were not legally entitled to take by bequest or devise under the will of said Knoche and that the American Heirs were entitled to take the shares of said estate which the provisions of said will attempted to bequeath and devise to the foreign heirs, then the American Heirs and each of them for herself agrees to transmit, pay or turn over, or cause to be transmitted, paid or turned over to the said foreign heirs or their attorneys in fact or their assignees, that part of the proceeds of the sale of all or any part of said real estate which such American Heir may receive by reason of the inability of the foreign heirs to take under said will, and if the real estate or any part thereof is not sold each American Heir, for herself, agrees to deliver to the foreign heirs a deed of that part of said unsold real estate to which such American Heir became entitled by reason of the inability of the foreign heirs to take under said will, each foreign heir to receive her ratable portion of such proceeds of her ratable interest in said real estate in accordance1104 with the provisions of the said will less her proportionate share of the expenses of any sale or sales and of the expenses of administering said property and of the transfer and other taxes which were required to be paid out of the estate of said Knoche, and less such mortgages and interest thereon as may have 562 been paid, and provided further that the share of said Adelheid Knoche shall not be nine-twenty-seconds as provided in said will, but six-twenty-seconds and no more, and that the other three-twenty-seconds of the nine-twenty-seconds devised or attempted to be devised to said Adelheid Knoche shall belong to said Marie C. Clausen pursuant to the letter of the said Godfrey Knoche above recited. On July 25, 1925, the undivided one-half interest owned by Godfrey Knoche at his death in certain premises in the Borough of Manhattan, County and State of New York, known as Lot 14, § 5, Block 1484, and as street numbers 521-523 East 72d Street and 520-522 East 73d Street, was sold to the 521 East 72d Street Corporation for $120,000 and at a net profit, as computed by the respondent, of $32,604.02 In determining the deficiency due from petitioner for the calendar year 1925, 1105 set forth in the formal notice of deficiency attached to the petition, the respondent included in petitioner's income the sum of $14,079 as profit realized by petitioner in 1925 upon the sale of her share of the undivided one-half interest owned by the decedent at death in the premises set forth above, said $14,079 being 92,340/213,840 of the profit of $32,604.02 computed upon the sale of the one-half interest. On or about the first day of October 1925, the petitioner as plaintiff brought a suit in the Supreme Court of the State of New York for the partition or sale of the real estate left under the residuary clauses of the will of Godfrey Knoche, and for judicial settlement of the accounts of Henry Seib as agent of the devisees of Godfrey Knoche in the administration and management of the known real estate of which Godfrey Knoche died seized, and for the interpretation and construction of certain wills and agreements affecting the interests of the parties to the real property and the property included in such accounts. Under date of March 28, 1927, the court rendered an interlocutory judgment in said action, which provided in part as follows: FOURTH: The defendants Louise1106 Lueckhoff, Auguste Mosler and Anna Schnitzer Rothe and Adelheid Knoche (now deceased), four of the said devisees of Godfrey Knoche, deceased, were at the time of the death of said Godfrey Knoche, alien enemies and were incapable of inheriting or holding real estate, either by devise or inheritance, under the laws of the State of New York, and all the provisions for their benefit in the Will of Godfrey Knoche, deceased, are, therefore, void and of no effect. FIFTH: Upon the death of said Godfrey Knoche, all of this interest in the real property, which is the subject of this action, passed absolutely to the plaintiff, Marie Clausen, and to Elfriede Siebrecht (now deceased). SIXTH: The rights, title, shares and interests of the several parties to this action in and to the real property, described as parcel #1 in the "EIGHTEENTH" paragraph of this interlocutory judgment, hereby are adjudged and declared to 563 be as follows, and the rights of the parties to this action therein are hereby adjudged and determined to be as follows, to wit: * * * 3. The plaintiff, Marie Clausen, is seized in fee simple and possessed of ninety-two thousand three hundred and forty undivided1107 four hundred and twenty-seven thousand six hundred and eightieth (92340/427680) parts of said premises. * * SEVENTH: The rights, title, shares and interest of the several parties to this action in and to the real property, described as parcel #2 in paragraph "EIGHTEENTH" of this interlocutory judgment, hereby are adjudged and declared to be as follows, and the rights of the parties to this action therein are hereby adjudged and determined to be as follows, to wit: * * * NINTH: Under a certain contract to which the plaintiff, Marie Clausen, Elfriede Siebrecht, deceased, Louise Lueckhoff, Auguste Mosler, and Adelheid Knoche, deceased, were parties, the following defendants are entitled to share in one-half of the proceeds of the sale of the real property described in Parcel #1 of paragraph "EIGHTEENTH" and in all of the proceeds of the sale of the real property described in Parcel #2 of paragraph "EIGHTEENTH" of this interlocutory judgment, in the following proportions: Louise LueckhoffEighteen undivided one hundred thirty-second (18/132) parts;Auguste MoslerTwenty-four undivided one hundred thirty-second (24/132) parts;Otto C. Sommerich, asThirty-six undivided one hundred Ancillary Administratorthirty-second (36/132) parts.with the Will annexed ofAdelheid Knoche, deceased1108 During the year 1928 the one-half interest owned by the decedent at the time of his death in real estate in the Borough of Manhattan, described in the interlocutory judgment of March 28, 1927, as parcel #1, was sold for $377,500 and at a net profit, as computed by the respondent, of $94,113.94, and the real estate owned by the decedent at the time of his death in the Borough of Brooklyn, described as parcel #2, was sold for $24,000 and at a loss, as computed by the respondent, of $1,900. Under date of August 23, 1928, the Supreme Court of the State of New York rendered its final judgment in the action entitled Marie Clausen v. Fred J. Siebrecht et al., referred to above. In determining the deficiency due from the petitioner for the calendar year 1928, set forth in the formal notice of deficiency attached to the petition, the respondent included in the petitioner's net income the sum of $39,819.66 as profit realized by petitioner in 1928 upon the sale of her share of the interest owned by the decedent at death in 564 the premises described as parcels #1 and #2. The profit so attributed to the petitioner was computed as follows: Profit on sale of parcel #1, 92,340/$40,640.11213,840 x $94,113.94 (profit on sale of decedent's interest) equalsLoss on sale of parcel #2, 57/132 X(820.45)$1,900 (loss on sale of decedent'sinterest) equalsCorrected profit$39,819.661109 The petitioner filed no Federal income tax return for 1925 but did file a tentative Federal income tax return for the calendar year 1928 with the collector of internal revenue, third district of New York, on March 14, 1929. OPINION. SMITH: By the interlocutory decree of the Supreme Court of the State of New York held in and for the County of New York, dated March 21, 1927, the petitioner is declared to be seized in fee simple and possessed of 92,340/427,680 parts of certain premises in the Borough of Manhattan and of 57/132 parts of certain premises in the Borough of Brooklyn, which were devised to her by her brother. The decedent owned a one-half interest in the first described premises. These premises were sold at a profit. No question is raised in this proceeding as to the amount of the profit realized upon the sale of the decedent's interest therein. By virtue of the agreement which the petitioner had entered into with her sisters in 1924, the court decreed that the petitioner should receive only 4/22 of the proceeds from the sale of the property and that the balance of the proceeds should be distributed in accordance with the terms of the agreement. Petitioner therefore1110 contends that she is taxable upon only 4/22 of the profits realized from the sales, while the respondent contends that the petitioner is taxable upon 92,340/213,840 of the profit realized upon the sale of decedent's interest. The petitioner was the owner in her own right of an undivided 92,340/427,680 interest in the Manhattan properties, for under the decree of the Supreme Court of New York her foreign sisters were alien enemies and incapable of inheriting or holding New York real estate and the provisions of the brother's will for their benefit were void and of no effect. The interest of the deceased brother passed absolutely to the petitioner and her American sister, Elfriede Siebrecht. In the collateral agreement of 1924 between the sisters, after the official conclusion of peace between the United States and Germany on July 2, 1921, the petitioner agreed to keep 4/22 of the proceeds of the sale of her brother's estate and further agreed that the balance of her share should be paid to her sisters in Germany, or their heirs. This agreement, so far as it concerns the profits 565 subsequently realized on the sale of the particular properties in the Borough of Manhattan1111 with which we are concerned, was but an attempt to assign the petitioner's future profits. If it had been more than that deeds from the German sisters or their heirs would have been necessary when the properties were sold. There were none. The German sisters had no vestige of title. They held a contract, much as the mother in ; affd., , held assignments for love and affection from her son of specified entities "out of my share of the rents, income, and profits from my interest in all the property, real and personal, conveyed or to be conveyed" by a certain company named to another company. The court said: * * * The deeds were assignments of or from future net income, and made without valuable consideration. * * * For the question presented is not whether, as between grantor and grantee, the assignment is effective and enforceable, but whether the assignment, even if enforceable as against the grantor * * * prevents the entire gross income from being income taxable as against the grantor. * * * To permit the assignor of future income from his own property to escape taxation thereon by a gift1112 grant in advance of the receipt by him of such income would by indirection enlarge the limited class of deductions established by statute. As long as he remains the owner of the property, the income therefrom should be taxable to him as fully, when he grants it as a gift in advance of its receipt, as it clearly is despite a gift thereof immediately after its receipt. In , the court said: * * the mere equitable ownership of the wife in the partnership interest standing in the name of her husband by reason of an agreement on the part of her husband to transfer the property to her would not prevent the application of the rule recently announced by the Supreme Court in , where the husband transferred to his wife one-half his interest in the partnership, and the husband nevertheless remained the ostensible and active partner in the business. See also , and 1113 , both decided by the United States Circuit Court of Appeals for the Second Circuit; ; affirmed and appeal dismissed without opinion, . By the agreement of January 16, 1924, the petitioner did not make a valid gift of any portion of her interest in the property acquired by her from her deceased brother to her sisters residing in Germany. The effect of the agreement was simply that the petitioner's interest in the properties should be sold and a portion of the proceeds distributed to her sisters in Germany. For reasons above stated, we are of the opinion that this did not have the effect of freeing the 566 petitioner from tax upon the profit realized on the sale of her interests in the properties. The assertion of the delinquency penalty for failure to file an income tax return for 1925 is sustained. Reviewed by the Board. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625033/	PACKARD CLEVELAND MOTOR CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Packard Cleveland Motor Co. v. CommissionerDocket No. 9935.United States Board of Tax Appeals14 B.T.A. 118; 1928 BTA LEXIS 3012; November 13, 1928, Promulgated 3012 1. Where a company sold trucks on a basis of 25 per cent cash and accepted for the balance a note secured by a chattel mortgage providing for ten or twelve monthly payments, and immediately assigned and transferred the note and sold, assigned and transferred the chattel mortgage to a financing company, receiving from it the full remaining unpaid amount of the purchase price, it should report as income the entire amount of cash so received in the taxable year. 2. In such a situation though the sale may have been on the installment basis, upon the receipt from the financing company of the full purchase price of the truck or car, the sale became a closed transaction and income arose. 3. The fact that taxpayer is an endorser with recourse and guaranteed payment of the notes does not relieve it of reporting as income the full amount received. H. A. Michills, C.P.A., for the petitioner. J. Arthur Adams, Esq., for the respondent. VANFOSSAN 119 This proceeding is brought to redetermine the income and profits taxes of the Packard Cleveland Motor Co. for the period from June 1, 1918, to December 31, 1918, and for the calendar year 1919, in3013 the amounts of $19,173.03 and $9,647.55, respectively. The former sum is represented by a claim in abatement for a slightly larger amount and reduced by an overassessment certificate of the respondent. The petitioner asserts (1) that the collection of the taxes due for the period from June 1 to December 31, 1918, is barred by the statute of limitations; (2) that the commissioner erred in treating the petitioner's income on the closed-transaction basis instead of installment sales or deferred-income basis; and (3) that notes received in partial payment of automobiles and trucks were not worth their face value when so received and hence the petitioner's income should have been reduced accordingly. FINDINGS OF FACT. The petitioner is a corporation organized under the laws of the State of Ohio and having its principal office in Cleveland. It was engaged in the business of selling Packard automobiles and trucks and had the agency therefor in nineteen counties of Ohio, including the cities of Cleveland, Akron, Canton, Youngstown, Sandusky and Mansfield. On June 14, 1919, the petitioner filed its return for the period from June 1, 1918, to December 31, 1918. An additional tax3014 of $19,952.63 was assessed in March, 1924. A claim in abatement for that amount was filed by the petitioner on April 17, 1924. On March 3, 1925, the petitioner executed an income and profits-tax waiver relating to the making of any assessment of income, excess-profits or war-profits taxes due under any return for the year 1918, and effective until December 31, 1925. On October 15, 1925, the respondent made his final determination and issued his 60-day deficiency letter disallowing the said claim for abatement, subject, however, to an allowance of $779.60 as an overassessment. During the years under consideration the petitioner sold a large number of Packard trucks and a small number of Packard automobiles on the following plan: The purchaser paid at least 25 per cent, occasionally 40 per cent, and in at least one instance 50 per cent, of the purchase price in cash and received title to the truck. He then executed a chattel mortgage and a note to the petitioner assigning to it the said truck to secure the payment of the unpaid portion of the purchase price, increased by certain financing, insurance, and other charges. 120 The chattel mortgage was immediately "sold, 3015 assigned and transferred" to the American Commercial Co. of Cleveland, Ohio, hereinafter called the Commercial Company, by the following form of assignment: FOR VALUE RECEIVED, the within mortgage and all the right, title and interest of the undersigned, mortgagee therein and thereunder, and to the property therein described are hereby sold, assigned and transferred to THE AMERICAN COMMERCIAL COMPANY, Cleveland, Ohio, and to its successors and assigns. As an inducement to said assignee to purchase said mortgage and note the undersigned hereby certifies and represents them to be valid and subsisting obligations; that nothing has been done limiting, modifying, or in any way affecting their validity; that they were executed in connection with the sale of the automobile described therein, which said automobile was actually delivered to and accepted by said mortgagor; that at the time of the execution of said mortgage and note the undersigned did not hold said automobile on consignment, but had good title, free and clear of all claims whatsoever, there then existing no conditions to prevent the undersigned from selling the same; and that there is due and unpaid thereon only the sum3016 mentioned in said mortgage. The undersigned further guarantees the prompt payment of all moneys due, or to become due, under said mortgage, and, should it become necessary to make collection through an attorney, to pay all costs of such collection, including a reasonable attorney fee; and also the full performance by said mortgagor of all the conditions and convenants of said mortgage by said mortgagor to be performed. Dated (Dealer sign here before filing) By (Authorized officer of Firm member if Corporation or partnership) Witness: The note executed by the petitioner provided for either ten or twelve monthly payments, payable at the American Commerical Co., and was assigned and transferred to the Commerical Company by the following endorsement: For value received we hereby assign and transfer the within note to THE AMERICAN COMMERCIAL COMPANY. GUARDIAN BLDG. CLEVELAND, OHIO. guarantee payment of the same at maturity and waive demand, protest and presentation for payment and notice of non-payment and protest. THE PACKARD CLEVELAND MOTOR CO.By At the time the petitioner assigned and transferred to the Commerical Company the purchaser's note, together3017 with the chattel mortgage securing it, it received from that company the full amount of the purchase price of the truck remaining unpaid by the purchaser. 121 The portion of the note representing interest and financing charges was retained by the Commercial Company. Since such assignment was made with recourse, the petitioner on various occasions was compelled to pay to the Commercial Company due and unpaid portions of the purchase money notes in respect to which the purchaser was in default. In such a situation the truck was repossessed. Often the truck so repossessed was refinanced in the same manner as described above and resold either to the original purchaser or to a stranger. No investigation of the financial responsibility of the purchaser was made by the Commercial Company, while the petitioner secured as its customers those who appeared to be honest and industrious and had a sufficient margin of cash to render the risk reasonably good. It often secured hauling contracts for its purchasers in advance of the sale. Monthly statements were submitted by the Commercial Company to the petitioner showing the status of payments made by purchasers. The petitioner was3018 not concerned with the collection of unpaid installments until and unless the purchasers became delinquent from two to four months. In some instances additional time was allowed by the Commerical Company with the consent of the petitioner. Upon the sale of the truck and the assignment of the unpaid purchase obligations to the Commercial Company the account was closed on petitioner's books, the name of the purchaser disappeared from the petitioner's books, and reappeared only in the event of refinancing or repossession. Following the Armistice and chiefly in 1920 and 1921 the petitioner was compelled to repossess many trucks and ultimately suffered a considerable loss thereby. The Packard Company had reduced the price of trucks by approximately $1,000 in 1919 or 1920 and in 1920 ceased altogether their manufacture. In Cleveland the market for trucks in 1920 was exceedingly poor on account of the cessation of war activities during the preceding year. The following is a summary of purchasers' notes unpaid on January 1, 1919, and January 1, 1920: Representing unpaid balance on saleNotes unpaid Jan. 1, 1919Notes unpaid Jan. 1, 19201917$5,034.951918183,062.91$1,113.001919233,253.09Total of unpaid notes188,097.86234,366.093019 The respondent based the computation of the petitioner's profit for the years in question on the amount of the cash payments received from the purchaser plus the amount of cash actually received within 122 the taxable year from the Commerical Company from the sale and assignment of the purchasers' deferred obligations. Respondent excluded from his computation that portion of the notes representing financing charges and interest, all of which were retained by the Commercial Company. Subsequent to 1920 the books of the petitioner were adjusted to show its income on a deferred basis rather than on an accrual basis. OPINION. VAN FOSSAN: The petitioner contends that the collection of the deficiency in tax due for the period from June 1 to December 31, 1918, is barred by the statute of limitations because no waiver was ever executed extending the statutory period for collection, the waiver of March 3, 1925, relating solely to the assessment of tax. Petitioner's return for 1918 was filed June 14, 1919. The assessment was made in March, 1924, or within five years after the filing of the return, and was timely, irrespective of the waiver. 3020 Petitioner, however, contends that, assuming the assessment was timely made, the collection of the tax is barred. The period for the assessment and collection of the tax not having expired before the enactment of the Revenue Act of 1924, enacted June 2, 1924, section 278(d) of that Act became operative and extends the time for collection for six years from the date of the assessment. ; ; . In this situation the filing of the waiver was immaterial. The second and major issue relates to the computation of income, it being contended by petitioner that its method of selling and financing the sale of trucks and cars was founded essentially on the installment or deferred-income basis, while respondent has treated the same as a closed transaction when petitioner received from the Commercial Company the full unpaid price of its trucks and cars. In our findings of fact we have set out step by step petitioner's sale and payment procedure. As between petitioner and its purchasers the sales originally may have been on an installment3021 basis. This, however, would not be an end of the matter. Pursuant to previous arrangements, petitioner immediately assigned and transferred the notes and sold, assigned and transferred the mortgages to the Commercial Company, receiving in cash the full unpaid purchase price of the car or truck. Thereupon petitioner closed the purchaser's account on its books. Only in the event of a repossession or refinancing was the account again opened and then the precise procedure 123 originally followed was usually reenacted. Under this set of facts we are convinced that upon the receipt of the full remaining purchase price of the truck or car petitioner received income in that amount. . Though the transaction may have been an installment sale originally, when the Commercial Company paid the petitioner the full balance of the account and assumed the obligation of collecting from the purchaser, so far as petitioner was concerned, the sale became a closed transaction. The Commercial Company did not act as the petitioner's agent in collecting. It had bought all of petitioner's rights under the note and mortgage and thereafter acted in3022 its own sole behalf. In support of its position petitioner points to the fact that it guaranteed payment of the notes and might be, and in a considerable number of instances was, obliged to respond to the Commercial Company as an endorser on the paper. We do not deem this fact to be of controlling weight. Though the possibility of default was in contemplation it was not established as a surety when the notes were sold and, in fact, every reasonable precaution was taken by petitioner before making a sale to forfend against such a contingency. The treatment of the sale on petitioner's books argues strongly against petitioner's contention. As an alternative contention petitioner urges that it was error for the respondent to tax them on the full amount of cash received for the reasons that petitioner was contingently liable as an endorser and the notes were not worth their full face value when received. It urges further that only the endorsement with recourse by petitioner gave them such value. The evidence does not convince us that under the facts and circumstances surrounding the sale the notes were not worth their face. The working arrangement between petitioner and the*3023 Commercial Company was very intimate. The notes were sold immediately on receipt for full face value. It is not reasonable to assume that petitioner would have made the sale in the first place or have guaranteed payment of the notes to the Commercial Company had it not believed them good for their face value. Petitioner's practice was to find a man who appeared to be honest and industrious and possessed of enough cash to make the initial payment. It often secured for him hauling contracts before the sale was made. The unpaid balances of the notes were secured by chattel mortgages. The record and all reasonable inference therefrom do not support the petitioner's contention. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625034/	Estate of Harry B. Sidles, Deceased, Daniel J. Monen, Jr., and Janice P. Sidles, Co-Executors, Petitioners v. Commissioner of Internal Revenue, RespondentEstate of Sidles v. CommissionerDocket No. 6563-73United States Tax Court65 T.C. 873; 1976 U.S. Tax Ct. LEXIS 170; January 29, 1976, Filed 170 Decision will be entered under Rule 155. Decedent was the sole shareholder of a corporation. Prior to his death, a plan of complete liquidation under sec. 337, I.R.C. 1954, was adopted and the corporation's principal asset was sold pursuant to this plan. As of the date of decedent's death all that remained to be done under the plan was a corporate resolution to distribute and the distribution of the corporation's assets, subject to its liabilities, and the execution and filing of the articles of dissolution with the State. Held, on the date of his death the decedent possessed the right to receive the proceeds of the liquidation; therefore, the liquidating distribution received by the estate constituted income in respect of a decedent within the meaning of sec. 691, I.R.C. 1954. Held, further: The estate tax deduction provided by sec. 691(c), I.R.C. 1954, may be used first against ordinary income, and then against long-term capital gain income in respect of a decedent. The deduction is not limited to offsetting related sec. 691(a) income items. William E. Seidler and John J. Gross, for the petitioners.Ronald M. Frykberg, for the respondent. Dawson, Chief Judge. Hall, J., concurring 171 in the result. Wilbur, J., agrees with this concurring opinion. Tannenwald, J., dissenting in part. Raum, J., agrees with this dissent. Featherston, J., dissenting. Forrester and Drennen, JJ., agree with this dissent. DAWSON873 OPINIONRespondent determined deficiencies of $ 160,203 and $ 2,197 in petitioners' Federal income taxes for the taxable years ended May 31, 1969, and May 31, 1970, respectively.Some issues have been conceded by petitioners. The primary issue for our decision is whether a liquidating distribution received by the Estate of Harry B. Sidles from Bi-State Distributing Corp. constituted "income in respect of a decedent" within the meaning of section 691(a)(1). 1 If this distribution is 874 determined to be "income in respect of a decedent," then we must decide whether the deduction provided by section 691(c) is to be offset only against section 691(a) income.All of the facts are stipulated. The stipulation of facts and the exhibits attached thereto are adopted as our findings. The relevant facts are summarized below.Harry B. Sidles (herein referred to as 172 the decedent) was born on May 2, 1903, and died testate in Omaha, Nebr., on June 12, 1968. During his lifetime the decedent was a cash basis taxpayer.Daniel J. Monen, Jr., and Janice P. Sidles, the petitioners herein, are the duly appointed and qualified coexecutors of the Estate of Harry B. Sidles (herein referred to as the estate). When the petition was filed herein the legal residence of Daniel J. Monen, Jr., was Omaha, Nebr., and that of Janice P. Sidles was Scottsdale, Ariz.The estate's fiduciary income tax return (Form 1041) for the taxable year beginning June 12, 1968, and ending May 31, 1969, was filed with the Internal Revenue Service Center at Kansas City, Mo. Subsequently, two amended returns were filed for that year. The estate's fiduciary income tax return for the taxable year ending May 31, 1970, was filed with the District Director of Internal Revenue at Omaha, Nebr.Bi-State Distributing Corp. (herein referred to as Bi-State) was originally incorporated under the laws of Nebraska in 1930 as the H.E. Sidles Co. On October 17, 1947, the name of the corporation was changed to Bi-State Distributing Corp.From January 3, 1956, until his death on June 12, 1968, the decedent 173 owned all the outstanding common stock (500 shares) of Bi-State. At his death decedent's adjusted basis in these shares was $ 29,701.04.As of June 12, 1968, Bi-State's board of directors consisted of three individuals: the decedent (nominated and elected January 20, 1933), Janice P. Sidles (nominated and elected on January 3, 1956), and Areta L. Kelly (nominated and elected on June 26, 1962). Janice P. Sidles and Areta L. Kelly were the decedent's wife and mother-in-law, respectively. On July 22, 1968, Margaret DeVore was nominated and elected to serve the balance of the decedent's term as a director. She was an employee of Bi-State and was not related to the decedent or to either of the other two directors.875 At a special meeting held on February 28, 1968, Bi-State's board of directors adopted a plan of complete liquidation and dissolution pursuant to section 337 of the Internal Revenue Code of 1954, and section 21-2083 of the Nebraska Business Corporation Act. On the same day this plan of complete liquidation was approved by the decedent as Bi-State's sole shareholder.On February 29, 1968, Bi-State filed with the Nebraska secretary of state a statement of intent to dissolve.Bi-State174 owned 11,025 shares of Sidles Co. stock. On March 26, 1968, Sidles Co. made an offer to purchase these shares. The purchase agreement provided that Bi-State would receive cash of $ 13,429 and a 20-year, 6-percent promissory note from Sidles Co. in the face amount of $ 899,000. On the same day Bi-State accepted this purchase offer. Bi-State's basis in the 11,025 shares of Sidles Co. stock at the time of sale was $ 86,344.84.Bi-State owned certain real and personal property at 4827 Dodge Street in Omaha, Nebr., and from November 1964 until November 1968 was actively engaged in the operation of a gift shop, Areta's, at that location. The gift shop was managed by Areta L. Kelly, decedent's mother-in-law.After the decedent's death, Bi-State took no action to distribute any of its assets pursuant to the previously adopted plan of liquidation until November 29, 1968, when its board of directors adopted a resolution to distribute all its real and personal property to the decedent's estate. On that date a warranty deed, transferring the real property located at 4827 Dodge Street, and a bill of sale, transferring the personalty to the estate, were executed. On November 30, 1968, Bi-State175 assigned all its right, title, and interest in the Sidles Co. promissory note to the estate.As of the dates of distribution, November 29 and 30, 1968, the assets distributed in liquidation by Bi-State to the estate had a total net fair market value of $ 702,830.85, being the total fair market value of assets received ($ 731,195.88), less liabilities assumed ($ 28,365.03).Articles of dissolution were executed by Bi-State on November 30, 1968, and were filed with the Nebraska secretary of state on December 17, 1968. On December 17, 1968, a certificate of dissolution was issued.At the time Bi-State adopted its plan of liquidation and dissolution, which was by act of the corporation, section 21-2088, 876 Nebraska Business Corporation Act, provided the procedure for the corporate revocation of voluntary dissolution proceedings. 2176 177 Pursuant to the provisions of section 337, Bi-State did not recognize its gain on the sale of its assets in liquidation, i.e., the gain on the sale of its Sidles Co. stock, less a $ 204 loss on the sale of a 1968 Buick station wagon.On the decedent's Federal estate tax return, the executors included the 500 shares of Bi-State stock at a value of $ 702,830.85, valued as of the alternate valuation date (November 30, 1968). This valuation was accepted by respondent following an audit.In his notice of deficiency dated June 12, 1973, respondent determined that the gain realized from the liquidation of Bi-State constituted income in respect of a decedent. The gain ($ 673,129.81) was calculated by subtracting the decedent's adjusted basis in his Bi-State stock ($ 29,701.04) from the net fair market value of the assets received by the estate as a liquidating distribution ($ 702,830.85). The respondent further determined that a deduction of $ 950 for the taxable year ending May 31, 178 1969, for Federal estate tax attributable to income in respect of a decedent, as claimed by petitioners, was not allowable, but that an estate tax deduction of $ 94,448 was 877 allowable as an offset against income in respect of a decedent totaling $ 674,708 in computing the alternative tax. It was further determined that for the taxable year ending May 31, 1970, the proper deduction for Federal estate tax attributable to income in respect of a decedent was $ 255, rather than $ 686 as claimed on the return.Petitioners contend that the liquidating distribution received by the estate from Bi-State is not governed by section 691(a) and, even if it did constitute income in respect of a decedent, the deduction provided by section 691(c) should not be limited solely to section 691(a) income items.The principal issue is whether the liquidating distribution received by the estate from Bi-State constituted "income in respect of a decedent" as that term is used in section 691, which provides, in relevant part, that:The amount of all items of gross income in respect of a decedent which are not properly includible in respect of the taxable period in which falls the date of his death or a prior 179 period (including the amount of all items of gross income in respect of a prior decedent, if the right to receive such amount was acquired by reason of the death of the prior decedent or by bequest, devise, or inheritance from the prior decedent) shall be included in the gross income, for the taxable year when received, of:(A) the estate of the decedent, if the right to receive the amount is acquired by the decedent's estate from the decedent; [Emphasis added.]Section 1.691(a)-1(b), Income Tax Regs., defines "income in respect of a decedent" as:those amounts to which a decedent was entitled as gross income but which were not properly includible in computing his taxable income for the taxable year ending with the date of his death or for a previous taxable year under the method of accounting employed by the decedent. * * [Emphasis added.]Respondent determined that the liquidation proceeds were income in respect of the decedent because, as of the date of his death, the decedent was entitled to and possessed the right to receive the liquidating distribution from Bi-State.Petitioners argue that the criterion for determining whether an item constitutes "income in respect of a decedent" 180 within the meaning of the Code and regulations sections quoted above is that the decedent must be entitled to the item in the sense that he had a right to the income at the time of his death, which right had been earned during his lifetime. Petitioners further contend that neither the adoption of the plan of liquidation nor 878 decedent's activities or economic efforts created the requisite right to income under section 691 and the regulations thereunder. They argue that the decedent had no right and was not entitled to the liquidation proceeds until the distribution had been authorized by Bi-State's board of directors.Income in respect of a decedent is defined only in the regulations and not in the statute. An attempt to add such a definition to the Code in 1959 failed. H.R. 3041, 86th Cong., 1st Sess. (1959). However, some guidelines can be gleaned from an examination of congressional intent as reflected in the legislative history of section 691 and its antecedents.Prior to 1934 an accrual basis taxpayer was required to pay income tax on those amounts accrued but not received as of the date of his death. However, neither a cash basis taxpayer nor his estate was required to pay 181 a Federal income tax on such amounts because they were considered corpus rather than income. Nichols v. United States, 64 Ct. Cl. 241">64 Ct. Cl. 241 (1927), cert. denied 277 U.S. 584">277 U.S. 584 (1928). Furthermore, no income tax liability arose when capital assets were transferred after death since the estate's basis in such assets was fair market value at date of death and the amounts received generally did not exceed this amount. 3Congressional concern with this discrimination between taxpayers and loss of revenue led to the enactment of section 42 of the Revenue Act of 1934. This section required all income accrued to the date of death but not otherwise properly includable in income for that period or any prior period to be included in decedent's income tax return for the period ending with his death regardless of his method of accounting. See S. Rept. No. 558, 73d 182 Cong., 2d Sess. 28 (1934).While this section achieved an equality between cash and accrual basis decedents, it resulted in bunching of income since amounts which would have been received over several years and taxed at lower rates were required to be reported in the year of death. This situation was aggravated by the imposition of war surtaxes and by the realization that taxpayers might be taxed on substantial sums which they had not yet received or might never receive. See S. Rept. No. 1631, 77th Cong., 2d Sess. 100-105 879 (1942), 2 C.B. 504">1942-2 C.B. 504, 579-583. Furthermore, the decision of the Supreme Court in Helvering v. Enright, 312 U.S. 636">312 U.S. 636 (1941), greatly expanded the meaning of "accrued" as used in section 42. In that case, the Supreme Court, after giving the reasons for the enactment of section 42, explained that it was endeavoring to effectuate the legislative objective of ensuring that income, which would have been taxable had decedent lived to receive it, should not escape income taxation by reason of his death.Accruals here are to be construed in furtherance of the intent of Congress to cover into income the assets of decedents, earned during their life and unreported as income, 183 which on a cash return, would appear in the estate returns. Congress sought a fair reflection of income. [312 U.S. at 644-645.]Section 134 of the Revenue Act of 1942 added section 126 of the 1939 Internal Revenue Code. This section, the predecessor of section 691 of the Internal Revenue Code of 1954, eliminated the undesirable pyramiding effects of the prior law through formulation of the concept of "income in respect of a decedent." Under this section income accruing to a decedent because of his death was not to be included in his final return, but was to be treated as income and reported as such by the person receiving such income. As noted in Commissioner v. Linde, 213 F.2d 1">213 F. 2d 1, 5-6 (9th Cir. 1954), cert. denied 348 U.S. 871">348 U.S. 871 (1954):there is nothing in the legislative history or in the text of Sec. 126 to indicate that it was intended to be anything other than an improved device to accomplish the general purpose of the internal revenue code that all income should pay a tax and that death should not rob the United States of the revenue which otherwise it would have had. We think it clear that the intent of Congress continued to be as stated in the Enright case "to cover into income 184 the assets of decedents, earned during their life and unreported as income". * * [Fn. ref. omitted.]* * it is our view that section 126 was but an improved method adopted by Congress in aid of its continuing effort to avoid the loss of tax upon income merely because of the death of the decedent who would have paid a tax upon the same economic returns had he lived to receive them.Section 691 includes in gross income "all items of gross income in respect of a decedent which are not properly includible" in the taxable year ending with the date of his death or prior period. This reflects the same general congressional intent to tax all items which can constitutionally be considered income, but which are not exempted from taxation, as that underlying section 61 which defines gross income. However, for income to be 880 considered "income in respect of a decedent," section 691 requires that the decedent possess a right to that income as of his date of death. 4186 This is a question of fact and each case depends upon its "subsisting facts." Trust Co. of Georgia v. Ross, 392 F. 2d 694, 695 (5th Cir. 1967), cert. denied 393 U.S. 830">393 U.S. 830 (1968). One of the factors to be considered is whether the 185 income received after death resulted from the decedent's activities and economic efforts during his lifetime. 5 But this right must be distinguished from the activity which created it. No matter how great the activity or effort, there can be no income in respect of a decedent under section 691 unless the decedent possessed a right to receive such income on his date of death. Trust Co. of Georgia v. Ross, supra at 695. Our point of inquiry must be whether the transaction had sufficiently matured as of decedent's death so as to create in him a right to receive the income when it was subsequently realized.The facts and circumstances of this case lead us to the conclusion that the amounts received by the decedent's estate on the liquidation of Bi-State constituted income in respect of a decedent within the meaning of section 691.On February 28, 1968, the board of directors of Bi-State Distributing Corp., consisting of Harry 187 B. Sidles, Janice P. Sidles, and Areta L. Kelly, passed a resolution calling for the complete liquidation and dissolution of the corporation. The sole 881 stockholder of Bi-State, Harry B. Sidles, approved the resolution that same day.The liquidating distribution had its source exclusively in decedent's actions. His affirmative vote for liquidation created a right to receive that distribution, which right existed at his death. Although decedent had the power to rescind the transaction creating such a right, he had not attempted to do so before his death. Had the decedent lived to receive the liquidating distribution, it would have constituted income to him, and consequently such amounts constitute income in respect of a decedent when received by the estate.There can be no doubt that the estate acquired the right to receive the liquidation distribution from the decedent. The estate's right to such proceeds derived solely from decedent's death and not from its own efforts. Whatever actions the estate took were of no material significance here.Furthermore, the actions of Bi-State's board of directors which remained to be done at the time of decedent's death do not derogate decedent's 188 right to receive the liquidating distribution. The resolution of November 29, 1968, to distribute the assets in liquidation to decedent's estate, the declaration of the liquidating dividend and the filing of articles of dissolution were mere formalities; ministerial acts necessary to complete the liquidation under State law. On the date of his death the decedent had performed enough substantive acts within his control to perfect his right to receive the liquidating distribution for purposes of section 691. 6189 Cf. Hudspeth v. United States, 471 F. 2d 275 (8th Cir. 1972); Kinsey v. Commissioner, 477 F. 2d 1058 (2d Cir. 1973), affg. 58 T.C. 259">58 T.C. 259 (1972).In Keck v. Commissioner, 415 F. 2d 531 (6th Cir. 1969), revg. 49 T.C. 313">49 T.C. 313 (1968), the Commissioner determined a deficiency in the income tax of George W. Keck and Mary Ann Keck, and also asserted transferee liability against Mary Ann Keck, as transferee of the assets of the Estate of Arthur D. Shaw, deceased. 882 The issue there was whether certain amounts received in 1960 by Mary Ann Keck and by the estate, were taxable as income in respect of a decedent under section 691. The deceased, Arthur D. Shaw, owned stock in three affiliated corporations as of March 1, 1956. On that date an agreement was entered into prior to the sale of the assets of the corporation. The sale, however, was contingent upon approval of the Interstate Commerce Commission. The shares of stock were placed in escrow pending such approval.Mr. Shaw died November 27, 1958. ICC approval was not obtained until May 5, 1960. On July 21, 1960, pursuant to authority granted by the ICC, the three companies were liquidated pursuant to the agreement earlier agreed upon, and the cash received from the sale was distributed 190 in exchange for shares of the stock of the three companies. The executor of the Estate of Mr. Shaw paid over to Mrs. Keck $ 314,328.53 in exchange for 100 shares of one of the companies liquidated. The court there held that at the time of the decedent's death, his stock had not been converted into section 691 income in respect of a decedent. The Court of Appeals agreed with the dissenting opinion of Judge Featherston in George W. Keck, 49 T.C. 313">49 T.C. 313 (1968), that the sale was subject to a number of contingencies which operated to prevent the cash from becoming income in respect of a decedent: (1) The sale was subject to approval of the ICC, which approval did not come until 18 months after decedent's death; (2) as of the time of decedent's death, neither decedent nor the other stockholders were contractually committed to the plan to liquidate the corporation; (3) the majority stockholder (who in this case was not decedent) might have decided not to liquidate the corporation; and (4) the decedent's own stock was not committed to vote for the plan until May 23, 1960, when the proxies were signed and delivered.The Keck case is clearly distinguishable on its facts. Unlike Keck , the decedent, 191 as Bi-State's sole shareholder, possessed the power to compel payment of the liquidating distribution, as well as the right to that payment, when he died. His right to the liquidation distribution was not subject to the many contingencies involved in Keck. The transaction was not subject to the approval of any Government agency; there was no other stockholder who could vote not to liquidate the corporation. The distribution made to the Estate of Harry B. Sidles, was clearly 883 "income in respect of a decedent" within the meaning of section 691.The second issue we must decide is whether the estate tax deduction provided in section 691(c) can be offset only against related section 691(a) items. Petitioners argue that the 691(c) deduction is not limited to deductions from or offsets against income items in respect of a decedent but may be used in the way that is most advantageous to them. They have first taken the 691(c) deduction against ordinary income (which was not income in respect of a decedent) and then applied the remainder against the capital gain income in respect of a decedent which engendered the deduction.Section 691(c) provides that when a taxpayer includes an amount 192 of "income in respect of a decedent" in his gross income, he "shall be allowed" a deduction. This deduction is limited to the portion of the estate tax imposed upon the decedent's estate which is attributable to the inclusion of that amount of income in respect of a decedent in the decedent's gross estate. Sec. 691(c)(1)(A). Neither the statute nor its legislative history expressly restricts the 691(c) deduction to 691(a) income items. The purpose for providing this deduction was to prevent subsequent income taxation of an item of income in respect of a decedent which had already been taxed for estate tax purposes. S. Rept. No. 1622, 83d Cong., 2d Sess. 87-89 (1954); H. Rept. No. 1337, 83d Cong., 2d Sess. 64-65 (1954).Based on our conclusion on the first issue, the estate had income in respect of a decedent of $ 674,708. The estate tax attributable to the income in respect of a decedent (and thus the amount of the section 691(c) deduction) was $ 94,448. The estate also had other taxable income for 1969 of $ 29,284. It took the 691(c) deduction first against ordinary income, and, after completely using that amount, took the remaining deduction as an offset against capital gains 193 before making the alternate tax computation provided by section 1201(b).In his statutory notice of deficiency the respondent allowed the 691(c) deduction only as an offset against the 691(a) items (capital gain) and not from ordinary income. Respondent's computation in the notice of deficiency was as follows: 884 1 Income in respect of a decedent $ 674,708Less net estate tax in respect of a decedent94,448Balance, long-term capital gain580,260Capital gain tax rate25%Capital gain tax145,065Tax on other income of estate:Taxable income, per amended return andwith sec. 691(c) deduction added back in: $ 29,284Tax on $ 29,28410,771Total tax 155,836Petitioners' method results in a tax savings because the deduction was first taken against ordinary income, which is taxable at a higher rate than the capital gains.Respondent relies on Read v. United States, 320 F. 2d 550 (5th Cir. 1963). In that case the income in respect of a decedent consisted of long-term capital gain against which the estate offset the section 691(c) deduction before computing the alternative tax. The 194 Government argued that the 691(c) deduction must be taken against ordinary income and could not be offset against capital gains because "there is no express provision making the deduction applicable in alternative tax computations," Read v. United States, supra at 552. In other words, a deduction is not an offset. The Court of Appeals for the Fifth Circuit found for the estate, reversing the decision of the District Court and remanding the case. It noted that the adoption of the Government's position would result in the imposition of both estate and income tax on amounts of income with respect to a decedent where the alternative computation was used, contrary to the congressional intent in enacting section 691(c). The court also referred, at page 553, to the legislative history which noted that recipients of income in respect of decedent are to be "allowed an offsetting deduction" for the estate tax attributable to the inclusion of income in respect of a decedent in the decedent's gross estate, citing S. Rept. No. 1622, 83d Cong., 2d Sess. 87 (1954).In Read, the 691(c) deduction obviously exceeded the amount of ordinary income and would have been lost unless it could be offset against 195 the capital gain income in respect of a decedent item. The Government's position would have forced the estate to 885 forego the alternative tax in order to fully utilize the 691(c) deduction.The Court of Appeals, after allowing the offset, noted that:The offsetting is a pro tanto cancelling out. It works a reduction in the amount of the particular kind of income which is to be subject to taxation. There is equal purpose to be served and a like reason for allowing the deduction where the alternative tax computation is used as where it is not. * * * [Read v. United States, supra at 553; emphasis added.]Respondent argues that this language requires us to sustain his position in this case because this will result in a proper matching of the deduction with its related income consistent with congressional intent.We do not find Read to be on point because the holding in that case was that the 691(c) deduction could be used as an offset where the alternative tax is used. Respondent does not dispute petitioners' right to an offset here.The issue confronting us in this case was not before the court in Read and, accordingly, we have only considered those portions of that case which discussed 196 the statutory purpose of section 691(c). Furthermore, we think that the failure of the estate in Read to use the section 691(c) deduction in the most advantageous way should not be deemed to be a conclusive determination that the credit must be offset solely against income in respect of a decedent.The scope of the 691(c) deduction has been explored in three subsequent cases. Meissner v. United States, 364 F. 2d 409 (Ct. Cl. 1966); Goodwin v. United States, 458 F. 2d 108 (Ct. Cl. 1972); and, Quick v. United States, 503 F. 2d 100 (10th Cir. 1974).In Meissner, the executors used the alternative tax to offset the section 691(c) deduction against the related income in respect of a decedent (capital gain) and the respondent argued that the 691(c) deduction could be applied only against ordinary income. The Court of Claims refused to so hold and stated at page 413:We are of the view, however, that taxpayers are not limited to an "either-or" choice; we think that to carry out the purpose of section 691(c), a taxpayer should be able to use the deduction in the way most advantageous to him. Stated differently, he should be able to use it against ordinary income first and any balance against 197 capital gain. * * In Goodwin, where the income in respect of a decedent was again capital in nature, the Government reversed its position and 886 contended that when the income in respect of a decedent was capital gain, the 691(c) deduction could be taken only as a deduction from gross income which includes the capital gain income in respect of a decedent item (since the alternative tax was not used) and could not be deducted from unrelated ordinary income. The Court of Claims again held for the taxpayer, following the Meissner decision.The taxpayer did not use the alternative tax in Quick and the Court of Appeals for the Tenth Circuit held that when the section 691(c) deduction is greater than the long-term capital gain income in respect of a decedent remaining after the 1202 deduction is taken the deduction need not be restricted to the item which gave rise to it, and could be taken against income unrelated to that deduction. The facts there were that the taxpayer received installment payments consisting of long-term capital gains which constituted income in respect of a decedent. The taxpayer deducted the estate tax allowance after the section 1202 capital gains deduction had been 198 taken. The Government, upon audit, rearranged the figures by deducting the estate tax allowance from the entire capital gain, then applying the 50-percent capital gains deduction. The court in Quick noted that, although the statute reads that the estate tax deduction "shall be allowed," it does not specifically state from what it should be deducted, nor does it state the point in time at which it should be taken. The Court of Appeals for the Tenth Circuit, following Meissner, held that since no method was specified, the deduction could be taken in the manner "most advantageous to the taxpayer."The issue before us is precisely the one considered in Goodwin and Quick, although those cases involved section 1202. See and compare J. T. Bridges, Jr., 64 T.C. 968">64 T.C. 968 (1975). We are convinced that the rationale of those cases is correct. We think the purpose of section 691(c) is only:to provide approximately the same tax consequences in the case of a decedent whose gross estate includes claims to income as in the case of a decedent all of whose income receivables had been collected (and income tax paid thereon) prior to his death. * * [2 Mertens, Law of Federal Income Taxation, sec. 12.102(b), 199 ch. 12, p. 404.] * To adopt the Government's view would result in the imposition of both estate and income tax on the income amounts where the alternative computation was used. * * [Read v. United States, 320 F.2d 550">320 F. 2d 550, 553 (5th Cir. 1963).]887 Section 691(c)(1)(A) provides:(A) General rule. -- A person who includes an amount in gross income under subsection (a) shall be allowed, for the same taxable year, as a deduction an amount which bears the same ratio to the estate tax attributable to the net value for estate tax purposes of all the items described in subsection (a)(1) as the value for estate tax purposes of the items of gross income or portions thereof in respect of which such person included the amount in gross income (or the amount included in gross income, whichever is lower) bears to the value for estate tax purposes of all the items described in subsection (a)(1). [Emphasis added.]We have examined the legislative history of section 691 and have found nothing to indicate that the deduction provided in section 691(c) can only be used to offset section 691(a) income items. The express language of the statute does not indicate that the deduction should be so limited, and 200 we are reluctant to imply such an intent on the part of Congress based on speculation.Our holding results in as close an approximation as is possible without adding additional language to section 691(c). We agree with the Court of Claims that "taxpayers are not limited to an 'either-or' choice." Goodwin v. United States, supra at 111.Accordingly, we conclude that the estate tax deduction provided by section 691(c) may be used first against ordinary income and then against long-term capital gain income in respect of a decedent.Decision will be entered under Rule 155. HALL Hall, J., concurring in the result: I believe the liquidation gains did constitute income in respect of a decedent. However, some of the language in the Court's opinion could be construed as going farther than I would in stating the criteria for distinguishing income in respect of a decedent from mere unrealized appreciation in value of property. The issue, as properly framed by the Court's opinion, is whether at death decedent had a right to receive the Bi-State liquidation proceeds. Under Nebraska law, the filing of a statement of intent to dissolve without more obligates the corporation to cease doing business 201 and distribute its assets to its shareholders. Nebraska Business Corporation Act, Neb. Rev. Stat. secs. 21-2085 and 21-2086 (1974). Should the 888 corporate directors fail to make such a distribution, within a reasonable period the shareholders would apparently be able to sustain an action to compel such a distribution in the absence of shareholder action reversing the original dissolution resolution. At that point the shareholders are vested with a legal right to the proceeds, and the postdeath gains are income in respect of a decedent. The case is analogous to the execution of an enforceable executory contract of sale. Trust Co. of Georgia v. Ross, 392 F. 2d 694 (5th Cir. 1967), cert. denied 393 U.S. 830">393 U.S. 830 (1968). However, I do not consider it significant that decedent, as Bi-State's sole shareholder, had the power to compel payment of the liquidating distribution when he died, for any sole shareholder, as a practical matter, has such power at all times. Reference to the sole shareholder's power proves too much. He has the effective power, for example, to cause an ordinary dividend to be declared. But when no formal directors' action declaring such a dividend has been taken, a postdeath 202 declaration would not give rise to income in respect of a decedent, for the decedent had no right at death to such a distribution. What counts is whether the formal corporate actions have been taken which would give even a minority shareholder the legal right to compel a liquidating distribution. References to cases holding that a "right" need not be a "legal" right are also inapposite here in the context of realization of gains on appreciated property. Such cases involve compensation income. Indeed, it may well be that even in the compensation cases a right existed to compensation in quantum meruit, as evidenced by the very postdeath, nondonative payment which was held to be income in respect of a decedent. In any event, short of the existence of a fixed, predeath legal right to the proceeds of a sale or exchange, I would not consider realization of gains on the sale or exchange of property to be income in respect of a decedent. TANNENWALD (In Part); FEATHERSTONTannenwald, J., dissenting in part: While the issue is not entirely free from doubt, I accept the majority conclusion that the proceeds of the liquidation are "income in respect of a decedent" within the meaning of section 691. 203 Prior to the decedent's death, both the directors and the shareholders had not only resolved to liquidate Bi-State but had specifically provided 889 in the respective resolutions that all of Bi-State's assets be sold, that the officers of Bi-State be "authorized and directed to file a Statement of Intent to Dissolve and Articles of Dissolution pursuant to the Nebraska Business Corporation Act" (emphasis supplied), and that the debts of Bi-State be paid and "the remaining assets * * be distributed * * * as soon as practicable but in no event later than the termination of a twelve-month period." Additionally, also prior to decedent's death, the statement of intent to dissolve had been filed with the secretary of state of Nebraska. Finally, at the times the resolutions were adopted and the statement of intent to dissolve filed and at the time of his death, decedent was the sole shareholder of Bi-State. To be sure, under section 21-2088, Nebraska Business Corporation Act, Bi-State's board of directors could have revoked the dissolution proceeding after decedent's death and prior to the filing of the certificate of dissolution. But, in my opinion, this possibility is not enough to obviate 204 the conclusion that, under the circumstances herein, decedent's right to receive the liquidation proceeds had so matured as to make him "entitled" to such proceeds and thus bring the transaction within section 691. See sec. 1.691(a)-1(b), Income Tax Regs.The fact that the right to proceeds of liquidation may not have sufficiently ripened to require them to be included in decedent's income on the theory of constructive receipt (decedent being a cash basis taxpayer) 1 or as accrued income (had decedent been an accrual basis taxpayer) is beside the point. The legislative history of the predecessor of section 691 (sec. 126, I.R.C. 1939) shows clearly that the applicable standard for taxing income in respect of a decedent was intended to be broader and to cover "All amounts of gross income which are not includible in the income of the decedent." (Emphasis added.) See H. Rept. No. 2333, 77th Cong., 2d Sess. 84 (1942); S. Rept. No. 1631, 77th Cong., 2d Sess. 101 (1942). See also Commissioner v. Linde, 213 F.2d 1">213 F. 2d 1, 6 (9th Cir. 1954).In the foregoing context, I believe Keck v. Commissioner, 415 F. 2d 531 (6th Cir. 1969), 205 revg. 49 T.C. 313">49 T.C. 313 (1968), and W. B. Rushing, 52 T.C. 888">52 T.C. 888 (1969), affd. 441 F. 2d 593 (5th Cir. 1971), are distinguishable. In those cases, the decedent (Keck) and the transferor (Rushing) did not have such control and the right to 890 receive the amounts in question could have been varied or even destroyed by the action of independent third parties. 2 The circumstances herein are more closely akin to those involved in Hudspeth v. United States, 471 F. 2d 275 (8th Cir. 1972), and I would apply the rationale of that case. In so stating, I recognize that there may be a distinction, due to the involuntary nature of death, between a situation involving the applicability of section 691 and one involving a claimed assignment of income (Hudspeth) but, in the instant situation, I think it is a distinction without a difference. My disagreement with the majority goes 206 to the issue of how the estate tax deduction under section 691(c) should be applied. The majority rests its decision in favor of the petitioners on the ground that, since section 691(c) does not indicate that the estate tax deduction can only be used to offset section 691(a) income items, a taxpayer should have a choice and be able to use the deduction in the way most advantageous to him, i.e., by applying it first to ordinary income and using the balance of the deduction against long-term capital gain. In thus giving effect to section 691(c), the majority ignores the plain mandate of section 1201(b). 3207 In Read v. United States, 320 F. 2d 550 (5th Cir. 1963), the alternative tax applied 4208 and the taxpayer sought to offset the entire estate tax deduction against the long-term capital gain. The Court of Appeals rejected the Government's contention that the estate tax deduction could be taken only against ordinary 891 income. 5 In effect, the Court of Appeals held that, in applying the alternative tax, section 691(c) was self-contained, i.e., the estate tax deduction should be offset against the long-term capital gain, and disagreed with the contention that the estate tax deduction was to be treated like any other deduction, with the result that it could not be used in the alternative tax computation.In Meissner v. United States, 364 F. 2d 409 (Ct. Cl. 1966), it appears that the taxpayer sought, as had the taxpayer in Read, to offset the estate tax deduction against its long-term capital gain in determining the amount of tax due under the alternative tax computation. The Government again asserted the position it had taken in Read, and the Court of Claims, following the Court of Appeals in that case, held for the taxpayer. However, because sizable amounts of ordinary income were involved and because the amount of the refund would have to be determined in subsequent proceedings (see 364 F. 2d at 410 n. 2, and 412), the Court of Claims went on to express its views on the issues involved in the instant case. Describing what it was doing as a possible "refinement to Read" (see 364 F. 2d at 414), the Court of Claims reasoned that, in computing the alternative tax, the estate tax deduction was to be allowed first against ordinary income and, to the extent not so used, against the 209 long-term capital gain.In Goodwin v. United States, 458 F. 2d 108 (Ct. Cl. 1972), it is unclear whether only the regular income tax was involved or both the regular income tax and the alternative tax as in Meissner. The main issue was whether the estate tax deduction came "off the bottom," i.e., after the application of the 50-percent long-term capital gain deduction under section 1202, as contended by the taxpayer, rather than "off the top," i.e., before the application of such capital gain deduction, as contended by the Government. See Quick v. United States, 360 F. Supp. 568">360 F. Supp. 568, 570 (D. Colo. 1973), affd. 503 F. 2d 100 (10th Cir. 1974). The Court of Claims applied the rationale of Meissner and sustained the taxpayer.In Quick v. United States, 503 F. 2d 100 (10th Cir. 1974), the Tenth Circuit Court of Appeals followed Goodwin in a situation where the alternative tax was not involved and rejected the Government's contention on the ground that it would result in 892 depriving the taxpayer of the full benefit of the section 691(c) deduction by, in effect, cutting it in half. This Court recently applied Quick in J. T. Bridges, Jr., 64 T.C. 968">64 T.C. 968 (1975), where the alternative tax was likewise 210 not involved.Unquestionably, Meissner and possibly Goodwin, as well as the rationale of Quick and Bridges, depart from the concept of Read that section 691 is self-contained, with the result that the estate tax deduction should be treated as an offset against the item of income in respect of a decedent, in the sense that they treat the estate tax deduction like any other deduction, although Meissner and the reasoning of Goodwin also return to the offset technique by permitting the amount of the estate tax deduction not used against ordinary income to be offset against the long-term capital gain in computing the alternative tax. With all due respect, I think that this departure from Read is erroneous and that the majority herein is wrong in following the same path.My own view is that Read reflects the correct approach, i.e., that section 691 should be treated as self-contained, with the estate tax deduction offsetting the long-term capital gain. Compare Statler Trust v. Commissioner, 361 F. 2d 128 (2d Cir. 1966), revg. 43 T.C. 208">43 T.C. 208 (1964), and United States v. Memorial Corp., 244 F. 2d 641 (6th Cir. 1957). This approach comports with the objective of allowing "an offsetting deduction" 211 enunciated in the legislative history of section 691(c). See H. Rept. No. 1337, 83d Cong., 2d Sess. 64 (1954); S. Rept. No. 1622, 83d Cong., 2d Sess. 87 (1954). See also Read v. United States, 320 F. 2d at 553; Quick v. United States, supra. The net amount thus obtained is then carried out of section 691, included in income, and becomes subject to other allowable deductions.Another possible approach is that reflected in Quick v. United States, supra, and J. T. Bridges, Jr., supra, where the taxpayer was allowed to move the estate tax deduction out of section 691 in order not to impair his right to its full benefit through the application of section 1202. But, as I see it, there is no basis for applying a different concept in synthesizing sections 691(c) and 1202 rather than sections 691(c) and 1201(b). In both situations, the basic question is what is the proper amount of the long-term capital gain which should be treated as income in respect of a decedent.6893 In any event, I do not believe petitioners 212 should be able to utilize the estate tax deduction in part to reduce their taxable income to zero under step 1 of the alternative tax computation (sec. 1201(b)(1)) and then use the balance of the estate tax deduction against their long-term capital gain under step 2 of that computation (sec. 1201(b)(2)). To allow petitioners to go this far violates the mandate of section 1201(b), which clearly eliminates any deductions (see Walter M. Weil, 23 T.C. 424">23 T.C. 424 (1954), affd. 229 F. 2d 593 (6th Cir. 1956); Pope & Talbot, Inc., 60 T.C. 74">60 T.C. 74 (1973), affd. per curiam 515 F. 2d 155 (9th Cir. 1975)), and enables them to have their cake and eat it too. With respect to the objective of achieving the same tax consequences to the estate or beneficiary which would have obtained if the decedent collected the income item prior to death (see, e.g., Read v. United States, 320 F. 2d at 553), there are so many permutations and combinations involved, due to variations in the composition of decedent's income, deductions, and applicable tax brackets, as against those of the estate or a beneficiary, and in estate tax brackets, depending upon whether the decedent pays, or is obligated to pay, the applicable income 213 tax prior to, or at the time of, his death, and the amount of that income, as to make impossible an all-inclusive illustrative calculation. But, the hard fact is that, under the majority approach, the estate or beneficiary gets an excessive benefit, since the alternative tax of 25 percent of long-term capital gain, by hypothesis, requires a higher rate of ordinary income tax. Thus, in every case where the alternative tax computation applies and the ordinary income tax rate exceeds 25 percent, which occurs at relatively low levels, to wit, $ 10,000 of taxable income in the case of estates and $ 16,000 in the case of married individuals filing joint returns, every dollar of the estate tax deduction attributable to a long-term capital gain item under section 691(c), allowed against ordinary income rather than as an offset in computing long-term capital gain, produces a greater tax benefit. To my mind, such a consequence is repugnant to section 1201(b) and is not required to satisfy the provisions of section 691(c).I would sustain respondent's computation in the instant case.894 Featherston, J., dissenting: I respectfully disagree with the majority's conclusion on the first issue. Section 691(a), 214 which prescribes the general rule for the taxation of "income in respect of a decedent," refers to the "right to receive" items of gross income. Generally speaking, the term "income in respect of a decedent" applies only to "those amounts to which a decedent was entitled as gross income" but which were not properly includable in his final return. Sec. 1.691(a)-1(b), Income Tax Regs. As stated in Trust Co. of Georgia v. Ross, 392 F.2d 694">392 F.2d 694, 695 (5th Cir. 1967), cert. denied 393 U.S. 830">393 U.S. 830 (1968): "the right [to income] is to be distinguished from the activity which creates the right. Absent such a right, no matter how great the activitives or efforts, there would be no taxable income under sec. 691." While the right to income need not be a legal right to collect a sum ascertainable on the date of death, see Commissioner v. Linde, 213 F.2d 1">213 F.2d 1 (9th Cir. 1954), remanding 17 T.C. 584">17 T.C. 584 (1951), cert. denied 348 U.S. 871">348 U.S. 871 (1954); O'Daniel's Estate v. Commissioner, 173 F.2d 966 (2d Cir. 1949), affg. 10 T.C. 631">10 T.C. 631 (1948), the right to collect the income when realized must have arisen prior to or at the decedent's death. The problem in the instant case, therefore, is not to weigh and assess the 215 probabilities at decedent's death that his estate or some other beneficiary would or would not ultimately receive the proceeds of the liquidation of Bi-State, but rather to determine the rights of the decedent or that beneficiary as of the date of decedent's death.This imprecise test is not easily applied to cases involving the liquidation of corporations. In my opinion, in such cases "The crucial question should be whether the redemption or liquidation has proceeded to a point beyond the control of the decedent prior to his death." Ferguson, Freeland & Stevens, Federal Income Taxation of Estates and Beneficiaries 208 (1970). The issue of whether a contract for the disposition of property has created income in respect of a decedent, e.g., via sale, is analogous. In contract cases, the issue is whether, on the date of death, the transaction has proceeded to the point where the value of the property has been converted into an intangible right to receive the ultimate proceeds of the sale or other disposition. Sec. 1.691(a)-2(b), Example 4, Income Tax Regs. Such a conversion occurs only when the property is somehow put beyond the control of decedent prior to his death. See Commissioner v. Linde, supra;216 Estate of Helen Davison, 155 Ct. Cl. 290">155 Ct. Cl. 290, 292 F.2d 937">292 F.2d 937 (1961), 895 cert. denied 368 U.S. 939">368 U.S. 939 (1961); Stephen H. Dorsey, 49 T.C. 606">49 T.C. 606, 633 (1968). In Trust Co. of Georgia v. Ross, supra, for example, the court, holding that the disposition of certain stock by decedent prior to his death created income in respect of a decedent, stated (392 F.2d at 696):[Decedent] entered into a binding contract prior to his death. That contract required the conveyance of the property from whence the income in litigation was derived. The contract created a right to these proceeds in [decedent] at the time the contract was executed. The contract inured to and was binding upon his executor. * In contrast, in Keck v. Commissioner, 415 F.2d 531 (6th Cir. 1969), revg. 49 T.C. 313">49 T.C. 313 (1968), discussed at length in the majority opinion, where a contingent or informal agreement to liquidate a corporation did not constitute a binding contract, the Court of Appeals refused to find income in respect of a decedent.I do not think the liquidation of Bi-State, at decedent's death, had proceeded to a point beyond his control so that his stock had been converted to a mere right to receive income. It bears reiterating 217 that decedent was sole shareholder of Bi-State. To the extent possible under a scheme of State regulation his control of that corporation was absolute, and his rights were in no way diluted by the presence of minority shareholders. His estate succeeded to the same quantum of control.At any time prior to his death, decedent, the sole shareholder, could have reversed the decision to liquidate Bi-State. Neb. Rev. Stat. secs. 21-2087, 21-2088 (1974). Similarly, at any time after his death and prior to the distributions on November 29 and 30, 1968, decedent's estate, as sole shareholder, could have rescinded the resolution to liquidate and sold the stock to a third party or could have decided to keep the corporation alive so that, for example, it could continue the operation of the gift shop or the ownership of the real and personal property located at 4827 Dodge Street in Omaha. Had the estate taken either one of those steps, clearly it would not have received income in respect of a decedent. The estate received the liquidation proceeds only because it, as sole shareholder, did not revoke the liquidation resolution.Under the Trust Co. of Georgia reasoning, since there was no commitment 218 by either the decedent or his executor to permit Bi-State to be liquidated, decedent's stock at his death had not been converted to income.896 The importance of the power to rescind a decision to liquidate a corporation has been emphasized in cases dealing with the transfer of stock in a corporation after the adoption of a resolution to liquidate. In Rushing v. Commissioner, 441 F.2d 593">441 F.2d 593 (5th Cir. 1971), affg. 52 T.C. 888">52 T.C. 888 (1969), the court held that the transfer of a controlling interest in the corporation relieved the transferor of tax on the liquidation proceeds of the transferred shares. An opposite result was reached in Hudspeth v. United States, 471 F.2d 275">471 F.2d 275 (8th Cir. 1972), where the taxpayer transferred shares to a charity but retained a controlling interest in the corporation. The Hudspeth court explained the dichotomy as follows (471 F.2d at 278):we read Rushing [Rushing v. Commissioner, 441 F.2d 593">441 F.2d 593 (5th Cir. 1971)] as evincing the proposition that if the donor or vendor transfers a controlling interest in a corporation, such that the transferee will have the legal capacity to suspend or rescind the liquidation and thereby have the power to supercede the donor's initial intent 219 to provide the donee only with the otherwise imminent liquidation proceeds, then the gains are not taxable to the transferor. But, in the case where the taxpayer retains control of the corporation and the transferee will be unable to vitiate the taxpayer's intent to liquidate, the shareholders' vote remains sufficient to constitute the necessary severance of gain.To the same effect, see Kinsey v. Commissioner, 477 F.2d 1058">477 F.2d 1058, 1062 (2d Cir. 1973), affg. 58 T.C. 259">58 T.C. 259 (1972); Simmons v. United States, 341 F. Supp. 947">341 F. Supp. 947, 951 (M.D. Ga. 1972); cf. Jacobs v. United States, 280 F. Supp. 437">280 F. Supp. 437 (S.D. Ohio 1966), affd. 390 F.2d 877">390 F.2d 877 (6th Cir. 1968). While these cases involved the alleged constructive receipt or anticipatory assignment of income, I think their reasoning is apposite in resolving the present controversy. The right of the decedent or his estate to rescind the liquidation resolution shows that the liquidation had not proceeded to a point beyond the control of the decedent-shareholder. His unbridled right unilaterally to reverse the liquidation decision eviscerated any claim to a "right" to the liquidation proceeds under the Nebraska statute.Deciding the first issue in this fashion 220 would obviate the necessity for dealing with the second one. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩2. This section reads in relevant part:By the act of the corporation, a corporation may, at any time prior to the issuance of a certificate of dissolution by the Secretary of State, revoke voluntary dissolution proceedings theretofore taken, in the following manner:(1) The board of directors shall adopt a resolution recommending that the voluntary dissolution proceedings be revoked, and directing that the question of such revocation be submitted to a vote at a special meeting of shareholders;(2) Written or printed notice, stating that the purpose or one of the purposes of such meeting is to consider the advisability of revoking the voluntary dissolution proceedings, shall be given to each shareholder of record entitled to vote at such meeting within the time and in the manner provided [in this act] for the giving of notice of special meetings of shareholders;(3) At such meeting a vote of the shareholders entitled to vote thereat shall be taken on a resolution to revoke the voluntary dissolution proceedings, which shall require for its adoption the affirmative vote of the holders of at least two-thirds of the outstanding shares; and(4) Upon the adoption of such resolution a statement of revocation of voluntary dissolution proceedings shall be executed by the corporation by its president or a vice president and by its secretary or an assistant secretary, which statement shall set forth:(a) The name of the corporation;(b) The names and respective street addresses of its officers;(c) The names and respective street addresses of its directors;(d) A copy of the resolution adopted by the shareholders revoking the voluntary dissolution proceedings;(e) The number of shares outstanding; and(f) The number of shares voted for and against the resolution, respectively.↩3. Under present law, sec. 1014(c) provides that the general rule of sec. 1014(a) that the basis of property acquired from a decedent shall be the fair market value of the property on the date of the decedent's death, "shall not apply to property which constitutes a right to receive an item of income in respect of a decedent under section 691↩."4. It is clear that the determination of whether a right or entitlement existed is to be made at the date of decedent's death.See Keck v. Commissioner, 415 F.2d 531">415 F. 2d 531, 535 (6th Cir. 1969), revg. 49 T.C. 313">49 T.C. 313 (1968):"It is our conclusion that, at the date of his death, decedent * * * possessed neither the right nor the power to require the corporations to liquidate and did not, prior to his death, possess the right to receive any proceeds from the contemplated liquidation. It follows that the amounts herein involved are not taxable under Section 691. [Emphasis added.]"and Trust Co. of Georgia v. Ross, 392 F. 2d 694, 696 (5th Cir. 1967), cert. denied 393 U.S. 830">393 U.S. 830 (1968):"It is implicit in the statute and in the definition that this condition or limitation has reference to the date of death of the decedent. That is, income is to be included if decedent was entitled to the income at the date of his death. * * * [Emphasis added.]"Whatever actions the estate or Bi-State's board of directors could have taken after decedent's death are not material here. Therefore, the assignment-of-income cases, where the courts considered whether the transferees had power to revoke the plan of liquidation, cited by petitioners' counsel, are inapposite.↩5. For additional factors see Davison's Estate v. United States, 155 Ct. Cl. 290">155 Ct. Cl. 290, 292 F.2d 937">292 F. 2d 937, 941-942 (1961); Commissioner v. Linde, 213 F. 2d 1, 4↩ (9th Cir. 1954); Ferguson, Freeland & Stephens, Federal Income Taxation of Estates and Beneficiaries 146-148 (1st ed. 1970).6. Although the decedent's right to the liquidating distribution at his death was an absolute and unconditional one, it should be noted that sec. 1.691(a)-1(b)(3), Income Tax Regs., provides that income to which the decedent had a "contingent claim" at the time of his death is sufficient to create income in respect of a decedent. See also Rev. Rul. 60-227, 1 C.B. 262">1960-1 C.B. 262, 263.Further, it has been held that the requisite right need not be a legally enforceable one, O'Daniel's Estate v. Commissioner, 173 F. 2d 966 (2d Cir. 1949), but merely free from contingencies, Estate of Nilssen v. United States, 322 F. Supp. 260">322 F. Supp. 260, 264-265 (D.Minn. 1971)↩.1. This consists of $ 673,130 realized on the liquidation of Sidles Co. and $ 1,578 from a note receivable of the Sidles Co.↩1. Compare W. B. Rushing, 52 T.C. 888">52 T.C. 888, 896-897 (1969), affd. 441 F. 2d 593↩ (5th Cir. 1971).2. It is not without significance that in George W. Keck, 49 T.C. 313">49 T.C. 313 (1968), revd. 415 F. 2d 531 (6th Cir. 1969), the dissenting judges in this Court specifically reserved the question whether they would hold to the same view if the decedent had been the controlling shareholder, which is the case herein. See 49 T.C. at 323↩ n. 1.3. During the taxable years in question, that section read as follows:SEC. 1201(b). Other Taxpayers. -- If for any taxable year the net long-term capital gain of any taxpayer (other than a corporation) exceeds the net short-term capital loss, then, in lieu of the tax imposed by sections 1 and 511, there is hereby imposed a tax (if such tax is less than the tax imposed by such sections) which shall consist of the sum of -- (1) a partial tax computed on the taxable income reduced by an amount equal to 50 percent of such excess, at the rate and in the manner as if this subsection had not been enacted, and(2) an amount equal to 25 percent of the excess of the net long-term capital gain over the net short-term capital loss.↩4. Some confusion exists in the cases regarding the mandatory or elective nature of the alternative tax, but this is primarily due to the fact that where the alternative tax produces a result more favorable to the taxpayer, he will always use it. However, the alternative tax is required to be applied if it produces a lower tax. See Lone Manor Farms, Inc., 61 T.C. 436">61 T.C. 436, 442 (1974), affd. without published opinion 510 F. 2d 970 (3d Cir. 1975). But see J. T. Bridges, Jr., 64 T.C. 968">64 T.C. 968↩ (1975).5. The taxpayer had not sought to apply any part of the estate tax deduction against ordinary income.↩6. It should be noted that the alternative tax was not involved in either Quick or Bridges↩, so, despite this conceptual conflict, they are factually distinguishable from the instant case.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625035/	GROVER C. BLUMER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Blumer v. CommissionerDocket No. 28380.United States Board of Tax Appeals23 B.T.A. 1045; 1931 BTA LEXIS 1780; July 3, 1931, Promulgated 1780 For the year 1924 petitioner's business, which had been previously conducted as a sole proprietorship, was reported as a partnership throughout the entire year. The evidence established the fact that the partnership was not created earlier than some time in November or December, 1924. The respondent's determination of a deficiency in income taxes, and of a penalty for fraud, sustained. Wayne Ely, Esq., for the petitioner. John H. Pigg, Esq., for the respondent. MARQUETTE 1045 This proceeding is for the redetermination of deficiencies in income taxes asserted by the respondent for the years 1922, 1923 and 1924, in the amounts of $1,031.03, $1,200.64 and 3,987.19, respectively. For the year 1924 the respondent has also asserted a fraud penalty 1046 in the amount of $1,993.60. The petitioner makes no contest with respect to the years 1922 and 1923. As to the year 1924 the error assigned is that the determination of deficiency and penalty was based upon the theory that petitioner's business during that year was not conducted as a partnership, but was owned solely by petitioner. FINDINGS OF FACT. In 1922 the petitioner opened1781 a cafeteria known as Blumer's Food Store, in St. Louis, Mo. His wife assisted in the management and conduct of the business and received a salary for her services for each of the years 1922 and 1923. In her income-tax return for 1924 she reported a much larger amount, listing it as income from the partnership of Blumer's Food Store. In the latter part of 1924 petitioner consulted an accountant, and learned that if the business was conducted as a partnership it would effect a reduction in the amount of his income tax. Late in the year 1924, or early in 1925, the petitioner and his wife signed articles of partnership. The provisions of those articles pertinent here read as follows: Agreement dated December 30, 1923, between Nona Blumer and Grover C. Blumer, both of the City of St. Louis, State of Missouri, whereas it is mutually agreed as follows: That the parties agree to form and hereby do form a partnership under the laws of the State of Missouri, for the purpose of doing a general retail food and restaurant business for the account of said partnership, to buy and sell foodstuff, to take, to hold and convey such other property, real, personal, or mixed, as shall be necessary1782 or requisite for such partnership to acquire in order to obtain or secure the payment of any indebtedness or liability accrued to the partnership, to construct, own, rent or lease such properties as shall be necessary or incidental to the proper conduct of the foregoing business. That the said partnership shall be conducted under the name of Blumer's Food Store. That the said partnership shall commence on the first day of January, 1924, and shall continue during the lives of both parties heretofore mentioned. * * In witness whereof the parties hereto set their hands and seals this 30th day of December, 1923. (Signed) G. C. BLUMER. (Signed) Mrs. NONA BLUMER. Witness: (Signed Mrs. ETHEL MEDLIN. Witness: (Signed) HAZEL O'KEEFE. At the close of 1924 the accountant was employed to audit the books and accounts of Blumer's Food Store for that year, and to prepare the income-tax returns. He relied upon petitioner's statement 1047 to him that a partnership agreement had been entered into between Blumer and his wife. In making his audit the accountant made adjustments on the books, and changed the capital account from individual ownership to that of1783 a partnership. Mrs. Blumer's account was credited with an equal amount of the profits of the business for the year 1924. No allocation of profits to Mrs. Blumer appeared on the books prior to the adjustments aforesaid. The accountant prepared income-tax returns for the year 1924 for the petitioner, for petitioner's wife, and for Blumer's Food Store. The latter was on a form blank for a partnership, and named petitioner and his wife as the only, and equal, partners. The return was sworn to by the petitioner. The individual returns of the petitioner and his wife each reported an equal amount of income as having been received from Blumer's Food Store, as a partnership. After investigation, the respondent determined a deficiency in petitioner's income tax for 1924, and also asserted a fraud penalty under section 275(b) of the 1924 Revenue Act. OPINION. MARQUETTE: The petitioner contends that on or about December 30, 1923, he and his wife formed a partnership to conduct the business of Blumer's Food Store, which partnership became effective January 1, 1924, and so continued throughout that year. The respondent has determined that the petitioner's business was conducted1784 as a sole proprietorship during 1924, just as it had been theretofore, and on that basis deficiency in income taxes was asserted. In support of his contention the petitioner offers a copy of the partnership agreement, the pertinent portions of which are set forth in our findings of fact; and the petitioner himself testifies that the agreement was signed some time in 1924, but he is unable to fix the month. As against the evidence, petitioner's wife testifies that the agreement was not signed until the latter part of 1924, or early 1925; one of the witnesses to the agreement, who was petitioner's cashier, testifies that both parties to the agreement signed it in her presence and that the signing took place late in 1924 or early in 1925; the accountant who closed petitioner's books and made out his tax returns testifies that "about November" 1924 petitioner asked him whether income taxes would be reduced if the food store business was owned by a partnership rather than individually, and that later petitioner told the accountant that a partnership agreement had been properly signed, but did not exhibit the document. From all the evidence offered we are clearly of opinion that the1785 agreement was not signed, and that no partnership between the 1048 petitioner and his wife existed earlier than some time in November, 1924, at best, and very possibly not before the close of that year. Manifestly, therefore, the petitioner has not overcome the presumption that the respondent's determination of a deficiency in 1924 income tax was correct. The respondent also asserted a penalty against the petitioner under section 275(b) of the Revenue Act of 1924. That section reads as follows: If any part of any deficiency is due to fraud with intent to evade tax, then 50 per centum of the total amount of the deficiency (in addition to such deficiency) shall be so assessed, collected and paid, in lieu of the 50 per centum addition to the tax provided in section 3176 of the Revised Statutes, as amended. Section 907(a) of the Revenue Act of 1926, as amended by section 601 of the Revenue Act of 1928, relating to hearings before this Board, provides: * * In any proceeding involving the issue whether the petitioner has been guilty of fraud with intent to evade tax, where no hearing has been held before the enactment of the Revenue Act of 1928, the burden of proof1786 in respect of such issue shall be upon the Commissioner. * * Assuming, but not deciding, that under the laws of Missouri the petitioner and his wife might lawfully form a business partnership together, the fact that the motive for such a partnership was to reduce income taxes in the future would not constitute fraud, if the means employed were legal. ; ; ; . But the petitioner was not content to reduce his income taxes for future years only, through the device of a partnership. He caused an agreement to be drawn dated December 30, 1923, which purported to create at that time a partnership between himself and his wife, effective on January 1, 1924. That agreement, the petitioner admits upon cross-examination, was not executed until some time in 1924; other evidence establishes that it was not executed until, at best, within the last two months of that year. There is nothing in the agreement giving to it any retroactive effect. It is a forward-looking document only, and is1787 the basis of petitioner's contention that a partnership existed throughout the year 1924. We can not escape the conclusion that the petitioner knew, when he signed and swore to his personal income-tax return and to the partnership return, both for the year 1924, that no such partnership existed from the beginning of that year and, therefore, he knew that each of those returns was false. It is clear, also that the purpose of those returns was to evade a portion of the tax upon his income for that year. In our opinion the respondent's determination of fraud is amply sustained by the 1049 record. The plea of the petitioner that he relied upon an accountant to prepare his tax return can not justify the false statements in his return, especially in view of the fact that he did not exhibit the partnership articles to the accountant while the return was being prepared, but, instead, falsely stated that the agreement was effective for the entire taxable year. D. C. &larke,; . Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/1461382/	842 F.Supp. 7 (1993) Gilbert ORTIZ, Jr., et al., Plaintiffs, v. SECRETARY OF DEFENSE, et al., Defendants. Civ. A. No. 92-2764. United States District Court, District of Columbia. December 14, 1993. 8 Gershon Michael Ratner, National Veterans Legal Services Project, Kenneth J. Nunnenkamp, Michael L. Leetzow, Finnegan, Henderson, Farabow, Garrett & Dunner, Washington, DC, for plaintiffs. Michael Ambrosino, U.S. Attys. Office, Washington, DC, for defendants. MEMORANDUM OPINION AND ORDER SPORKIN, District Judge. Plaintiffs Gilbert Ortiz and Nollie Plowman are two former soldiers who have brought this action to challenge the decision of the Army Board for Correction of Military Records ("ABCMR") denying their applications for upgrade of their discharges from "other than honorable" to "honorable". The ABCMR denied plaintiffs' applications because they were not filed within the time specified by statute and because plaintiffs failed to demonstrate that it was in the interest of justice to excuse their failure to file timely applications. This action is brought under the Administrative Procedure Act and the United States Constitution. The complaint contains three counts. Count I challenges the denial of the discharge upgrade for lack of timeliness as arbitrary, capricious and contrary to law because Plaintiffs filed within the statutory limitations period. Count II alleges that even if the statute of limitations were not met, the decision not to waive the statute of limitations in "the interest of justice" was arbitrary and capricious because the ABCMR failed to evaluate and justify its decisions with regard to the merits of plaintiff's claims. Count III challenges the denial of upgrades on equal protection grounds, arguing that Army veterans are treated differently than Navy and Air Force veterans by their respective BCMRs. The Court has before it defendant's Motion to Dismiss or in the Alternative for Summary Judgment, and plaintiffs' Cross Motion for Summary Judgment. I. Facts The following facts are undisputed: Gilbert Ortiz Plaintiff Gilbert Ortiz entered the United States Army on November 7, 1966. During the time Ortiz was in the Army, he was repeatedly absent without leave ("AWOL") and accrued 913 days lost time due to AWOL and confinement. He was convicted twice by summary court-martial and once by special court-martial for AWOL. These proceedings resulted in reductions in grade and hard labor and a period of confinement. Ortiz' commander recommended that he be administratively removed from the service for reasons of unfitness. Informed of the serious 9 consequences that might result from his contemplated separation from the service, Ortiz waived consideration of his case by a board of officers. He also waived representation by appointed counsel and the right to submit statements on his own behalf. On March 27, 1970, Ortiz was discharged from the Army with a discharge under other than honorable conditions. Ortiz was credited with 10 months, 21 days active service. On August 24, 1984, within 15 years of his date of discharge, Ortiz applied to the Army Discharge Review Board ("ADRB") for an upgrade of his discharge. Mr. Ortiz argued that his post-discharge conduct combined with his immaturity at the time of his service warranted an upgrade of his discharge classification to general/under honorable conditions. His application to the ADRB was denied on June 18, 1985. Upon denial by the ADRB, Ortiz was informed that he had the right to apply for consideration with the ABCMR. On July 3, 1985 Ortiz applied to the ABCMR for an upgrade of his discharge. Mr. Ortiz listed the following as reasons why the Board should find it in the interest of justice to consider his untimely filed application: I have maintained gainful employment and the erradic [sic] behavior demonstrated during the Army no longer exists as my personal problems have been resolved. Administrative Record I at 16. The ABCMR denied Ortiz' application on December 10, 1986. The Board's justification for denying the Mr. Ortiz' application was as follows: The alleged error or injustice was, or with reasonable diligence should have been, discovered on 27 March 1970. The time for the applicant to file a request for correction of any error or injustice expired on 27 March 1973. The subject application was not submitted within the time required. The applicant has not presented, nor do the records contain, sufficient justification to establish that it would be in the interest of justice to excuse the failure to file within the time prescribed by law. Administrative Record I at 2. Nollie Plowman Plaintiff Nollie Plowman entered into active service with the United States Army on September 13, 1974. After completing his training, Plowman received non-judicial punishment for failing to report to his place of duty. Despite this initial infraction, Plowman was subsequently promoted, achieving the rank of SP-4 by May, 1976. On June 4, 1976, Plowman was given non-judicial punishment for failing to appear at the appointed time on guard duty and for being incapacitated for duty resulting from a previous "indulgence" of alcohol. Plowman was fined and reduced in grade from SP-4 to Private First Class. On July 30, 1976, Mr. Plowman received non-judicial punishment for being AWOL from July 9 through July 14. Mr. Plowman was placed under restriction, fined, given extra duty and reduced from Private First Class to Private E-2. Plowman again received non-judicial punishment on September 16, 1976 for being AWOL from September 6 through September 8. This infraction caused Mr. Plowman again to be placed on restriction, to be given extra duty and to be reduced in grade to Private E-1. Beginning in September 1976, Plowman was treated for drug and alcohol abuse. This treatment was apparently ineffective, as Plowman continued to go AWOL. Court-martial charges were brought against him. Plowman elected to submit a resignation in lieu of court-martial. In his resignation request, Plowman admitted that he had committed the charged offenses and was aware of the consequences of his request for resignation. He was discharged on July 21, 1977, with a classification of "Other than Honorable." On December 21, 1983, Mr. Plowman applied to the ADRB to change the status of his discharge.[1] He referred to both a mental condition and his drug and alcohol abuse as reasons for his misconduct. On October 12, 10 1984, the ADRB declined to upgrade his discharge. On January 28, 1987, nearly nine years after his discharge from active duty, but less than three years after the ADRB denied his request for a discharge upgrade, Plowman filed an application to the ABCMR for an upgrade of his discharge. Listing the date of discovery of the alleged injustice as 1986, Plowman stated that the Board should find the consideration of the application in the interest of justice because, "mental problems was keeped [sic] in service a year after being completly [sic] busted." Administrative Record II at 62. The ABCMR decided not to upgrade the status of Plowman's discharge status on August 17, 1988. In a decision similar to its decision with regard to Mr. Ortiz, the Board concluded that Mr. Plowman had not applied to it within the three year limitations period and that Plowman did not present sufficient justification to find it in the interest of justice to waive the statute of limitations. Count I Count I challenges the ABCMR's determination that the plaintiffs did not file their applications within the statutory period. The relevant portion of the statute which governs applications to BCMRs reads as follows: "No correction may be made ... unless the claimant ... files a request [for the correction] within three years after he discovers the error or injustice." 10 U.S.C. § 1552(b). Plaintiffs argue that the ABCMR's three-year statute of limitations period does not begin to run when the applicant is separated from the service, but instead it begins to run only once administrative remedies, specifically all applications to the ADRB, have been denied. Plaintiffs claim that while their applications for review were filed with the ABCMR more than three years after their discharges, this Court should find that the applications were properly filed because plaintiffs applied to the ABCMR within three years after denial of their claims by the ADRB. Plaintiffs base their argument on two separate facts. First, under 37 C.F.R. § 581.3(c)(3) (1993) in order to apply to the ABCMR, an applicant need to have "exhausted all effective administrative remedies afforded him by existing law or regulations, and such legal remedies as the Board shall determine are practical and appropriately available to the applicant." Thus, appeal for the correction of a military discharge record normally lies first to the relevant DRB and then to the BCMR. See Hodges v. Callaway, 499 F.2d 417, 420 n. 7 (5th Cir.1974). The second fact on which plaintiffs base Count I is that the ADRB has a fifteen year statute of limitations while the ABCMR has a three-year statute. Compare 10 U.S.C. § 1553(a) (application to Discharge Review Board must be made within 15 years of date of discharge) with 10 U.S.C. § 1552(b) (3-year limit for boards for the correction of military records created under this statute). Plaintiffs assert that because an appeal to the ADRB is considered an administrative prerequisite to an application to the ABCMR, the ADRB's 15-year statute of limitations would be abbreviated by 12 years if an aggrieved party were required to file with the ADRB within three years in order to preserve any subsequent right of application to the ABCMR. Plaintiffs would have this Court find that no "error or injustice" within the meaning of § 1552(b) has occurred until all administrative remedies, including application to the DRB, have been exhausted. This Court finds that the ABCMR acted neither arbitrarily nor capriciously in interpreting the "discover[y of] error or injustice" language to mean from the date of discharge. That there may exist other avenues of relief for the amendment of improper discharges besides the ABCMR does not mean that the ABCMR's 3-year statute must be subjugated to other, longer statutes found in other procedures. Plaintiff's theory runs contrary to the plain language of the statute. In Walters v. Secretary of Defense, 725 F.2d 107 (D.C.Cir.1983) (rehearing denied) the D.C. Circuit held that for purposes of the statute of limitations in discharge cases, it is perfectly proper to find that the statutory time begins to run at the time of discharge. The Court there noted that waiting until all administrative remedies are exhausted before starting the statutory time clock, "would virtually repeal the statute of limitations in a 11 case ... where the plaintiff has not exhausted his administrative remedies." Id. at 114. The same would occur in this case under plaintiffs proposed interpretation of the three-year statute in § 1552. The three-year ABCMR statute would become an 18-year statute (or more, depending on how long it takes the ADRB to make a decision) by virtue of the ADRB's 15-year statute. This is an unacceptable result under the terms of the statute. The ABCMR's determination that the statutory time clock began to tick at the time of discharge for both plaintiffs was neither arbitrary, capricious, nor contrary to law and defendants are entitled to summary judgment on this Count. Count II In Count II of the complaint, plaintiffs allege that the ABCMR has failed to justify its decision not to waive the three year statute of limitations in the interest of justice. Thus, plaintiffs argue, the decision was arbitrary, capricious and contrary to law. As an initial matter, this court must address whether it has jurisdiction to review a decision that appears from the statute to be wholly committed to the ABCMR's discretion. Arguing that the "interest of justice" language is routinely interpreted by courts, plaintiffs direct the Court's attention to the case of Allen v. Card, 799 F.Supp. 158 (D.D.C.1992). In Allen, Judge Flannery found denial of a waiver reviewable and used an "abuse of discretion" standard to review a decision of the Coast Guard BCMR not to waive the statute of limitations in the interest of justice. Plaintiffs also devote a considerable portion of their brief to the legislative history surrounding the limitations period found in § 1552. Plaintiffs suggest that this 3-year limitations term was added to the BCMR statute specifically to address the concern of the Comptroller General regarding late filed monetary claims. Non-money claims, say the plaintiffs, were not intended to be squelched by the term limitation. Based on this legislative history, plaintiffs argue the statute was not intended to give unbridled discretion to the Army to make the determination whether to waive the statute or not. There is evidence from the legislative history of 10 U.S.C. § 1552 confirming plaintiffs' assertion. Initially, the Department of Defense favored no time limitation period at all on appeals to the BCMRs. The term limitation was implemented at the request of the GAO: When the original bill which the Department of Defense recommended was considered before the Committee on Armed Services of the House of Representatives, three specific objections were interposed by the General Accounting Office. First, the lack of any time limitation on the bill. The Department of Defense was opposed to any time limitation but withdrew its opposition if the proviso set forth in the present act ... were adopted, whereby the boards would have authority to excuse compliance with the limitation in cases where an injustice would result to a member of the armed services who, for instance, because of injury in combat, capture, participation in combat or other exigencies or military service might render it impracticable for him to file his claim within the prescribed period. Authorizing Payment of Claims Arising from Correction of Military and Naval Records: Hearing on H.R. 1181 Before a Subcomm. of the Senate Comm. on Armed Services, 82nd Cong., 1st Sess. 3 (1951) (Statement of Stephen S. Jackson, Office of Counsel, Office of the Secretary of Defense). In Mullen v. United States, 17 Cl.Ct. 578 (1989) the Claims Court relied on this legislative history, and came to the determination that because the Congress had never intended to discourage late-filed applications for non-money claims to the BCMRs, the decision not to waive the statute in the interest of justice should be reviewable: It is clear from the legislative history that the waiver provision of section 1552(b) was a compromise intended to operate as a safety valve in cases where a service man was unable to file his application within three years from discovery. It provides authority to the boards to waive the three year requirement where it is in the interest 12 of justice to do so. Nowhere in the available legislative history is there any mention of unbridled discretion being placed in the boards. In fact, the general tone of the reports indicates that the boards should waive the requirement when an injustice is present. Id. at 582. Thus, plaintiffs argue, the decision by a BCMR not to waive the statute of limitations should not be seen as wholly within the agency's discretion; such a decision should be reviewed as any other agency decision under the appropriate provision of the Administrative Procedures Act. Other precedent suggests a contrary conclusion. In Ballenger v. Marsh, 708 F.2d 349 (8th Cir.1983), the 8th Circuit addressed this same issue. The Court there found that a decision of the ABCMR not to review an untimely application was not "an appropriate decision for review by a federal court." Id. at 351. Citing Ballenger, the D.C. Circuit has noted that "[T]he decision to grant an exception to an applicant appears to be wholly within the Board's discretion." Kendall v. Army Bd. for Correction of Military Records, 996 F.2d 362, 367 at n. 8. (D.C.Cir. 1993). To this Court it appears that the decision whether to waive the statute of limitations in the interest of justice is completely within the Board's discretion. The statutory limitations period governing BCMR review states, "However, a [BCMR] may excuse a failure to file within three years after discovery if it finds it to be in the interest of justice." 10 U.S.C. § 1552(b) (emphasis added). The provision on its face makes clear that the determination of whether to excuse late filing lies exclusively with the Board. Even then, the language is "may excuse", not "shall excuse". No standards for review are suggested. This Court believes that the statute of limitations found in § 1552 serves a legitimate purpose for both monetary and nonmonetary claims. While the statute may provide a "safety valve" for instances when it would be inequitable for a military record to remain uncorrected, control of this "safety valve" was placed by Congress in the hands of the BCMRs. Even if the ABCMR's decision not to waive the statute were reviewable, plaintiffs would obtain no relief. If reviewable, the applicable standard would be whether the action of the military agency "conforms to the law, or is instead arbitrary, capricious or contrary to statutes and regulations governing that agency." Kendall, 996 F.2d at 367 (citing Ridgely v. Marsh, 866 F.2d 1526, 1528 (D.C.Cir.1989). This Court finds that neither plaintiff has presented sufficient evidence to demonstrate it would be in the interest of justice to excuse the failure to timely file his appeal. Mr. Ortiz' and Mr. Plowman's abbreviated descriptions of the personal problems which caused them to be dismissed from the military do not help to explain why they failed to file with the ABCMR within the applicable limitations period or why it would be unjust not to upgrade their discharges. This Court finds the decisions of the ABCMR neither arbitrary nor capricious given the inadequate bases for relief put forward by plaintiffs. The Court feels compelled to engage in this discussion because of the Court of Appeals' Kendall decision. The Kendall majority, while asserting in a footnote that the decision not to waive the statute of limitations is wholly within the agency's discretion, proceeded to address the merits of Kendall's claim nonetheless. The dissent also addressed Kendall's claim on the merits. Because of this mixed message, the Court will find as an alternative holding that the ABCMR's determination that it would not be in the interest of justice to waive the statute was not an abuse of discretion. Summary judgment will be granted in favor of the defendant on Count II. Count III In Count III, plaintiffs allege that because the Army Board treats discharge cases differently from similar boards in the Navy and Air Force, plaintiffs' Due Process and Equal Protection rights have been violated. Plaintiffs allege that when considering similar claims, the Navy and Air Force Boards for the Correction of Military Records routinely examine the merits of an applicant's case to determine whether waiving the statute of limitations period would serve justice. In 13 contrast to the practice of the Navy and Air Force Boards, plaintiffs claim that the Army Board does not look to the merits of the application when deciding whether to waive the application in the interest of justice. Plaintiffs argue that as a result, Army veterans are routinely discriminated against relative to Navy and Air Force veterans in violation of the 5th and 14th amendments to the United States Constitution. Under Count III, Plaintiffs ask for broad discovery of Army, Navy, and Air Force records in order to confirm that the Army irrationally interprets the law in a substantially different fashion than the other armed services to the detriment of Army veterans. The Court believes that even if plaintiffs' allegations are accurate, they fail to state a claim for which relief can be granted. The application for upgrade of a military discharge does not involve a fundamental right and Army veterans do not constitute a suspect class. As a result, the system of correction boards will survive an equal protection attack so long as the challenged classification is "rationally related to a legitimate governmental purpose." Kadrmas v. Dickinson Public Schools, 487 U.S. 450, 457-58, 108 S.Ct. 2481, 2487, 101 L.Ed.2d 399 (1988). 10 U.S.C. § 1552 authorizes separate correction boards for different branches of the military. This allocation of review of records between the services can be justified in any number of ways. Most obviously, it is perfectly rational that the circumstances of an Army veteran requesting a review of his or her records be judged by Army appointees who may be more familiar with the specific circumstances of Army veterans compared to Coast Guard, Navy, or Air Force veterans. The challenged procedure must be viewed as rationally related to a legitimate government purpose. The assertion that two different services interpret the same legislative language in lawful, albeit substantially different ways (which this Court must take to be true for purposes of a motion to dismiss) does not make an equal protection violation. The Equal Protection Clause does not warrant a calculus by this Court of the lowest common denominator from among the services and mandate its imposition on the rest. As has been noted by another judge of this Court, "Each branch is entitled to manage its internal operations as it sees fit without subjecting itself to an equal protection suit because another branch has adopted a different approach in the management or discipline of its personnel." Vietnam Veterans of America v. Secretary of Navy, 741 F.Supp. 1, 5 (D.D.C. 1990). The Court in Vietnam Veterans rejected an equal protection claim when confronted with evidence that one branch of the armed services treated drug users more harshly than other branches. Noting that courts must be particularly cautious in evaluating the internal operations of the military, the Court called the discrepancy in treatment by one branch "a rational exercise of its discretion." Id. at 14. See also, Poindexter v. United States, 777 F.2d 231, 236 & n. 5 (5th Cir.1985) (rejecting claim that the Army was violating equal protection and due process by requiring proof of negligence for recovery under Military Claims Act, while other services did not require proof of negligence); Sharp v. Weinberger, 593 F.Supp. 886, 891 (D.D.C.1984) (no equal protection violation where all services did not implement a Department of Defense directive in a similar fashion). The cases cited by plaintiffs are inapposite. Most involve regulations or laws written by a single civil legislative body to discriminate between two groups for indefensible reasons. This case challenges differing interpretations of a statute by different decision-making bodies. Just as two different judges may sometimes view the same facts and, in their discretion, come to different conclusions without violating the Equal Protection Clause, the various BCMRs may read § 1552 differently without denying equal protection. Plaintiffs can point to no case where similar inter-service disparities have been found to be the basis for an equal protection claim. Defendants' motion to dismiss on Count III must be granted. An appropriate order accompanies this opinion. *14 ORDER Upon consideration of defendant's Motion for Summary Judgment, plaintiffs' Opposition and Cross-Motion for Summary Judgment, oral argument, and for the reasons stated in the foregoing memorandum opinion, it is hereby ORDERED that summary judgment be granted in favor of the defendants on Count I of the complaint; and it is further ORDERED that summary judgment be granted in favor of the defendants on Count II of the complaint; and it is further ORDERED that Count III of the complaint be dismissed. NOTES [1] The administrative record is unclear as to the exact date that this application was made to the ADRB. There appears to be a "Received" stamp on the application dated "Dec. 21".	01-04-2023	10-30-2013
https://www.courtlistener.com/api/rest/v3/opinions/4625055/	JOHN A. COHEN AND ALISON L. COHEN, Petitioners, v COMMISSIONER OF INTERNAL REVENUE, RespondentCohen v. CommissionerDocket No. 1539-88United States Tax CourtT.C. Memo 1990-650; 1990 Tax Ct. Memo LEXIS 725; 60 T.C.M. (CCH) 1509; T.C.M. (RIA) 90650; December 27, 1990, Filed 725 Decision will be entered for the respondent. Alison L. Cohen, for the petitioners. Daniel Morman, for the respondent. BUCKLEY, Special Trial Judge. 726 BUCKLEY2158 MEMORANDUM FINDINGS OF FACT AND OPINION This case was heard pursuant to the provisions of section 7443A(b) and Rule 180 et seq. 1Respondent, by separate notices of deficiency, determined deficiencies in petitioners' Federal income taxes as follows: Additions to TaxYearTaxSection 6653(a)(1)Section 6653(a)(2)1983$ 965.00$ 48.0019841,683.0084.15The main issue for determination is whether petitioners failed to report all tip income received by Alison L. Cohen (hereafter petitioner) from her employment727 as a beverage server at the Claridge Hotel and Casino in Atlantic City during the 2 years in question. The secondary issue is whether petitioners were negligent if there was an underreporting of tip income. Some of the facts are stipulated and they are so found. Petitioners resided at Absecon, New Jersey, when they filed their petition herein. Petitioners were married during 1983 and 1984, but were separated at the time of trial. They filed joint Federal income tax returns for the 2 years at issue. Petitioner Alison Cohen was a cocktail waitress at the Claridge Hotel and Casino in Atlantic City during 1983 and 1984. She worked mainly during the day shift and served cocktails in the casino area of the hotel. Thus, her cocktail service took place in the area of gaming tables, and the cocktails she served were complimentary in nature. Petitioner's usual shift was from ten in the morning until four or five in the afternoon. The amount of tips she received was dependent upon how busy the gaming tables were during those hours. We accept petitioner's testimony that the day shift was slow until noon or thereafter. Petitioner maintained a daily record of tips during each of the728 2 years. She listed tips at the end of each shift, as she took her "tip book" to work with her each day. She then utilized the tip book to report to her employer on a weekly basis the tips she received. The total amounts of tip income petitioner recorded in her tip books were $ 3,085 for 1983 and $ 2,752 for 1984. There were discrepancies in both 1983 and 1984 between the amount of tips petitioner recorded in her diaries and the amount she reported to her employer. In each year, tip amounts in the diaries exceeded amounts reported to her employer. Respondent, by his notices of deficiency, determined that petitioner had underreported tips by $ 4,678 in 1983 and $ 5,554 in 1984. 2159 During 1983 petitioner worked 1,173.75 hours in a tip-earning capacity, all during the day shift. During 1984, petitioner worked 1,118.6 hours in a tip-earning capacity on the day shift and 79.9 hours in such capacity on the swing shift. This case arose out of an undercover operation called the Atlantic City Tip Project. Special agents of the Internal Revenue Service, during 1984 and 1985, performed surveillance at ten casinos in the Atlantic City area, commencing on September 1, 1984. 729 Sampling plans were developed which covered the period from the beginning of the surveillance until August 31, 1985. The agents were instructed not to guess at the amount received by a waitress. If for instance, a tip was received and they could not see the denomination, their instructions were to use the lowest possible denomination. If funds were received when a waitress did not serve a drink, they were instructed not to include the amount as a tip since it could be for cigarettes or such item. The surveillances were designed to acquire a random sample of 210 observations of one-half hour each, over a full calendar year. As a result of the samples, it was determined that there was no discernible difference between tip rates at the various casinos, but that there were statistically significant differences between the shifts worked. Further, there were no statistically significant differences between days of the week. For instance, even though there were many more patrons during weekends, there similarly were more waitresses. Based upon the tip project results, the estimated average hourly tip rate for the day shift was $ 9.85 and for the swing shift $ 11.93. These rates were730 then reduced by 5 percent to indicate 95 percent statistical confidence rates of $ 7.65 and $ 9.87, respectively. It was these latter figures which were applied by respondent in arriving at petitioner's gross hourly tip rate for both 1983 and 1984. Respondent, after computing the gaming table waitresses' hourly tips, reduced the gross amount by 15 percent to allow for payouts made to bartenders. This computation resulted in a net tip rate of $ 6.50 per hour for the day shift and $ 8.39 per hour for the swing shift. These rates were applied by respondent to petitioner's hours worked during both 1983 and 1984. Respondent had a similar tip project in place during 1981, a time prior to the opening of Claridge's Hotel and Casino, which resulted in significantly higher hourly tip rate figures. As a general rule, respondent's determinations are presumed correct and the burden is on petitioners to show otherwise. Welch v. Helvering, 290 U.S. 111 (1933); Rule 142(a). It is also well settled that tips received are includable in gross income as compensation for services rendered. Section 61(a); Killoran v. Commissioner, 709 F.2d 31">709 F.2d 31 (9th Cir. 1983), affg. 731 a Memorandum Opinion of this Court. Where a taxpayer either keeps no records of tip income received, or it appears that the records do not clearly reflect tip income received, respondent is authorized by section 446 to compute income under a method which, in his opinion, does clearly reflect income. Menequzzo v. Commissioner, 43 T.C. 824">43 T.C. 824, 831 (1965); Bruno v. Commissioner, T.C. Memo 1985-168">T.C. Memo. 1985-168. We have held statistical surveys such as that in the 1984-1985 Atlantic City Tip Project to be an appropriate method of computing tip income. Catalano v. Commissioner, 81 T.C. 8">81 T.C. 8 (1983), affd. without published opinion sub nom. Knoll v. Commissioner, 735 F.2d 1370">735 F.2d 1370 (9th Cir. 1984); Ross v. Commissioner, T.C. Memo. 1989-682; Bruno v. Commissioner, supra.Reconstruction of income through statistical sampling is an allowed method to compute income where it is clear that petitioner did not maintain accurate records. Thus, in Ross v. Commissioner, supra, we upheld deficiencies based upon a sampling program almost identical to that utilized in this case. Ross also732 concerned reconstruction of tips of cocktail waitresses in Atlantic City casinos, but for the year 1981. We held in Ross, as we held in Bruno v. Commissioner, 2supra, that respondent's method of reconstructing tip income was reasonable under the circumstances. Respondent's method of computing income in the 1984-1985 Atlantic City Tip Project was reasonable. Respondent's study was formulated so as to provide a conservative estimate of tips received by cocktail waitresses in the gaming areas. We hold that petitioner failed to keep accurate records of the tips which she received, that she did not report accurate amounts to her employers, and that she understated her tips on her Federal income tax returns during 1983 and 1984 in the amounts determined by respondent. The next issue733 for decision is whether petitioner is liable for the additions to tax under section 6653(a) (1) and (2). Section 6653(a) (1) imposes a 5 percent addition to tax if any part of an underpayment of tax is due to negligence or intentional disregard of rules and regulations. Section 6653(a) (2) provides for a separate addition to tax equal to 50 percent of the interest payable on the portion of the underpayment attributable to negligence or intentional disregard of rules and regulations. Respondent's determination is presumed correct and petitioner 2160 bears the burden of proving otherwise. Bixby v. Commissioner, 58 T.C. 757">58 T.C. 757, 791-792 (1972); Rule 142(a). Negligence, within the meaning of these sections, has been defined as the failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 957 (1985). Because we find that petitioner understated her tip income, and that her books and records failed to reflect accurately her income as required by section 6001, respondent's determination regarding the additions to tax is sustained. Decision will be entered for the respondent734 . Footnotes1. All section references are to the Internal Revenue Code as amended and in effect for the years at issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩. 50 percent of the interest due on the full amount of the deficiency.↩2. We required a recomputation in Bruno↩ because respondent's determinations were based upon inaccurate hourly work records of the taxpayer's employer. The statistical sampling, however, we held to be reasonable.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625056/	J. Eugene Goldberg, et al. 1 v. Commissioner. Goldberg v. CommissionerDocket Nos. 64863, 64876, 64890.United States Tax CourtT.C. Memo 1959-88; 1959 Tax Ct. Memo LEXIS 161; 18 T.C.M. (CCH) 405; T.C.M. (RIA) 59088; April 30, 1959161 Held, certain payments received by petitioner Faye B. Goldberg from the estate of William Barrett, deceased, are taxable as community income to petitioners in 1948 and as separate income to petitioner Faye B. Goldberg in 1949, 1950, and 1951; certain deductions for contributions and automobile expenses are determined., the inclusion by respondent of certain amounts of interest in the community income of petitioners for each of the years here involved is disapproved; and no part of any of the deficiencies herein is due to fraud with intent to evade tax. James Evert Denebeim, Esq., 111 Suter Street, San Francisco, Calif., and Bruce K. Denebeim, Esq., for the petitioners. Charles W. Nyquist, Esq., for the respondent. ARUNDELLMemorandum Findings of Fact and Opinion ARUNDELL, Judge: In these consolidated proceedings the respondent determined deficiencies in income tax and additions to the tax under sections of the Internal Revenue Code of 1939 2 for calendar years as follows: Additions to the TaxDefi- § 293 § 294 § 294Yearciency(b)(d)(1)(A)(d)(2)J. Eugene Goldberg, Docket No. 648631948$ 30.00$ 15.0000195146.4850.69$ 7.44$ 4.36J. Eugene Goldberg and Faye B. Goldberg,Docket No. 648761949$ 93.70$164.06$15.00$ 6.77195054.24147.1516.529.92Faye B. Goldberg, Docket No. 648901948$149.00$ 74.50$14.96$ 8.981951130.7895.3137.0422.23162 Some of the issues have been settled by stipulation and effect will be given thereto under Rule 50. Those issues remaining for determination are (1) whether any portion of the income of the estate of William Barrett, deceased, is taxable to petitioners in the years 1948 through 1951; (2) whether the respondent erred in disallowing a part of the amounts deducted as contributions in the returns filed for 1949, 1950, and 1951; (3) whether the respondent erred in disallowing a part of the amounts deducted as automobile expense in the returns filed for 1948 and 1949; (4) whether the respondent erred in including in petitioners' community income for each of the taxable years interest on Connecticut Mutual Life Insurance Company Policy No. 523560; (5) whether any part of the deficiencies is due to fraud with intent to evade tax; (6) whether the deficiencies and additions to the tax for the years 1948 and 1949 are barred by the statute of limitations; and (7) whether the respondent erred in determining the above-mentioned additions to the tax under section 294(d). Counsel for petitioner 163 J. Eugene Goldberg, in Docket No. 64863, has conceded all issues of tax liability for 1948, thus leaving as the sole issue in that proceeding whether any part of the deficiency for 1948 of $30 is due to fraud with intent to evade tax. Counsel for respondent has conceded that the deficiency determined against each of the petitioners for 1948 is barred by the statute of limitations in the absence of fraud, and that the joint deficiency for 1949 of $93.70 is barred in the absence of fraud or a 25 per cent omission from gross income. Findings of Fact The several stipulations of facts and the suppemental stipulation of facts are found as stipulated. Petitioner J. Eugene Goldberg (hereafter sometimes referred to as Eugene) and petitioner Faye B. Goldberg (hereafter sometimes referred to as Faye) are husband and wife, presently residing at Daly City, California, a community property state. Petitioners filed separate returns for the years 1948 and 1951 and joint returns for the years 1949 and 1950 with the then collector of internal revenue for the first district of California. William Barrett, the father of Faye, died testate on April 21, 1944. Moses Barrett and Faye were named as executors. 164 Moses and William were brothers. The will was admitted to probate on June 28, 1944, and the estate was in the process of administration until March 19, 1954, when the court entered its decree of final distribution. On December 8, 1944, the Probate Court ordered the executors to pay for maintenance of Rose Barrett, the decedent's widow, a family allowance of $500 per month during the progress of the settlement of the estate. This amount was paid for only a few months and thereafter the amounts that were distributed to or for Rose Barrett were distributed at irregular intervals and in irregular amounts and were not identified as a family allowance. Approval by the court for this course of conduct was not requested or secured prior to the closing of the estate in 1954. The will of William Barrett bequeathed certain personal property to his widow and left the residue of the estate to Faye and Moses, in trust - "To receive and collect the principal and income of the Trust Estate, and after the payment and deductions hereinbefore mentioned, to pay and/or accumulate, and/or use, or invest, own, apply and distribute the same to and for the purpose hereinafter stated, and/or the use and benefit 165 of the beneficiary hereinafter named; and to convey and transfer the corpus or principal of the trust estate with accumulations, if any, as hereinafter provided." Such provisions were to pay two brothers $25 per month each for life, 50 per cent of the remaining net balance "shall be paid in monthly, or other convenient installments to my wife" for life and - "The other Fifty (50%) Percent of the entire remaining net balance of the income received from said Trust Estate and available for distribution, after said deductions as aforesaid shall be paid, used and expended in monthly, or other convenient installments, for the care support and comfort of my said daughters FAYE BARRETT, LILLIAN BARRETT and GUSSIE BARRETT ROSENTHAL in equal proportions, or to the survivor of them." Although the decree of final distribution of the estate of William Barrett was not obtained until about 10 years after the will was admitted to probate, during the 10-year period Moses and Faye managed the properties which were to be held in trust and distributed the income among the members of the family who were named in the will as beneficiaries of the trust, and the income from the properties was reported on 166 fiduciary returns entitled "Trust of William Barrett (Deceased)." The distributions of the income among the beneficiaries were not made exactly in the manner provided in the trust created under the will but rather in the manner agreed upon by the beneficiaries as best suited their needs. At the time of the decree of final distribution in 1954, all of the legatees waived an accounting. During the period here involved the estate of William Barrett, deceased, received income from real estate, which real estate was held by the estate and Moses, as tenants in common. This income was reported by Moses on a partnership return, and the amount shown as income attributable to the partnership interest of the estate of William Barrett was reported by Moses as fiduciary on Form 1041, fiduciary income tax returns, entitled "Trust of William Barrett (Deceased)." Faye, as coexecutor, received interest income on the mortgages comprising the balance of the estate, and such interest was reported in the said fiduciary returns. On the aforesaid fiduciary income tax returns filed by Moses in the name of the "Trust of William Barrett (Deceased)" the amount reported as distributable to beneficiaries, and 167 the amount reported as distributable to Faye for each year were as follows: DistributableAmount ReportedIncome asas DistributableYearReportedto Faye1948$8,169.63$1,292.4119498,648.781,412.2019508,518.651,379.6619518,154.091,014.21 On the fiduciary returns, Moses failed to claim depreciation allowable on the real estate in the amount of $674.41 each year. After allowance of the depreciation, the corrected income and Faye's distributive share were as follows: Corrected Dis-Faye's CorrectedtributableDistributableYearIncomeShare1948$7,495.22$1,149.2019497,974.371,229.0619507,844.241,207.3719517,479.681,146.61 On petitioners' joint income tax returns for the years 1949 and 1950 they claimed deductions in each year for charitable contributions totaling $100 and on their separate returns for 1951 they claimed community deductions for charitable contributions in a total amount of $125. In the notice of deficiency, respondent allowed charitable contributions in the amount of $52 in each year and disallowed the excess over this amount. Petitioners were accustomed to donating each year to such charities as Red Cross, March of Dimes, Heart Association, Cancer 168 Society, Muscular Dystrophy, and those to which other Americans usually give. These contributions were in an amount not less than $48 per year. Faye also contributed at least $52 per year to Temple Beth Sholum. She made these donations in memory of and out of respect for her father. For the years 1948 and 1949 petitioners incurred and paid automobile expenses in the amounts of $721.97 and $812.79, respectively. Fifty per cent of these amounts constitutes ordinary and necessary business expenses and was allowed by the respondent as such. The interest received from the Connecticut Mutual Life Insurance Company on Policy No. 523560 for the years 1948 through 1951 in the respective amounts of $9.33, $9.98, $10.66 and $11.41 belonged to Hattie Goldberg, the mother of Eugene. On the separate return filed by Faye for 1948 no items of itemized income or deductions were shown but there was the entry "1/2 from Husband $2,474.29." On the separate return which she filed for 1951, she reported income from the estate of William Barrett in the amount of $1,014.21 as separate property; "1/2 Community Income from husband's return $1,924.44;" and total deductions of $722.52, with a statement "See Spouse's 169 return for details." Eugene entered the employment of the bureau of internal revenue on November 16, 1948, as a deputy collector. For a month he was assigned as a clerk in the excise tax division and thereafter through the years herein involved was assigned to the collection division where it was his duty to serve warrants and distraints. During his service with the internal revenue, he never investigated or audited tax returns and, except for about a week of special training late in 1949 and 1950, he had no special instruction in the preparation of tax returns. At the time of the hearing, petitioners had been married for about 14 years. Prior to the years here involved, Faye had always had their individual returns prepared. When the time came to prepare the returns for 1948, she thought Eugene ought to be able to make them out since he was then "an Internal Revenue man." He then prepared their returns for 1948 and also later prepared all of their returns for the years 1949, 1950, and 1951. Prior thereto he had never prepared any income tax returns. Eugene first went to work for the United States Government on April 23, 1941, as an assistant storekeeper with the Quartermaster Corps, 170 Presidio of Monterey, California. His job there was to keep stock records. On May 29, 1944, he was employed by the War Assets Administration in a clerical position and remained there until he started with the Internal Revenue in 1948. Eugene's activities as a real estate salesman in 1948 consisted only of spending some time on Sundays sitting at houses that were being offered for sale. He did not act as a real estate salesman in 1949. In the 1948 return filed by Eugene he reported as community income from wages, salaries and commissions the following amounts from the following sources: War Assets Administration (husband)$3,492.64Grant Realty Co. (husband)324.91Grant Realty Co. (wife)356.01Internal Revenue (husband)217.38Total$4,390.94During the first half of 1950, Eugene was detailed by the Internal Revenue for the tax season to aid taxpayers in the preparation of simple returns. He did not quiz the taxpayers in detail about their affairs but simply asked them for all their information and helped them calculate their tax. When he was presented with a more complicated return, he was directed and did refer such taxpayers to those of greater training and capabilities in such problems. 171 At the time Eugene prepared his and his wife's separate returns for 1948, the joint returns for 1949 and 1950, and the separate returns for 1951, he asked Faye for all the information she had in order to prepare such returns. Faye had certain separate property of her own and during 1948 and 1949 was employed as a real estate saleswoman. During 1948, 1949, and 1950, Eugene had a margin account with the brokerage firm of Walston, Hoffman & Goodwin. During the years 1948, 1949, and 1950, he received monthly statements from the firm showing the status of the account. In preparing the family income tax returns, Eugene omitted items of income therefrom as follows: Items1948194919501951Community Income: Dividends$198.75$ 159.00$ 237.50$321.00Interest1.772.582.3252.00Net long-term capital gain79.9600540.11 Faye's Separate Income: Dividends136.25106.00131.00144.00Interest49.8876.3864.4979.59Net short-term capital gain463.33000Estate of Barrett01,229.061,207.370The above dividend income from community property consisted of a number of separate credits for dividends made to the brokerage account of Walston, 172 Hoffman & Goodwin and a certain number of separate checks for dividends from stocks outside of the brokerage account made payable to Eugene and Faye jointly. In the joint return for 1950, Eugene reported estimated dividend income of $100 and in each of the separate returns for 1951 Eugene reported estimated dividend income of $37.50, or a total of $75. Approximately 90 per cent of the abovementioned omitted interest income from Faye's separate property came from two savings accounts carried in the names of Faye and her mother, Rose Barrett. The above-mentioned net long-term capital gain of $79.96 omitted from the 1948 returns consisted of a gain of $94.08 from the sale of 20 shares of Anaconda stock on November 15, 1948, less a loss of $14.12 from the sale of 20 shares of Sears Roebuck stock on the same day. Both the gain and the loss were omitted from the 1948 returns. At the time Eugene prepared the separate returns for 1951 he attached a note to his individual return which read as follows: "I have a capital gain. The extent of the gain I have not been able to ascertain as I cannot find the bills on what the stocks cost me. As soon as I can find the bills or ascertain what the cost 173 price was I will file an amended return and report this capital gain." The above-mentioned short-term capital gain of $463.33 omitted from the separate return of Faye for the year 1948 is the net result of two transactions, one resulting in a gain and the other in a loss, neither of which was reported in the return. The one resulting in a gain was from the sale of some property on Anza Street on February 19, 1948. Faye and Eugene S. Grant purchased the Anza Street property on October 17, 1947. They each had a 50 per cent interest in the property. They sold the property at a gain and Faye's share of the gain was $602.72. On November 15, 1948, Faye sold 30 shares of Sears Roebuck stock at a loss of $139.39. The difference between $602.72 and $139.39 is $463.33. Petitioners each filed an amended return for the year 1951. Eugene's amended return was received in the collector's office on October 9, 1952, and Faye's amended return was received on October 10, 1952. The joint return for 1949 was filed on March 15, 1950, showing gross income in the amount of $4,558.60. Petitioners jointly executed a series of waivers 3of the statute of limitations provided in section 275 on Form 872, the first 174 of which was executed on February 28, 1955. No part of any of the deficiencies determined by the respondent for each of the taxable years 1948 to 1951, inclusive, is due to fraud with intent to evade tax. The returns filed by petitioners for each of the taxable years involved herein were not false and fraudulent returns with intent to evade tax. The separate deficiencies and additions to the tax determined against each of the petitioners for the year 1948 are barred by the statute of limitations. The joint deficiency and additions to the tax determined against petitioners for the year 1949 are not barred by the statute of limitations. Opinion Petitioners on the first issue contend that the distributions from the estate of William Barrett, deceased, were improperly included in the gross income of petitioners for the years involved and should have been taxed to the 175 estate of William Barrett, deceased, under sections 161 and 162. 4176 This is a question of law. The facts are fully set forth in our findings. Petitioners' main point is that the distributions in question bore no relationship to the term of Barrett's will, the court orders, or good practice on the part of fiduciaries and, under the laws of the State of California, were subject to restoration to the estate. It is incorrect to say 177 the distributions bore "No" relationship to the terms of the will or court orders. It may be conceded that they were not in exact accordance therewith. For instance, under the court order dated December 8, 1944, the coexecutors were to pay the widow a family allowance of $500 per month "during the progress of the settlement of the estate or until the further order of this Court." These payments were literally made for only a few months although the estate was in the process of administration until 1954. The trustees did make further payments to the widow from time to time. As far as the record shows, no complaint was ever made by anyone, including decedent's widow, and, at the time of the decree of final distribution, all of the legatees waived an accounting. Under the terms of the will, the decedent bequeathed and devised the residue of his estate to Moses and Faye, in trust, to pay two brothers each $25 per month for life, 50 per cent of the balance to his widow for life, and the remaining 50 per cent equally to his three daughters, of whom Faye was one. The distributions here in question were made substantially in accordance with those directions. Petitioners in support of their 178 contentions rely primarily upon our decision in Estate of B. Brasley Cohen, 8 T.C. 784">8 T.C. 784 [Dec. 15,709], wherein we held that the income from that estate was taxable to the estate because such income did not become payable to the legatees under section 162(b), nor was it properly paid or credited to the legatees under section 162(c). The facts in the Brasley Cohen case were quite different from the facts in the instant case. In Brasley Cohen there was no actual distribution or credits made on behalf of any of the devisees or legatees, whereas in the instant case distributions were made to all the legatees substantially as provided for in the will and to the satisfaction of all interested parties. The legatees thus received such distributions under a claim of right. Cf. North American Oil Consolidated v. Burnet, 286 U.S. 417">286 U.S. 417. This claim was never questioned and was finally approved by the court in its decree of final distribution entered on March 19, 1954. We hold that the distributions were taxable to the legatees under section 162 rather than to the fiduciary under section 161(b). Cf. Howells v. Fox, 251 Fed. (2d) 94 (C.A. 10, 1957). The parties have stipulated that if we hold the 179 legatees taxable rather than the fiduciary then "the amounts set forth in Exhibit 5-E are the amounts which would have been distributable under the terms of the will." These amounts are $1,149.20 for 1948, $1,229.06 for 1949, $1,207.37 for 1950, and $1,146.61 for 1951. Contributions will be allowed as set forth in our findings. Cohan v. Commissioner, 39 Fed. (2d) 540 (C.A. 2, 1930). We hold that the respondent did not err in disallowing a part of the amounts deducted for automobile expenses in the returns filed for 1948 and 1949. The fifth issue is whether "any part" of any of the deficiencies involved herein "is due to fraud with intent to evade tax" under section 293(b). 5 The burden of proving fraud is upon the respondent. Sec. 1112, I.R.C. 1939. Fraud is never presumed but must be established by clear and convincing evidence. Henry S. Kerbaugh, 29 B.T.A. 1014">29 B.T.A. 1014, affd. 74 Fed. (2d) 749 (C.A. 1, 1935); George L. Rickard, 15 B.T.A. 316">15 B.T.A. 316; Arlette Coat Co., 14 T.C. 751">14 T.C. 751; Frank Imburgia, 22 T.C. 1002">22 T.C. 1002, 1014; W. A. Shaw, 27 T.C. 561">27 T.C. 561, affd. 252 Fed. (2d) 681 (C.A. 6, 1958). Fraud involves the determination of petitioners' "intent" at the time the returns were filed. E. S. Iley, 19 T.C. 631">19 T.C. 631. 180 In that case we said: "There is lacking one essential element, the very heart of the fraud issue, namely, the intent to defraud the Government by calculated tax evasion. "Although intent is a state of mind, it is nonetheless a fact to be proven by the evidence. It must appear as a positive factor. In determining the presence or absence of fraud the trier of the facts must consider the native equipment and the training and experience of the party charged. The whole record is to be searched for evidence of the intent to defraud." Eugene had never prepared an income tax return prior to the returns here in question. His training and experience along that line were practically nil. He had little native equipment that could be said to qualify him in the preparation of complicated income tax returns. True, he was employed by the Internal Revenue in November 1948 but only in the position of serving warrants and distraints. 181 He never investigated or audited tax returns and, except for about a week of special training late in 1949 and 1950, he had no special instruction in the preparation of tax returns. Faye had always had their individual returns prepared but when the time came to prepare the returns for 1948, she thought Eugene ought to be able to do the job since he was then employed by the Internal Revenue. The basis for the fraud determined by the respondent is the various amounts of taxable income that were omitted from the returns. These amounts are now agreed upon and are set out in our findings. Petitioners now agree that all of these omitted items are taxable and should have been reported except, of course, the distributions from the estate of William Barrett, which latter amounts we held, under the first issue discussed above, were also taxable. All of these amounts, except the distributions from the estate, are relatively small in amount. No dividends were reported in the 1948 and 1949 returns, and only estimated dividends were reported in the 1950 and 1951 returns. Eugene testified that at the time of filing the returns it was his understanding that the dividends credited to his brokerage 182 account were not income for the reason that he owed money to the stockbroker and that he was not entitled to the dividends. As to the dividends from stocks outside of the brokerage account, Eugene testified that he had kept no records of such dividends; and that "they were small amounts, 5, 10, 15 dollars, maybe quarterly, and I just took each check and I spent the money, I cashed them and spent it, and that was it. I didn't keep any records." The same explanation, lack of records, was given for the failure to report Faye's separate income from dividends and the community income from interest. As to Faye's separate income from interest, approximately 90 per cent of such interest consisted of one-half of the interest credited to two savings accounts in the names of Faye and her mother. Faye testified she did not report such interest to Eugene as she was under the impression that the total of such interest had been reported by her mother. Eugene had little or no knowledge of his wife's financial affairs and relied on the information Faye gave him. The omitted net long-term capital gain for 1948 of $79.96 consisted of the difference between a gain from the sale of some Anaconda stock 183 and a loss from the sale of some Sears Roebuck stock. Eugene failed to deduct the loss as well as to report the gain. Also, in the 1948 return, he failed to deduct Faye's separate loss of $139.39 from the sale of 30 shares of Sears Roebuck stock which she owned as her separate property. It may be noted here that Eugene, over the 4-year period, failed to take, in addition to the above stock losses, approximately 13 items as deductions from gross income for which the respondent made due allowance in the deficiency notices. Eugene testified that he simply overlooked these items in their favor. The explanation for the failure to report Faye's separate net short-term capital gain for 1948 is that Faye was under the impression at the time the returns were filed that her share of the gain from the sale was reflected in the withholding statement from Grant, which statement she turned over to Eugene to be attached to the return. Grant testified he had no knowledge of ever rendering to Faye an account of the cost and expenses of the Anza Street property. Eugene testified that at the time he prepared the 1948 returns he did not know that Faye and Grant had sold the Anza Street property. While 184 this explanation is weak, we do not think it shows an intent on the part of petitioners to defraud. We think that the most than can be said against petitioners on this issue of fraud is that both petitioners were very negligent in the preparation and filing of their income tax returns for the years 1948 to 1951, inclusive. Negligence, however, whether slight or great, is not equivalent to the fraud with "intent" to evade tax named in the statute. Mitchell v. Commissioner, 118 Fed. (2d) 308 (C.A. 5, 1941), reversing 40 B.T.A. 424">40 B.T.A. 424; William W. Kellett, 5 T.C. 608">5 T.C. 608, 618; Walter M. Ferguson, Jr., 14 T.C. 846">14 T.C. 846, 849; appeal to C.A. 4 dismissed nolle prosse; L. Glenn Switzer, 20 T.C. 759">20 T.C. 759, 764-765; Cleveland Thurston, 28 T.C. 350">28 T.C. 350, 355; and John and Mary Marinzulich, 31 T.C. 487">31 T.C. 487. The court in the Mitchell case said: "Negligence, whether slight or great, is not equivalent to the fraud with intent to evade tax named in the statute. The fraud meant is actual, intentional wrongdoing, and the intent required is the specific purpose to evade a tax believed to be owing. Mere negligence does not establish either. Griffths v. Commissioner, 7 Cir., 50 Fed. (2d) 782. * " The Mitchell case has 185 been cited with approval in William W. Kellett, supra; Carter v. Campbell, Jr., 264 Fed. (2d) 930 (C.A. 5, Mar. 10, 1959), and several other cases. In Walter M. Ferguson, Jr., supra, we said: "A strong suspicion that Walter knew his income was more than he was reporting might arise from the record. But suspicion of incredible ignorance or of actual knowledge on his part is not enough. Negligence, careless indifference, or disregard of rules and regulations would not suffice. The petitioners dismissed their responsibility to file proper returns much too lightly. But the Commissioner, to support the fraud penalties, must prove by clear and convincing evidence that the taxpayers, or one of them, intended to defraud him. The evidence is not quite adequate to support that burden. * * " We have carefully considered all of the evidence, including all of the testimony given by Eugene and Faye, the latter being over the objection of petitioners' counsel that, under section 14-306 of the D.C. Code, 6 neither could be compelled to testify for or against each other, and have come to the conclusion that respondent has not proven by clear and convincing evidence that petitioners were motivated 186 by an intent to defraud. We have so found as an ultimate fact and we so hold. It follows from our determination of the fraud issue that the separate deficiencies and additions to the tax determined against each of the petitioners for the year 1948 are barred by the statute of limitations. As to the year 1949, petitioners, in their joint return for that year, reported a gross income of $4,558.60. The omitted gross income for 1949 amounts to a total of $1,573.02. Since this latter amount is in excess of 25 per centum of the amount of gross income stated in the return, it follows, under section 275(c), that the joint deficiency and additions to the tax determined against petitioners for the year 1949 are not barred by the statute of limitations. Since petitioners offered no evidence as to the additions to the tax under section 294(d), we sustain the respondent's determination in this respect except insofar as those amounts are automatically 187 changed in the recomputation of the deficiencies. Decisions will be entered under Rule 50. Footnotes1. Proceedings of the following petitioners are consolidated herewith: J. Eugene Goldberg and Faye B. Goldberg, Docket No. 64876; and Faye B. Goldberg, Docket No. 64890.↩2. Unless otherwise stated herein, all references to section numbers are to the Internal Revenue Code of 1939.↩. Amount stipulated.↩. Amount stipulated.↩. $538.25 of this amount was reported in an amended return filed for 1951 in October 1952.↩3. It is stipulated that these waivers are only operative if respondent can establish facts sufficient to bring the situation pertaining to the year 1949 within the provisions of section 275(c) relating to the omission from gross income of an amount in excess of 25 per centum of the amount of gross income stated in the return.↩4. SEC. 161. IMPOSITION OF TAX. (a) Application of Tax. - The taxes imposed by this chapter * * * upon individuals shall apply to the income of estates or of any kind of property held in trust, including - * * (3) Income received by estates of deceased persons during the period of administration or settlement of the estate * (b) Computation and Payment. - The tax shall be computed upon the net income of the estate or trust, and shall be paid by the fiduciary * . SEC. 162. NET INCOME. The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that - * (b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the legatees, heirs, or beneficiaries, but the amount so allowed as a deduction shall be included in computing the net income of the legatees, heirs, or beneficiaries whether distributed to them or not. As used in this subsection, "income which is to be distributed currently" includes income for the taxable year of the estate or trust which, within the taxable year, becomes payable to the legatee, heir, or beneficiary. * * (c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estates, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year, which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary; [Italics supplied.]↩5. SEC. 293. ADDITIONS TO THE TAX IN CASE OF DEFICIENCY. (b) Fraud. - If any part of any deficiency is due to fraud with intent to evade tax, then 50 per centum of the total amount of the deficiency (in addition to such deficiency) shall be so assessed, collected, and paid * * *.↩6. § 14-306. Husband and wife competent but not compellable witnesses. In both civil and criminal proceedings, husband and wife shall be competent but not compellable to testify for or against each other. (Mar. 3, 1901, 31 Stat. 1358, ch. 854, § 1068.)↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625057/	Blanche Curtis Newbury, Petitioner, v. Commissioner of Internal Revenue, Respondent; Alvin L. Newbury and Jacquelyn H. Newbury, Petitioners, v. Commissioner of Internal Revenue, RespondentNewbury v. CommissionerDocket Nos. 1089-65, 1090-65United States Tax Court46 T.C. 690; 1966 U.S. Tax Ct. LEXIS 50; August 29, 1966, Filed 50 Decisions will be entered under Rule 50. Held, the unenforceability under Texas law of a provision for support in a judgment of divorce does not prevent the characterization of payments made pursuant thereto as alimony for purposes of sections 71(a) and 215(a), I.R.C. 1954. Held, further, payments on a note provided for in a judgment of divorce constituted part of the community property settlement and, therefore, cannot be characterized as alimony for purposes of sections 71(a) and 215(a), I.R.C. 1954. Blanche Curtis Newbury, pro se, in docket No. 1089-65.Roger M. Carter, for the petitioners in docket No. 1090-65.Williard A. Herbert, for the respondent. Fay, Judge. FAY690 Respondent determined deficiencies in the income tax and additions to tax of petitioners, as follows:Additions toDocket No.YearDeficiencytax, sec. 6651(a),I.R.C. 19541089-651959$ 724.00$ 181.001960516.00129.001961400.00100.001962355.0088.751090-651960809.281961738.341962594.58 Respondent concedes that petitioner in docket No. 1089-65 is not liable for an addition to tax under section 6651(a) of the Internal Revenue Code of 19541 for each of the years 1959, 1960, 1961, and 1962. Petitioners in docket No. 1090-65 51 did not contest certain adjustments set forth in the notice of deficiency. The sole issue for decision is whether certain amounts paid by Alvin L. Newbury to Blanche Curtis Newbury constitute payments made in discharge of a legal obligation to support after divorce, as defined in section 71, so as to be includable in the income of petitioner in docket No. 1089-65 pursuant to section 71(a)(1) and deductible by the petitioners in docket No. 1090-65 pursuant to section 215(a).691 FINDINGS OF FACTPetitioner Blanche Curtis Newbury (hereinafter referred to as Blanche) is a resident of Dallas, Tex.Petitioners Alvin L. Newbury (hereinafter referred to as Alvin) and Jacquelyn H. Newbury, husband and wife, filed Federal joint income tax returns on the cash basis with the district director of internal revenue, Dallas, Tex., for 1960, 1961, and 1962.On April 29, 1958, Blanche and Alvin were divorced. A judgment of divorce was entered on that date by the Domestic Relations Court of Dallas County, Tex.The above-said judgment of divorce is divided into several sections bearing headings as follows:Article IProperty to Become Defendant's [Blanche] SeparateProperty from and After Entry of the Divorce DecreeArticle IIProperty to Become Plaintiff's [Alvin] Separate Propertyfrom and After Entry of the Divorce DecreeArticle IIIProperty to be Delivered to the Defendant [Blanche] by thePlaintiff [Alvin]Article IVPlaintiff's [Alvin] Covenant to Amortize the CommunityIndebtednessArticle VChild Custody and Child SupportArticle VIContractual Alimony for the Defendant [Blanche]Article VIIGeneral ProvisionsArticle 52 I of the judgment of divorce provided, inter alia, that the following property would become the separate property of Blanche from and after the date of entry of the divorce decree: PropertyHouse and Lot described in (1)(a), subject to outstanding mortgageHousehold goods, furniture, fixtures, etc., described in (1)(b)1955 Buick sedanTwo promissory notes described in (1)(d)302 Shares of Huey & Philp Hardware Co.100 Shares of First National Bank of Corsicana300 Shares of Georesearch CorporationCashArticle II of the judgment of divorce provided, inter alia, that the following property would become the separate property of Alvin from and after the date of entry of the divorce decree: PropertyHouse and lot described in (1)(a)1957 Ford sedan450 Shares of Newbury & Daniels, Inc.Lot described in (1)(d)Cash surrender value of insurance policy described in (1)(e)Antique cannons, (1)(f)Unsecured note described in (1)(g)Unsecured notes described in (1)(h)Four endowment policies described in (1)(j)692 Article III of the judgment of divorce reads as follows:As a further part of the consideration for the partition of the properties of the Parties hereto in accordance with the terms and provisions of 53 Articles I and II hereof, and as a part of the inducement and consideration for the DEFENDANT agreeing thereto, the PLAINTIFF agrees that he will simultaneously with the execution of this agreement execute and deliver unto the DEFENDANT the following described promissory notes:1. One certain promissory note bearing even date herewith in the principal sum of $ 12,500.00, executed jointly by Alvin L. Newbury and Mrs. F. B. Ingram, a widow, as co-makers, bearing interest at the rate of 5% per annum from date and payable in 84 equal monthly installments of $ 176.68 each, covering principal and interest, with the first installment being due and payable on or before the 1st day of May, 1958, and one installment being due and payable on or before the 1st day of each succeeding month thereafter until all principal and interest on said note shall have been paid in full. 22. One certain promissory note bearing even date herewith in the principal sum of $ 1197.65, bearing interest at the rate of 5% per annum, payable in monthly installments of $ 79.85, covering principal and interest, with the first installment being due and payable on or before the 1st day of May, 1958, and a like installment 54 being due and payable on or before the 1st day of each succeeding month thereafter until all principal and interest thereon shall have been paid in full, which note shall be executed by Alvin L. Newbury and Mrs. F. B. Ingram jointly as co-makers, payable to the order of DEFENDANT herein. 33. One certain promissory note in the principal sum of $ 6200.00, executed by PLAINTIFF to DEFENDANT, bearing even date herewith, and payable in monthly installments of $ 50.00 each, without interest, the first installment being due and payable on or before the 1st day of May, 1958 and a like installment being due and payable on or before the 1st day of each succeeding month thereafter until such note shall have been paid in full. 4Each of the three notes above described shall provide for maturity at the option of the holder in the event of any default in payment as therein provided, and each of such notes shall provide for 10% additional on the principal and interest as attorneys fees if placed in the hands of an attorney for collection.The purpose of the aforesaid promissory notes was to assure Blanche that Alvin would meet the following obligations which were imposed upon him by the judgment of 55 divorce: (1) To pay off the $ 12,500 mortgage on the house awarded to Blanche in the divorce decree; (2) to pay off the $ 1,197.65 balance due on the title I loan that had been previously obtained to make improvements on the above-mentioned house; and (3) to pay to Blanche a sum of $ 6,200.Article IV provided, inter alia, that Alvin (1) assume community indebtedness in the total amount of $ 1,880.79 5 and (2) pay Blanche's attorney in the divorce proceeding $ 2,750 for his services rendered in such proceeding.693 By reason of articles I, II, III, and IV of the judgment of divorce, Blanche received as her separate property at least one-half of the value of the parties' total community property.Article VI of the judgment of divorce provided as follows:Contractual Alimony for the Defendant [Blanche]1. As a part of the consideration for DEFENDANT'S agreeing 56 to the partition of properties hereinabove provided for, and for the purpose of making more equitable the share of property which DEFENDANT receives, the Parties hereto agree that PLAINTIFF shall simultaneously with the execution of this agreement become bound and obligated to pay to DEFENDANT the sum of $ 250.00 on the 1st day of May, 1958, and a like sum on the 1st day of each succeeding month thereafter until 124 such monthly installments shall have been paid; and thereafter, he shall be bound and obligated to pay and he hereby agrees to pay to DEFENDANT the sum of $ 300.00 on the 1st day of the 125th month next following May 1, 1958, and the sum of $ 300.00 on the 1st day of each succeeding month thereafter. The monthly payments provided for in this paragraph shall terminated [sic] upon the death of DEFENDANT unless DEFENDANT should remarry prior to her death, in which event such monthly payments shall terminate simultaneously with her remarriage.Alvin made payments as follows: YearContractualTitle IHouseDollaralimonyloanmortgagenote1959$ 2,7501 $ 709.16$ 2,120.16$ 40019603,0002,120.1655019612,8352,120.1645019622,0152,120.16400Blanche did not file 57 income tax returns for the years 1959, 1960, 1961, and 1962. In his notice of deficiency, respondent determined that Blanche received alimony or payments in lieu of alimony in the amounts of $ 4,520 in 1959, $ 3,456 in 1960, $ 2,885 in 1961, and $ 2,625 in 1962, which constitute taxable income to her.In their joint returns for 1960, 1961, and 1962, petitioners in docket No. 1090-65 deducted from their taxable income the amounts of $ 3,456, $ 3,465, and $ 2,625, respectively, as alimony. In his notice of deficiency, respondent determined that the above-said amounts were not deductible from said petitioners' taxable income.OPINIONBlanche and Alvin were divorced on April 29, 1958, pursuant to a judgment of divorce entered by the Domestic Relations Court of Dallas County, Tex. Article VI of the judgment of divorce provided that Alvin was to pay Blanche "Contractual Alimony" in the sum of $ 250 per month for the first 124 months and $ 300 per month thereafter until the payments were terminated by Blanche's death or remarriage. 694 We must decide whether these payments are includable in Blanche's taxable income pursuant to section 71(a)(1)6 and deductible from Alvin's taxable income pursuant 58 to section 215(a). 7 In his notices of deficiency, respondent took inconsistent positions as to these payments with respect to Blanche and Alvin; however, he argues on brief in favor of Blanche and against Alvin. Respondent contends (and Blanche as well) that the payments from Alvin to Blanche represent either (1) a division of property or (2) an unenforceable59 contractual obligation of continuing support after divorce; and, under either alternative, are neither includable in Blanche's income nor deductible from Alvin's income. Accordingly, we must first determine whether the monthly payments described in article VI were part of the community property division or for Blanche's support.Where husband and wife in a community property State divide their property in a property settlement, the portion that the wife takes as her part of the community property is not for her support or in the nature of alimony since, under community property law, it already belongs to her. Whether payments are (1) for the purpose of support or (2) in consideration of an interest in community property is a question that turns on the facts. Ann Hairston Ryker, 33 T.C. 924">33 T.C. 924 (1960). Careful scrutiny of the record convinces us that the monthly payments described in article VI of the judgment of divorce were, and were intended by the parties to be, for Blanche's support and were not part of the division of community property.8 The judgment itself labeled the disputed monthly payments as "Contractual Alimony for the Defendant [Blanche]." Nevertheless, the language of 60 article VI states that the monthly payments described therein were part of the consideration for (1) Blanche's agreeing to the property division and (2) making such division more equitable. We are not, however, bound by such language, especially when other provisions of the judgment of divorce make it equivocal. Riddell v. Guggenheim, 281 F.2d 836">281 F.2d 836 (C.A. 9, 1960).The payments received by Blanche have all the attributes of support payments and, if it were not for the language in article VI, the question could be easily resolved. Other provisions of the judgment provide 695 for a division of the parties' community property and we have found as a fact that by reason of such other provisions Blanche actually received the cash equivalent of more than one-half of the total amount of the parties' community property. There is nothing in the record to indicate that Blanche had, or, at the time of the divorce, believed herself to have, any greater property right than that for which she was compensated 61 by the provisions of the agreement other than that providing for the disputed payments (article VI).Article VI does not specify any aggregate sum to be paid to Blanche in the form of regular monthly payments. It is not possible to compute any such aggregate sum because all payments provided for in said article would cease upon the death or remarriage of Blanche. All of these factors are relevant in the resolving of the question of whether or not the article VI payments were for the purpose of support, and we are inexorably led to the conclusion that said payments made to Blanche were "periodic payments" for her support and were not part of the division of community property.Having concluded that the disputed monthly payments were for Blanche's support, we must decide whether they are includable in Blanche's income under section 71(a)(1) and deductible from Alvin's income under section 215(a). Respondent and Blanche maintain that these payments are not includable in her income since they were not in discharge of a legally imposed obligation of support. They base this contention on the grounds that there is no legal obligation to pay permanent alimony in Texas and that the payments 62 in issue, if for support, would be considered to be permanent alimony in Texas.The question presented herein was exhaustively considered in Taylor v. Campbell, 335 F. 2d 841 (C.A. 5, 1964), which involved facts similar to those presented in the case at bar. The Fifth Circuit decided that it was not Congress' intention in section 71 "to exclude from the coverage of this statute all payments which a Texas court would consider permanent alimony while otherwise providing for a nation wide deduction for identical payments." Instead, it concluded that the unenforceability of a postdivorce support agreement does not prevent the characterization of payments made pursuant thereto as alimony for purposes of sections 71(a)(1) and 215(a). The Fifth Circuit found support for its position in a report of the Senate Finance Committee (referring to the predecessor of sec. 71(a)), wherein it was stated:These amendments are intended to treat such payments as income to the spouse actually receiving or actually entitled to receive them and to relieve the other spouse from the tax burden upon whatever part of the amount of such payment is under present law includable in his gross income. In addition, 63 the amended sections will produce uniformity in the treatment of amounts paid in the nature of or in lieu of alimony regardless of variance in the laws of different States concerning the existence or continuance of an obligation to pay alimony. 696 [S. Rept. No. 1631, 77th Cong., 2d Sess., p. 83. See also H. Rept. No. 2333, 77th Cong., 2d Sess., p. 72]We believe that Taylor v. Campbell, supra, correctly interprets section 71(a) and is, accordingly, controlling herein. (See also Tuckie G. Hesse, 700">7 T.C. 700 (1946), wherein this Court on equally similar facts reached the same conclusion as that of the Fifth Circuit in Taylor v. Campbell.) Therefore, we hold that the monthly payments described in article VI of the judgment of divorce are includable in Blanche's taxable income under section 71(a)(1) and deductible from Alvin's taxable income under section 215(a).Article III of the judgment of divorce provided that, upon execution of the aforesaid judgment, Alvin was to execute and deliver to Blanche certain promissory notes drawn to her -- to wit, the mortgage note, the title I note, and the dollar note. 964 The mortgage note was payable in 84 equal monthly installments (or 7 years) from May 1, 1958. The title I note was payable in approximately 16 months (or 1 1/3 years) from May 1, 1958. The dollar note was payable in 124 months (or 10 1/3 years) from May 1, 1958.Section 71(c)(1) states as follows: (c) Principal Sum Paid in Installments. --(1) * * * For purposes of subsection (a), installment payments discharging a part of an obligation the principal sum of which is, either in terms of money or property, specified in the decree, instrument, or agreement shall not be treated as periodic payments.However, section 71(c)(2) modifies the foregoing provisions in the following manner:(2) * * * If, by the terms of the decree, instrument, or agreement, the principal sum referred to in paragraph (1) is to be paid or may be paid over a period ending more than ten years from the date of such decree, instrument, or agreement, then (notwithstanding paragraph (1)) the installment payments shall be treated as periodic payments for purposes of subsection (a), but (in the case of any one taxable year of the wife) only to the extent of 10 percent of the principal sum. 65 * A reading of section 71(c) makes it clear that the payments made by Alvin on the mortgage note and on the title I note, which payments were to be made over a period ending less than 10 years from the date of the judgment of divorce, are not excepted from the operation of section 71(c)(1) by reason of section 71(c)(2). Moreover, there is nothing in the record to suggest that the principal sums of the mortgage and title I notes (1) were not payable absolutely and (2) were subject to any contingencies. Consequently, payments on those notes cannot be characterized as "periodic" within the meaning of section 71(a)(1). Therefore, payments on the mortgage and title I notes cannot, under any circumstances, be (1) includable in Blanche's taxable 697 income under section 71(a)(1) and (2) deductible from Alvin's taxable income under section 215(a).We are left to consider the tax consequences to Blanche and Alvin resulting from payments by Alvin on the dollar note, since such payments, spread over a period of more than 10 years, are specifically excepted by section 71(c)(2) from the operation of section 71(c)(1) and are, therefore, treated as "periodic payments" for purposes of section 71(a). 66 In the instant case, such question requires us first to consider whether payments on the dollar note were part of the community property division or for Blanche's support.Article III appears in that portion of the judgment of divorce which ostensibly provides for the division of the parties' community property -- it even precedes the section (article IV) which provides for the division of community indebtedness. Not only does the language in article III state that the notes described therein were a "further part of the consideration for the partition of the properties of the Parties * * in accordance with the terms and provisions of Articles I and II hereof [Emphasis supplied]," but the article itself is labeled "Property To be Delivered To The Defendant [Blanche] by the Plaintiff [Alvin]." Due to (1) the particular juxtaposition of the section providing for the dollar note in the judgment of divorce (article III), (2) the labeling of that section, and (3) the language contained therein -- especially that relating to articles I and II -- we are led to conclude that Alvin and Blanche intended article III to comprise part of the division of their community property.Although Alvin's 67 testimony (which we believe, in general, to be creditable and reliable) indicates that Blanche may have received, at the least, one-half of the parties' community property by reason of articles I, II, and IV alone, there is no other evidence in the record to substantiate such fact. Due to the absence of evidence corroborating values of property testified to, and relying upon our conclusion above as to the parties' actual intent with respect to payments described in article III, we cannot say with any degree of certitude (as we can and did with respect to the payments pursuant to article VI) that payments on the dollar note were not, in fact, part of the community property division. Accordingly, payments on the dollar note cannot be characterized as being in the nature of alimony, and, therefore, are not (1) includable in Blanche's taxable income under section 71(a)(1) and (2) deductible from Alvin's taxable income pursuant to section 215(a).Decisions will be entered under Rule 50. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954.↩2. This note will hereinafter be referred to as the mortgage note.↩3. This note will hereinafter be referred to as the title I note.↩4. This note will hereinafter be referred to as the dollar note.↩5. This amount represented all the indebtedness incurred by Blanche from the date of separation up to the date on which the judgment of divorce was executed.↩1. Fully repaid by Sept. 1, 1959.↩6. SEC. 71(a)(1)↩ Decree of divorce or separate maintenance. -- If a wife is divorced or legally separated from her husband under a decree of divorce or of separate maintenance, the wife's gross income includes periodic payments (whether or not made at regular intervals) received after such decree in discharge of (or attributable to property transferred, in trust or otherwise, in discharge of) a legal obligation which, because of the marital or family relationship, is imposed on or incurred by the husband under the decree or under a written instrument incident to such divorce or separation.7. SEC. 215(a) General Rule. -- In the case of a husband described in section 71, there shall be allowed as a deduction amounts includible under section 71↩ in the gross income of his wife, payment of which is made within the husband's taxable year. * *8. We note that, in the judgment of divorce, article VI was separated by article V (which concerns child custody and support) from the other provisions describing property which each party would receive.↩9. The purpose of these notes and the obligations which they represented have been fully described in our Findings of Fact.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625061/	Appeal of SAMUEL COOPER.Cooper v. CommissionerDocket No. 959.United States Board of Tax Appeals1 B.T.A. 615; 1925 BTA LEXIS 2854; February 26, 1925, decided Submitted January 28, 1925. 2854 Reasonable and necessary expenses incurred by a traveling salesman are proper deductions from gross income. Mr. Samuel Cooper, the taxpayer, pro se.W. Frank Gibbs, Esq. (Nelson T. Hartson, Solicitor of Internal Revenue) for the Commissioner. 615 Before GRAUPNER, LANSDON, LITTLETON, and SMITH. This appeal is taken from a determination of deficiency in tax liability of $208.50 asserted in a letter addressed by the Commissioner to the taxpayer on November 24, 1924. The taxpayer testified in his own behalf, and certain exhibits were admitted. From the oral and documentary evidence the Board makes the following. FINDINGS OF FACT. The taxpayer is an individual residing in the city of New York, where he was employed during the year 1923 as a traveling salesman for the Whiz Dress Co. He received his entire compensation in the form of commissions on sales and from such commissions he paid all his traveling expenses. During the year in question he was absent from his home for 184 days during which he incurred and paid expenses which he itemized as follows: Railway, Pullman and taxicab fares$1,073.70Excess baggage, transfer, and porter charges944.11Hotel rooms800.00Meals578.50Entertaining customers on tour545.00Entertaining customers in New York210.00Tips for bell boys and porters177.00Telephone and telegraph135.00Laundry and valet bills125.004,588.312855 DECISION. The Board holds that the evidence adduced is not sufficient to prove the taxpayer's right to deduct the amounts of $755 for entertaining customers; $177 for tips for bell boys and porters, and $135 for telephone and telegraph tolls. The amount of $125 paid for laundry and valet service represents personal expenses and 616 therefore is not a legal deduction from taxable income. The remaining items are proven and are deductible. Final determination will be settled on consent or on ten days' notice, in accordance with Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625063/	Crestwood Publishing Co., Inc., Petitioner, v. Commissioner of Internal Revenue, RespondentCrestwood Publishing Co. v. CommissionerDocket No. 31531United States Tax Court29 T.C. 789; 1958 U.S. Tax Ct. LEXIS 265; January 31, 1958, Filed 265 Decision will be entered for the respondent. Petitioner, organized after December 31, 1939, was required to compute its excess profits credits based on invested capital. It now claims additional credits based on a constructive average base period net income, contending that it comes within the provisions of section 722 (c) (1), (2), and (3), I. R. C. 1939. Held, petitioner has not shown that it qualifies for relief under the cited sections of the Internal Revenue Code of 1939. Sidney Gelfand, for the petitioner.Martin D. Cohen, Esq., for the respondent. Mulroney, Judge. MULRONEY 789 OPINION.The petitioner claimed refunds of excess profits taxes under section 722 (c) 1 as follows:Taxable yearended April 30Amount1943$ 12,158.41194461,691.8719455,605.98The respondent denied the 266 section 722 (c) relief claimed in full and determined a deficiency in excess profits tax of $ 5,977.06 for the year ended April 30, 1943, payment of which was deferred pursuant to section 710 (a) (5).The petitioner made additional claims by amended petition concerning its right to carry back certain net operating losses and certain alleged unused excess profits tax credits. The respondent states on brief that he is orally advised by petitioner's counsel that such additional claims have been abandoned. This is apparently the case as the record and briefs are devoid of evidence or argument concerning the 790 claims. Petitioner apparently agrees that if we find that it does not qualify under section 722 (c), the asserted deficiency in excess profits tax is correct. Therefore, the only issue remaining is whether the petitioner qualifies for relief under section 722 (c).The evidence in 267 this case was presented before a commissioner of this Court and he made findings of fact based upon a stipulation and the record made. These findings were served upon the parties and both parties requested that we adopt such findings with certain proposed additions thereto. We feel that further findings are unnecessary; therefore, we adopt, for the purpose of this Opinion, the findings of fact of the commissioner.The petitioner was organized on May 27, 1940, by Michael M. Bleier and Theodore Epstein for the purpose of publishing "pulp" magazines of the type sometimes referred to as "girlie" and "gag and cartoon" magazines. Two magazines were published the first year of operation and two others were added the second year. During the third year of operation, two publications of a different nature were substituted for two of the magazines published theretofore.Petitioner began business with no paid-in capital. Its method of operations was to obtain paper, printing, and editorial matter on credit to publish the magazine. The publications were distributed by national distributors who perform the function of a circulation department and collection agency for publishers of pulp magazines. 268 The petitioner used five of these national distributors at various times during the years 1940 to 1945.The services of a distributor are obtained through negotiated contracts. The publisher presents the idea for a new publication to a distributor and if the publisher can convince the distributor that the publication will be successful, a contract is entered into. Pulp magazines, which have no subscription circulation to speak of, must of necessity be distributed by a national distributor to be successful. Once the salability of a magazine is determined, usually after two or three issues, any of the distributing companies would distribute the publication. The distribution contracts customarily have a provision allowing either party to terminate the contract after 60 days' notice.As was customary in the trade at the time the printed copies of an issue of petitioner's magazines were delivered for distribution, the distributor advanced to petitioner a small percentage of the anticipated proceeds from sales. A publisher such as petitioner could use such advances to make payments on its accounts for paper, printing, and other services.The petitioner, being a corporation which came269 into existence after December 31, 1939, was required under sections 712 and 714 to base its computation of excess profits tax credits on invested capital. It is now seeking a higher excess profits credit, based on a constructive 791 average base period net income under the provisions of section 722 (c) (1), (2), and (3), contending that its excess profits taxes for the years in issue are excessive and discriminatory within the meaning of section 722 (a). 2270 Section 722 (c), 3 generally speaking, provides that the tax shall be considered excessive and discriminatory if the taxpayer can show that the excess profits credit based on invested capital is an inadequate standard because:(1) The business of the taxpayer is of a class in which intangible assets not includible in invested capital under section 718 make important contributions to income,(2) The business of the taxpayer is of a class in which capital is not an important income-producing factor, or(3) The invested capital of the taxpayer is abnormally low.271 The petitioner contends that it qualifies for relief on each of the three grounds, or that each of the enumerated qualifying conditions existed in its case. The existence of one or all of the qualifying conditions specified in the statute is not sufficient however to establish a taxpayer's right to relief under section 722 (c). These qualifying conditions may not result in the invested capital method being an inadequate standard for the determination of the excess profits credit. The petitioner must, therefore, demonstrate the inadequacy of its 792 excess profits credit based on invested capital by showing that the inadequacy results from one of the above factors and by establishing within the framework of section 722 (a) a fair and just amount representing normal earnings to be used as a constructive average base period net income. Danco Co., 14 T. C. 276. See also the Bulletin on Section 722, part I (D). In short, to qualify for the refund claimed, petitioner must show (1) the existence of one of the qualifying factors enumerated, (2) which results in an inadequate excess profits credit, and (3) a fair and just amount representing normal272 earnings to be used as a constructive average base period net income.We will first determine whether petitioner has shown that it meets any of the qualifying conditions set out in section 722 (c). First of all, petitioner contends that its business is of a class in which intangible assets not included in invested capital make important contributions to income. According to the Bulletin on Section 722, as amended by E. P. C. 35, 1949-1 C. B. 134, 135, a corporation comes within the "class" referred to in section 722 (c) (1), "[if] the nature of the taxpayer's business function, the character of its organization, or the methods it employs in operation are such that intangible assets of the character in question make important contributions to income * * ."Petitioner lists two assets which, according to petitioner, come within the meaning of the statute. They are (1) the special standing, ability, and reputation of petitioner's owners and management in the operation of the business; and (2) the distribution contracts which petitioner negotiated with national distribution companies.As to the first contention, we have held that the mere successful operation273 of a business through efficient management and competent personnel does not establish the existence of a qualifying factor under section 722 (c) (1). North Fort Worth State Bank, 22 T.C. 539">22 T. C. 539. See also E. P. C. 35, supra. We conceded in the cited case that the taxpayer's management was capable and experienced but we denied relief because of the taxpayer's failure to show that its management and officers were in any way superior to that of banks generally.The same can be said of the instant case. The petitioner has shown that its officers were competent in running the affairs of a magazine-publishing corporation, but no more. It was shown that the officers obtained credit for the petitioner but it was not shown that this is anything more than ordinary in the case of publishing companies in general. In other words, petitioner has not shown that its management has contributed any more to the production of income than ordinary, efficient management is expected to contribute.In contrast, in Danco Co., supra, upon which the petitioner relies, it was shown that the contacts, reputation, and technical attributes of one274 of the taxpayer's officers were responsible for the immediate flow of business to the taxpayer. We found that "petitioner was not 793 simply manufacturing and selling an article. In conducting a customs business, it was performing a service in accordance with the specifications outlined by its customers." It is easily understandable, in an organization conducting a customs service such as in Danco Co., supra, that the personal and technical reputation of a principal in the organization could be a valuable asset to an organization. See also Avildsen Tools & Machines, Inc., 26 T.C. 1127">26 T. C. 1127. The petitioner, in the instant case, was "simply manufacturing and selling an article" and no personal touch of its officers was employed to gain customers or income for the petitioner. We therefore conclude that petitioner has failed to prove that the attributes of its officers were such that they constituted intangible assets within the meaning of section 722 (c) (1).As we have stated, petitioner next contends that the distribution contracts negotiated between national distribution companies and petitioner constitute intangible275 assets which make important contributions to income and which are not included in invested capital within the meaning of section 722 (c) (1). The Bulletin on Section 722, as amended by E. P. C. 35, supra, lists a group of intangibles to be used as illustrations as follows: "Patents, copyrights, licenses, goodwill, franchises, contracts, secret formulas, secret processes, trademarks, brand names, trade names, subscription lists, * ." This list is not meant to be all inclusive but is to be used for illustrative purposes.E. P. C. 36, 1941-1 C. B. 137, cited with apparent approval in Danco Co., supra, gives an illustration of how certain intangibles qualify as important income producers under the statute. The taxpayer, a newly organized restaurant business, was permitted by a nationally known restaurant organization to use its name, menus, recipes, and plan of operation. Obviously, this taxpayer's use of these particular features of a nationally known business substantially affected its business-getting capacity, and thereby made important contributions to the income of the taxpayer.We see in this example, the list 276 of illustrations, and the cases cited, Danco Co., supra, and Avildsen Tools & Machines, Inc., supra, that the intangible, to qualify under the statute, must be of a nature that places the taxpayer in an advantageous position insofar as income is concerned. Assets such as trademarks, patents, franchises, secret formulas, etc., have an aura of exclusiveness about them. The holders of such assets have valuable income-producing assets because of this exclusiveness and, therefore, have an advantage over the ordinary business without such assets.There is nothing at all exclusive about a publisher's obtaining a distribution contract with a national distributor. There was testimony to the effect that all publishers of pulp had to acquire national distributor contracts to have a successful magazine and if such a 794 publisher could convince a distributor that he had a salable publication, he could acquire the distribution contract.Petitioner is about like any producer who has employed a commission salesman for the article it is about to produce. The distribution company is to perform a sales service for which service 277 it will receive a percentage of the sale price of the article it sells. There may be cases where the employment contract with a sales agency would be an important income-producing factor to the producer, but it is easier to visualize a case where such a contract would often be an important income-producing factor to the sales agency. Certain it is that such a sales and distribution contract would not qualify as an important income-producing factor to the producer without some showing that the contract secured the services of some superior sales and distribution agency. Nothing like that is shown here. There was neither contention nor proof that the companies employed by petitioner were superior to other companies in the business.The contracts here were shown to be the ordinary distribution contracts of the type that all publishers of pulp magazines enter into with distribution companies. The fact that the distribution contract was entered into, when the article to be produced, the magazine, was in the idea stage, is immaterial. The fact remains that securing the contract by convincing a distribution company of public acceptance of its idea amounts to no more than hiring an ordinary278 salesman for the product it was about to produce. There was nothing exclusive about the contract. Usually the contracts contained provisions whereby either party could terminate upon 60 days' notice. The record here shows that between 1940 and 1945 petitioner had distribution arrangements with five different companies. At times two or three distributors handled the same magazine at the same time. We hold, under the record presented, the distribution contracts by which the petitioner distributed its magazines do not qualify as intangible assets to petitioner within the meaning of section 722 (c) (1).Petitioner next contends that it meets the qualifying condition as provided under section 722 (c) (2) in that the business of petitioner is of a class in which capital is not an important income-producing factor. First of all, petitioner failed to introduce any evidence concerning the use or need of capital in its or any class of business, and secondly, it was affirmatively shown that capital was an income-producing factor in petitioner's particular business.The commissioner's findings of fact demonstrate that petitioner began business with very little capital, operating for the279 most part on credit obtained. Most of the services and materials employed in publishing petitioner's magazines were obtained on credit. Petitioner seems to think that since credit was obtained capital was not an income-producing factor. Regulations 112, section 35.725-2 (e), expressly 795 state that where capital is raised indirectly as shown by accounts payable or other forms of credit, and the use of such credit is necessary to the production of income, capital is a material income-producing factor. While the cited regulations deal primarily with section 725 (a), the principles outlined therein for determining whether capital is a material income-producing factor should also be applied under section 722 (c) (2). Bulletin on Section 722, as amended by E. P. C. 35, supra.Of course, we realize that even though a corporation employs capital in its operations, capital is not necessarily an important income-producing factor. In the instant case, however, we feel that capital in some form was very necessary. This was not a personal-service type organization as petitioner would have us believe. Petitioner's purpose for existence was to produce an article for sale. 280 Inventories were maintained in each of the years before us. Using the fiscal year ending April 30, 1943, as an example, petitioner had circulation sales income in excess of $ 200,000. The cost of goods sold, which included the cost of paper, editorial matter, printing, and engraving, was approximately $ 150,000. Other expenses, such as salaries, rent, and interest, amounted to approximately $ 40,000. Petitioner had larger, but similar sums representing sales, cost of goods sold, and other expenses in the other years before us. We think that it is obvious from these figures that capital was a very important income-producing factor in petitioner's business.Petitioner next contends that it meets the qualifying condition set out in section 722 (c) (3) in that its invested capital is abnormally low. The record does not support this contention. In order to establish that a taxpayer's invested capital is abnormally low within the meaning of the statute, the petitioner must show that there is some identifiable abnormality in the taxpayer's invested capital structure. Springfield Plywood Corporation, 18 T.C. 17">18 T. C. 17.Petitioner attempts to establish the281 abnormality in its invested capital by arguing that it must have been abnormal, as petitioner began business with no paid-in capital. The obvious fallacy in such an argument is that the fact that petitioner began business with no paid-in capital has nothing to do with invested capital of the petitioner in the years before us. The term "invested capital" as used in subsection (c) (3) of section 722 means invested capital as determined under the Code for excess profits purposes. Springfield Plywood Corporation, supra.Section 715 defines invested capital and sections 716 through 720 are employed in computing invested capital. Nowhere in the computation is it necessary to know what amount of paid-in capital was needed to begin business.Petitioner has made no attempt to establish what its statutory "invested capital" was during the years before us. Neither was an attempt 796 made to establish what the normal invested capital of such a business would be. We are, therefore, asked to compare an unknown to an unknown and find that one is abnormal to the other. This cannot be done. See Metal Hose & Tubing Co., 21 T. C. 365.282 We therefore find that petitioner has failed to show that it comes within the provisions of section 722 (c) (3).The conclusion that petitioner has failed to prove that it meets any of the qualifying conditions as set out in section 722 (c) (1), (2), or (3) makes it unnecessary for us to make any determination as to petitioner's attempts to reconstruct a constructive average base period net income. We will state in passing, however, that the evidence presented by petitioner on this issue was generally unsatisfactory.Reviewed by the Special Division.Decision will be entered for the respondent. Footnotes1. All references hereinafter to Code section numbers refer to the Internal Revenue Code of 1939, unless otherwise specified.↩2. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME.(a) General Rule. -- In any case in which the taxpayer establishes that the tax computed under this subchapter (without the benefit of this section) results in an excessive and discriminatory tax and establishes what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purposes of an excess profits tax based upon a comparison of normal earnings and earnings during an excess profits tax period, the tax shall be determined by using such constructive average base period net income in lieu of the average base period net income otherwise determined under this subchapter. In determining such constructive average base period net income, no regard shall be had to events or conditions affecting the taxpayer, the industry of which it is a member, or taxpayers generally occurring or existing after December 31, 1939, except that in the cases described in the last sentence of section 722 (b) (4) and in section 722 (c), regard shall be had to the change in the character of the business under section 722 (b) (4) or the nature of the taxpayer and the character of its business under section 722 (c) to the extent necessary to establish the normal earnings to be used as the constructive average base period net income.↩3. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME.(c) Invested Capital Corporations, Etc. -- The tax computed under this subchapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer, not entitled to use the excess profits credit based on income pursuant to section 713, if the excess profits credit based on invested capital is an inadequate standard for determining excess profits, because -- (1) the business of the taxpayer is of a class in which intangible assets not includible in invested capital under section 718 make important contributions to income,(2) the business of the taxpayer is of a class in which capital is not an important income-producing factor, or(3) the invested capital of the taxpayer is abnormally low.↩In such case for the purposes of this subchapter, such taxpayer shall be considered to be entitled to use the excess profits credit based on income, using the constructive average base period net income determined under subsection (a). * *	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625065/	JOHN HORACE CLELAND AND CAROL DRENNAN CLELAND, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentCleland v. CommissionerDocket No. 16554-89United States Tax CourtT.C. Memo 1993-589; 1993 Tax Ct. Memo LEXIS 605; 66 T.C.M. (CCH) 1570; December 15, 1993, Filed 605 Decision will be entered for respondent, except as to the additions to tax under section 6659. John Horace Cleland, pro se. For respondent: James R. McCann. DAWSON, GOLDBERGDAWSON; GOLDBERGMEMORANDUM OPINION DAWSON, Judge: This case was assigned to Special Trial Judge Stanley J. Goldberg pursuant to section 7443A(b)(4) and Rules 180, 181, and 183. 1 The Court agrees with and adopts the opinion of the Special Trial Judge which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE GOLDBERG, Special Trial Judge: Respondent determined deficiencies in petitioners' Federal income taxes, additions to tax, and additional interest as follows: Additions to Tax Additional InterestSec.Sec.Sec. Sec. YearDeficiency6653(a)(1)6653(a)(2)6659 6621(c)1981$ 8,818$ 4411$ 2,645219828,41842112,525219832,54412711763219842,8991451870219851,9449715832606 The deficiencies, additions to tax, and additional interest determined by respondent are attributable to petitioners' claimed losses and investment tax credits related to an investment program promoted by Gold Depository and Loan Company, Inc. (GD&L), involving marine dry cargo containers (containers). The issues for decision are whether petitioners are entitled to such losses and credits claimed with respect to their purported purchase of containers, and whether petitioners are liable for the additions to tax for negligence and additional interest under section 6621(c). Respondent conceded that the additions to tax under section 6659 are not applicable if we find that the containers petitioners purportedly purchased did not exist. Some of the facts were stipulated, and the stipulation of facts and attached exhibits are incorporated by this reference. Petitioners resided at Chicago, Illinois, when their petition was filed. GD&L promoted sales and leasing of marine dry cargo containers, offering investors the opportunity to purchase 20-foot and 40-foot containers through its program. Petitioners learned of the GD&L container program in 1984 from their tax return preparer, Earl607 Lehman, and received a prospectus detailing the tax advantages of the program. On November 17, 1984, John Cleland (petitioner) signed an agreement with GD&L for the purchase of twenty 40-foot and sixty 20-foot containers, for a total purchase price of $ 200,000. He paid $ 10,000 of the purchase price by check. The agreement reflects that the remaining $ 190,000 of the purchase price is to be paid by a loan. Other than the purchase agreement with GD&L, petitioners have no documents showing an indebtedness to GD&L or any other entity for the balance of the purchase price of the containers. We have considered the GD&L container sales and leasing program in other cases, concluding that the containers did not exist, the purported sales transactions were shams, and the program was completely lacking in economic substance. E.g, ; ; . At trial, petitioner acknowledged that he is now "pretty certain" the containers purportedly sold to him by GD&L never existed. On608 this record, we find that the containers petitioners purportedly purchased did not exist and petitioners had no enforceable obligation to pay $ 190,000 to GD&L or any other entity. Accordingly, petitioners are not entitled to the investment tax credits and depreciation and other deductions, including interest, claimed with respect to the GD&L program. Respondent's determination with respect to the disallowance of petitioners' GD&L losses and credits is sustained. The remaining issues are petitioners' liability for additions to tax for negligence under section 6653 and increased interest on tax-motivated transactions under section 6621(c). Section 6653(a)(1) imposes an addition to tax equal to 5 percent of the underpayment of tax if any part of the underpayment is due to negligence or intentional disregard of rules or regulations. Section 6653(a)(2) imposes an addition to tax in the amount of 50 percent of the interest due on the portion of the underpayment attributable to negligence. Negligence is defined as the lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances. .609 Respondent's determination that petitioners were negligent is presumed correct, and petitioners bear the burden of proving that they were not negligent. Petitioner has a bachelor of arts degree in journalism and a master's degree in English. Petitioner Carol Drennan Cleland has a bachelor of arts degree in humanities, social sciences, and teaching. Petitioners had made other investments before investing in the GD&L program, but had not previously pursued tax-sheltered investments. Prior to investing in the GD&L program, petitioners had no experience in the marine dry cargo container leasing industry and relied on the promotional materials prepared by GD&L for information about the investment. Petitioners contend that they are not negligent because they relied upon their accountant, to whom they paid an undisclosed amount to involve them in the GD&L program. While there are situations where reliance on expert or professional advice may satisfy the reasonable and prudent person standard, a taxpayer must establish that the person upon whom he or she relied is qualified to give the advice. Further, the taxpayer must show that the adviser had sufficient knowledge of the facts to610 render a competent opinion. In sum, it must be established that the reliance was reasonable. , affd. , affd. . This petitioners have failed to show. Petitioner stated concerning his accountant's knowledge of the true facts of the GD&L program: "I think he and I were on the same wavelength of just innocent trust." Petitioners admit that they relied in their investment decision on information supplied by the purveyor of the program, and did no independent research into the feasibility of making a profit from the program. Considering the size of petitioners' investment and the proportionately large tax writeoffs, further investigation was mandated. , affg. . The record before us simply does not support a finding that petitioners relied on the advice of competent and unbiased parties. We cannot say that reliance on the advice of an accountant who 611 promoted the program and was apparently not well informed about the underlying facts amounts to reasonable and prudent conduct. Such reliance is not the type of activity which will overcome the addition to tax for negligence or intentional disregard of rules or regulations. ; , affd. without published opinion , affd. sub nom. , affd. sub nom. , affd. without published opinion sub nom. . Petitioners failed to produce evidence to support the substantial losses and credits they claimed with respect to the GD&L container program. Such losses and credits are based in large part on a purported loan for which petitioners admit they signed no note or other document evidencing any indebtedness. Respondent's determinations with respect612 to the additions to tax for negligence are sustained. Section 6621(c) provides for an interest rate of 120 percent of the rate established under section 6621 if there is a substantial underpayment (an underpayment which exceeds $ 1,000) in any taxable year attributable to one or more "tax motivated transactions". The increased interest rate applies to interest accrued after December 31, 1984, even though the transaction was entered into prior to that date. , affd. without published opinion . We conclude that the GD&L container transactions were tax-motivated transactions, and therefore hold that section 6621(c) is applicable. Petitioners also contend that they should be excused from liability for additions to tax and additional interest because the claims for refund they filed were paid even though respondent knew from her investigation of GD&L that the program was an abusive tax shelter. This argument is without merit. Respondent is not estopped from asserting the deficiencies and additions to tax even though petitioners' requests for refunds613 had been granted before petitioners' returns were audited. ; , affg. . Similarly, we reject petitioner's contention that respondent was estopped from determining a deficiency in this case by the following language in a letter from the Internal Revenue Service District Director in Chicago to a Member of Congress whom petitioner had contacted concerning his tax refunds: Mr. Cleland's tax returns contain certain tax deductions or credits that are part of a tax shelter examination. Therefore, his claimed refunds will not be issued until the examination of the tax shelter is completed. The examination will be completed as expeditiously as possible. If the examination results in an adjustment to Mr. Cleland's return, he will be afforded the opportunity to exercise his appeal rights. Mr. Cleland will be contacted as soon as the examination is completed.Petitioner argues that this language and the refunds he subsequently received led him to believe that614 the GD&L program was legitimate. However, he failed to show that any reliance on these factors was to petitioners' detriment. To the contrary, it appears that the refunds petitioners received were to their benefit. Decision will be entered for respondent, except as to the additions to tax under section 6659. Footnotes1. All section references are to the Internal Revenue Code in effect for the years in issue, unless otherwise indicated, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩1. 50 percent of the interest due on the deficiency.↩2. 120 percent of the interest due on the deficiency.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625066/	BAY TRUST COMPANY, TRUSTEE, ESTATE OF LOUIS E. OPPENHEIM, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. OSCAR LOWMAN, PAULINE H. SLOMAN, AND FLORENCE H. POLOZKER, EXECUTORS OF THE ESTATE OF JENNIE H. OPPENHEIM, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. SARA O. LEVY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. EARL H. SPIESBERGER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Bay Trust Co. v. CommissionerDocket Nos. 76356, 77886, 79701, 79702.United States Board of Tax Appeals34 B.T.A. 233; 1936 BTA LEXIS 729; March 27, 1936, Promulgated 729 The trustee of a trust, created by an agreement made by the parties in compromise of a will controversy, may not deduct as distributed income, under Revenue Act 1928, sec. 162(b), the amount of a fixed annuity payable in any event, irrespective of the amount of trust income, notwithstanding that in the taxable year the payment is made from trust income and that in any year an inadequacy of trust income is to be made up of contributions by remaindermen. Edward S. Clark, Esq., for the petitioners in Docket Nos. 76356, 79701, and 79702. C. Frederick Stanton, Esq., for the petitioners in Docket No. 77886. Thomas F. Callahan, Esq., for the respondent. STERNHAGEN 234 OPINION. STERNHAGEN: The respondent determined a deficiency of $1,289.66 in the 1931 income tax of the trustee of the estate of Louis E. Oppenheim (Docket No. 76356), and determined liability therefor of Levy and Spiesberger as transferees (Docket Nos. 79701 and 79702). He also determined a deficiency of $2,699.28 in the 1932 income tax of Jennie H. Oppenheim (since deceased), the widow of Louis E. Oppenheim and one of the beneficiaries of his trust estate (Docket No. 77886). 730 These determinations are admitted by the respondent to be inconsistent in theory, and the question to be determined is whether an annual payment made in 1931 by the trustee of Louis E. Oppenheim's estate to Jennie H. Oppenheim is a proper deduction of the trustee for that year under section 162(b), Revenue Act of 1928, 1 and whether a similar payment in 1932 is taxable income of the widow. The facts are all stipulated, and a brief statement will suffice for a consideration of the issue to be decided. 731 Louis E. Oppenheim died in Michigan on June 29, 1921, survived by his widow, Jennie H. Oppenheim, and two ststers, Carrie Spiesberger and Sara Levy. By his will he set up a trust of specific securities and directed that the net income therefrom should be paid quarterly to his widow for life, the property then to be distributed to the sisters. The widow refused to recognize the will and began a proceeding for interstate administration. Thereupon, on September 14, 1921, the interested parties made a settlement agreement whereby the widow would receive: * * * an annuity during her life of $30,000 per annum, payable in equal monthly installments of $2,500 on the 1st day of each month commencing July 1st, 1921. The trust described in Item XII of said Last Will and Testament of Louis E. Oppenheim, deceased, shall, as supplemented and changed by this agreement, exist and continue to exist for the purpose of paying said annuity. 235 A trust was set up consisting of the securities provided in item XII of the will and other property of the estate. If the trust income were less than $30,000 in any year, the remaindermen were to make up the difference, upon failure of which the732 trustee might sell corpus to the extent necessary to enable it to pay the $30,000 to the widow. The agreement was immediately supplemented to provide that not only the annuity but also taxes and carrying charges should be paid out of trust income. In October 1921, the will and the compromise agreement were probated in Michigan. In 1932, the agreement was further modified so that the remaindermen were only to make up a deficiency in an amount necessary to pay to widow $24,000. In 1931, $30,000 was paid to the widow out of trust income, and in 1932, $28,000 was paid to her, of which $19,268.45 was trust income. The trustee, in its fiduciary income tax return for 1931, deducted $30,000 as trust income distributed to the widow, and she included the amount in her individual tax return as income. The Commissioner disallowed the deduction by the trustee and has withheld action upon a claim for refund filed by the widow. For 1932, the Commissioner determined that the $28,000 received by the widow should be included in her income, and has determined a deficiency against her accordingly. The trustee and its transferees contend that the amount paid to the widow was a distribution733 to her of trust income and therefore deductible upon the fiduciary return. The estate of the widow contends that the amounts received by her were not such distributions of income as were deductible by the trustee and taxable to her. The Commissioner stands neutral, although expressing his preference for the trustee's position. In our opinion, the widow's position is supported by the authorities. ; ; ; (on review, C.C.A., 2d Cir.); ; ; cf. . It seems to us not important whether the widow is to be regarded as deriving to any extent from the original will, or from the compromise agreements, or from both. She chose not to take under the will and not to take by statute, but instead to take by the agreement which was voluntarily734 made in substitution for both. But whether she may be said to have taken a legacy or a gift or contractually, we understand the Butterworth, case, when read in the 236 light of the earlier cases which it disapproved, 2 as rejecting the view that she took by purchase. The amount must be regarded, therefore, either as a distribution of income or as an annuity, the significance of the alternative being for present purposes the tax effect upon the trustee and upon the widow under section 162(b). Upon this subject the Supreme Court has spoken authoritatively in , in which, as appears from the facts stated in the dissenting opinion, the periodical payments were a charge first upon income and only secondly upon corpus, and were apparently in fact paid in the taxable year from income. Nevertheless, the payments, because they were fixed in amount and payable in any event, were treated as annuities and held to be not deductible by the trustee. This was in contradistinction to the payments in the Butterworth case, which were treated as distributions of net income. Following those decisions, the later decisions above cited have735 disapproved the deduction by the trustee of distributions fixed in amount and payable without regard to whether they were within or exceeded the income of the trust. The opinion in , is not at variance with this line of decisions, since it was found in that case that the definite duty of the trustees was to distribute all the income, and this was held not affected by the added discretion to distribute corpus if in their opinion the needs of the widow required it. It must be held, therefore, that the literal application of the statute to permit the deduction by the trustee of so much of the trust income as is distributed currently is precluded by judicial construction. The idea that the trust from which the widow's payments were derived can be recognized as three trusts, one created by the will, another created by the agreement, and a third created by the remaindermen's contributions, can not be adopted. There was, in the taxable year, but736 a single trust, and the provision for further contributions by the remaindermen did not serve to make it otherwise. Nor can we regard the possible contributions of the remaindermen as income of the trust, the distribution of which is deductible. The widow's right was against the trust for a fixed annuity, and the obligation of the remaindermen to make contributions to the trust sufficient to enable the trust to pay the annuity without invading its corpus did not affect the character of the widow's right. There is argument as to whether in Michigan the probate of the compromise agreement serves, as in Rhode Island, to stamp the contractual arrangement as testamentary, , 3 or whether it retains its inherent contractual character 237 although adjectively affected by probate law. Cf. ; ; ; 737 . It is unnecessary in this proceeding to consider the argument, since in any event the trust obligation to the widow is, irrespective of its genesis, fixed in amount despite a possible inadequacy of income from which to defray it. In Docket No. 77886 the Commissioner erroneously included in the income of Jennie H. Oppenheim the amount received from the trust; in Docket No. 76356 he correctly denied the deduction to the trustee; and in Docket Nos. 79701 and 79702 the petitioners are liable as transferees for the resulting deficiency of the trust estate. Judgment will be entered under Rule 50.Footnotes1. SEC. 162. NET INCOME. The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that - * * (b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year. ↩2. ; ; . ↩3. See Case Note, Harvard Law Review, vol. 49, p. 844 (March 1936). ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625067/	Dallas Downtown Development Company (Dissolved), W. W. Overton, Jr., Justin McCarty, and Ballard Burgher, Liquidating Trustees, Petitioners, et al., 1 v. Commissioner of Internal Revenue, RespondentDallas Downtown Development Co. v. CommissionerDocket Nos. 16618, 16224, 16567, 16568, 16614, 16615, 16616, 16617, 16665, 16718, 16729, 16731, 16732, 16734, 16771, 16772, 16773, 16774, 16780, 16829, 17604United States Tax Court12 T.C. 114; 1949 U.S. Tax Ct. LEXIS 288; January 31, 1949, Promulgated 288 Decision will be entered for the petitioners. Sale by numerous stockholders of 100 per cent of stock in petitioner corporation after unsuccessful efforts of purchaser to acquire from corporation the building occupied by purchaser, held not to result in taxable gain to petitioner corporation, notwithstanding acquisition of all of the stock was accomplished on purchaser's behalf by its nominees, followed by immediate liquidation of petitioner corporation and transfer of building through dummy corporation to purchaser. Steubenville Bridge Co., 11 T. C. 789, followed. Robert Ash, Esq., for the petitioners in Docket Nos. 16224 and 17604.Webster Atwell, Esq., and E. Crippen, Esq., for the petitioners in Docket Nos. 16614, 16615, 16616, 16617, and 16618.Leslie M. Shults, Esq., for the petitioners in Docket Nos. 16567 and 16568.Sam Winstead, Esq., for the petitioner in Docket No. 16665.J. W. Bullion, Esq., for the petitioners in Docket Nos. 16718 and 16729.J. I. Worsham, Esq., for the petitioners in Docket Nos. 16731, 16732, and 16734.Felix Atwood, Esq., for the petitioners in Docket Nos. 16771, 16772, 16773, 16774, 289 and 16780.John N. Jackson, Esq., for the petitioner in Docket No. 16829.John W. Alexander, Esq., and J. Marvin Kelley, Esq., for the respondent. Opper, Judge. Leech, J., dissents. Disney, J., dissenting. Harlan, J., dissenting. OPPER114 By these proceedings petitioners challenge respondent's determination of a deficiency in income tax against petitioner Dallas Downtown Development Co. (dissolved) in the amount of $ 37,302.55 for the 115 taxable year 1946; they also contest the determination of transferee liability as follows:Income taxPetitionerDocket No.deficiencyEstate of J. O. McReynolds16224$ 21,000.00Trust Under Will of James Charles O'Connor1656714,700.00Estate of Ivor Elizabeth O'Connor Morgan1656815,400.00Texas Bank & Trust Co. of Dallas1661437,302.55Ballard Burgher1661537,302.55Justin McCarty1661637,302.55W. W. Overton, Jr1661737,302.55Mina G. McJunkin and Fred McJunkin, Jr., Trust1666520,300.00Estate of E. M. Kahn1671821,000.00Harry L. Meador1672937,302.55Frank O. Witchell167313,500.00Estate of Mollie I. Witchell 11673215,925.00Estate of Otto H. Lang1673420,300.00Pauline B. Seay1677117,500.00John M. Seay1677217,762.50Charles E. Seay1677335,000.00George E. Seay1677419,250.00Pauline B. Seay Trust1678037,302.55Cecil A. Keating Trust1682914,700.00Mary Victoria McReynolds Wozencraft1760421,000.00290 The deficiency against petitioner Dallas Downtown Development Co. (dissolved) resulted from respondent's determination that petitioner realized long term capital gain of $ 149,210.19 from a sale of its building to Texas Bank & Trust Co. of Dallas in the taxable year.The facts are found from stipulations of the parties, which we hereby adopt as part of our findings, and from testimony and documentary evidence.FINDINGS OF FACT.Petitioner Dallas Downtown Development Co. (dissolved), hereinafter called Development Co., filed no Federal income tax return for the taxable year 1946.The Development Co. was during part of the taxable year a Texas corporation which owned and was engaged in operating an office building known as the Texas Bank Building in Dallas, Texas. As of January 21, 1946, the Development Co.'s capital stock consisted solely291 of 4,000 shares of $ 100 par value common, which were owned in varying amounts by approximately 62 stockholders, of whom 16 are petitioners in this proceeding and are sometimes hereinafter called old stockholders. Ownership of approximately 61 per cent of the 4,000 shares was divided between petitioner Harry Meador, who was president and a director, and the Seay family, consisting of petitioners Pauline B. Seay and sons John M. Seay, George E. Seay, and Charles E. Seay, the latter two being directors. By a written instrument signed by Meador and the Seays, dated February 28, 1944, and in effect during 1945 and 1946, the parties were committed to give each 116 other the refusal to purchase the Development Co.'s stock before disposing of it to outsiders.During the period in question and for many years prior thereto, petitioner Texas Bank & Trust Co. of Dallas, hereinafter called Texas Bank, was a tenant in the Texas Bank Building, occupying a portion thereof for its banking business.As early as 1943 or 1944 petitioner W. W. Overton, Jr., a director and stockholder of Texas Bank, negotiated with Meador, also a director of Texas Bank, for a purchase of stock in the Development292 Co. But although Meador discussed with Overton a sale of part of the Meador-Seay block of stock, those negotiations did not result in sales.In the latter part of 1945 Meador made a survey of rental conditions, as a result of which he notified the tenants of Texas Bank Building, including Texas Bank, of a rent increase to become effective January 1, 1946. Shortly after receiving the notice, Overton called Meador to inquire how much the Development Co.'s income would be increased by virtue of the increase in rents, and was given that information by Meador. At about the same time Texas Bank desired to acquire a building of its own. Overton had discussions with the following group of officers, directors, and stockholders of Texas Bank: Petitioners Ballard Burgher and Justin McCarty, Jr., directors; Garrett and Reed, president and vice president, respectively; and Burrus and Brown, principal stockholders. That group appointed Overton, McCarty, and Burgher as a committee to act for Texas Bank Building.In November 1945 Overton consulted Webster Atwell, an attorney employed by Texas Bank, seeking advice concerning the means by which Texas Bank could acquire title to Texas Bank Building. 293 Atwell advised that under Texas law the bank could not invest in excess of 50 per cent of its capital and certified surplus in a home office building, and that if a more costly building were to be acquired the bank could conform to the law by taking title subject to a lien on the building. Atwell further advised that the Development Co. could convey good title only with consent of all its stockholders. On December 3, 1945, Overton executed and delivered a note payable to Texas Bank in the principal sum of $ 10,000, payable in 90 days, which sum was used in the incorporation of Dallas Downtown Investment Co., hereinafter called the Investment Co. A charter for the Investment Co., issued December 5, 1945, by the Secretary of State of the State of Texas, on application and affidavit of the incorporators, Overton, McCarty, and Burgher, stated that the purpose for which the Investment Co. was formed was "to erect and repair any building or improvement, and to accumulate and lend money for said purposes, and to purchase, sell, and subdivide real property in the City of Dallas, Texas, and its suburbs not extending more than two miles beyond 117 the City Limits of Dallas and its294 suburbs, and to accumulate and lend money for that purpose." According to the affidavit, the capital stock was divided into 100 shares of common with par value of $ 100 per share, and was subscribed and paid for by the incorporators in the following amounts:NameAmountAmountsubscribedpaidOverton$ 3,500$ 3,500McCarty3,5003,500Burgher3,0003,000The above note for $ 10,000 was paid on March 1, 1946, by Overton, McCarty, and Burgher, in the following amounts:Overton$ 5,000McCarty2,500Burgher2,500Sometime between about December 4 and December 28, 1945, four proposed contracts for sale of Texas Bank Building were drafted, all naming the Development Co. as seller and the Investment Co. as buyer, but none of the four was ever consummated or signed by any of the proposed parties to it. The first of these proposed contracts, reciting a consideration of approximately $ 589,000, was drafted by Atwell on or about December 4, 1945, at Overton's request and was delivered to Meador, who discussed it with Pauline Seay, Charles E. Seay, and the directors of the Development Co. George E. Seay and John M. Seay were both absent at the time, serving295 with the Army and Navy, respectively. Pauline Seay, Charles E. Seay, and the directors of the Development Co. expressed opposition to a sale of the Texas Bank Building. Therefore Meader notified Overton that there was no chance of consummating the deal.Negotiations under all four proposed contracts were carried on between Meador and Overton. No discussion was had concerning whether Overton was acting for himself or for Texas Bank, but during the course of negotiations Meador stated that he believed it was a good investment for the bank. The second proposed contract, drafted on or about December 17, 1945, by Ralph W. Malone, an attorney for Meador, and reciting a consideration of $ 700,000, was delivered to Atwell, who drafted the third proposed contract, reciting the same consideration, $ 700,000, but providing that the buyer's performance was contingent upon unanimous consent of the seller's stockholders and directors. Upon receipt of the third proposed contract, Malone, on or about December 28, 1945, drafted the fourth proposed contract, reciting the same consideration, $ 700,000, and providing that the seller's performance also was contingent upon unanimous consent of 118 296 its stockholders and directors. Meador discussed the $ 700,000 proposals with Pauline Seay, Charles E. Seay, and George E. Seay, who returned to the United States in early January of 1946. Finding the Seays opposed to a sale of the building, Meador informed Overton that the $ 700,000 discussion was just as dead as the $ 589,000 one. Each of the above four proposed contracts stated that the purchaser had deposited with the seller $ 50,000 "as part of the aforementioned consideration, the receipt of which is hereby acknowledged by Seller." However, no sum was paid under any of the proposed contracts.During 1945 and part of the taxable year, R. L. Thornton was president of Mercantile National Bank, hereinafter called Mercantile Bank, and a director of the Development Co., with one qualifying share. In the latter part of 1945 Overton came to Thornton to discuss the advisability of Texas Bank's acquiring a home office building. Thornton also discussed the same matter with members of the Seay family.On or about January 9, 1946, at a meeting attended by Meador and all the members of the Seay family, those present agreed to sell their stock for $ 175 a share. Meador had learned that297 Texas Bank was preparing to acquire land and erect a home office building, and convinced the Seays that they should sell their stock. On or about January 10, 1946, Meador and the Seays, as sellers, entered into a contract in which Overton, Burgher, and McCarty were denominated the purchasers, by the terms of which the purchasers agreed to pay $ 175 a share for all stock in the Development Co. offered before January 31, 1946, provided that at least 80 per cent of the stock was offered for sale before that date. The 80 per cent condition was included in the contract at the purchasers' request because under Texas law the consent of at least 80 per cent of the stockholders was required for dissolution. The above contract was dated December 31, 1945, at request of the purchasers, who desired that it be so dated for "operating purposes." The contract was drafted by Malone, as attorney for the sellers, and was signed first by the sellers and delivered to the purchasers, who signed on the same day. Subsequently, on January 11, Meador mailed to all other stockholders of the Development Co. letters stating the details of the stock purchase contract and containing a form to be completed 298 by those stockholders desiring to offer their shares to the purchasers under that contract. The form provided, in part, that "said stock certificate, or certificates, has been endorsed in blank and is hereto attached for delivery to Harry Meador, President of said corporation, in trust, pending the consummation of said sale."By January 21, 1946, 3,835 of the Development Co.'s 4,000 shares were available for sale under the stock purchase contract, and on that date individual checks drawn on Texas Bank, payable to the holders of the 3,835 shares, and signed by "W. W. Overton, Jr., Ballard 119 Burgher, and Justin S. McCarty, by W. W. Overton, Jr.," were sent or delivered to the old stockholders. The amounts used for the stock payments were procured by a loan of $ 700,000 from Mercantile Bank to Overton, McCarty, and Burgher. The loan was secured by a promissory demand note in the amount of $ 700,000 dated January 22, payable to Mercantile Bank, and signed by Overton, McCarty, and Burgher; and by a separate collateral agreement of the same date signed by the same parties and pledging 4,000 shares of the Development Co. stock. Between January 21, and February 19, 1946, the remaining299 165 outstanding shares were purchased and paid for by Overton, McCarty, and Burgher in the same manner as that described above for the 3,835 shares. The aggregate of checks drawn against their account in Texas Bank by Overton, McCarty, and Burgher was $ 700,000, consisting of $ 699,639.82 paid to the old stockholders and other former stockholders not parties to this proceeding, and $ 360.18 for Federal and state revenue stamps covering the stock transfers.On January 1, 1946, a regular stockholders' meeting of the Development Co. was adjourned for lack of a quorum, and at Meador's direction the minutes contained blanks to be filled with the date of the next stockholders' meeting when Meador should decide to call such a meeting. On January 21, 1946, the adjourned meeting of January 1 was convened, and stockholders were stated to be present as follows:StockholdersSharesOverton1,279Burgher1,277McCarty1,277Bishop1Atwell1All of the foregoing were elected directors at that meeting, and on the same day met, authorized notice of a special stockholders' meeting on February 23, 1946, to vote on the question of dissolving the Development Co., and elected officers300 as follows: Overton, president; McCarty, vice president; and Bishop, secretary and treasurer.A special meeting of the board of directors of Texas Bank on January 24, 1946, passed a resolution to call a special stockholders' meeting for February 25, 1946, for the purpose of amending the bank's articles of association with reference to amount of capital stock and number of shares, "Capital Stock to be increased from $ 350,000.00 to $ 500,000.00, the number of shares to be increased from 17,500 to 25,000, the par value to remain at $ 20.00 per share." At the same meeting on January 24, "Upon the motion of Mr. Reed and the second of Mr. Mott, the committee composed of W. W. Overton, Jr., Justin S. McCarty, Jr., and Ballard Burgher was confirmed as negotiator for the purchase of the bank residence, which acquisition had been discussed since November of 1945 and was to be effected as of January 1, 1946." Pursuant to and in accordance with the above resolution, 120 the charter of Texas Bank was amended, and the plan of increase, to sell 7,500 shares at $ 45 per share, $ 150,000 of the proceeds to go to capital stock and $ 187,500 to surplus and/or undivided profits, was carried out. 301 At a special stockholders' meeting of the Development Co. held February 23, 1946, all stockholders were stated to be present as follows:StockholdersSharesOverton1,444Burgher1,277McCarty1,277Bishop1Atwell1The meeting unanimously adopted motions to dissolve the Development Co. and appointing all directors thereof as "the trustees of the creditors and stockholders of this corporation," to "have full power to settle the affairs, collect the debts, divide the monies and other properties among the stockholders after paying the debts due and owing by said corporation at the time of dissolution, and in this connection that said President and Directors have the power and authority to sell, convey and transfer all real and personal property belonging to said corporation in the name of said corporation and exercise full power and authority of said corporation over all such assets and properties."On February 26, 1946, pursuant to a consent certificate of dissolution executed by 100 per cent of the stockholders of the Development Co., the Secretary of State of the State of Texas issued his formal consent certificate of dissolution of the Development Co.At a special302 directors' meeting of the Investment Co. on February 28, 1946, attended by that company's three directors, Overton, McCarty, and Burgher, it was resolved that the Investment Co. "purchase" Texas Bank Building from the president and directors of the Development Co. (dissolved) for $ 730,000, of which $ 500,000 was "to be advanced by the Texas Bank" and the remaining $ 230,000 was to be borrowed from the Great National Life Insurance Co., hereinafter called Great National, "secured by a vendor's lien and deed of trust lien on said property." At the same meeting Overton, as president, was authorized to execute in the company's name a note for the $ 230,000 payable to Great National. It was further resolved that, upon receiving the property, the Investment Co. in turn would convey it to Texas Bank, for a recited consideration of $ 500,000, "which will already have been paid by said Bank." At a special stockholders' meeting of the Investment Co. on February 28, 1946, attended by that company's three record stockholders, Overton, McCarty, and Burgher, a resolution was adopted confirming and ratifying all actions of the board of directors taken at the meeting on the same day and described303 above.121 On March 8, 1946, in exchange for a note executed by the Investment Co. in accordance with the above resolution, Great National issued its check for $ 230,000, payable to Overton, Burgher, McCarty, Bishop, and Atwell, president and directors of the Development Co. (dissolved), and as trustee for creditors and stockholders of that company. On the same day Texas Bank issued its credit memorandum for $ 500,000 to the same parties, who deposited to a checking account in their names as liquidating trustees in Texas Bank amounts aggregating $ 752,279.20, made up of the two items above, and $ 22,279.20 representing the Development Co.'s available cash on hand. On the same day checks aggregating $ 752,279.20 were drawn on the above account as follows: To Mercantile Bank for $ 701,750, in payment of the $ 700,000 loan made by Overton, McCarty, and Burgher to effect the Development Co. stock purchase described above, with interest; and to Texas Bank for $ 50,529.20, in payment of the balance due on an installment note for $ 62,500, dated May 1, 1945, payable to Texas Bank, and executed by the Development Co. "By Harry Meador, President." On or about March 8, 1946, stock 304 certificates covering the 4,000 shares of the Development Co., which had been pledged to secure the $ 700,000 loan from Merchantile Bank, were marked "Cancelled" and were pasted in the stock book records of the Development Co. At the time these proceedings were heard, the Investment Co. was still in existence, its note to Great National had not been paid, and its operations as lessor of 75 front feet of real estate situated adjacent to Texas Bank Building and acquired in March or April 1946, resulted in annual gross income of about $ 25,000.On March 8, 1946, the Development Co. (dissolved), by Overton, Burgher, McCarty, Atwell, and Bishop, as president and directors and individually as grantors, executed a deed conveying Texas Bank Building and other assets of the dissolved Development Co. to the Investment Co. That deed recited a consideration of $ 730,000, "of which Five Hundred Thousand ($ 500,000.00) Dollars is paid in cash, the receipt of which is hereby acknowledged, and the balance of Two Hundred and Thirty Thousand ($ 230,000.00) Dollars is paid and secured to be paid and is payable hereafter according to a vendor's lien note of even date herewith signed by Dallas Downtown305 Investment Co., a Texas corporation, and payable to Great National Life Insurance Company of Dallas, Texas." It was further "expressly agreed and stipulated that the vendor's lien is retained against the above described property, premises and improvements, until the above described note and all interest thereon is fully paid."On March 8, 1946, the Investment Co., by Overton, president, executed a deed conveying to Texas Bank the Texas Bank Building and other assets received the same day under conveyance from the Development Co. described above. The deed from the Investment 122 Co. recited a consideration of "Five Hundred Thousand ($ 500,000.00) Dollars cash, the receipt of which is hereby acknowledged, and subject to the indebtedness of Two Hundred and Thirty Thousand ($ 230,000.00) Dollars, evidenced by a note payable to the Great National Life Insurance Company of Dallas, Texas." No payment was made at any time by Texas Bank to either the Investment Co. or the Development Co. except the $ 500,000 credit memorandum described above, issued on March 8, 1946, by Texas Bank to Overton, Burgher, McCarty, Bishop, and Atwell, president and directors of the Development Co. (dissolved), 306 and as trustee for creditors and stockholders of the Development Co.At the regular monthly meeting of the board of directors of Texas Bank on March 12, 1946, it was resolved that:Whereas, under authority of this Board of Directors, a Committee * * * negotiating for the purchase of the Texas Bank Building * * * has been conducting such negotiations since November, 1945; andWhereas, the negotiations * * * have been fruitful in that said Texas Bank Building has been purchased as a home for this Bank,the actions of the committee be "ratified, confirmed, and approved." A copy of this resolution was transmitted on March 25, 1946, to the Department of Banking, Austin, Texas.The Development Co.'s balance sheet as of December 31, 1945, discloses the following:AssetsProperty and equipment$ 589,352.63Current assets37,870.29Cash surrender value of life insurance2,450.00Total629,672.92Liabilities, capital stock, and surplusCapital stock$ 400,000.00Long term debt37,500.00Current liabilities32,668.11Deferred income8,715.00Earned surplus150,789.81Total629,672.92Within a variation of about $ 7,000 caused by normal operations, the307 Development Co.'s assets and liabilities as of January 21, 1946, were the same as on December 31, 1945, shown above.In his notice of deficiency directed to the Development Co. (dissolved), respondent stated, under "Explanation of Adjustment," as follows:It has been determined that you realized long-term capital gain in the taxable year upon the sale of assets to Texas Bank & Trust Company of Dallas as shown below:Sale price$ 738,562.82Cost of assets sold$ 1,172,365.36Less: Depreciation583,012.73Net cost or other basis of assets589,352.63Gain realized on sale149,210.19123 Substantially the same explanation of adjustments was made by respondent in notices of deficiency directed to the other petitioners against whom transferee liability is asserted.In acquiring 3,835 shares of capital stock in the Development Co. on January 21, 1946, and in acquiring the remaining 165 shares before February 19, 1946, the building committee, composed of Overton, McCarty, and Burgher, were acting only as agents and nominees of Texas Bank and not in their capacity as individuals. The shares so acquired were held by the building committee, Atwell, and Bishop for308 the benefit and use of Texas Bank, their principal. The sum of $ 700,000 was borrowed by the building committee for the account and benefit of the Texas Bank. The members of the building committee received no compensation, property, or other thing of value for their services in acquiring and holding the stock for Texas Bank and carrying out the details of the subsequent liquidation of the Development Co. It was not at any time the intention of Texas Bank, its agents, the building committee, or the trustees of the stockholders and creditors of the dissolved Development Co. that any considerations recited in the deeds of conveyance of the legal titles to the Investment Co. and to Texas Bank would in fact be paid. The only purpose and intent of Texas Bank and its agents in carrying out the transactions subsequent to dissolution of the Development Co. was to acquire, as stockholder, the bank building through liquidation.OPINION.We are again confronted with the problem of applying Commissioner v. Court Holding Co. 2 to a corporate taxpayer and of the potential transferee liability of two different sets of the corporation's stockholders. As in ,309 an unsuccessful effort to purchase the principal asset of the taxpayer, the Development Co., was followed by the acquisition from the old stockholders of all of its capital stock. That neither petitioner Development Co., as the taxpayer, nor the old stockholders, as transferees, are liable here follows directly from the holding in the Steubenville Bridge case, as to which in that respect the present facts are comparable. See also .Such distinction as exists here from what occurred in those cases has to do with the developments subsequent to the sale of stock by the old stockholders. The property in question ultimately came to rest in petitioner Texas Bank, which, because of its occupancy of a part of the building as its banking headquarters, was interested in a continuation of that occupancy not as tenant, but as owner. The transaction is complicated, first, by provisions of the Texas banking law, 310 124 and the necessity that the Texas Bank limit its investment in its banking quarters to a sum substantially less than the requisite purchase price, with the consequence that an intermediate corporation was inserted, the only function of which in the ultimate result was to be the dummy obligor on a mortgage procured from another bank in order to eliminate the unlawful excess of the Texas Bank's investment; and, second, by the conduct of negotiations through a committee of individuals from the Texas Bank's board of directors.We have found as facts, since every evidential and logical process necessitates such ultimate findings, that the individuals in question were at all times acting as agents and fiduciaries for the Texas Bank; that they attempted to acquire the property and eventually acquired the stock solely in that capacity and, when acquired, that they held it for and on behalf of the Texas Bank. The committee could not have secured the property for their own account, even had they attempted to do so. "* * * the modern current of authority appears to be to the effect that if an agent be employed to negotiate the purchase of land for his principal, and violates the principal's311 confidence, by purchasing the land with his own money, and taking a deed therefor to himself, he becomes a constructive trustee for the principal's benefit, upon payment of the purchase price. This is the rule adopted by the American Law Institute. 'The agency may be established by a written contract or a verbal contract, or no contract whatever, the assumption of confidence involving a purely gratuitous service, for which the agent is to receive no compensation in any form' * ." 4 Pomeroy, Equity Jurisprudence, 5th Ed., 141; see ; .We have found further that the Investment Co., the intermediate corporation, which momentarily secured the record title to the bank building and executed the note and deed of trust in a transitory phase of the whole operation, was no more than a nominee of the owner's then sole stockholder, and received and held the property on behalf of the Texas Bank and without consideration to or from itself. The Investment Co. being "a mere agent or conduit created with this limited function, 312 any gain or loss from the * * * dispositions of the property would be attributable not to it, but to its principal, the controlling stockholders. * * * ." . Property can be conveyed to a stockholder through its nominee or fiduciary without converting a liquidation into something else. .Stripping away the appearances and attempting then to grasp the essential nature of what actually occurred, we think the only realistic summarization of the entire transaction is that the principal 125 tenant of a business building decides to attempt to acquire it as its headquarters, and, being unsuccessful in buying the property itself from the corporate owner, secures all the stock by purchase from the individual holders, and, as sole stockholder, then dissolves the corporation, and through the intervention of a temporary conduit or agency, acquires the property as a liquidating dividend. So stated, it seems clear that there was313 no sale of the property by the corporation at any time, no capital gain to it, ; (acquiesced in, Internal Revenue Bulletin, Nov. 15, 1948, p. 1), and hence that there could be no transferee liability on either the old stockholders or the new.We see nothing in , or , to preclude this view of what occurred and of the resulting liabilities of the parties. The Investment Co.'s holding of the property is being disregarded, not because or in spite of its corporate form or of the issuance of its stock in the names of the Texas Bank's nominees, but because of its transitory and fiduciary character as the mere nominal holder of legal title to the Texas Bank's property. When the Development Co. was dissolved and its property distributed in liquidation through the Investment Co. to its sole stockholder, there was, in our view, a transaction resulting in314 no gain or loss to the liquidating company, , as surely as if the transfer had been direct. ;In a sense these cases present the reverse of the situation in such proceedings as ; affd. (C. C. A., 2d Cir.), ; certiorari denied, ; and . There, in lieu of a formal sale by the corporation, there was a dissolution, a transfer to the stockholders, and a sale in form by them to the ultimate vendee. The dissolution was an integral part of the formal arrangements, but there was nowhere any contention that the gain arose because of the transfer from the corporation to the stockholders. Here, whatever sale there was consisted of a transfer of stock from the old shareholders to the new. Dissolution would not have been necessary; the new stockholder could own and operate the property effectively 315 through its control of the intervening corporation. But it is only by reason of the dissolution and the transfer of the property to the new shareholder that there is any basis here for the contention that what occurred was the sale of the property rather than of the shares. Incidentally, we do not have here the question whether Texas Bank, as a taxpayer, secured any gain when it exchanged its stock for the building in liquidation. Cf. ; 126 certiorari denied, . In the instances first cited, the property transferred was the same, whether sold by the corporation directly or through the conduit of its shareholders. Here, there is a fundamental variance between what would have been transferred had the property itself been sold, as was first discussed, and what was dealt with when the stockholders merely sold their shares, demonstrated, in the facts before us, by the increase in the purchase price resulting when the vendee was compelled to add to the price of the shares the net liabilities of the corporation.The short of the316 matter seems to us to be that the taxpayer corporation did not sell its property when the stockholders sold their shares, ;; and that it did not become chargeable with any gain on the disposition of the property when it was distributed in liquidation to its sole stockholder. We are accordingly satisfied that no liability exists either on the original taxpayer or on either set of stockholders as transferees.Decision will be entered for the petitioners. DISNEY; HARLANDisney, J., dissenting: I shall not dwell upon the question as to whether it is important that the earlier agreements had to do with sale of the property, whereas the stock was finally purchased. In either event, in my opinion, the sale finally made was made by the corporation, the Development Co., and the majority wrongly concludes that there was no taxable gain. This to me appears clear for the following reasons: We have heretofore, in Taylor Oil & Gas Co., 15 B. T. A. 609, and in Fred A. Hellebush, 24 B. T. A. 660,317 twice concluded that a sale of property by the directors as trustee for a corporation in dissolution was a sale for the corporation and not the stockholders. Both cases were affirmed. In the Taylor case the resolution to dissolve was passed on January 16, 1920. It recited that the corporate existence "is hereby finally and forever dissolved." On the same date the stockholders resolved that the board of directors should act as liquidating trustees for its creditors and stockholders, and that they might, in the name of the corporation, sell the property. On January 20 the corporation was dissolved by filing papers with the secretary of state. On January 26 the directors, as trustees for stockholders and creditors, transferred the property. Thus it appears that the dissolution, both by resolution and by form of law, preceded the sale by the trustees for the corporation. In the Hellebush case the stockholders on April 20, 1927, resolved to dissolve and liquidate, and to transfer the property to the president 127 and secretary-treasurer of the corporation as trustees with power to liquidate the assets and to sell the property and distribute to the stockholders. The318 same day the corporate officers delivered a bill of sale to the trustees for the personal property and did the same as to the real estate about the same day. The trustees then made an agreement, on April 20, 1927, to sell the property and conveyed the personal property on that date, and on May 14 conveyed the real estate. Dissolution under the law of Ohio took place on June 2, 1927. The trustees received about $ 270,000 and distributed the net returns to the stockholders. Quoting Taylor Oil & Gas Co. v. Commissioner, 47 Fed. (2d) 108, which affirmed the Taylor case, supra, we said, "The real owner was still a company until such time as its affairs were liquidated, the debts paid and the residue distributed to the stockholders. The profit on the transaction was earned by the corporation and the assessment of the taxes based thereon was valid." We further stated, "The trust was closed when the property was sold, the debts owing the corporation were collected, the debts of the corporation paid and the money distributed to the stockholders." We, therefore, as above stated, concluded that the sale was by the corporation and not the stockholders. 319 The facts here are, in my opinion, in all essential respects the same as in the above cases. Though by February 19, 1946, all of the stock had been purchased and had passed to new stockholders, the corporation's status had not changed. On February 23, 1946, the stockholders voted to dissolve the corporation, appointing all directors thereof as "the trustees of the creditors and stockholders of this corporation" to "have full power to settle the affairs, collect the debts and divide the moneys and other properties among the stockholders after paying the debts due and owing by said corporation * * " and authorizing the president and directors to sell the property "belonging to said corporation in the name of said corporation and exercise full power and authority of said corporation over all such assets and properties." On February 26 the secretary of state dissolved the corporation. On February 28 the purchasing company resolved to purchase the property, the bank building, "from the president and directors of the Development Company (Dissolved)." Seven hundred thousand dollars ($ 700,000) had been borrowed from the Mercantile Bank in order that the new stockholders might purchase320 the Development Co.'s stock; and the stock certificates for all of the Development Co. stock had been pledged to secure the $ 700,000 loan. On March 8 the stock certificates were canceled and were pasted in the stock book records of the Development Co. Also, on March 8 "the Development Company Dissolved," by its president and directors and by them individually as grantors, conveyed the assets of the dissolved Development Co. to the purchaser or rather to the Investment Co., which was serving as a 128 go-between, and on the same day the Investment Co. transferred the property to the ultimate purchaser. On March 8 the purchaser issued a $ 500,000 credit memorandum representing part of the purchase price to the "president and directors of the Development Company Dissolved and as trustee for creditors and stockholders of the Development Company."The findings of fact made by the majority do not indicate when the affairs of the Development Co. were finally closed, any debts paid, and the residue distributed to the stockholders.In short, under the above facts, we have here a disposition of the corporate property, by its officers and directors as trustees, in the course of liquidation. 321 It is obvious that liquidation and distribution were not completed at the time of the passage of title to the property on March 8, for on that date the $ 500,000 was received and the deed of that date recites that $ 230,000 of the purchase price is "to be paid and is payable hereafter according to a vendor's lien note of even date * * ." With the property passing from the corporation through its officers as trustees who were specially authorized to convey the "property belonging to said corporation in the name of said corporation," it is impossible for me to understand why the corporation did not make the profit, if any. The law that corporate directors have a duty to and are trustees for that corporation is so well settled as not to require citations -- in addition to the fact that here they were specially authorized to act as trustees and acted as such in the sale. The Taylor and Hellebush cases are both merely examples of the general principle. In form, as well as in fact, the corporation sold this property. To refuse to attribute any profit made to the corporation is to refuse to recognize the corporate entity. It is clearly immaterial that a different group of 322 stockholders had purchased the stock. The corporation subsisted as completely in the hands of one group as in the former. I can not conceive why a change of stockholders (the new stockholders thereafter proceeding to liquidate, but disposing of the property through their officers as trustees) should cause escape of the corporation from tax upon the sale of its property. That dissolution of the corporation by the state preceded the deed is immaterial, for the same was true in the Taylor case. The real test is not formal dissolution, but, as stated in the Hellebush case, is the fact that the real ownership is in the company until completion of liquidation, payment of debts, and distribution of residue. That is not the case here. Though I think , was wrongly decided, it is distinguishable from this case in that there the dissolution was not to the officers and directors as trustees, with power to sell on behalf of the corporation, as we find in this case. I would hold that the sale resulted in taxable gain to the corporation. I, therefore, respectfully dissent.129 Harlan, J., dissenting: I dissent323 from the majority opinion herein because I am persuaded that it gives effect to appearance over reality. The courts have generally held corporations free from capital gains in the sale of corporate assets when such sale in good faith has been effected by a sale of the corporate stock or when such sale has been made after liquidation of a corporation in the absence of an agreement to sell made by authorized corporate representatives prior to any steps being taken toward liquidation. In the case at bar it would seem to be obvious that the sale of the corporate stock in January 1946 was not intended to operate as a corporate stock sale by either the purchaser or the seller of the stock, and the subsequent sale of the bank building by the liquidators of the corporation was in pursuance of an agreement to sell said bank building prior to liquidation. "The question always is whether the transaction under scrutiny is in effect what it purports to be in form." ( .)All of the facts surrounding the supposititious sale of Development Co.'s stock to Overton, Burgher, and McCarty, when integrated, constitute in effect324 a sale of the bank building. Also the sale of the building by Overton, Burgher, and McCarty as liquidators of Development Co. to Investment Co. of which Overton, Burgher, and McCarty were sole stockholders and directors, was but the consummation of an agreement which Overton, Burgher, and McCarty, as sole stockholders and directors of Development Co., had concluded with themselves as directors and stockholders of Investment Co. before any steps in liquidation had been taken by Development Co., the whole being in consummation of a plan by Overton, Burgher, and McCarty as a directors' committee of Texas Bank & Trust Co., the ultimate and always intended purchaser of the bank building.As to the pretended sale of the Development Co.'s stock, the initial negotiations were instituted by Meador, a director of Texas Bank & Trust Co. and also a heavy stockholder in Development Co., with Overton, another director in the same bank. After four proposed contracts had been drawn providing for the purchase of the bank building itself from Development Co., apparently the only point on which the parties reached agreement was that the stockholders of Development Co. demanded $ 700,000 for their 325 interest in the building and the bank was willing to pay $ 700,000 therefor. However, the sale was not consummated and negotiations abated for 12 days. Then Meador, at a meeting of stockholders, persuaded a majority of them to sell their stock instead of the building, the stockholders thereupon obviously divided the $ 700,000 which they had formerly demanded for the building by the number of corporation shares outstanding and arrived at a quotient of $ 175, which they inserted in the offer to sell as the required price per share. Before this offer was formally made, 130 however, at the request of Overton, Burgher, and McCarty, who acted as a committee representing the bank to negotiate the purchase of the bank building and who anticipated purchasing the stock, it was stipulated in the written offer to sell that, unless the offer was signed by at least 80 per cent of the stockholders, the purchasers were not obligated by acceptance of the offer. Thus the animus of the whole proceeding becomes obvious. An affirmative vote of 80 per cent of the stockholders was necessary for the dissolution of the corporation, and a dissolution prior to sale was necessary to avoid a capital326 gains tax on the increase in value of the bank building. It is thus obvious that the sellers were not in fact selling, and the buyers were not in fact buying, corporate stock, but the commodity being sold and bought was the privilege of liquidating the corporation and procuring physical possession of the bank building.In fact, Meador, who initiated the negotiations to sell the bank building to the bank and who was a director of the bank, certainly knew that the bank was the institution interested in the purchase throughout all the negotiations. As a bank director, he certainly knew the limitations on a banking institution imposed by law against the purchase of corporation stock. He knew that Overton, Burgher, and McCarty were designated by the bank as representatives to purchase the stock as individuals for the obvious purpose of overcoming the limitations of the bank itself. He also knew that the creation of Investment Co. had but one purpose, and that was to extricate the bank building from its corporate involvement with Development Co. The mortgage which Investment Co. placed upon the bank building could just as well have been placed there by Development Co. and the only 327 necessary function that Investment Co. performed was as a link in a complicated chain to procure the bank building under the subterfuge of buying bank stock, and this subterfuge was participated in by Development Co.'s stockholders through their agent Meador, who persuaded them to sell their stock.The decision in , upon which the majority rely, was based upon the very nonexistence of facts in that case which are the controlling facts in the case at bar. In the Steubenville case there was no stockholder similar to Meador who was a director of the ultimate purchaser. There was no united offer to sell all the stock at a common price. There was no mutual understanding between the buyer and seller of the stock that, if the purchaser did not procure enough stock to liquidate the corporation, the purchaser was not obligated. The Steubenville stockholders did not know the purpose of the sale of their stock. Neither the corporation itself nor any of its original stockholders had ever negotiated with the State of West Virginia, the ultimate purchaser of the bridge. The stock was sold by individual contract between328 the purchaser and the 131 new stock owners at prices varying from $ 1,425 a share to $ 4,333 a share. Obviously there is little basis in the facts in the Steubenville case to form a precedent for the majority opinion herein.However, if, for argument, it is admitted that the initial sale of the stock of Development Co. was not in truth a sale of the bank building, then we approach our second conclusion herein, to wit, that the sale of the bank building by the liquidators of Development Co. was in truth and in fact the sale of the bank building by the newly constituted Development Co. If there was no sale of the bank building by the original stockholders, then, of course, Development Co., under its new stockholders, retained the building as an asset with its original cost base therefor. The new stockholders acquired 3,850 of the 4,000 shares of Development stock on January 21, 1946, and on that date Overton, Burgher, and McCarty, who had acquired all the stock except 2 qualifying shares, elected themselves as directors. Three days thereafter, on January 24, 1946, Overton, Burgher, and McCarty were designated by the bank to negotiate the purchase of the bank building on329 the same day that the bank directors increased the capital stock of the bank sufficiently to raise the necessary finances. Anyone who would question that Overton, Burgher, and McCarty, as directors of Development Co., the owner of the bank building, did not at once agree with Overton, Burgher, and McCarty, as a committee representing the purchaser, to sell the bank building to the purchaser, would simply be unable to distinguish between serious drama and a farce and would not be giving proper weight to the presumption of correctness of all facts essential to the Commissioner's determination. The entire proceeding herein, from its initiation through the formation of Investment Co., the purchase of Development Co. stock, the liquidation of Development Co., the sale of the bank building to Investment Co., and the subsequent resale of the bank building to the bank all constitute integrated facts leading to a prompt decision by Overton, Burgher, and McCarty, as directors of Development Co., to sell the bank at the earliest possible date immediately after liquidation. If, on January 24, 1926, when Overton, Burgher, and McCarty, representing the bank, conferred with Overton, Burgher, 330 and McCarty, representing Development Co., and agreed to consummate the sale immediately after liquidation, we have in the case at bar facts coming directly under the law as laid down in Court . We do not have a case at all comparable with , wherein, after the purchasers of Steubenville stock acquired possession thereof and up until after liquidation had been practically completed, there was no negotiation either by the prospective purchaser of the bridge or any contact by the new stockholders of the corporation with the prospective purchaser.Since the decision of this Court in , 132 there has been a marked tendency in the decisions of this Court to permit greater latitude on the part of stockholders and corporate liquidators to dispose of corporate assets through stock sales and through sales in liquidation without liability on the part of the corporation for the capital gains realized from the sale of said assets. ; ;*331 ; and However, in all of these cases there has been a consistent requirement that no authorized representative of a corporation prior to liquidation should enter into any contract or agreement with the prospective purchaser of the corporate assets, the contract being consummated after liquidation. .It is my conviction that, if the majority opinion herein becomes the law controlling sales of assets by corporations, all of the restrictions and limitations which this Court has heretofore constructed around such sales in order to excuse the corporation itself from being liable for capital gains tax will be removed and little or no artifice will be required to excuse corporations in the future from capital gains, no matter how spurious may be the sale of the stock by the corporate stockholders or how much of a farce may be involved by the corporate liquidators selling the assets to themselves as agents for other purchasers. Footnotes1. Proceedings of the following petitioners are consolidated herewith: Estate of J. O. McReynolds, Deceased, Mary Victoria McReynolds Wozencraft, Independent Executrix and Sole Heir, Alleged Transferee; Trust Under Will of James Charles O'Connor, Deceased, Dallas National Bank, Trustee; Estate of Ivor Elizabeth O'Connor Morgan, Deceased, Dallas National Bank, Independent Executor and Trustee; Texas Bank & Trust Company of Dallas; Ballard Burgher; Justin McCarty; W. W. Overton, Jr.; Mina G. McJunkin and Fred McJunkin, Jr., Trust Under Will of Fred McJunkin, Republic National Bank of Dallas, Trustee; Estate of E. M. Kahn, Deceased, Alex Weisberg, Alex Sanger and I. S. Kahn, Trustees; Harry L. Meador; Frank O. Witchell; Estate of Mollie I. Witchell, Deceased, Frank O. Witchell, Independent Executor; Estate of Otto H. Lang, Deceased, W. J. Lang, Independent Executor; Pauline B. Seay; John M. Seay; Charles E. Seay; George E. Seay; Pauline B. Seay Trust, Under the Will of Dero E. Seay, Deceased, Pauline B. Seay and Mercantile National Bank at Dallas, Trustees; Cecil A. Keating Trust, First National Bank of Dallas, Trustee; Mary Victoria McReynolds Wozencraft, Alleged Transferee.↩1. Petitioner Mollie I. Witchell, Docket No. 16732, died prior to the hearing. Subsequently, on July 12, 1948, this Court granted a motion of Frank O. Witchell, executor of the decedent's estate, reciting that decedent had died on June 5, 1948, and asking that the executor be substituted as petitioner and that caption be amended accordingly.↩2. .↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625068/	GRACE SCRIPPS CLARK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Clark v. CommissionerDocket Nos. 20103, 36901.United States Board of Tax Appeals16 B.T.A. 453; 1929 BTA LEXIS 2576; May 10, 1929, Promulgated 2576 The petitioner, under a trust established by her father in 1906, had an equitable life interest therein consisting of the right to receive one-fourth of the distributions of the trust. On December 24, 1919, petitioner, in consideration of love and affection assigned to her husband a "one-half interest in all income, grants, interest, reversion, remainder, and remainders" which might thereafter be payable to her from the trust. The instrument of assignment was executed before a notary public on February 19, 1920. The trustees were not notified of the assignment until April 30, 1924. All payments made by the trustees of the distributions of the trust fund payable to the petitioner under the terms of the trust instrument prior to 1924 were made by check payable to the order of the petitioner and deposited in a bank to the joint account of petitioner and her husband. Held that the portion of each distribution belonging to the husband by virtue of the assignment was not income of the petitioner but of her husband, the assignee. Byron C. Hanna, Esq., for the petitioner. F. R. Shearer, Esq., for the respondent. SMITH 453 These proceedings, 2577 consolidated for hearing and decision, involve deficiencies in income tax for the years 1918, 1922, and 1923, as follows: 1918$4,978.08192276,794.14192344,235,83The only point involved with respect to the year 1918 is the running of the statute of limitations. At the hearing of these proceedings counsel for the petitioner admitted that the statute of limitations had not run upon the assessment of the deficiency for 1918 by reason of the filing by petitioner of a consent in 1924, knowledge of which he did not have at the time the appeal to the Board was prepared. The question presented for the years 1922 and 1923 is whether the petitioner is liable to income tax in respect of all of the income payable to her under the terms of a certain trust instrument, in view of the fact that she had assigned to her husband, Rex B. Clark, on December 24, 1919, one-half of her interest in the trust fund. The petitioner admits liability to income tax upon only one-half of the income payable to her. The petitioner admits certain errors with respect to the amount of income returned by her for the years 1922 and 1923. 454 FINDINGS OF FACT. The petitioner2578 is a daughter of James E. Scripps, who died in Detroit, Mich., on May 29, 1906. On May 4, 1906, he executed an instrument, hereinafter referred to as the trust instrument, by which he purported to transfer to William E. Scripps, George G. Booth, and Edgar B. Whitcomb as trustees certain shares of stock therein described. Contemporaneously with the execution of this instrument James E. Scripps delivered and transferred to the above-named trustees the shares of stock referred to in said trust instrument. The said trustees ever since have claimed to hold such stock and the proceeds thereof pursuant to the trust instrument. The petitioner is and for many years has been a resident of California. Prior to December 24, 1919, she became the wife of Rex B. Clark. As a beneficiary of the trust fund created by her portion of she received each year sums of money representing her portion of the distributions of the trust fund. On December 24, 1919, she executed the following instrument: This indenture, made the twenty-fourth day of December, in the year nineteen nineteen, between Grace Scripps Clark, of the City of Pasadena, County of Los Angeles, State of California, the party of the2579 first part, and Rex B. Clark, her husband, of said City, the party of the second part, witnesseth: That the said party of the first part, for and in consideration of the love and affection which the said party of the first part has and bears unto the said party of the second part, does by these presents give, grant, alien, and confirm unto the said second party, and to his heirs and assigns forever, one half interest in all income, rents, interest, reversion, remainder and remainders which may from time to time be payable to me or to which I may be hereafter entitled, under a certain trust agreement executed and delivered by my father James E. Scripps, now deceased, to William E. Scripps, George G. Booth and Edgar B. Whitcomb as trustees, dated May fourth, A.D., 1906, a copy of which is hereto annexed, and made a part hereof, marked Exhibit A, also under the will of my said father, dated May fourteenth, A.D., 1906, a copy of which is also hereto annexed, made a part hereof and marked Exhibit B. In witness whereof, the said first party has hereunto set her hand and seal, the day and year first above written. GRACE SCRIPPS CLARK. In the presence of - REX S. CLARK E. H. 2580 BAGBY On February 19, 1920, petitioner duly acknowledged the execution of the above recited instrument, hereinafter referred to as the assigning instrument, before a notary public in and for the County of Los Angeles, State of California. At all times subsequent to December 24, 1919, all sums distributed as income by the trustees of the above-mentioned trust, which under the terms of the trust instrument were distributable to petitioner, have been deposited 455 in the joint bank account of petitioner and her husband, Rex B. Clark, in the First National Bank of Detroit, in the City of Detroit, State of Michigan, and said funds so deposited from time to time have been withdrawn from said bank and until June 15, 1921, deposited in a joint bank account of petitioner and her husband, Rex B. Clark, in the First National Bank of Los Angeles, in the City of Los Angeles, State of California, and after June 15, 1921, in a joint bank account of petitioner and her said husband, in the Farmers & Merchants National Bank of Los Angeles, in the City of Los Angeles, State of California. Petitioner's husband, Rex B. Clark, has caused accounts to be kept of the sums so received, including2581 a cash book and a ledger, and in those accounts the funds so received at all times since December 24, 1919, have been credited one-half to petitioner and one-half to her husband, Rex B. Clark. The trustees were not immediately notified of the assignment, the petitioner being advised that such notification was not necessary in order to create a valid assignment. The trustees were, however, notified of the assignment on April 30, 1924, since which date separate checks have been drawn by the trustees of the portion of the income distributable to the petitioner and the portion distributable to her husband, Rex B. Clark. Commencing with the calendar year 1920, and for each calendar year thereafter, petitioner and her husband, Rex B. Clark, have each made income-tax returns to the collector at Los Angeles, showing the receipt by each of one-half of the total income distributed from said trust fund accruing to the petitioner and to the petitioner's assignee, Rex B. Clark. The respondent has amended petitioner's income-tax returns for 1922 and 1923 by adding to the reported income the amount returned by her husband as received from the trust fund by virtue of the assignment. 2582 The asserted deficiency for the year 1922, in the sum of $76,794.14, is predicated upon the hypothesis that all of the income of the said trust which the petitioner was or which petitioner and petitioner's husband were entitled to receive in the year 1922, in the total amount of $311,423.66, should properly be charged to petitioner as her income. In her income-tax return for 1922, petitioner showed net income in the amount of $104,116.51, which included $155,000 as income received from the above trust. The petitioner admits that the latter amount should have been $155,711.83 and that the total net income should have been $104,828.34, instead of $104,116.51, the amount returned. If the petitioner is chargeable upon the entire income of the trust fund distributable to her under the terms of the trust instrument in the amount of $311,423.66, the petitioner should 456 be charged with additional income for the year 1922, in which event the total net income of the petitioner for the year 1922 would be $260,540.17. Petitioner filed an income-tax return for 1923 showing net income in the amount of $43,387.33, and including as income received from the above trust $63,110.70. 2583 It is admitted by the petitioner that the latter amount should have been $121,306.89 and that the total net income should have been $101,583.52. It is further admitted that if the assigning instrument of December 24, 1919, is to be ignored and the petitioner is chargeable with all of the income distributable to her under the trust instrument as contended by the respondent, the corrected net income of petitioner for 1923 is $222,890.41. OPINION. SMITH: The question presented in these proceedings is whether the legal effect of the assignment made by the petitioner December 24, 1919, was to vest in her husband one-half of her interest in the trust fund of which she was a beneficiary and to relieve her from liability to income tax in respect of one-half of the income distributable to her under the trust instrument during the taxable years 1922 and 1923. In accordance with the petitioner's and her husband's understanding of the assigning instrument each returned one-half of income of the trust fund for the years 1922 and 1923 in their individual income-tax returns for those years. It is the contention of the respondent that the assignment did not vest in the husband a one-half2584 interest in the petitioner's distributable share of the income from the trust fund, and that the petitioner is liable for income tax on the entire amount. We can not doubt from the record that the petitioner, in executing the assigning instrument, intended to vest in her husband a one-half interest in the trust fund of which she was beneficiary. Both the petitioner and her husband have consistently acted upon that understanding of the instrument. At the time of the execution of the assigning instrument the petitioner and her husband were residents of the State of California, and they have continued to reside therein since. The property comprising the trust fund and the trustees of the fund were located in Michigan. It is well established in California, and also in Michigan, that a beneficiary of a trust of the nature of that here under consideration may assign his interest therein. California Civil Code, sec. 1135; Title Insurance & Trust Co. v. Duffill,191 Cal. 629">191 Cal. 629; 218 Pac. 14; Curtin v. Kowalsky,145 Cal. 431">145 Cal. 431; 2585 78 Pac. 962; Bridge v. Kedon,163 Cal. 493">163 Cal. 493; 126 Pac. 149; Henderson v. Sherman,47 Mich. 267">47 Mich. 267; 11 N.W. 153">11 N.W. 153. In Michigan there is a statutory restriction on assigning an interest in a trust for the receipts of rents and profits of land, but the restriction 457 does not affect a trust of personal property. The only assets of the trust fund here consisted of shares of stock in Michigan corporations and dividends therefrom. It is not material that the notice of the assignment here was not given to the trustees. The general rule of law prevails in California that the validity of an assignment does not depend upon notice to the debtor. Title Insurance & Trust Co. v. Williamson,18 Cal. App. 324">18 Cal.App. 324; 123 Pac. 245. The courts of California have held in numerous cases that instruments similar to the assigning instrument here under consideration create valid assignments. See Driscoll v. Driscoll,143 Cal. 528">143 Cal. 528; 2586 77 Pac. 471; Curtin v. Kowalsky, supra;Francoeur v. Beatty,170 Cal. 740">170 Cal. 740; 151 Pac. 123; Burkett v. Doty,176 Cal. 89">176 Cal. 89; 167 Pac. 518; Belden v. Farmers' & Mechanics' Bank of Healdsburg,16 Cal. App. 452">16 Cal.App. 452; 118 Pac. 449. The decisions in Michigan are to the same effect. Henderson v. Sherman, supra;Dunn v. Swan,115 Mich. 409">115 Mich. 409; 73 N.W. 386">73 N.W. 386; Brownson v. Roy,133 Mich. 617">133 Mich. 617; 95 N.W. 710">95 N.W. 710. We think it beyond doubt that the legal effect of the assigning instrument executed by the petitioner December 24, 1919, was to vest in the petitioner's husband all right, title, and interest in and to one-half of her interest in the trust fund, including the income therefrom. The fact that the trustees during the taxable years 1922 and 1923 paid the entire amount of the income to which the petitioner was entitled under the trust instrument to her rather than one-half to her and one-half to her husband is immaterial. Such part of the income as belonged to her husband under the assigning2587 instrument the petitioner received and held as trustee for her husband. The Revenue Act of 1921 and prior revenue acts make an individual liable for income tax on all the income that the individual receives as his own, with certain exemptions not material here. In Earl v. Commissioner, 30 Fed.(2d) 898, it was held that under California law the husband and wife may lawfully agree by contract that their joint earnings shall belong to them jointly and not otherwise, and that under an agreement that earnings of either spouse shall be received, held, taken and owned by them as joint tenants, the earnings of the husband were received, taken, and held from the beginning as the joint property of both; that accordingly the wife was liable to income tax in respect of one-half of the joint earnings of husband and wife. We think that upon this same principle one-half of the income of the trust fund distributed to the petitioner is taxable income of the petitioner's husband, Rex B. Clark, and that the petitioner is not liable to income tax in respect of it. The facts in the instant case are similar to those in 2588 Edith H. Blaney,13 B.T.A. 1315">13 B.T.A. 1315, where the petitioner under a trust established 458 by the will of her father had an equitable life interest therein consisting of the right to receive one-sixth of the income of the trust. On February 21, 1921, the petitioner, in consideration of love and affection, assigned to her husband and her children the right to receive portions of her income from the trust. Thereafter, payments were made by the trustees to the assignees. We held that the amounts paid to the assignees which were accumulated subsequent to the assignments did not constitute taxable income to the petitioner. See also O'Malley-Keyes v. Eaton, 24 Fed.(2d) 436; Young v. Gnichtel, 28 Fed.(2d) 789. Also compare Board decisions Wm. W. Parshall,7 B.T.A. 318">7 B.T.A. 318; C. R. Thomas,8 B.T.A. 118">8 B.T.A. 118; M. A. Reeb,8 B.T.A. 759">8 B.T.A. 759; William I. Paulson et al.,10 B.T.A. 732">10 B.T.A. 732. The instant case is distinguishable from Ormsby McKnight Mitchel,1 B.T.A. 143">1 B.T.A. 143; 2589 9 Fed.(2d) 414; 15 Fed.(2d) 287 (C.C.A.). Mitchel, who was a member of a copartnership, attempted to assign to his wife one-half of the profits which might come to him from the copartnership. The assignment provided that upon receiving the profits plaintiff would hold for and pay to his wife the share thereof to which she would be entitled thereunder. The assignment further provided that it might be terminated at any time at the option of either party. It amounted to nothing more than a voluntary concession to his wife temporarily of a part of whatever was distributed to him by the partnership. It was pointed out in that case that the Revenue Act of 1918 specifically holds a partner taxable upon his distributable share of the partnership profits. The case is also distinguishable from Maud Dunlap Shellabarger,14 B.T.A. 695">14 B.T.A. 695. The petitioner therein was a principal beneficiary under her father's will and the recipient of income from a trust created thereby. To avoid a contest of her father's will, petitioner executed an instrument by which she agreed that upon the receipt by her of income under the trust she would pay three-tenths thereof2590 to another party, and one-fifth thereof to a bank to be held and used for certain purposes. Petitioner contended that this amounted to an assignment of the income. The Board held that the instrument was so worded that it did not assign or transfer the income or any interest in the trust, but only bound the petitioner to use a portion of the income in a certain manner when received by her, and that the total income of the trust fund was income of the petitioner and taxable to her. The instant proceedings are also distinguishable from Bing v. Bowers, 22 Fed.(2d) 450; 26 Fed.(2d) 1017 (C.C.A.). In that case the plaintiff assigned to his mother the income and profits from certain property up to a certain amount. But what was assigned was not the income from the property but the petitioner's net income and profits from the operation of the property. It was held that the instrument of assignment did not pass to the mother an interest in 459 the property, or create a rent charge or any ownership pro tanto of the grantor's interest in the property, but that the grantor maintained the right of control and was therefore liable to income tax*2591 in respect of the income received by him. No question is raised as to the correctness of the deficiency determined by the respondent for 1918. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625071/	JAMES R. WILLIAMS, JR., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent; JAMES R. WILLIAMS, JR., AND VICKI L. WILLIAMS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentWilliams v. CommissionerDocket Nos. 19278-92, 19462-92United States Tax CourtT.C. Memo 1994-560; 1994 Tax Ct. Memo LEXIS 565; 68 T.C.M. (CCH) 1172; 68 Trade Cas. (CCH) P1172; November 3, 1994, Filed 565 Decisions will be entered under Rule 155. James R. Williams, Jr., pro se. For respondent: Ronald T. Jordan. RUWERUWEMEMORANDUM OPINION RUWE, Judge: Respondent determined deficiencies in petitioners' Federal income taxes and additions to tax as follows: James R. Williams, Jr. docket No. 19278-92Additions to Tax YearDeficiencySec. 6653(b)Sec. 66541979$ 77,600.68$ 38,800.34$ 3,235.48198013,451.576,725.78857.07198120,658.1010,329.05--Additions to Tax YearDeficiencySec. 6651(a)(1)Sec. 6653(a)(1)Sec. 6653(a)(2)1982$ 1,312.24$ 328.06$ 65.6111983345.2186.3017.2611984789.07197.2639.45119852,531.14632.79126.561Additions to Tax YearDeficiencySec. 6651(a)(1)Sec. 6653(a)(1)(A)Sec. 6653(a)(1)(B)1986$ 3,117.95$ 779.49$ 155.901198757.31100.002.871James R. Williams, Jr., and Vicki L. Williamsdocket No. 19462-92Addition to TaxYearDeficiencySec. 6653(b) 1978$ 37,267.66$ 18,633.83566 After concessions, the issues for decision are: (1) Whether petitioners underreported income during the years in issue; (2) whether petitioners are entitled to additional deductions for the years in issue; (3) whether petitioner James R. Williams, Jr., 1 is liable for the addition to tax for fraud under section 6653(b) 2 for the taxable years 1978, 1979, and 1980; 3 (4) whether petitioner is liable for the addition to tax for failure to file a timely return under section 6651(a)(1) for the taxable years 1982 through 1987; and (5) whether petitioner is liable for the addition to tax for negligence under section 6653(a) for the taxable years 1982 through 1987. 567 Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. For purposes of convenience, our findings of fact with respect to respondent's specific determinations will be combined with our opinion on each issue. BackgroundPetitioners resided in Zionsville, Indiana, when they filed their petitions. Petitioners filed a joint Federal income tax return for the taxable year 1978. On March 27, 1989, petition filed delinquent returns for taxable years 1979 through 1987. Petitioner's filing status on these returns was shown as married filing separately. With respect to taxable years 1979 through 1985, 4 petitioner had previously submitted to respondent Forms 1040 in which each relevant line contained the word "object", except that on line 8 of petitioner's 1979 Form 1040, he reported wages of $ 8,587.01. On separate occasions, respondent sent letters to petitioner indicating that the Forms 1040 filed by petitioner for his taxable years 1979 through 1984 5 were not acceptable "because [they did] not contain information required by law, and [they did] not comply with the Internal Revenue568 Code requirements." On January 21, 1987, petitioner was indicted for evasion of Federal income taxes under section 7201 for the taxable years 1978, 1979, and 1980. On August 17, 1987, a Plea Agreement was filed with the District Court for the Southern District of Indiana in which petitioner agreed to plead guilty to tax evasion under section 7201 for the taxable year 1979. Furthermore, in paragraph 6 of the Plea Agreement, petitioner conceded that section 6653(b), the civil fraud penalty, was applicable to any underpayment of personal income taxes determined for his taxable years 1978, 1979, and 1980. Pursuant to paragraph 5 of the Plea Agreement, petitioner agreed to file returns for the taxable years 1978 through 1985, which returns he filed on March 27, 1989. On October 15, 1987, petitioner was convicted of tax evasion under569 section 7201 for the taxable year 1979. During the years at issue, petitioner sold insurance, securities, and other types of investments, and he promoted partnership ventures and tax shelters. Petitioner was also the managing partner of Frozen Creek Associates and the trustee of Bank Creek Coal Trust, Speedway Coal Trust, and the Edward B. Morris Coal Trust. In addition, petitioner was the president/owner of Financial Sheltering Corp., a corporation that engaged in the securities business as a broker-dealer. In 1979, petitioner incorporated a business entity, Economic Energy Enterprise, Inc., of which he was the president and sole shareholder. Petitioners maintained a joint personal checking account at the Boone County State Bank (Boone) in Lebanon, Indiana. Petitioner Vicki L. Williams also maintained a separate personal checking account at Boone. For each business entity operated by petitioner, a separate account was opened at Boone. Respondent determined additional income and disallowed certain Schedule C deductions and itemized deductions claimed by petitioners. Respondent's determination is presumed correct, and petitioners bear the burden of proving otherwise. 6 Rule570 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933). DiscussionIssue 1: Unreported IncomeRespondent reconstructed petitioners' taxable income and deductions from a variety of sources -- canceled checks, deposit slips, bank statements, and credit memos reflecting deposits made into petitioners' personal accounts; canceled checks drawn by entities controlled571 by petitioner and deposited in petitioners' accounts, and a check spreadsheet prepared by petitioner detailing business and personal expenditures. On December 30, 1978, petitioner opened a checking account at Boone in the name of Frozen Creek Associates. 7 As of December 31, 1978, this account had a balance of $ 92,000. Petitioner received two checks dated December 30, 1978, from Frozen Creek Associates totaling $ 30,000. These checks did not clear the account of Frozen Creek Associates until January 3, 1979, and January 5, 1979, respectively. The parties agree that this $ 30,000 constitutes gross income. Petitioners claim, however, that because they did not receive the checks until 1979, they do not constitute income until that year. Respondent determined that petitioners constructively572 received the $ 30,000 in 1978. We agree with respondent. The general rule is that income is includable in gross income in the taxable year in which it is received, unless includable in a different year in accordance with the taxpayer's method of accounting. Sec. 451(a); sec. 1.451-1(a), Income Tax Regs.Section 1.451-2(a), Income Tax Regs., provides: (a) General rule. Income although not actually reduced to a taxpayer's possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions. * * We have long held that the doctrine of constructive receipt is to be applied sparingly. Thus, amounts owed to a cash basis taxpayer but unpaid are not to be included in the taxpayer's income unless it appears that the money was available to him, the entity was able and ready to pay him, his right to573 receive the money was not restricted, and his failure to receive the cash resulted from the exercise of his own choice. Basila v. Commissioner, 36 T.C. 111">36 T.C. 111, 115-116 (1961) (citing Gullett v. Commissioner, 31 B.T.A. 1067">31 B.T.A. 1067, 1069 (1935)); Haack v. Commissioner, T.C. Memo. 1981-13. Frozen Creek Associates had sufficient funds in its account as of December 31, 1978, to cover the $ 30,000 payment to petitioner. Petitioner was the managing partner of Frozen Creek Associates and could sign the checks without an additional countersignature. Furthermore, petitioner testified that he felt he was entitled to the payments in 1978, and there were no substantial restrictions on petitioners' right to receive the $ 30,000. Therefore, we sustain respondent's determination that petitioners were in constructive receipt of $ 30,000 in 1978. During 1978 and 1979, petitioner promoted the Bank Creek Coal Venture, which was operated by Stephen Weidner. In 1978, petitioner received payments totaling $ 40,266.45 from Mr. Weidner. Respondent determined that the entire amount was taxable income to petitioner in574 1978. Petitioner concedes that $ 24,010 was taxable income in 1978. Petitioner contends, however, that the remainder constituted a reimbursement of travel expenses incurred in connection with a coal symposium. Beyond petitioner's self-serving testimony, petitioners offered no evidence to establish that these payments constituted a reimbursement of travel expenses. We hold that petitioners have failed to prove respondent's determination erroneous and sustain respondent's determination that petitioners received $ 40,266.45 of taxable income in 1978. See Fleischer v. Commissioner, 403 F.2d 403">403 F.2d 403, 406 (2d Cir. 1968), affg. T.C. Memo. 1967-85; Tokarski v. Commissioner, 87 T.C. 74">87 T.C. 74, 77 (1986). In 1978, petitioner was retained by Martin Goldman to find investors for a partnership venture known as Docsa Manor. Petitioner received payments totaling $ 16,000 from Mr. Goldman in 1978. Respondent determined that the entire amount was taxable income to petitioner in 1978. Petitioner concedes that $ 6,000 was taxable income in 1978 but contends that the remainder constituted a loan that was to be settled575 at the time the balance of his commissions was paid. Petitioner testified that the deal never closed, and the investments were returned 1-1/2 years later. The question of whether a debtor-creditor relationship is created at the time an advance is received is a question of fact to be determined upon a consideration of all the evidence. An essential element of such a relationship is the intent of the recipient to repay the advance and the intent of the person advancing the funds to enforce such repayment. Beaver v. Commissioner, 55 T.C. 85">55 T.C. 85, 91 (1970). Advances of commissions to a taxpayer made under an agreement that places no personal liability for repayment on him constitute income to the taxpayer when received. Moorman v. Commissioner, 26 T.C. 666">26 T.C. 666, 674 (1956); George Blood Enters., Inc. v. Commissioner, T.C. Memo 1976-102">T.C. Memo. 1976-102. Here, Mr. Goldman treated the $ 10,000 payment as a referral fee in his account books, and he deducted it as such in 1978. Furthermore, he did not expect any repayment of the advance in the event that petitioner's earned commissions were less than the advance. 576 Moreover, when the deal fell through, repayment of the advance was not sought or offered. In view of the foregoing, we conclude that petitioner failed to show that he had an unconditional obligation to repay the advance and, therefore, sustain respondent's determination that such advance constituted income in 1978 when received by petitioner. On May 5, 1978, petitioner received a cashier's check from William R. Kemp in the amount of $ 1,500. This check, less $ 100 taken as cash, was deposited in petitioner's personal checking account. On or about July 27, 1978, petitioner received $ 10,000 from Dan H. Slone, which he deposited in his personal bank account -- less cash of $ 150. Respondent determined that both of these payments constituted taxable income to petitioner in 1978. Petitioners claim, however, that in both instances petitioner was merely cashing the checks for third persons, and therefore, the checks do not constitute taxable income. Other than petitioner's testimony, there is no evidence that petitioner was merely cashing these checks for third parties. In fact, contrary to petitioner's claim, he deposited each check into his personal account and drew only a fraction577 in cash. Therefore, we sustain respondent's determination that petitioners received $ 11,500 of taxable income in 1978. On September 16, 1978, petitioner opened an account entitled the Jim Williams Client Escrow Account at Boone. That same day, petitioner wrote a check on the client escrow account payable to "cash" in the amount of $ 15,000 and deposited the proceeds into his personal checking account. Respondent determined that the $ 15,000 constituted taxable income to petitioners in 1978. Petitioners argue that this is not taxable income, as it was used to acquire a cashier's check that was used as a down payment for an airplane to be used in a business deal. Petitioners offered no evidence, other than petitioner's testimony, to establish that this amount was used to acquire an airplane. Therefore, we hold that petitioners have failed to prove respondent's determination erroneous and sustain respondent's determination that petitioners received $ 15,000 of taxable income in 1978. On September 29, 1978, petitioner once again wrote a check payable to "cash" on the client escrow account in the amount of $ 8,000. The proceeds of this check were used to repay an $ 8,000 loan578 taken from Boone on petitioner's personal line of credit. Respondent determined that this $ 8,000 constituted taxable income to petitioners in 1978. Petitioners claim that the proceeds from this check were used to pay a third party and should not be taxable income to them. The fact that the $ 8,000 check was used to repay a personal loan by petitioner was stipulated by the parties. "The Court will not permit a party to a stipulation to qualify, change, or contradict a stipulation in whole or in part, except that it may do so where justice requires." Rule 91(e). Petitioners have not provided sufficient reasons why this stipulation should be set aside. Therefore, we hold that petitioners are bound by the stipulation and uphold respondent's determination that the $ 8,000 constitutes taxable income to petitioners in 1978. In the taxable years 1979, 1981, and 1982, petitioner received various checks drawn on the accounts of his controlled entities. In each instance, respondent determined the amounts to be taxable income to petitioner. Petitioner contends, however, that each of these checks represented either loans or loan repayments from his controlled entities. It is well settled579 that where funds of a corporation are disbursed for the personal use or economic benefit of a shareholder or his immediate family, with no intention of repayment, the amount disbursed is taxable to the recipient shareholder. Noble v. Commissioner, 368 F.2d 439">368 F.2d 439, 443 (9th Cir. 1966), affg. T.C. Memo. 1965-84; Silverman v. Commissioner, 28 T.C. 1061">28 T.C. 1061, 1064 (1957), affd. 253 F.2d 849">253 F.2d 849 (8th Cir. 1958). Thus, whether withdrawals by a shareholder from a corporation are treated for tax purposes as loans or dividends depends upon whether, at the time of the withdrawals, the taxpayer intended to repay them. Busch v. Commissioner, 728 F.2d 945">728 F.2d 945, 948 (7th Cir. 1984), affg. T.C. Memo. 1983-98; Berthold v. Commissioner, 404 F.2d 119">404 F.2d 119, 122 (6th Cir. 1968), affg. T.C. Memo. 1967-102; Chism's Estate v. Commissioner, 322 F.2d 956">322 F.2d 956, 960 (9th Cir. 1963), affg. T.C. Memo 1962-6">T.C. Memo. 1962-6. Although the taxpayer's testimony that580 he intended to repay and the label accorded the transaction by the parties are factors to consider, they are not determinative, and the Court must look to the objective criteria surrounding the transaction. This is especially true where the corporation is closely held. Busch v. Commissioner, supra at 948; Alterman Foods, Inc. v. United States, 505 F.2d 873">505 F.2d 873, 877 (5th Cir. 1974); Berthold v. Commissioner, supra at 121; Fin Hay Realty Co. v. United States, 398 F.2d 694">398 F.2d 694, 697 (3d Cir. 1968). First, in support of petitioner's contention that a check for $ 35,500 drawn on the bank account of Economic Energy Enterprises, Inc., constituted a loan from the entity to petitioner in 1979, petitioner introduced the check. The word "loan" appears on the memo line of the $ 35,500 check. Next, petitioner introduced check stubs from the checkbook of Economic Energy Enterprises, Inc., to support his claim that the $ 12,844 he received from Economic Energy Enterprises, Inc., in 1981 represented repayment of various small loans made by petitioner to Economic Energy Enterprises, 581 Inc. These check stubs contained notations indicating that certain deposits made to the entity's account were loans from petitioner. Finally, petitioner presented deposit slips to Triple M Leasing's account to support his contention that payments from that entity to Fox Pools in 1982 constituted repayment of various loans made by petitioner. Petitioner had a pool installed at his personal residence for which the checks represented payment. These deposit slips contained notations indicating that the deposits made to the entity's account were loans from petitioner. In short, the only evidence in support of petitioner's contentions that these amounts constituted loan proceeds or repayments are a few notations that appeared on checks, check stubs, and deposit slips that these amounts constituted loans. The conventional indicia of debt are notably lacking. There were no notes or certificates of indebtedness; there was no repayment schedule and no fixed date of maturity; no interest was charged; and no collateral was provided. Furthermore, the corporations made no effort to obtain payment of interest, nor was there any effort to obtain systematic and regular repayment of principal. 582 See Busch v. Commissioner, supra at 949; Alterman Foods, Inc. v. United States, supra at 878; Berthold v. Commissioner, supra at 122; Nix v. Commissioner, T.C. Memo. 1982-330; Howarth v. Commissioner, T.C. Memo. 1981-393. We find that petitioner has failed to establish that there was a definite intention on the part of either party that petitioner repay these advances; therefore, we uphold respondent's determination that these payments constituted taxable income to petitioner. On December 29, 1979, a check was drawn on Economic Energy Enterprises, Inc., payable to Boone in the amount of $ 15,166.44. This check was used to repay a $ 15,000 loan from the bank under petitioner's personal line of credit. Respondent determined this amount to be taxable income to petitioner in 1979. Of the original $ 15,000 loan, $ 5,000 was deposited into the personal account of petitioner Vicki L. Williams, and the remaining $ 10,000 was used to acquire a cashier's check payable to Linda L. Lockard. Petitioner argues that because 583 $ 10,000 of the loan proceeds from the bank was paid to Ms. Lockard for a business venture, a similar amount of the repayment of the loan by petitioner's wholly owned corporation should not be considered income to him. We disagree. Regardless of where the loan proceeds went, petitioner still personally benefited from the entity's paying off the entire amount of a loan for which he was personally liable. We find that the entire repayment constituted taxable income to petitioner in 1979. Issue 2: Additional DeductionsPetitioner argues that he is entitled to additional business expense deductions for commissions based on payments made to his brother, Lee Lon Williams. Lee Lon Williams owns and operates an entity known as LLW and Associates. In the taxable years 1978, 1979, and 1980, petitioner made payments to his brother in the amounts of $ 10,540, $ 45,030, and $ 22,100, respectively. During those same years, petitioner received payments from his brother or LLW and Associates in the respective amounts of $ 13,840, $ 7,500, and $ 15,000. Petitioner and his brother often loaned money back and forth over the years, but they never executed a loan agreement for such amounts. 584 Lee Lon Williams also received substantial commissions from Economic Energy Enterprises, Inc., during the taxable years 1979 and 1980. Deductions are strictly a matter of legislative grace, and petitioner bears the burden of proving that he 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). Taxpayers are required to maintain records that are sufficient to substantiate claimed deductions. Sec. 6001. Petitioner provided no documentary evidence to substantiate his claim that the above payments to his brother constituted deductible commission expenses. To the contrary, the evidence indicates that petitioner and his brother were simply lending money back and forth and that petitioner's wholly owned corporation was the one paying commissions to petitioner's brother. We hold, therefore, that petitioner has not met his burden of proving he is entitled to the deductions claimed. Petitioner testified that he returned money to clients who were unhappy with the project in which they invested. He stated this was done once in 1978 when he returned $ 10,000 to Brent Emerick; and twice in 1980 when585 he returned $ 5,082 to Neal Emerick and $ 10,000 to Don Cole. Petitioner argues that he is entitled to business expense deductions for these returned investments. Other than his testimony, petitioner presented only two checks payable to Neal Emerick totaling $ 5,082 as evidence that he is entitled to deduct the above amounts. We find that such evidence is insufficient to support petitioner's claimed deductions. Petitioner also claims that he is entitled to business bad debt deductions. Petitioner claimed that he was entitled to a bad debt deduction in 1978 in the amount of $ 6,875 in connection with a transaction with Wendell Nance. No evidence was presented to support this deduction; therefore, we find that petitioner is not entitled to this deduction. Petitioner also claimed he was entitled to two bad debt deductions in 1979 -- one in connection with $ 16,000 he loaned to Mr. Nance and one in connection with a $ 10,000 promissory note signed by Ms. Lockard. A taxpayer is entitled to report as an ordinary loss any business bad debt to the extent of its worthlessness during the taxable year. Sec. 166(a). Petitioner has the burden to establish: (1) The existence of a bona586 fide debt; (2) the amount of the debt; (3) that the debt was incurred in or was created or acquired in connection with the taxpayer's trade or business; and (4) that the debt became worthless at least in part during the taxable year. Sec. 166(a), (d)(2); Rule 142(a); secs. 1.166-1(a), (c), 1.166-5(b), Income Tax Regs.A bona fide debt is a debt that arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money. Sec. 1.166-1(c), Income Tax Regs. There is no standard test or formula for determining worthlessness; the determination depends upon the particular facts and circumstances of the case. However, it is generally accepted that the year of worthlessness is to be fixed by identifiable events that form the basis for reasonable grounds for abandoning any hope of recovery. Crown v. Commissioner, 77 T.C. 582">77 T.C. 582, 598 (1981); Dallmeyer v. Commissioner, 14 T.C. 1282">14 T.C. 1282, 1291 (1950). With regard to the first debt, the $ 16,000 allegedly loaned to Mr. Nance, we find that petitioner has not met his burden of proving that a bona fide debt existed. The only 587 evidence in support of petitioner's contention is petitioner's self-serving testimony. No note was executed, no due date or interest rate was established, and no security was offered or taken. As to the second debt, on October 30, 1979, petitioner took out a loan from Boone under his personal line of credit in the amount of $ 15,000. Of that amount, $ 5,000 was deposited into the personal account of petitioner Vicki L. Williams; the remaining $ 10,000 was used to acquire a cashier's check payable to Ms. Lockard. The $ 10,000 payment was for the right to conduct tests on a device that would allegedly increase gas mileage in cars. If petitioner did not get the kind of results from his tests that Ms. Lockard promised, then she agreed to repay the $ 10,000. To carry out this agreement, Ms. Lockard executed a promissory note in the amount of $ 10,000. Petitioner deducted the amount of the note in 1979 as a bad debt. We find that petitioner has not met his burden of proving the worthlessness of this $ 10,000 note. There was no evidence indicating that Ms. Lockard was incapable of paying, such as her insolvency or lack of assets. Furthermore, the failure to undertake any collection588 efforts reflects unfavorably on petitioner's allegation of worthlessness. Olivares v. Commissioner, T.C. Memo 1983-649">T.C. Memo. 1983-649. Therefore, we deny all of petitioner's claimed bad debt deductions. Petitioner has also claimed that he is entitled to business expense deductions for certain legal fees. To be entitled to a business expense deduction for legal fees under section 162, the taxpayer must prove that the fees were: (1) Ordinary and necessary, (2) paid or incurred in carrying on a trade or business, (3) incurred during the taxable year in which the taxpayer seeks to deduct them, and (4) paid by the person to whom the services were rendered. Sec. 162(a). Furthermore, the taxpayer must show that the claimed deduction is not disallowed under other provisions of the Code. Sec. 161. This means that petitioner must be able to show, inter alia, that the legal fees were not incurred for personal reasons, sec. 262, and that the fees were not expended to increase the value of any property and, thus, were not capital expenditures, sec. 263(a). First, in 1979, petitioner drew a check on his personal account payable to the Mendelson & Popow Client Escrow Account589 in the amount of $ 40,000 to pay legal fees. The only evidence supporting petitioner's contention is his self-serving testimony that the legal fees were paid for the preparation of memoranda and circulars for various projects. Second, in 1982, petitioner claimed a deduction for $ 19,490 in legal fees, which respondent disallowed. The only evidence presented by petitioner to support the claimed deduction was a copy of a cashier's check made payable to George Adinamis in the amount of $ 19,000. Petitioner testified that Mr. Adinamis was a local attorney who was hired to defend the investors in petitioner's various business entities who were being disallowed certain tax deductions related to their investments. Third, in 1984, petitioner claimed a deduction for legal fees in the amount of $ 6,000, which respondent again disallowed. The only evidence supporting this is petitioner's testimony that the expenditure related to his business. We find that petitioner has failed to meet his burden of proving that he was entitled to deduct the legal fees under section 162. Petitioner provided no documentary evidence to substantiate the nature of the legal services. Thus, we are unable 590 to determine whether the expenses were ordinary and necessary as opposed to capital expenditures. Furthermore, with regard to the fees advanced to Mr. Adinamis, petitioner has not sufficiently shown that the services were rendered to him and not one of his controlled entities. Petitioner testified that Mr. Adinamis was hired to defend the investors in petitioner's various business entities who were being disallowed certain tax deductions related to their investments. Payment of a related entity's expenses does not give rise to a deduction for petitioner. Hewett v. Commissioner, 47 T.C. 483">47 T.C. 483, 488 (1967). Issue 3: Addition to Tax for FraudRespondent has determined that petitioner 8 is liable for additions to tax under section 6653(b) for fraudulently understating his income in 1978, 1979, and 1980. Section 6653(b) provides that if any part of the underpayment is due to fraud, there shall be added to the tax an amount equal to 50 percent of the underpayment. In order to establish petitioner's liability for fraud, respondent bears the burden of proving by clear and convincing evidence that: (1) An underpayment of tax exists for each of the 591 years in issue, and (2) that some portion of each underpayment is due to fraud. Sec. 7454(a); Rule 142(b); Petzoldt v. Commissioner, 92 T.C. 661">92 T.C. 661, 699 (1989); Rowlee v. Commissioner, 80 T.C. 1111">80 T.C. 1111, 1123 (1983). First, respondent must prove that an underpayment exists for the periods in issue. Respondent cannot rely on the taxpayer's failure to prove error in respondent's determination to meet her burden of proof. Habersham-Bey v. Commissioner, 78 T.C. 304">78 T.C. 304, 312 (1982); Otsuki v. Commissioner, 53 T.C. 96">53 T.C. 96, 106 (1969). The parties have stipulated, and petitioner has conceded at trial, substantial amounts of unreported income in each of the years in issue. Beyond that, respondent has established additional unreported gross income received by petitioner in the years at issue. In order to reconstruct petitioners' income, respondent analyzed deposits to petitioners' personal592 checking accounts as well as deposits, withdrawals, and checks drawn on the accounts of petitioner's business entities. Section 6001 requires that taxpayers maintain records sufficient to determine their correct tax liabilities. DiLeo v. Commissioner, 96 T.C. 858">96 T.C. 858, 867 (1991), affd. 959 F.2d 16">959 F.2d 16 (2d Cir. 1992); Estate of Mason v. Commissioner, 64 T.C. 651">64 T.C. 651, 656 (1975), affd. 566 F.2d 2">566 F.2d 2 (6th Cir. 1977). In the absence of such records, respondent is authorized to use any reasonable means to reconstruct petitioners' taxable income. Sec. 446(b); Petzoldt v. Commissioner, supra at 686-687. We find that the means respondent used to reconstruct petitioners' income in the present case was reasonable, and respondent presented sufficient documentary evidence of additional unreported income to meet her burden of proving that an underpayment exists for the years in issue. Once the Commissioner has established receipts in excess of those reported on a taxpayer's return, the taxpayer bears the burden of coming forward with evidence of costs, expenses, 593 and other factors that would lessen such tax liability. United States v. Bender, 218 F.2d 869">218 F.2d 869, 871-872 (7th Cir. 1955). Petitioners have submitted canceled checks in an attempt to prove their entitlement to additional deductions. However, as previously discussed, petitioners have failed to meet their burden of proving additional deductions. Next, respondent must prove that some portion of the underpayment for each year is due to fraud. Respondent must show that petitioner intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes. Stoltzfus v. United States, 398 F.2d 1002">398 F.2d 1002, 1004 (3d Cir. 1968); Webb v. Commissioner, 394 F.2d 366">394 F.2d 366, 377-378 (5th Cir. 1968), affg. T.C. Memo 1966-81">T.C. Memo. 1966-81; Rowlee v. Commissioner, supra at 1123. Respondent argues that petitioner, by reason of his conviction for tax evasion under section 7201 for the taxable year 1979, is collaterally estopped from denying the specific intent requirement of section 6653(b) for that year. A criminal 594 conviction for tax evasion is a conclusive prior judicial determination of the ultimate fact that the underpayments of tax were "due to fraud" within the meaning of section 6653(b). Plunkett v. Commissioner, 465 F.2d 299">465 F.2d 299, 305 (7th Cir. 1972), affg. T.C. Memo 1970-274">T.C. Memo. 1970-274; Moore v. United States, 360 F.2d 353">360 F.2d 353, 355-356 (4th Cir. 1965); Amos v. Commissioner, 43 T.C. 50">43 T.C. 50, 55 (1964), affd. 360 F.2d 358">360 F.2d 358 (4th Cir. 1965). It is not material that petitioner's conviction was based on a guilty plea, because for purposes of applying the doctrine of collateral estoppel, it makes no difference whether the conviction results from a guilty plea or a trial on the merits. Gray v. Commissioner, 708 F.2d 243">708 F.2d 243, 246 (6th Cir. 1983), affg. T.C. Memo. 1981-1; Plunkett v. Commissioner, supra at 305; Stone v. Commissioner, 56 T.C. 213">56 T.C. 213, 221 (1971); Arctic Ice Cream Co. v. Commissioner, 43 T.C. 68">43 T.C. 68, 75 (1964). Because595 respondent has proven petitioner's conviction under section 7201, we hold that petitioner is collaterally estopped from denying that part of the underpayment for the taxable year 1979 was due to fraud. Now we must determine whether respondent has met her burden of proving that some portion of the underpayment for the years 1978 and 1980 was due to fraud. The existence of fraud is a factual question to be determined from the entire record. Gajewski v. Commissioner, 67 T.C. 181">67 T.C. 181, 199 (1976), affd. without published opinion 578 F.2d 1383">578 F.2d 1383 (8th Cir. 1978). Fraud is not to be imputed or presumed, but rather must be established by some independent evidence of fraudulent intent. Beaver v. Commissioner, 55 T.C. 85">55 T.C. 85, 92 (1970); Otsuki v. Commissioner, supra at 106. However, fraud may be proved by circumstantial evidence and reasonable inferences drawn from the facts, because direct proof of the taxpayer's intent is rarely available. Spies v. United States, 317 U.S. 492">317 U.S. 492 (1943); Rowlee v. Commissioner, supra at 1123.596 Courts have relied on a number of "badges of fraud" in deciding section 6653(b) cases: (1) Understatement of income, (2) maintenance of inadequate records, (3) failure to file tax returns, (4) implausible or inconsistent explanations of behavior, (5) concealment of assets, and (6) failure to cooperate with tax authorities. Bradford v. Commissioner, 796 F.2d 303">796 F.2d 303, 307 (9th Cir. 1986), affg. T.C. Memo 1984-601">T.C. Memo. 1984-601. Upon examination of the entire record, we conclude that some portion of petitioner's underpayments for 1978 and 1980 was due to fraud. A number of the Bradford badges of fraud are present here. First, respondent has shown that petitioner has substantially understated his income not only for 1978 through 1980 but for all the years in issue. Such consistent and substantial understatement of income is strong evidence of fraud. Merritt v. Commissioner, 301 F.2d 484">301 F.2d 484, 487 (5th Cir. 1962), affg. T.C. Memo 1959-172">T.C. Memo. 1959-172; Otsuki v. Commissioner, 53 T.C. 96">53 T.C. 96, 107-108 (1969). Second, failure to file Federal income tax returns is persuasive597 circumstantial evidence of fraud. Marsellus v. Commissioner, 544 F.2d 883">544 F.2d 883, 885 (5th Cir. 1977), affg. T.C. Memo. 1975-368; Castillo v. Commissioner, 84 T.C. 405">84 T.C. 405, 409 (1985); Grosshandler v. Commissioner, 75 T.C. 1">75 T.C. 1, 19 (1980). As discussed below, petitioner failed to file timely Federal income tax returns for the taxable years 1979 through 1985. Third, petitioners have failed to maintain adequate records of their earnings. Respondent was forced to reconstruct their income using other means. Fourth, the practice of charging personal items to corporate business expense is evidence supporting the imposition of additions to tax for fraud. Benes v. Commissioner, 42 T.C. 358">42 T.C. 358, 383 (1964), affd. 355 F.2d 929">355 F.2d 929 (6th Cir. 1966). Fifth, petitioner failed to cooperate with the Internal Revenue Service during its investigation of petitioners' tax liability for the years 1978 through 1980. Respondent's agents were forced to issue numerous summonses to various financial institutions and third parties. This, too, is598 evidence of fraud. Rowlee v. Commissioner, 80 T.C. at 1125; Grosshandler v. Commissioner, supra at 20. Finally, petitioner, in his Plea Agreement, conceded that section 6653(b) was applicable to any underpayment of personal income taxes determined for the taxable years 1978, 1979, and 1980. Such an admission is evidence that the underpayments in those years were due to fraud. Issue 4: Additions to Tax for Failure To File a Timely ReturnRespondent determined that petitioner was liable for additions to tax under section 6651(a)(1) for the taxable years 1982 through 1987. Section 6651(a)(1) imposes an addition to tax upon a taxpayer who fails to file a timely return, unless the taxpayer can show: (1) That the failure did not result from "willful neglect", and (2) that the failure was "due to reasonable cause". Willful neglect has been defined as a conscious, intentional failure or reckless indifference. United States v. Boyle, 469 U.S. 241">469 U.S. 241, 245 (1985). Reasonable cause has been defined as the exercise of ordinary business care and prudence where the taxpayer is still, nevertheless, 599 unable to file the return within the prescribed time. Sec. 301.6651-1(c)(1), Proced. & Admin. Regs. For the taxable years 1986 and 1987, petitioner did not file any income tax returns until March 27, 1989. Petitioner is clearly liable for additions to tax under section 6651(a)(1) for these years. For the taxable years 1979 through 1985, petitioner filed Forms 1040 in which each relevant line contained the word "object" except that on line 8 of his 1979 Form 1040, he reported wages of $ 8,587.01. On separate occasions, respondent sent letters to petitioner indicating that the Forms 1040 were not acceptable "because [they did] not contain information required by law, and [they did] not comply with the Internal Revenue Code requirements." Petitioner filed amended returns for these years on March 27, 1989. It is well settled that a Form 1040 (or Form 1040A) that fails to disclose sufficient information from which respondent can compute and assess the tax liability of a particular taxpayer does not constitute "a return". Thompson v. Commissioner, 78 T.C. 558">78 T.C. 558, 561-562 (1982); Reiff v. Commissioner, 77 T.C. 1169">77 T.C. 1169, 1177 (1981);600 Hatfield v. Commissioner, 68 T.C. 895">68 T.C. 895, 898 (1977). We hold that petitioner's original filings did not constitute returns. Therefore, petitioner will be liable for the section 6651(a)(1) additions to tax unless he can show reasonable cause and lack of willful neglect. Petitioner testified that beginning in 1979, he was being investigated by the Securities Exchange Commission on securities violations and that his attorney advised him to exercise his Fifth Amendment right. A good faith belief that the filing of an income tax return would violate a taxpayer's constitutional rights does not, in and of itself, constitute reasonable cause for failure to file. See Reiff v. Commissioner, supra at 1180. At trial, petitioner made references to securities charges. Petitioner, however, has failed to establish any relationship between the criminal charges and the information requested on the Form 1040, and he has failed to show that any real danger of criminal prosecution existed at the times he was required to file returns for each of the years in issue. Reasonable reliance on the advice of an attorney may also constitute601 reasonable cause for failure to file a return. United States v. Boyle, supra at 250. However, petitioner's self-serving, uncorroborated testimony is insufficient to establish such reasonable reliance. See Lust v. Commissioner, T.C. Memo. 1975-16. Therefore, we find that petitioner has failed to show reasonable cause and uphold respondent's determination of additions to tax under section 6651(a)(1) for the years 1979 through 1985. Issue 5: Additions to Tax for NegligenceRespondent also determined additions to tax under section 6653(a)(1) and (2) for the taxable years 1982 through 1985, and under section 6653(a)(1)(A) and (B) for the taxable years 1986 and 1987. 9 These sections impose an addition to tax equal to 5 percent of the underpayment if any part of any underpayment is due to negligence or disregard of rules or regulations, plus an amount equal to 50 percent of the interest payable with respect to the portion of such underpayment attributable to negligence. 602 Respondent's determination that a taxpayer was negligent is presumptively correct, and the burden is on the taxpayer to show lack of negligence. Hall v. Commissioner, 729 F.2d 632">729 F.2d 632, 635 (9th Cir. 1984), affg. T.C. Memo. 1982-337; Marcello v. Commissioner, 380 F.2d 499">380 F.2d 499, 506-507 (5th Cir. 1967), affg. in part and remanding in part 43 T.C. 168">43 T.C. 168 (1964); Bixby v. Commissioner, 58 T.C. 757">58 T.C. 757, 791 (1972). Negligence is defined as the lack of due care or the failure to do what a reasonable and ordinarily prudent person would do under the circumstances. McGee v. Commissioner, 979 F.2d 66">979 F.2d 66, 71 (5th Cir. 1992), affg. T.C. Memo. 1991-510; Marcello v. Commissioner, supra at 506; Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 947 (1985). Petitioner argues that he was not negligent, because he relied on a certified public accountant. Reliance upon the advice of experts may constitute a defense to the addition to tax for negligence. Jackson v. Commissioner, 86 T.C. 492">86 T.C. 492, 539 (1986),603 affd. 864 F.2d 1521">864 F.2d 1521 (10th Cir. 1989); Industrial Valley Bank & Trust Co. v. Commissioner, 66 T.C. 272">66 T.C. 272, 283 (1976). This is true even where the advice relied upon was erroneous. Brown v. Commissioner, 47 T.C. 399">47 T.C. 399, 410 (1967), affd. 398 F.2d 832">398 F.2d 832 (6th Cir. 1968). However, reliance on professional advice, standing alone, is not an absolute defense to negligence; such reliance must be shown to be reasonable. Freytag v. Commissioner, 89 T.C. 849">89 T.C. 849, 888 (1987), affd. 904 F.2d 1011">904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. 868">501 U.S. 868 (1991). Petitioner bears the burden of proving that he at least supplied the professional with the necessary information and that the incorrect return resulted from the preparer's mistakes. Pessin v. Commissioner, 59 T.C. 473">59 T.C. 473, 489 (1972). We are not convinced that petitioner supplied the necessary information to his accountant. Therefore, petitioner has not met his burden of showing lack of negligence through reasonable reliance on an expert. *604 In fact, additional factors point to petitioner's negligence. Petitioner failed without reasonable justification to timely file his tax return and failed to keep adequate records. See Emmons v. Commissioner, 92 T.C. 342">92 T.C. 342, 349 (1989), affd. 898 F.2d 50">898 F.2d 50 (5th Cir. 1990); Nelson v. Commissioner, T.C. Memo. 1993-419. Accordingly, we sustain respondent's determination. Decisions will be entered under Rule 155. Footnotes1. 50 percent of the interest due on the deficiency.↩1. References to petitioner in the singular refer only to petitioner James R. Williams, Jr.↩2. 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.↩3. Respondent concedes the addition to tax for fraud for 1981, and that petitioner Vicki L. Williams is not liable for the addition to tax for fraud for 1978.↩4. A copy of petitioner's 1980 Federal income tax return is not contained in the record.↩5. The record does not contain a similar letter with respect to petitioner's taxable year 1985.↩6. With respect to several items in the notices of deficiency, petitioners failed to offer any evidence at trial. Moreover, petitioners did not adequately address these items on brief. Accordingly, we find petitioners have abandoned these items. See, e.g., Bradley v. Commissioner, 100 T.C. 367">100 T.C. 367, 370 (1993); Leahy v. Commissioner, 87 T.C. 56">87 T.C. 56, 73-74↩ (1986). Therefore, as to these items, we sustain respondent's determinations, and we will restrict our opinion to discussing those adjustments contained in the notices of deficiency that petitioners actively contested.7. The signature card for this checking account authorized recognition of either↩ petitioner's signature or Eugene G. Popow's signature. The signature card was reexecuted in 1979 to authorize only the signature of petitioner.8. See supra↩ note 3.9. Sec. 6653 was amended by sec. 1503(a) of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, 2742, effective for returns the due date for which is after Dec. 31, 1986. As amended, the 5-percent addition to tax for negligence or disregard of rules or regulations and the 50-percent interest provision formerly contained in sec. 6653(a)(1) and (2) are contained in sec. 6653(a)(1)(A) and (B), respectively.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625072/	William C. and Marguerite Piarulle, Petitioners v. Commissioner of Internal Revenue, RespondentPiarulle v. Comm'rDocket No. 9467-81United States Tax Court80 T.C. 1035; 1983 U.S. Tax Ct. LEXIS 77; 80 T.C. No. 54; May 19, 1983, Filed 77 Petitioners executed and respondent accepted a single Form 872, Consent to Extend the Time to Assess Tax, that extended the period for assessment for their 1974 and 1975 taxable years to Dec. 31, 1980. Thereafter, petitioners executed a single Form 872 that purported to extend the period for assessment for their 1974, 1975, and 1977 taxable years to June 30, 1981. Before accepting that form, and at a time at least 55 days prior to the expiration of the period for assessment, respondent struck through the reference to the 1977 taxable year. Respondent did not seek the consent of petitioners for this alteration. Held, the striking of the reference to 1977 was a material alteration rendering the form invalid. Held, further, petitioners' conduct does not estop them from asserting the invalidity of the form. William J. Neild, for the petitioners.George W. Connelly, Jr., for the respondent. Cohen, Judge. COHEN1035 By statutory notice dated March 27, 1981, respondent determined the following deficiencies in petitioners' Federal income taxes:YearDeficiency1974$ 19,734197515,33019768,81119777,158Pursuant to a Joint Motion for Separate Trial granted November 1, 1982, the only issues presently before the Court 1036 involve the statute of limitations for the taxable years 1974 and 1975. The issues for determination are: (1) Whether, after a multiyear Form 872, Consent to Extend the Time to78 Assess Tax, had been executed by petitioners, respondent's striking of the reference to one of the taxable years rendered the consent invalid as to the remaining taxable years, and (2) whether petitioners are estopped from asserting the invalidity of the consent.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 this reference.Petitioners William C. and Marguerite Piarulle, husband and wife, resided in Rochester, N.Y., at the time their petition in this case was filed. Petitioners timely filed joint Federal income tax returns for the taxable years 1974, 1975, 1976, and 1977 with the Internal Revenue Service Center, Andover, Mass.On or about June 29, 1974, William C. Piarulle (Dr. Piarulle) and two joint venturers entered into a series of agreements with Oaklawn Farms, Inc. (Oaklawn). 1 Dr. Piarulle's pro rata share of receipts, deductions, and credits from that joint venture was reported by petitioners on Schedule F, Form 1040, for their taxable years 1974, 1975, 1976, and 1977.79 Dr. Piarulle, as a joint venturer, entered into another series of agreements with Oaklawn in August of 1975. Petitioners reported Dr. Piarulle's pro rata share of receipts, deductions, and credits from that joint venture on Schedule F, Form 1040, for their taxable years 1975, 1976, and 1977.On or about December 30, 1976, Dr. Piarulle and three joint venturers purchased a limited partnership interest in Hawk Mining Co., Ltd. (Hawk). Petitioners reported Dr. Piarulle's pro rata share of the net losses claimed by Hawk on Schedule E, Form 1040, for their 1976 and 1977 taxable years.1037 The dates at which the normal 3-year period of assessment of a deficiency expired, pursuant to section 6501(a), 2 for the taxable years at issue are as follows:TaxableDue dateStatute of limitationsyearApr. 15 --Apr. 15 --19741975197819751976197919761977198019771978198180 Petitioners' 1974 return was initially selected for examination on or before September 1, 1975. The issues examined included deductions claimed with respect to Dr. Piarulle's transactions with Oaklawn. The Buffalo Examination Division of the Internal Revenue Service (the Service) issued a 30-day letter to petitioners with respect to the Oaklawn issue on February 5, 1976. Each of petitioners' returns at issue herein was prepared by the C.P.A. firm of Goldstein and Viele. On February 27, 1976, Edmund Viele, C.P.A., of Goldstein and Viele, submitted to respondent a protest to that 30-day letter on behalf of petitioners. At the time that Protest was submitted, an examination of Oaklawn was proceeding in another Internal Revenue District, and petitioners' 1974 return was placed in a "Suspense" file.Petitioners' 1975 return was initially selected for examination on or about September 7, 1977. The issues examined included deductions claimed with respect to Dr. Piarulle's transactions with Oaklawn. Petitioners did not agree to the revenue agent's proposed adjustments relative to Oaklawn, and their 1975 return was similarly placed in a "Suspense" file.In a letter to the Chief of Audit81 Review dated October 26, 1977, Mr. Viele noted that it had been at least 12 months since the start of the initial audit of petitioners' 1974 return and asked for a reply regarding the cause of the delay. The District Director notified Mr. Viele that he would reply to that letter directly to the petitioners because the Service had no record that petitioners granted authorization for Mr. Viele to receive such information. By letter dated December 6, 1977, the 1038 District Director informed petitioners that the tax matters pertaining to Oaklawn were the only remaining items at issue on their 1974 return, that these tax matters were still under study by the Service's National Office, and that the approximate completion date of such study could not be estimated.In a letter dated February 14, 1978, the District Director asked petitioners to sign a Form 872, Consent Fixing Period of Limitation Upon Assessment of Tax, for 1974. As typed by the Service, that form provided that tax may be assessed at any time on or before June 30, 1979. Petitioners changed the "9" in "1979" to an "8" (thereby indicating "1978") and executed the form on February 24, 1978. The District Director notified82 petitioners that this Form 872 was unacceptable because petitioners had not initialed the altered date and asked them to execute a new Form 872 extending the assessment period for 1974 to December 31, 1978. The new Form 872 included a typed restriction that limited its coverage to adjustments related to Oaklawn. Petitioners executed that new Form 872 on March 28, 1978.On November 29, 1978, petitioners executed another Form 872 extending to December 31, 1979, the period for assessment for their 1974 and 1975 taxable years. This form also included a typed restriction limiting its coverage to adjustments related to Oaklawn.In a letter dated October 29, 1979, the District Director again asked petitioners to further extend the period for assessment for 1974 and 1975. The letter stated that the tax matters pertaining to Oaklawn were still under consideration by the National Office and that the date when the examination of petitioners' returns could be resumed could not be estimated at that time. Petitioners executed a Form 872 on November 20, 1979, extending the period for assessment for 1974 and 1975 to December 31, 1980. This form included the same restriction as on the previous83 forms limiting the coverage to Oaklawn adjustments.On October 6, 1980, Revenue Agent James Stockton telephoned Dr. Piarulle and asked for further extensions for 1974 and 1975. Dr. Piarulle indicated his preference to have Mr. Viele handle the matter. Mr. Viele telephoned Mr. Stockton the same day and stated that he would not recommend that 1039 petitioners sign any further extensions; however, he did agree to meet with Mr. Stockton.Mr. Stockton met with Mr. Viele and Dr. Piarulle on October 23, 1980. The issues discussed included Oaklawn and Hawk. Dr. Piarulle refused to extend the period for assessment for 1974 and 1975, but the parties did agree to have Mr. Viele meet with Mr. Stockton and Dominic Pardi, Mr. Stockton's supervisor. Dr. Piarulle was at this time frustrated that the Service had not resolved the Oaklawn issue to petitioners' satisfaction and was reluctant to extend the period for assessment for a longer period than he considered appropriate.Sometime after the October 23 meeting and before October 28, 1980, petitioners executed a Form 2848, Power of Attorney, appointing Mr. Viele as their attorney-in-fact for all matters regarding their 1974 and 1975 tax84 returns. Mr. Viele met with Mr. Stockton and Mr. Pardi on October 28, 1980, but the parties were still unable to reach a settlement on the Oaklawn issues for 1974 and 1975. Mr. Viele agreed, however, to recommend to petitioners that they consent to extend the period for assessment for the taxable years 1974, 1975, and 1977. 3 Following this meeting, Mr. Stockton prepared and mailed a Form 872 to petitioners. The pertinent part of that form provided:(1) The amount of any Federal Income/(Kind of Tax) tax due on any return(s) made by or for the above taxpayer(s) for the period(s) ended December 31, 1974, December 31, 1975 and December 31, 1977, may be assessed at any time on or before December 31, 1981/(Expiration Date). However, if a notice of deficiency in taxfor any such period(s) is sent to the taxpayer(s) on or before that date, then the time for assessing the tax will be further extended by the number of days the assessment was previously prohibited, plus 60 days. * * (3) The taxpayer(s) may file a claim for credit or refund and the Service may credit or refund the tax within 6 months after this agreement ends.The amount of any deficiency assessment is to be limited85 to that resulting from any adjustment to income, deduction, gain, loss or credit arising from transactions entered into with Oak Lawn Foods, Inc., including any 1040 consequential changes to other items based on such adjustments. (Oak Lawn Foods, Inc., is also known or referred to as Oak Lawn Farms, Inc.)The provisions of section 6511(c), Internal Revenue Code of 1954, are limited to any refund or credit resulting from adjustment for which the period for assessment is extended under this agreement.[The portions inserted by preparer are indicated by underscoring.]After receiving the Form 872 prepared by Mr. Stockton, petitioners crossed out the expiration date of December 31, 1981, and wrote "June 30, 1981" above that date. Petitioners placed their initials next to the modified date and then executed that form on November 3, 1980. Mr. Stockton picked up the form86 from petitioners, noticed the change of date, indicated that such change was acceptable, and then personally delivered the modified form to John Heim, Chief of the Review Staff of the Buffalo District, the next day. Mr. Heim reviewed the Form 872 and respondent's files regarding petitioners in Mr. Stockton's presence. Upon examination of petitioners' 1977 return, Mr. Heim noted that a loss had been claimed with respect to Hawk on Schedule E, Form 1040. Mr. Heim recalled that Hawk was the subject of an open examination in respondent's Manhattan District Office, and noted that the restriction on the Form 872 as prepared by Mr. Stockton limited future assessments to issues relating to Oaklawn. Mr. Heim crossed out "December 31, 1977" on the part of the form for taxable periods, initialed this change, and then signed the form on behalf of respondent. Mr. Stockton asked Mr. Heim if he should obtain two new consents -- one for 1974 and 1975, and one for 1977. Mr. Heim replied that only a new consent for 1977 was necessary.On November 10, 1980, Mr. Stockton mailed to petitioners the Form 872 altered by Mr. Heim on November 4, a new Form 872 for the taxable year 1977, and a letter 87 explaining that the restrictive language on the new Form 872 had been expanded to include issues relating to Hawk. Mr. Stockton did not send copies of this letter or the forms to Mr. Viele, and no attempt was made to inform Mr. Viele of the changes made to the Form 872 signed by Mr. Heim on November 4.On or about November 13, 1980, Dr. Piarulle telephoned Mr. Stockton. Dr. Piarulle was extremely upset, stated that it was a "rotten thing" to change the Form 872, and asked how respondent could change a document after it had been agreed to by both sides. He told Mr. Stockton that he would not sign 1041 the new consent. Petitioners did not execute the new Form 872 for 1977, and neither petitioners nor Mr. Viele had any further communications with the Service prior to the statutory notice of deficiency issued March 27, 1981.OPINIONThe parties agreed in writing to extend the period for assessment for petitioners' 1974 and 1975 taxable years to December 31, 1980. Respondent, however, did not issue a statutory notice of deficiency for 1974 and 1975 until March 27, 1981. The pertinent parts of section 6501 provide:SEC. 6501(a). General Rule. -- Except as otherwise provided88 in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed (whether or not such return was filed on or after the date prescribed) or, if the tax is payable by stamp, at any time after such tax became due and before the expiration of 3 years after the date on which any part of such tax was paid, and no proceeding in court without assessment for the collection of such tax shall be begun after the expiration of such period. * * (c) Exceptions. -- * * (4) Extension by agreement. -- Where, before the expiration of the time prescribed in this section for the assessment of any tax imposed by this title, except the estate tax provided in chapter 11, both the Secretary and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed at any time prior to the expiration of the period agreed upon. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon.[Emphasis supplied.]Assessment against petitioners with respect to 1974 and 1975 is therefore barred unless: (1) The parties validly agreed89 to extend the period for assessment beyond the date the notice was issued, or (2) the petitioners are estopped to deny the validity of such an agreement.I. The Validity of the "Agreement"Respondent argues that the Form 872 executed by petitioners on November 3, 1980, was not part of a "package deal" covering the taxable years 1974, 1975, and 1977; that the consent was the equivalent of three separate waivers; and that 1042 the deletion of the reference to 1977 in that form had no effect on the validity of the waiver for 1974 and 1975. Respondent further contends that a multiyear consent is similar to a severable or divisible contract, and if the alteration to that form were material, the materiality would be limited to the 1977 tax year.A consent to extend the period for assessment of an income tax is essentially a unilateral waiver of a defense by the taxpayer and is not a contract. Strange v. United States, 282 U.S. 270 (1931); Tallal v. Commissioner, 77 T.C. 1291 (1981). Contract principles are significant, however, because section 6501(c)(4) requires that the parties reach a written agreement as to the90 extension. The term "agreement" means a manifestation of mutual assent. S. Williston, Contracts 6 (3d ed. 1957).The Form 872 prepared by respondent and executed by petitioners November 3, 1980, provided that the period for assessment for taxable years 1974, 1975, and 1977 would be extended only for issues related to Oaklawn. Respondent crossed out the reference to 1977 and now seeks to enforce the "agreement" for 1974 and 1975. Dr. Piarulle was at this time frustrated that the Oaklawn issue had not been resolved earlier and was reluctant to consent to a further extension for 1974 and 1975. Petitioners signed the consent upon the advice of their accountant only when it was thought that they were obtaining something with respect to 1977. In signing the Form 872, petitioners were led to believe that only Oaklawn issues would be raised for 1974, 1975, and 1977. Respondent, with ample time to take any one of several actions that would give petitioners notice of, and a chance to decide whether to accept, respondent's alterations, decided instead to change a previously executed consent and impose new terms upon petitioners, without notifying the representative who had negotiated 91 the combined consent.Respondent cites Greylock Mills v. Commissioner, 31 F.2d 655">31 F.2d 655 (2d Cir. 1929), cert. denied 280 U.S. 566">280 U.S. 566 (1929), and Revere Copper & Brass v. United States, 77 Ct. Cl. 456">77 Ct. Cl. 456, 3 F. Supp. 157">3 F. Supp. 157 (1933), for the principle that a single waiver that covers more than 1 taxable year is, in legal effect, a separate waiver as to taxes for each of the years therein mentioned. In each of these cases, the taxpayer executed and the Service accepted a single document extending the period of assessment for multiple 1043 taxable years, including 1917. Under prior law, the duration of these consents was for an indefinite period of time. Thereafter, the Commissioner issued a ruling providing that all consents in effect for the taxable year 1917 would expire on April 1, 1924. The taxpayers argued that because the consent for 1917 expired on April 1, 1924, the consent for each of the taxable years in the same document must also expire on that date. In both of these cases, the Court held that the waiver remained valid as to taxable years other than 1917. The reasoning of the92 Courts was summed up in Revere as follows: "A single waiver including several years is a separate waiver for each year within the contemplation of the statute and the contemplation of the parties." (Emphasis supplied.) Revere Copper & Brass v. United States, supra at 160.Greylock and Revere are distinguishable from the case at issue. In each of these cases, the consent had already been executed by the taxpayer and accepted by the Service, and there was no indication at the time the consents were executed that the parties contemplated a package deal. In this case, the Form 872 executed by petitioners had not been accepted by the Service at the time it was altered, and the facts justify the conclusion that the petitioners did contemplate a package deal.In Cary v. Commissioner, 48 T.C. 754">48 T.C. 754 (1967), we held that a Form 872 signed by the taxpayer, but altered by an employee of the Service without the taxpayer's consent before it was accepted by the Service, was invalid. Respondent seeks to distinguish Cary on the basis that the Form 872 in that case referred to only 1 taxable year. This difference is immaterial. As we stated 93 in Cary v. Commissioner, supra at 766:The same physical document, a Form 872, was signed by the petitioner and on behalf of the respondent but the document as signed by petitioner had been changed before being signed on behalf of the respondent. Such a document did not constitute a consent in writing by both the taxpayer and the Commissioner.An agreement that incorporates 3 taxable years is materially different from one that incorporates only 2 of those years; at the time it was executed by petitioners, the Form 872 was materially different than when it was "accepted" by respondent. Petitioners and respondent did not have a manifestation 1044 of mutual assent, and no written agreement was reached as required by section 6501(c)(4).The consent was a written document prepared by respondent. Nothing on the face of the consent stated that respondent may selectively choose, after the consent is executed by petitioners, to accept the consent for certain years and not for other years. (Had petitioners executed a separate Form 872 for each year involved, we would have a different case, and we express no opinion here as to the result in such a case.) 94 Simply put, petitioners executed one instrument and respondent seeks to enforce a different instrument against them. We hold that the Form 872 executed by petitioners on November 3, 1980, and thereafter altered by respondent's agent is invalid and does not operate to extend the period of assessment for 1974, 1975, or 1977.II. EstoppelA taxpayer may be estopped to deny the validity of an agreement to extend the period of limitations where the Government reasonably relies upon waivers executed by the taxpayer. Benoit v. Commissioner, 25 T.C. 656">25 T.C. 656 (1955), affd. 238 F.2d 485">238 F.2d 485 (1st Cir. 1956). The circumstances required for equitable estoppel to apply are:(1) there must be false representation or wrongful misleading silence; (2) the error must originate in a statement of fact, not in opinion or a statement of law; (3) the one claiming the benefits of estoppel must not know the true facts; and (4) that same person must be adversely affected by the acts or statements of the one against whom an estoppel is claimed. [Lignos v. United States, 439 F.2d 1365">439 F.2d 1365, 1368 (2d Cir. 1971).]Respondent contends95 that he reasonably relied on the validity of the consent; that petitioners were under a duty to advise respondent that they believed the consent to be invalid; that petitioners failed to so advise respondent; and that this failure to advise constituted wrongful misleading silence on the part of the petitioners.Respondent's argument that he reasonably relied on the validity of the consent for 1974 and 1975, however, is not supported by the facts. It was respondent's own employee who materially altered the Form 872. When Mr. Heim crossed out the reference to 1977 on that form, he was asked by Mr. Stockton if it was necessary to prepare two new forms -- one for 1045 1974 and 1975, and one for 1977. Mr. Heim had the opportunity to seek petitioners' consent to the change in the form or to seek the advice of legal counsel as to the effect of altering the form, but he chose to assume that the altered form was valid. Under these circumstances, we find that any reliance was not reasonable and was not the result of any conduct of petitioners.Respondent's argument that petitioners' actions constituted wrongful misleading silence is equally without merit. After that form was altered96 by Mr. Heim, Revenue Agent Stockton sent the form directly to petitioners. Mr. Stockton did not send a copy of the form to petitioners' accountant, Mr. Viele, even though a valid Form 2848, Power of Attorney, appointing Mr. Viele as petitioners' attorney-in-fact had previously been filed with respondent. In fact, no attempt was made to inform Mr. Viele of the changes made to the Form 872. Mr. Stockton testified that no information was sent to Mr. Viele because the power of attorney only covered 1974 and 1975. This argument is inconsistent, however, with respondent's contention that after the alteration, the Form 872 was only valid for 1974 and 1975. It is more likely that Mr. Stockton either forgot to send copies of the correspondence to Mr. Viele, or deliberately bypassed Mr. Viele because Mr. Viele knew that Hawk was part of the package to which Mr. Stockton had agreed. In either case, no wrong may be attributed to petitioners.Shortly after receiving the altered Form 872, Dr. Piarulle telephoned respondent and spoke with Mr. Stockton and Mr. Pardi. Dr. Piarulle stated that it was a "rotten thing" for respondent to alter the form and that he would not sign the new Form 87297 for 1977. Respondent argues that Dr. Piarulle did not specifically mention the taxable years 1974 and 1975, and therefore no notice was given that the consent was repudiated for those years. Respondent was aware, however, that Dr. Piarulle was extremely upset about the alteration of the form and that he desired the examinations of 1974 and 1975 to be concluded as soon as possible. Petitioners' 1974 return had been selected for examination more than 4 years earlier, and Dr. Piarulle initially refused to consent to extend further the period for assessment on October 23, 1980. When petitioners did decide to execute the Form 872 on November 3, 1046 1980, they shortened the extension date from December 31, 1981, to June 30, 1981.In Cary v. Commissioner, supra, the Service prepared a Form 872 that contained an erroneous reference to the taxable year involved. It was apparent that the Service intended the extension year to be 1957, but the Service inadvertently inserted "6-30-62" as the date to which the period for assessment was to be extended. The taxpayer, his accountant, and his attorney were aware of this mistake before the taxpayer executed98 the form and sent it to the Service. No action was taken to inform the Service of their mistake. Thereafter, someone in the Service's employ altered the Form 872 by striking through "6-30-62" and inserting "12-31-57." This alteration was made at least 15 days prior to the expiration of the period for assessment. A copy of the altered Form 872 was sent to the taxpayer's accountant, and no effort was made to inform the Service of any objection to the validity of the Form 872. In discussing a taxpayer's duty to advise the Service we stated:Here the facts show that petitioner on the advice of his accountant concurred in by his attorney deliberately sent a document to the Internal Revenue Service which he and his representatives knew contained an error which he and his representatives considered material. Neither petitioner nor his representatives directed the attention of the Internal Revenue Service to the error in the instrument. Had no change been made in the instrument in the Internal Revenue Service, these facts might justify the conclusion that petitioner was estopped to deny that the document he submitted to the Internal Revenue Service was an extension of the statute of99 limitations on assessment for the year 1957 because of petitioner's misleading the respondent to respondent's detriment. However under the facts of the present case we are not required to decide such an issue. It is clear from the evidence here that the error in the Form 872 was not overlooked by respondent. Not only was the error noticed but the instrument was changed by respondent's employee after petitioner had signed the instrument without any consultation with petitioner or his representatives in an attempt to obtain their agreement to the change or a new instrument with the right date inserted in the appropriate blank space. * * At the time this document was altered in the Internal Revenue Service and signed on behalf of the Commissioner, there still remained at least 15 days to obtain a proper Form 872 extending the statute of limitations on assessment for the year 1957.Under these circumstances it can hardly be said that the Commissioner was misled by petitioner. In this case respondent is relying on a document which was altered by his agents or employees without the consent of petitioner. * * * [Cary v. Commissioner, supra at 765-766.]100 1047 In summary, the Form 872 was altered by respondent's own employee; no information regarding the altered form was sent to petitioners' attorney-in-fact; Dr. Piarulle informed respondent of his strong objection to the alteration in the form; and respondent was aware that petitioners wanted to conclude the examinations of 1974 and 1975 as soon as possible. Based on these facts, it cannot be said that respondent was misled by petitioners' silence.In this case as in Cary, respondent seeks to rely on a document that was altered by one of his employees without the consent of petitioners at a time when sufficient time remained to obtain a proper Form 872. Respondent's error was one of law (i.e., assuming that the altered Form 872 was valid as to 1974 and 1975), not one of fact. All of the facts were known to respondent. In these circumstances, it is unreasonable to say that the situation was created by petitioners and that they are therefore precluded from relying upon limitations provisions that are otherwise applicable, particularly when respondent could have prevented the expiration of the limitations periods by obtaining new consents or by issuing statutory notices*101 of deficiency on a timely basis. See Atlas Oil & Refining Corp. v. Commissioner, 22 T.C. 552">22 T.C. 552 (1954).Accordingly.An appropriate order will be issued. Footnotes1. This corporation is also referred to in the exhibits as Oak Lawn Farms and Oak Lawn Foods.↩2. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954 as amended and in effect during the years here in issue.↩3. Petitioners had previously executed in March of 1980 a Form 872 extending the period for assessment for their 1976 taxable year to Dec. 31, 1981.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625073/	BOYLE ICE COMPANY OF DELAWARE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Boyle Ice Co. v. CommissionerDocket Nos. 51777, 62092, 69294, 73851.United States Board of Tax Appeals33 B.T.A. 420; 1935 BTA LEXIS 756; November 8, 1935, Promulgated 756 Where a contract is acquired solely in exchange for all of its stock, the basis of such contract in the hands of a transferee, for purposes of exhaustion deductions, is the same as in the hands of the transferor, under applicable provisions of the 1928 Act. There being no evidence that there was any cost of such contract to the transferor, the transferee is not entitled to deductions for exhaustion of such contract. John C. Gregory, Esq., for the petitioner. E. A. Tonjes, Esq., for the respondent. MCMAHON 420 OPINION. MCMAHON: These are proceedings, duly consolidated for hearing and opinion, for the redetermination of deficiencies in income tax for the years 1928, 1929, 1930, and 1931, in the respective amounts of $628.91, $595.92, $598.54, $598.54. Each petition contains an allegation 421 that the respondent erred in determining the deficiency and each contains the allegation, in substance, that respondent erred in holding that the basis, for purposes of exhaustion, of a certain contract is the same as in the hands of the transferor, such basis as determined by the respondent being nothing, since it cost the transferor nothing, 757 and in failing to hold that the basis of such contract is $100,000, alleged to be its cost to the petitioner. These allegations were denied by respondent. The parties entered into the following stipulation of facts: 1. The petitioner is a corporation duly organized and incorporated under the laws of the State of Delaware on August 17, 1923. 2. Exhibit "A", attached hereto and made a part hereof, is a true and correct copy of a certain contract, involved in this proceeding, dated June 25, 1923, between the Pennsylvania Railroad Company, first party; Boyle Ice Company, a corporation organized and existing under the laws of the State of Illinois, second party; and Fruit Growers Express Company, a corporation organized and existing under the laws of the State of Delaware, third party, together with guarantee letter dated June 28, 1923, addressed jointly to the Pennsylvania Railroad Company and Fruit Growers Express Company and signed by John P. Boyle in his lifetime, which guarantee letter was duly accepted by the Pennsylvania Railroad Company and Fruit Growers Express Company. 3. Exhibit "B", attached hereto and made a part hereof, is a true and correct copy of a certain758 resolution duly adopted by the Boyle Ice Company, of Delaware, the Delaware Corporation, at the first meeting of its board of directors held the 22nd day of August, 1923. 4. Exhibit "C", attached hereto and made a part hereof, is a true and correct copy of a certain resolution duly adopted by the Boyle Ice Company, the Illinois corporation, at a special meeting of its board of directors held the 22nd day of August, 1933. [1923] 5. Exhibit "D", attached hereto and made a part hereof, is a true and correct copy of a certain resolution duly adopted by Boyle Ice Company, the Illinois corporation, at a special meeting of its board of directors held the 20th day of September, 1923. 6. On or about September 20, 1923, pursuant to the resolutions set forth in Exhibits "B" and "D", the Boyle Ice Co. of Delaware, the Delaware corporation, acquired from the Boyle Ice Company, the Illinois corporation, the contract referred to in paragraph 2 hereof as Exhibit "A"; and in exchange therefor, the Boyle Ice Company of Delaware, the Delaware corporation issued 7,000 shares of its common capital stock to the Boyle Ice Company, the Illinois corporation, the certificate for said shares being759 issued in the name of John P. Boyle, who held the stock as nominee of the Boyle Ice Company, the Illinois corporation. 7. The aforesaid 7,000 shares of stock issued to John P. Boyle as nominee of the Boyle Ice Company, the Illinois corporation, was held in this manner until January 1, 1924. 8. That of the 7,000 shares of stock issued to John P. Boyle, as aforesaid, certificates for 3,000 shares thereof were reissued on or about January 2, 1924 to Boyle Ice Company, the Illinois corporation, and certificates for the balance, to-wit, 4,000 shares, were thereafter reissued to various and sundry purchasers of 2,000 shares of preferred stock of Boyle Ice Co. of Delaware, the Delaware corporation, as a bonus in connection with their purchases of said preferred stock. 422 9. That of the 7,000 shares of stock issued to John P. Boyle, as aforesaid, 4,766 shares were acquired by stockholders of the Boyle Ice Company, the Illinois corporation. Boyle Ice Company of Delaware, the Delaware corporation, had an issue of 3,000 shares of preferred stock; and of this stock 1,883 shares thereof were purchased by stockholders of the Boyle Ice Company, the Illinois corporation, subsequent760 to January 2, 1924. Exhibits A, B, C and D, referred to in the above stipulation, we incorporate herein fully by reference. Exhibit C authorizes John P. Boyle to subscribe, on behalf of the Illinois corporation, for 1,000 shares of preferred stock of petitioner. By Exhibit A, the Boyle Ice Co. of Illinois agreed to construct an ice plant on or before January 2, 1924, at Huntingdon, Pennsylvania, to furnish and sell ice to the express company and the railroad company. The guarantee letter, attached to the contract, provided that the rights and obligations of the Illinois corporation might be assigned to a Delaware corporation, the Illinois corporation to guarantee full performance by the Delaware corporation. After the contract in question was executed, it was determined that the consideration to be paid for it by the new corporation, the petitioner, should be 7,000 shares of petitioner's common stock, and that 1,000 of these shares should constitute the compensation of the Boyle Ice Co., the Illinois corporation, for its services in securing the contract. The plant was ready for operation on January 1, 1924. By January 1, 1924, Boyle had disposed of $240,000 of preferred761 stock. By some time in April 1924 $25,000 more preferred stock had been disposed of and the sale of the remainder of the $300,000 preferred stock was practically completed by June 1924. Of the 7,000 shares of common stock of petitioner 1,000 shares were retained by the Boyle Ice Co., the Illinois corporation, as compensation for obtaining the contract, 2,000 shares were given to such Illinois corporation in its capacity as purchaser of $100,000 of preferred stock, and 4,000 shares were distributed to a group of 56 other preferred stockholders. On or about January 2, 1924, the petitioner sold 110 shares of common stock for $15 cash per share to three individuals. These 7,110 shares of common stock of petitioner and $300,000 par value preferred stock were all the shares of stock issued by the petitioner up to and through 1924. At the date the petitioner was formed no money was paid in to petitioner. The contract was its sole asset. While the preferred stock of petitioner was being sold, the plant at Huntingdon was erected on the credit of John P. Boyle. John P. Boyle's undertaking to erect an adequate icing station to be ready for use on January 1, 1924, was quite a responsibility, 762 because if there were a failure it would mean that this potential 423 influence for future business or other divisional icing plants would be gone. Frederick A. Thulin, an attorney and accountant, advised Boyle that he would have to assume the responsibility of financing the preferred stock of petitioner, and that the remaining 6,000 shares of common stock of petitioner would have to remain available to be allocated for the purpose of securing $300,000 of financing. On or about September 20, 1923, he date the petitioner acquired the contract from the Boyle Ice Co. of Illinois, such contract had a fair market value of at least $100,000. At that time the 7,000 shares of common stock which petitioner exchanged therefor had a fair market value of at least $100,000. In each of the years in question the respondent disallowed the deduction of $5,000 claimed by the petitioner as amortization of the cost of the contract. Upon the foregoing facts, which we find, we are called upon to determine the proper basis for the deduction of exhaustion allowances upon the contract in question in the hands of the petitioner during the years 1928 to 1931, inclusive. Petitioner contends763 that the basis is $100,000, which it claims was the amount of value paid by petitioner for it to the Boyle Ice Co. of Illinois or, in other words, its cost to petitioner. (See ). Respondent now contends, in conformity with his determination, that the basis is nothing, since under the Revenue Act of 1928 the basis is the same in the petitioner's hands as it would be in the hands of Boyle Ice Co. of Illinois and that the contract cost the Boyle Ice Co. of Illinois nothing. There are set forth in the margin pertinent provisions of the Revenue Act of 1928. 1764 424 The evidence shows that the petitioner acquired the contract in question on or about September 20, 1923, from the Boyle Ice Co. of Illinois in exchange for 7,000 shares of its common capital stock and that John P. Boyle held such stock as nominee of the Illinois corporation until January 1, 1924. In the stipulation of facts it is stated in part, "On or about September 20, 1923, * * * the Boyle Ice Co. of Delaware, * * * acquired from the Boyle Ice Company, the Illinois corporation, the contract * * ; and in exchange therefor, * * issued 7,000 shares of the common capital stock to the Boyle Ice Company, the Illinois corporation." No other common stock was issued by the petitioner until about January 2, 1924. There is no proof that any of the preferred stock of the petitioner was outstanding immediately after the transfer of the contract to the petitioner. Upon the evidence we are constrained to approve the respondent's determination. So far as the evidence shows the transaction in question comes within the provisions of section 112(b)(5). The contract was transferred to the petitioner by the Boyle Ice Co. of Illinois solely in exchange for stock of the petitioner765 and, so far as the evidence shows, immediately after the exchange the Illinois corporation was in control of the petitioner. Immediately after the exchange, the Illinois corporation owned all of the 7,000 outstanding shares of common stock of petitioner. As pointed out above, we do not know that there was any outstanding preferred stock of petitioner immediately after the exchange. If there was, there is no evidence to show that the Illinois corporation did not own a controlling portion of it within the definition of control in section 112(j). 2In our opinion it is not determinative that at or about the time of the exchange the Illinois corporation authorized its nominee, John P. Boyle, to deliver as a bonus to purchasers of preferred stock of the petitioner a portion of the common stock received by the Illinois corporation upon the exchange or that it was originally contemplated that this would be necessary. 766 There is no evidence to show that petitioner had any agreement with the Illinois corporation that such Illinois corporation would return any of the common stock to petitioner, or that any of it would be issued for the benefit of the petitioner. The Illinois corporation had the right to do with the stock as it saw fit, so far as the evidence shows. About three months after the exchange the Illinois corporation did distribute some of such common stock as a bonus to purchasers of preferred stock of petitioner, but this was done, the evidence, particularly exhibit D, shows, because the Illinois corporation deemed it advisable for its 425 own benefit. There is no escape from the conclusion that immediately after the exchange the Illinois corporation owned more than 80 percent of the outstanding common stock of the petitioner. , and . In the former case we stated in part: * * The situation does not require that the original owners shall remain indefinitely in control after the exchange. It is only necessary that the owners of the property transferred767 shall be immediately in control of the corporation to which the transfer of property is made. . In the latter case we stated in part: * * Clearly, "immediately after the exchange" [early in January 1929] the transferors were in control of Insull Utility Investments, Inc., and remained in control of it until after January 18, 1929. What happened on and after that date has no bearing upon the question in issue. Our opinion in , is apposite. * * * Under the provisions of section 114(a), the basis for the exhaustion of the contract is the same as provided in section 113(a)(8) for the purpose of determining gain or loss, which is the basis in the hands of the transferor, the Illinois corporation. Under the general provisions of the revenue acts such basis in the hands of the transferor is the cost to the transferor. Section 202(a) of the Revenue Act of 1921 and section 113(a) of the Revenue Act of 1928, which are substantially the same in this respect. Such basis is not to be increased or decreased, since, under section 202(c)(3) of the Revenue Act of 1921, which768 is substantially the same as section 112(b)(5) of the Revenue Act of 1928, no gain or loss could have been recognized upon the exchange. The respondent has held that the contract cost the Illinois corporation nothing. There is no evidence to show that the contract did cost the Illinois corporation anything. Consequently, the petitioner is entitled to no deductions for exhaustion of the contract. The evidence shows, and we have found as a fact, that at the time of the exchange the contract and the stock exchanged therefor each had a fair market value of at least $100,000. In the view we have taken this is of no consequence, but we may say in passing that in fixing such value we have taken into consideration the terms of the contract regarding the quantity of ice to be sold and the prices therefor, the cost of manufacturing the ice, the duration of the contract, estimated and actual earnings of the stock, the fact that on or about January 2, 1924, petitioner made several small sales of some of its common stock for $15 per share, under conditions substantially the same as those of September 20, 1923, and all other facts and circumstances bearing on the question of value. 769 Decision will be entered for the respondent.Footnotes1. SEC. 114. BASIS FOR DEPRECIATION AND DEPLETION. (a) Basis for depreciation. - The basis upon which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the same as is provided in section 113 for the purpose of determining the gain or loss upon thesale or other disposition of such property. SEC. 113. BASIS FOR DETERMINING GAIN OR LOSS. (a) Property acquired after February 28, 1913. - The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that - * * * (8) SAME - CORPORATION CONTROLLED BY TRANSFEROR. - If the property was acquired after December 31, 1920, by a corporation by the issuance of its stock or securities in connection with a transaction described in section 112(b)(5) (including, also, cases where part of the consideration for the transfer of such property to the corporation was property or money, in addition to such stock or securities), then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made; * * * SEC. 112(b)(5). TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR. - No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately↩ after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange. [Emphasis supplied.] 2. (j) Definition of control.↩ - As used in this section the term "control" means the ownership of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625076/	First National Industries, Inc. v. Commissioner.First Nat'l Industries, Inc. v. CommissionerDocket No. 389-63.United States Tax CourtT.C. Memo 1967-136; 1967 Tax Ct. Memo LEXIS 124; 26 T.C.M. (CCH) 608; T.C.M. (RIA) 67136; June 23, 1967William Waller, 12th Fl., American Trust Bldg., Nashville, Tenn., for the petitioner. Vallie C. Brooks, for the respondent. SCOTT Memorandum Findings of Fact and Opinion SCOTT, Judge: Respondent determined deficiencies125 in petitioner's income tax for the fiscal years ended January 31, 1957, and January 31, 1959, in the amounts of $8,324.21 and $152,024.93, respectively. The deficiency for the year 1957 results from the disallowance of a claimed net operating loss carryback from the fiscal year 1959 to the fiscal year 1957, which claimed carryback loss had been tentatively allowed. The issue for decision is whether petitioner realized a long-term capital gain in its fiscal year ended January 31, 1959, on the disposition of its interest in 1,000 shares of stock of B. G. Wholesale, Inc. Findings of Fact Some of the facts have been stipulated and are found accordingly. Petitioner, a corporation organized under the laws of Delaware on February 2, 1955, had its principal office at the date of the filing of the petition in this case at Nashville, Tennessee. It filed its corporate Federal income tax returns for its fiscal years ended January 31, 1957, and January 31, 1959, with the district director of internal revenue, Nashville, Tennessee. Petitioner was organized to engage in the investment and rental business and since its incorporation, its principal place of business has been in Nashville, 126 Tennessee. Petitioner computes its taxable income under an accrual method of accounting, and it used such method in reporting its taxable income on its Federal income tax returns for the fiscal years ended January 31, 1957, and January 31, 1959. During the taxable years ended January 31, 1957, and January 31, 1959, petitioner had outstanding 35,200 shares of common stock, 22,340 shares of which were owned by First National Company and 85 shares by G. L. Comer (hereinafter sometimes referred to as Comer). Franklin Garment Company, Huffines Shirt Company, Merchants Warehouse Company, and Jobbers Manufacturing Company owned 35, 505, 3,755, and 8,480 shares, respectively. All of the common stock of Jobbers Manufacturing Company was owned by First National Company and all of the common stock of First National Company was owned by Church of Christ Foundation, Inc. All of the outstanding stock of Franklin Garment Company and of Huffines Shirt Company was owned by Merchants Warehouse Company, and all of the outstanding stock of Merchants Warehouse Company was owned by Comer. Church of Christ Foundation, Inc. (hereinafter sometimes referred to as the Foundation) was organized in 1946 as127 a nonprofit corporation under the laws of the State of Tennessee by G. L. Comer, M. B. Comer, L. H. Jones, F. A. Berry, and J. C. Shacklett. By letter dated January 5, 1948, respondent ruled that the Foundation was exempt from tax under section 101(6), I.R.C. of 1939. By letter dated March 6, 1961, the Chief, Exempt Organizations Branch, Tax Rulings Division of the Internal Revenue Service, advised the Foundation that the Service was proposing to issue a ruling holding that the Foundation was not exempt under section 501(c)(3), I.R.C. 1954. By letter dated November 14, 1961, the Director of the Tax Rulings Division of the Internal Revenue Service advised the Foundation that its exemption had been revoked retroactively to the year 1955. In addition to the common stock of First National Company, all of which as heretofore stated was owned by the Foundation, First National Company had issued and outstanding 42,600 shares of preferred stock of a par value of $100. This preferred stock was nonvoting and provided for a 4 percent noncumulative dividend. Twenty-six thousand seven hundred shares of the preferred stock of First National Company were owned by corporations128 which were owned directly or indirectly by the Foundation. These corporations and the number of shares of stock owned by each were as follows: No. of SharesCompanyof StockAllen Garment Company2,900Blue Ridge Shirt Manufacturing Com-pany2,033Church of Christ Foundation1,845Cookeville Shirt Company1,835Heavy Duty Manufacturing Company555Kentucky Pants Company2,135Lebanon Garment Company2,250Mammoth Cave Garment Company1,455McMinnville Garment Company4,090Milan Shirt Manufacturing Company2,250John S. Naylor Company4,350Transfer Parking Station82Winchester Manufacturing Company920Total26,700 The remaining 15,900 shares of preferred stock of the First National Company were owned by corporations owned and controlled directly or indirectly by Comer. These corporations and the number of shares owned by each were as follows: No. of SharesCompanyof StockComer Realty Company5,750Franklin Garment Company1,750Charles Loridans Building Corpora-tion5,000Merchants Warehouse Company3,400Total15,900Comer is president of Washington Manufacturing Company and some of its subsidiaries129 or affiliated corporations. The majority of the outstanding common stock of the Washington Manufacturing Company during the years here in issue was owned by R. W. Comer and Sons Trust. Comer was trustee of the R. W. Comer and Sons Trust and as such managed and controlled the investments of that trust. In 1944 Comer contacted an individual by the name of Ervin G. Houchens (hereinafter referred to as Houchens) with respect to the two of them jointly acquiring a wholesale business in Bowling Green County. At the time Houchens was operating 13 or 14 stores and had a warehouse supplying these stores. A company by the name of National Stores owned at that time three or four stores. As a result of further discussions between Houchens and Comer, the two of them organized a corporation known as B. G. Wholesale, Inc. Comer paid cash in the amount of $100,000 as his capital contribution and the corporation from these funds acquired the wholesale business at Bowling Green and the stores operated by National Stores. Houchens transferred the 13 or 14 stores he was operating together with the merchandise in those stores to B. G. Wholesale, Inc., which was credited on the corporation books as a130 capital contribution in the amount of $100,000. One-half of the common stock of B. G. Wholesale, Inc., consisting of 1,000 shares was issued to Houchens, and the other one-half was issued at the direction of Comer to corporations which he owned. From the time of its incorporation in 1944 throughout the years here in issue, B. G. Wholesale, Inc., operated its retail grocery stores under the name of Houchens Markets. The first several years of operation of B. G. Wholesale, Inc., resulted in little profit, but thereafter the business began to expand and the profits increased so that by around the third year of its operation dividends were being paid on its stock. From the time B. G. Wholesale, Inc., was incorporated throughout the years here in issue Houchens was in complete control of the management and operation of the business, and Comer or his corporations took no part in the business operation but were merely stockholders. When Comer and Houchens organized of them became dissatisfied with the arrangement, there would be either a division of the business or one or the other of the parties would propose a "buy or sell proposition." It was understood that Houchens would not131 transfer his stock and that Comer would not transfer his stock other than to corporations which he owned or controlled either directly or indirectly without offering the stock for sale to the other stockholder. Approximately 2 years after B. G. Wholesale, Inc., was organized, Houchens discussed with Comer the possibility of his purchasing the stock held by Comer's interests but no decision was reached. Around 1956 Houchens again proposed purchasing the stock of B. G. Wholesale, Inc., issued to Comer's interests and at this time Comer at first told Houchens he would sell his stock. Houchens proceeded to investigate arrangements for financing the purchase of the stock and received a tentative commitment for a bank in Nashville to finance the purchase. However, prior to any consummation of the transaction, Comer decided he would not sell the stock to Houchens. From the time somewhere around 1956 until approximately the first of May 1958, there were no further discussions between Comer and Houchens with respect to Houchen's purchase of the B. G. Wholesale, Inc., stock. Sometime after the discussion in 1956, the B. G. Wholesale, Inc., stock had been listed with a brokerage firm in Nashville, 132 Tennessee, in order to determine what price might be obtained for all of the stock. Sometime shortly before May 1, 1958, Houchens began to discuss with E. H. Hatcher (hereinafter referred to as Hatcher) the purchase of the B. G. Wholesale, Inc., stock from the Comer interests. Hatcher is an accountant who has been employed since approximately 1926 by Washington Manufacturing Company and has done work for that company as well as other companies in which Comer has an interest. He was, during the years here involved, treasurer and a director of petitioner and has kept petitioner's books from the time of its organization throughout the years here involved. During the period involved in this case he was assistant secretary and director of First National Company, a trustee of the Foundation, assistant secretary and treasurer of Blue Ridge Shirt Manufacturing Company, and a director of the Dixie Manufacturing Company and of Mammoth Cave Garment Company. He supervised the accounting of the Foundation, First National Company, Blue Ridge Shirt Manufacturing Company, Dixie Manufacturing Company, Mammoth Cave Garment Company, and Huffines Shirt Company. Blue Ridge Shirt Manufacturing Company, 133 Dixie Manufacturing Company, Mammoth Cave Garment Company, and Huffines Shirt Company were garment manufacturers who leased machinery from petitioner. First National Company is a holding company and owns numerous subsidiary companies. During the years here in issue the only company from which Hatcher received a salary or other compensation was the Washington Manufacturing Company. On June 25, 1948, the 1,000 shares of B. G. Wholesale, Inc., stock which had originally been transferred to several of the corporations controlled by Comer were transferred to First National Company which on that date was owned by Comer. On November 30, 1950, First National Company transferred the 1,000 shares of B. G. Wholesale, Inc., stock to Merchants Warehouse Company for $100,000. Merchants Warehouse Company was also owned by Comer. On March 22, 1955, Merchants Warehouse Company transferred the 1,000 shares of B. G. Wholesale, Inc., stock to petitioner for $100,000. On December 10, 1957, petitioner obtained a loan of $750,000 from the First American National Bank in Nashville, Ennessee, executing a promissory note in that amount payable to the bank secured by the pledge of the 1,000 shares of134 common stock in B. G. Wholesale, Inc., which it had acquired in 1955. Petitioner's books and records reflect that the 1,000 shares of B. G. Wholesale, Inc., stock acquired in 1955 were donated by petitioner to the Foundation on February 28, 1958. On that date a special meeting of petitioner's board of directors was held and the minutes of that meeting reflect that the following resolution was passed unanimously: RESOLVED, that this corporation donate to Church of Christ Foundation, Inc. Certificate No. representing 1,000 shares of the common stock, having a par value of $100.00 a share, in B. G. Wholesale Company, Inc., a Kentucky corporation; and further RESOLVED, that the President or a Vice President and the Secretary or an Assistant Secretary endorse said certificate for transfer, affixing thereto necessary revenue stamps, and when so endorsed and stamped, deliver the same to the Officers of Church of Christ Foundation, Inc., taking the receipt of such Officers for said certificate of stock. If said shares are represented by more than one certificate, then all certificates aggregating 1,000 shares shall be endorsed and delivered; and further RESOLVED, that notice of this135 donation be at once given to the Stockholders of this corporation. On February 28, 1958, a special meeting of the trustees of the Foundation was held at which a resolution was passed pledging the 1,000 shares of capital stock of B. G. Wholesale, Inc., with the First American National Bank of Nashville, Tennessee, to secure the indebtedness of petitioner. The minutes of this meeting read in part as follows: The Chairman then stated that on the 28th day of February, 1958, First National Industries, Inc. donated to this Corporation 1,000 shares of the common capital stock, having a par value of $100.00 each, of B. G. Wholesale, Incorporated of Bowling Green, Kentucky, and that said shares had been transferred into the name of this corporation and were represented by Certificate No. 21. The Chairman further stated that First National Industries, Inc. was indebted to First American National Bank of Nashville for borrowed money evidenced by a note in the amount of $650,000.00, and this stock is held by them to secure this note. Since this corporation owned 87% of the capital stock of First National Industries, Inc. he felt it was for the best interest of this corporation to continue136 to use the said 1,000 shares of stock with said Bank to secure said indebtedness of its subsidiary. After a full discussion, it was, on motion duly seconded, unanimously. RESOLVED, that this corporation pledge to First American National Bank of Nashville 1,000 shares of the common capital stock of B. G. Wholesale, Incorporated, a Kentucky corporation, evidenced by Certificate No. 21, and that such pledge be on the terms and conditions set out in the collateral form note now in use by said bank; and further RESOLVED, that the President or a Vice President and the Secretary or Assistant Secretary have prepared and execute an irrevocable power of attorney for transfer of stock in reference to said shares of stock with the same to be in blank and to deliver said power of attorney together with said certificate of stock to said First American National Bank of Nashville; and further RESOLVED, that said officers are authorized and empowered to waive notice of any renewals or extensions of said note or execution of notes in payment of interest thereon, and generally to pledge said shares of stock for the security of said indebtedness of First National Industries, Inc. Petitioner's137 books reflect that on March 12, 1958, it paid $100,000 on the $750,000 note to the First American National Bank of Nashville, tennessee, and renewed the note for $650,000. The 1,000 shares of stock in B. G. Wholesale, Inc., had been assigned a value of $900,000 on the books of the Foundation and credited by the Foundation to donated surplus. Houchens had had no objection to petitioner's transferring the 1,000 shares of B. G. Wholesale, Inc., stock to the Foundation since in his view this was not a transfer of the stock outside of organizations controlled by Comer. On May 1, 1958, after a discussion between Hatcher and Comer wherein Hatcher stated that from the standpoint of the Foundation it would be advantageous to have as high a dividend as feasible declared on the B. G. Wholesale, Inc., stock but that in his discussion with Houchens, the latter had stated that in his opinion the money should be kept in B. G. Wholesale, Inc., for expansion, Comer instructed Hatcher to negotiate some form of agreement with Houchens with respect to the stock. Under date of May 3, 1958, Hatcher prepared on the Foundation stationery a letter to Houchens which read as follows: We are authorized138 to advise you that the terms on which we would be willing to have our 50% of the Common stock of B. G. Wholesale, Inc. and Subsidiaries retired have been approved on the basis we discussed, as follows: B. G. Wholesale, Inc. would retire our stock at 50% of the consolidated book value as of May 31, 1958 plus $300,000.00. Terms of payment 30% in cash. Balance payable over a five (5) year period, if needed. Interest on unpaid balance at the rate of 5% per annum. Unpaid balance can be paid in full any time after December 31, 1958 if you desire. Although no additional Federal income taxes are anticipated, it is understood that book value of May 31, 1958 would later be adjusted for any such contingency and any other undisclosed liabilities or assets. We believe this covers the substance of our discussion and details can be spelled out when formal contract is executed. We will appreciate written notification if you care to accept the proposal above outlined. The above offer will remain open until May 10, 1958. On May 8, 1958, Houchens addressed a letter to the Foundation to the attention of Hatcher, trustee, which read as follows: This letter will constitute my rejection139 of your offer of sale of 50% of the stock of the B. G. Wholesale, Inc., which offer was set for the in your letter of May 3, 1958. As a counter-offer I am proposing to sell to you the 50% of the common stock of B. G. Wholesale, Inc., owned by myself, Gilbert Biggers and Covella H. Biggers, under the same terms and conditions as set forth in your letter of May 3, 1958, with the exception that we shall retain as our exclusive property the trade name of "Houchens" and "Houchens, Inc.", and all brand names now used by the Houchens stores and markets. This counter-offer will remain open for your acceptance until May 17, 1958, at 12:00 noon and may be accepted by your notifying me in writing. After receiving Houchens' letter of May 8, 1958, Hatcher investigated certain sources of obtaining lines of groceries for the various stores, and after determining that such sources were available telephoned Houchens to inform him that the offer set forth in his letter of May 8, 1958, was acceptable to the Foundation. During this telephone conversation Houchens requested Hatcher to withhold acceptance of the offer contained in Houchens' letter of May 8, 1958, until the matter could be discussed140 with the board of directors of B. G. Wholesale, Inc. On May 13, 1958, Houchens addressed a letter to the Foundation for the attention of Hatcher, trustee, on stationery of B. G. Wholesale, Inc., signed in the name of B. G. Wholesale, Inc., by Houchens as president, which read as follows: We wish to withdraw our offer to sell our 50% of the Common Stock of the B. G. Wholesale, Inc., which offer was set forth in our letter of May 8, 1958. We hereby accept your offer to retire your 50% of the Common Stock of the B. G. Wholesale, Inc., as set forth in your letter of May 3, 1958, excepting that the unpaid balance shall be payable annually in an amount of not less than 50% of the net earnings of the Corporation, after taxes but before depreciation, with the Corporation reserving the right to pay all or any portion of the unpaid balance after May 31, 1959, with the unpaid balance bearing interest at the rate of 5% per annum, provided that we may purchase the 50% of the Common Stock of the Houchens Warehouse Corporation at Book Value as of May 31, 1958, which, according to stock record book, is owned by Merchants Warehouse Corporation; terms, cash upon determination of book value by141 auditors. You may proceed to have your attorney draw contract for our approval. On May 27, 1958, Houchens as president of B. G. Wholesale, Inc., the Foundation by Paul A. Hargis, Vice President, and the First American National Bank of Nashville, Tennessee executed a contract wherein B. G. Wholesale, Inc. agreed to redeem the 1,000 shares of its common stock held by the Foundation for a consideration of one-half of the consolidated book value of the outstanding stock of B. G. Wholesale, Inc., as of the close of business on May 31, 1958, plus the sum of $300,000. B. G. Wholesale, Inc., kept its books and records on the basis of a fiscal year ended May 31, and for this reason the contract was made effective as of May 31, 1958. Under the contract the agreed redemption price, which after the closing of the books was determined to be $955,374.29, was to be paid with a cash downpayment on or before June 16, 1958, of $250,000, and the balance to be evidenced by a promissory note of B. G. Wholesale, Inc., bearing interest at 5 percent. The contract further provided for the note being payable to the First American National Bank of Nashville, Tennessee as escrow agent and to be delivered142 to the bank with a copy of the contract executed by the three parties. The contract also provided for holding the stock in escrow until such time as the note was paid. The minutes of a special meeting of the trustees of the Foundation held September 23, 1958, state the following: The Chairman then stated that at a former meeting of this Board of Trustees, held February 28, 1958, Resolutions were passed pledging 1,000 shares of the common capital stock of B. G. Wholesale, Inc., of Bowling Green, Kentucky, with First American National Bank of Nashville, to secure indebtedness of First National Industries, Inc.; that this corporation owned 87% of the capital stock of First National Industries, Inc., and the Chairman thought it was the best interest of this corporation to support its subsidiary in any way possible; that subsequent to said meeting, said 1,000 shares of stock had been sold and a Promissory Note for $705,374.29 had been executed by B. G. Wholesale, Inc., dated May 31, 1958, payable in five equal annual installments beginning June 30, 1959, which Note was payable to American National Bank of Nashville, Tennessee as escrow agent. The Chairman called attention [to the fact] 143 that the correct name of the escrow agent was First American National Bank of Nashville but that he felt it was immaterial and the Note was accepted in this form as it was acting as escrow agent for this corporation. The Chairman further stated that First National Industries, Inc. was still indebted to First American National Bank of Nashville and desired to furnish security with that bank, and he suggested that this Board of Trustees authorize the pledging of said Note to secure any and all indebtedness now owing or hereafter created by Firstnational Industries, Inc. to First American National Bank of Nashville. After a full discussion, it was, on motion duly seconded, unanimously RESOLVED, that this corporation cause to be pledged to First American National Bank of Nashville that certain Note dated May 31, 1958, in the principal amount of $705,374.29, executed by B. G. Wholesale, Inc., payable to American National Bank of Nashville, Tennessee, as escrow agent, for Church of Christ Foundation, Inc., in five annual installments, with the first installment being due June 30, 1959, which Note bears interest at the rate of 5% per annum until paid, with interest being payable at the144 same time as principal; and further RESOLVED, that First American National Bank of Nashville, as escrow agent, using the name American National Bank of Nashville, Tennessee, be and it hereby is directed, authorized and empowered to endorse the aforesaid Note as escrow agent without recourse on itself, either individually or as escrow agent, and deliver the said Note to the commercial department of First American National Bank of Nashville, to be held by it in accordance with the pledge agreement set out on its ordinary form of Promissory Note for the security of any and all indebtedness to it of First National Industries, Inc. now owing or hereafter created, and that this pledge continue until all indebtedness of First National Industries, Inc. is paid in full, but in the event of default with the right of said bank to proceed to collect said Note in any manner provided by law and apply the proceeds to the payment of said indebtedness; and further RESOLVED, that the President or a Vice President, and the Secretary or an Assistant Secretary, give to First American National Bank of Nashville, in the name of this corporation, such instructions as said bank may request and confirm such145 instructions from time to time thereafter at the request of said bank, and do all other things necessary or proper to fully pledge said Note with said bank as security for indebtedness of First National Industries, Inc. The books and records of the Foundation reflect that on June 19, 1958, it received $250,000 in cash from B. G.Wholesale, Inc., and on the same day paid $250,000 in cash on its indebtedness of $452,927.40 to First National Company. On June 19, 1958, the records of First National Company show that that company made payments on its indebtedness to Blue Ridge Shirt Manufacturing Company, Dixie Manufacturing Company, Mammoth Cave Garment Company, and McEwen Manufacturing Company in the respective amounts of $50,000, $100,000, $50,000 and $50,000. During the years involved in this case First National Company owned all the outstanding stock of these four corporations. Petitioner's books and records reflect that on June 19, 1958, it received from Blue Ridge Shirt Manufacturing Company, Dixie Manufacturing Company, Mammoth Cave Garment Company, and McEwen Manufacturing Company, payments in the respective amount of $50,000, $100,000, $50,000 and $50,000 to be applied to146 the indebtedness of those companies to petitioner. Petitioner's records also reflect that on June 19, 1958, it paid $250,000 on its note to the First American National Bank of Nashville, Tennessee, secured by the 1,000 shares of common stock of B. G. Wholesale, Inc., thus reducing this note to $400,000. Petitioner's records further reflect that on October 9, 1958, it executed a new note to the First American National Bank of Nashville, Tennessee in the amount of $700,000, consolidating the $400,000 note renewed on June 18, 1958 with another note of $300,000 and receiving $100,000 of newly borrowed cash. On March 5, 1959, the First American National Bank of Nashville, Tennessee purchased the promissory note of B. G. Wholesale, Inc., dated May 31, 1958, in the amount of $705,374.29 for the face amount of the note plus interest thereon in the amount of $27,235.29; and on this same date the Foundation recorded on its books and records receipt of a cash payment in these two amounts. On this same day, the Foundation recorded on its records an advance of $700,000 to First National Company. The records of First National Company show that on March 5, 1959, it paid on its indebtedness to147 Dixie Manufacturing Company, Mammoth Cave Garment Company, and McEwen Manufacturing Company, the respective amounts of $200,000, $300,000, and $200,000, and the records of petitioner show that on March 5, 1959, it received payments from those same three companies in the respective amounts of $200,000, $300,000, and $200,000 to be applied to the indebtedness of those companies to petitioner. Petitioner's records further reflect that on March 5, 1959, petitioner paid $700,000 on its note to the First American National Bank of Nashville, Tennessee. The 1,000 shares of common stock in B. G. Wholesale, Inc., pledged to the First American National Bank of Nashville by petitioner on December 10, 1957, as collateral on its note of $750,000 was assigned to the bank in negotiable form and continued to be so assigned as collateral for petitioner's indebtedness to the bank until March 5, 1959, when petitioner's outstanding note of $700,000 was paid. On March 5, 1959, the stock was released from petitioner's account and transferred to the liability account of B. G. Wholesale, Inc., as collateral on its note of May 31, 1958, which the bank had purchased on March 5, 1959. The stock was released148 by the bank to B. G. Wholesale, Inc., on July 5, 1962, when that corporation's note was paid in full. The books and records of petitioner and the other companies owned or controlled by Comer or the Foundation with which it had transactions as heretofore set out were kept in the ordinary courses of the respective businesses of those corporations and the various entries were made in the ordinary courses of business of those corporations. These corporations had intercompany transactions which resulted in indebtedness arising among them and these corporations also customarily borrowed from or made advances to each other. Amounts shown as indebtedness of one corporation to another corporation on the various corporate books were the results of these intercompany transactions or loans. The revenue agent who examined the books and records of the Foundation and of petitioner and of a number of the other corporations referred to in these findings found the books and records of the various corporations in excellent shape and found intercompany transactions meticulously reported. He found no attempt to cover up or hide any transactions. Payments by one of the various companies to another of149 those companies, including those heretofore set out, were made by checks drawn on the bank account of the company making the payment. Commencing in 1957 B. G, Wholesale, Inc., was paying dividends of 25 percent on its outstanding stock. The dividends on the 1,000 shares of stock owned by petitioner at that time thus amounted to $25,000. During the years 1954 through 1958 the Foundation had made contributions to various religious, charitable, and educational organizations in a total amount of approximately $116,000 in excess of the donations which had been made to the Foundation. Petitioner on its Federal income tax return, filed for its fiscal year ended January 31, 1959, reported as taxable income before special deduction, a loss of $43,445.97 and showed a special deduction for partially taxexempt interest in an amount of $5,779.54 with a resulting loss of $49,225.51. Petitioner took no deduction for contributions or gifts in the computation of its loss but on schedule H it showed under the designation, "Contributions or Gifts Paid," an amount of $100,000 as an amount paid to the Church of Christ Foundation, and on schedule M, "Reconciliation of Taxable Income and Analysis of150 Earned Surplus and Undivided Profits," it showed as contributions in excess of 5 percent limitation the amount of $100,000. On April 15, 1959, petitioner filed an application for a tentative carryback adjustment for the loss of $49,225.51 reported on its Federal income tax return for its fiscal year ended January 31, 1959. The claimed tentative carryback adjustment was allowed by respondent, and on May 13, 1959, petitioner was refunded $15,015.11 of the amount paid by it as income tax for its fiscal year ended January 31, 1957, plus interest on such refund in the amount of $199.51. Respondent in his notice of deficiency increased petitioner's taxable income as reported for its fiscal year ended January 31, 1959, by the amount of $600,000 shown as "long-term capital gain" with the following explanation: It is determined that you realized a long-term capital gain in the amount of $600,000.00 on the disposition of your interest, during the fiscal year ended January 31, 1959, in 1,000 shares of stock of Bowling Green Wholesale, Incorporated, the computation of which is as follows: Proceds$700,000.00Basis of stock100,000.00Long-term capital gain realized$600,000.00151 Accordingly, your taxable income is increased in the amount of $600,000.00. Respondent increase petitioner's income for its fiscal year ended January 31, 1957, by the amount of the net operating loss carryback from its fiscal year ended January 31, 1959 to its fiscal year ended January 31, 1957, which had been previously tentatively allowed with the explanation that this carryback loss had been disallowed since it had been determined that petitioner sustained no net operating loss for its taxable year ended January 31, 1959. Opinion Respondent takes the position that in substance the sale of the B. G. Wholesale, Inc., stock by the Foundation was a sale by petitioner and therefore the gain is that of petitioner. However, in accordance with the stipulation of the parties, respondent is not contending for any greater gain than the $600,000 as determined in the notice of deficiency. Respondent's alternative position is that petitioner's transfer of the B. G. Wholesale, Inc., stock to the Foundation, subject to petitioner's loan at the bank, resulted in a gain to petitioner to the extent that the loan exceeded petitioner's basis in the stock. Petitioner maintains that the B. G. 152 Wholesale, Inc., stock was donated to the Foundation on February 28, 1958, to enable the Foundation, which at that time it considered to be an exempt organization, to use the dividends from the stock as a supplement to the cash donations it received to maintain or increase the amount of its contribution to churches and their charitable and educational affiliates. It is petitioner's position that at the time it donated the stock to the Foundation there existed no agreement for the sale of the stock, that the ultimate sale of the stock was negotiated and carried through by the Foundation, and that the gain was that of the Foundation and not of petitioner. Petitioner contends that it realized no income upon the transfer of the stock to the Foundation even though the stock remained pledged with the First American National Bank of Nashville as security for petitioner's loan. Petitioner argues that since it remained liable on the note and the Foundation neither assumed nor ultimately paid the indebtedness for which the stock was pledged, no income could result upon the transfer of the stock subject to the liability. It is petitioner's position that it is immaterial whether in fact the Foundation153 was an exempt organization at the time the transfer was made since petitioner's belief that it was such an organization was sufficient to show a donative intent on the part of petitioner upon the transfer of the stock and thus cause the transfer to be one which resulted in no gain to petitioner. There are a number of cases dealing with whether gain is taxable to the transferor of property which is sold by the transferee immediately after its transfer. In many of these cases, relying on Commissioner v. Court Holding Company, 324 U.S. 331">324 U.S. 331 (1945), and the numerous cases applying the principle announced therein, the Commissioner contends as he does here that although in form the sale is made by the transferee, in substance it is the sale of the transferor. Where a contract of sale has been negotiated prior to the transfer, the cases generally consider the sale in substance to be that of the transferor. Commissioner v. Court Holding Company, supra; John E. Palmer, 44 T.C. 92">44 T.C. 92 (1965), affirmed per curiam, 354 F. 2d 974 (C.A. 1, 1965); and 154 Harry C. Usher, Sr., 45 T.C. 205">45 T.C. 205 (1965). Where the transferor has entered into negotiations with respect to a sale but no contract of sale has resulted from these negotiations, the sale is generally not considered to be that of the transferor unless other circumstances are such as to indicate a lack of substance in the transaction. Oahu Beach & Country Homes, Ltd., 17 T.C. 1472">17 T.C. 1472 (1952), and Sheppard v. United States, 361 F. 2d 972 (Ct. Cls., 1966). From the facts in the instant case, we conclude that although petitioner's officers were aware at the time the stock was transferred to the Foundation that it was quite likely to be sold to Houchens or redeemed by the corporation in the near future, there did not exist any contract for the sale of the stock at the date of its transfer. Under these circumstances, had there been no encumbrance on the stock when it was transferred and were we to conclude that the stock was a bona fide contribution to the Foundation or a dividend to the indirect owner of 87 percent of petitioner's stock, we would agree with petitioner that no gain resulted to it from the transfer. If no encumbrance were on the stock when155 it was transferred, it would be immaterial in this case whether the transfer of the stock was a contribution or a payment to petitioner's stockholders with respect to their stock since no issue of a claimed deduction for a charitable contribution is here in issue. Cf. Crosby Valve & Gage Co., 46 T.C. 641">46 T.C. 641 (1966), on appeal (C.A. 1, Jan. 1, 1967). If property which has appreciated in value is transferred by a taxpayer to discharge an obligation, such taxpayer realizes a gain from the transfer to the extent that the value of the obligation discharged exceeds his basis in the property. A gift of property that has appreciated in value does not result in income to the donor taxpayer, Humacid Co., 42 T.C. 894">42 T.C. 894, 913 (1964), but where property is donated subject to a mortgage the circumstances of the transfer may be such that a gain does result to the donor. Joseph B. Simon, 32 T.C. 935">32 T.C. 935 (1959), affd. 285 F. 2d 422 (C.A. 3, 1960). Since the amount of the mortgage on property is part of its sale price even though the purchaser does not assume156 the mortgage, Crane v. Commissioner, 331 U.S. 1">331 U.S. 1 (1947), on the theory that the purchaser will be required in some way to discharge the mortgage, a transfer of property subject to a mortgage may be in substance a receipt by the transferor of the amount of the mortgage on the property if the transferee does in fact pay the indebtedness secured by the mortgage. See Joseph B. Simon, supra. Petitioner contends that in the instant case the Foundation did not in fact pay the note secured by the B. G. Wholesale, Inc., stock which petitioner transferred to it. Petitioner states that it contributed "the stock" to the Foundation and not merely "its equity" in the stock. Even though the resolution passed by petitioner's directors was for a contribution of the stock, all petitioner had any ability to contribute at that time was "its equity" in the stock since the stock was pledged with the bank to secure petitioner's note for $750,000. The stock was assigned to the bank in negotiable form. It could not have been transferred to the Foundation without the agreement of the bank. The Foundation left the stock assigned to the bank to secure petitioner's note. Unless petitioner157 had either paid the note or put up other collateral satisfactory to the bank which there is no indication in the record it even considered doing at the time of the transfer, the bank would not have temporarily released the stock to permit title to be transferred to the Foundation without the agreement of the Foundation to assign the stock as security for petitioner's note. In substance, accepting petitioner's contention that it made a contribution of the stock to the Foundation in February 1958, all it did contribute was "its equity" in the stock. Petitioner remained the obligor on the note and ultimately petitioner paid the note with funds which came in effect from the sale of the stock. This indirect advance by the Foundation to petitioner with which petitioner paid the note for which the stock was security occurred after the close of petitioner's fiscal year ended January 31, 1959. From the time the title to the stock was transferred by petitioner to the Foundation in February 1958 until March 5, 1959, the Foundation held the stock subject to its assignment to the bank as security for petitioner's loan. After the contract for the redemption of the stock was entered into, the bank158 continued to hold the stock in assigned form until the note given by G. B. Wholesale, Inc., as part of the redemption price had been paid in full when the bank purchased the B. G. Wholesale, Inc., note from the Foundation and petitioner with $700,000 of the funds from this purchase paid its note for which the stock was security, and the bank transferred the stock from petitioner's account to that of B. G. Wholesale, Inc. The facts show that all the money which the Foundation received from B. G. Wholesale, Inc., in payment for its stock found its way to petitioner and was used by petitioner to discharge its indebtedness to the bank. The first $250,000 of the payment received from B. G. Wholesale, Inc., which is not directly involved in this case, was used by the Foundation to pay a debt to the First National Company, all of the common stock of which the Foundation owned directly and most of the preferred stock of which it owned directly or indirectly. The First National Company used the $250,000 as payment on its indebtedness to four companies, all of the outstanding stock of each of which it owned, which four companies forthwith paid the same amounts on their indebtedness to petitioner. 159 Upon the sale of the B. G. Wholesale, Inc., note which the Foundation received as the remaining portion of the redemption price of the stock, the Foundation advanced $700,000 of the funds received to the First National Company which paid this amount on its indebtedness to three of the same four corporations which then paid petitioner the same amounts on their indebtednesses to petitioner. Petitioner forthwith paid its note to the First American National Bank of Nashville. In substance, the $700,000 which petitioner used to pay the note was part of the redemption price of the stock. The $700,000 was advanced by the Foundation to First National Company which owned all of petitioner's common stock. In form First National Company used the $700,000 to discharge that amount of its indebtednesses to corporations, all the stock of which it owned, and these corporations discharged their indebtednesses to petitioner. In substance the $700,000 was used to pay petitioner's note which was secured by the B. G. Wholesale, Inc., stock. "[By] this roundabout process petitioner received the same benefit" as though the Foundation had directly paid its note. Minnesota Tea Co. v. Helvering, 302 U.S. 609">302 U.S. 609 (1938).160 The Foundation obtained no more advantage from receipt of the $700,000 than it would have obtained had it directly paid petitioner's note except for having on its books $700,000 as an advance to First National Company. There is no showing in the record that First National Company has or ever intends to repay this advance. We conclude that the intent and plan of petitioner's officers and directors when petitioner transferred the B. G. Wholesale, Inc., stock to the Foundation was that the stock, or proceeds from its sale, would be used to discharge petitioner's note to the First American National Bank of Nashville. Even though petitioner's indebtedness to the bank was not assumed by the Foundation, the Foundation took the stock subject to the indebtedness under such circumstances as to amount to an understanding and agreement that in effect the stock or proceeds from its sale would be used to discharge petitioner's indebtedness to the bank and in effect petitioner sold the stock to the Foundation for the amount of its note which at the time was $750,000. Since the Foundation indirectly owned 87 percent of petitioner's stock, petitioner's transfer of the stock to the Foundation might161 be considered to be in the nature of a dividend. Section 311(a) of the Internal Revenue Code of 19541 codifies the generally accepted law under the 1939 Code, that a corporation realizes no gain or loss upon the distribution of property with respect to its stock. However, one of the exceptions to this general rule is contained in section 311(c)2 which provides that if a corporation distributes property to a shareholder with respect to its stock, such property is subject to a liability and the amount of such liability exceeds the adjusted basis of such property in the hands of the distributing corporation, gain shall be recognized to the distributing corporation in an amount equal to such excess as if the property distributed had been sold at the time of the distribution. 162 If petitioner's transfer of its stock to the Foundation were considered to be in substance a distribution of a dividend to the indirect owner of 87 percent of its stock as distinguished from a contribution, the language of the Statute would require the recognition of a capital gain at least to the extent determined by respondent. Petitioner's contention that the stock was transferred to the Foundation to enable the Foundation to receive dividends is unimpressive since the clear inference from the record is that petitioner's management was aware of the likelihood of the stock being disposed of in the near future if the owner of the stock insisted on reasonably high dividends. The lack of any intention to assist the corporation, at least to the extent of the amount of petitioner's note for which the B. G. Wholesale, Inc., stock was security, is indicated by the immediate advance of $700,000 of the funds the Foundation received upon the sale of the B. G. Wholesale, Inc., note to the bank to First National Company from which the $700,000 found its way to pay petitioner's note. The same day the Foundation sold the B. G. Wholesale, Inc., note to the bank, petitioner's note to the same*163 bank was paid by a portion of the funds from the sale. We agree with respondent that the substance of the transaction whereby petitioner transferred the stock to the Foundation was a sale by petitioner of the stock for an amount of at least $700,000. We therefore sustain respondent's determination that petitioner realized a capital gain in this amount from the transfer of the B. G. Wholesale, Inc., stock to the Foundation in its fiscal year ended January 31, 1959. Decision will be entered for respondent. Footnotes1. SEC. 311. TAXABILITY OF CORPORATION ON DISTRIBUTION. (a) General Rule. - Except as provided in subsections (b) and (c) of this section and section 453(d), no gain or loss shall be recognized to a corporation on the distribution, with respect to its stock, of - (1) its stock (or rights to acquire its stock), or (2) property. ↩2. Sec. 311(c) Liability in Excess of Basis. - If - (1) a corporation distributes property to a shareholder with respect to its stock, (2) such property is subject to a liability, or the shareholder assumes a liability of the corporation in connection with the distribution, and (3) the amount of such liability exceeds the adjusted basis (in the hands of the distributing corporation) of such property, then gain shall be recognized to the distributing corporation in an amount equal to such excess as if the property distributed had been sold at the time of the distribution. In the case of a distribution of property subject to a liability which is not assumed by the shareholder, the amount of gain to be recognized under the preceding sentence shall not exceed the excess, if any, of the fair market value of such property over its adjusted basis.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625077/	APPEAL OF TRANSATLANTIC CLOCK & WATCH CO.Transatlantic Clock & Watch Co. v. CommissionerDocket No. 4897.United States Board of Tax Appeals3 B.T.A. 1064; 1926 BTA LEXIS 2506; March 30, 1926, Decided Submitted December 7, 1925. 2506 The taxpayer corporation set up a reserve for bad debts at the close of its fiscal year ended September 30, 1922, in the amount of $5,000. In its income-tax return for such fiscal year it deducted from gross income $4,302.14 on account of bad debts ascertained to be worthless and charged off during the year, and in addition the $5,000 set up as a reserve for bad debts at the close of the year. Held, that the taxpayer was entitled to the deduction of only a reasonable addition to a reserve for bad debts and not to the deduction of debts ascertained to be worthless plus an addition to the reserve. Barnett Briskin, C.P.A., for the taxpayer. F. O. Graves, Esq., for the Commissioner. SMITH 1064 Before SMITH, LITTLETON, and TRUSSELL. This is an appeal from the determination of a deficiency for the fiscal year ended September 30, 1922, in the amount of $1,093.76. The point in issue is the right of the taxpayer to deduct from gross income $5,000, representing a reserve for bad debts set up at the close of the year, in addition to $4,302.14, representing bad debts ascertained to be worthless and charged off during the year. FINDINGS OF2507 FACT. The taxpayer is a New York corporation with its principal office at New York City. The taxpayer's books were kept and its income-tax returns made on a fiscal year basis ending September 30, 1921, September 30, 1922, and September 30, 1923. It is engaged in the business of importing and selling clocks and watches. Its customers are located throughout the United States. Its gross sales for the year ended September 30, 1921, September 30, 1922, and September 30, 1923, were $292,033.22, $756,902.53, and $783,914.62, respectively. Its accounts receivable at the close of the years indicated were $75,312.42, $114,872.46, and $133,345.50, respectively. In its income-tax return for the fiscal year ended September 30, 1921, it claimed as a deduction from gross income $2,858.42 on account of debts ascertained to be worthless and charged off within the taxable year. In its return for the succeeding fiscal year it claimed as a deduction for bad debts $9,302.14, of which amount $4,302.14 represented accounts ascertained to be worthless and charged off within the year, and the balance represented a reserve for bad debts set up at the close of the year, this return being the2508 1065 first one made by it after the enactment of the Revenue Act of 1921, which permitted taxpayers to set up a reserve for bad debts. In a schedule attached to the taxpayer's return for this fiscal year (ended September 30, 1922), the taxpayer said: After charging off to Expense $4,302.14 for Bad Debts, there were still over $11,000.00 of the accounts receivable over 90 days past due, and it is estimated that not more than half of this amount will be collected, and since the total amount of the accounts receivable is over $109,000, we believe $5,000 will be no more than enough to cover the losses through bad debts. In its income-tax return for the fiscal year ended September 30, 1923, the taxpayer claimed as a deduction on account of bad debts $8,996.76. In a schedule attached to its return and made a part thereof it explained the bad debts deduction as follows: Schedule 18 - bad debts.Reserve for Bad Debts, Oct. 1, 1922$5,000.00Bad Debts, previously reported as Income, ascertained to be worthless through failure, etc., charged against Reserve for Bad Debts during taxable year8,996.76Balance, September 30, 1923$3,996.76Add: Provision for Bad Debts - 1.15% of Sales8,996.76Balance in Reserve, September 30, 1923$5,000.002509 This Reserve is to take care of an outstanding accounts receivable of $133,345.50, of which $12,615.53 is doubtful accounts from which it is expected not more than 50% will be realized. The taxpayer's books of account for the fiscal year ended September 30, 1922, showed a reserve for bad debts at the close of the year in the amount of $5,000. In submitting a balance sheet to the Commissioner in connection with its income-tax return for that year, it did not show the reserve for bad debts specifically as such, but deducted from the accounts receivable the $5,000 in question. OPINION. SMITH: During the years 1920 to 1923 the taxpayer's business increased rapidly. The taxpayer dealt with customers throughout the United States. Its experience showed that a considerable percentage of accounts which had been uncollected for more than 90 days were never collected. Prior to the enactment of the Revenue Act of 1921 it was not permitted to deduct from gross income any amount set up as a reserve for bad debts. In lieu thereof it claimed in its returns the deduction from gross income of debts actually ascertained to be worthless and charged off during the taxable year. 1066 2510 When it came time for it to make up its return for the fiscal year ended September 30, 1922, the Commissioner's Regulations 62 had been promulgated, which permitted a taxpayer, under certain circumstances, to set up a reserve for bad debts and deduct the addition thereto from gross income. The provision of the Revenue Act of 1921 which permits a corporation taxpayer to deduct from gross income a reserve for bad debts is section 234(a)(5), which reads as follows: Debts ascertained to be worthless and charged off 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 to be charged off in part. In his answer to the taxpayer's petition the Commissioner alleges that the deduction by the taxpayer of a reasonable addition to a reserve for bad debts is allowable only in the discretion of the Commissioner; that when a taxpayer elects to claim as a deduction an addition to a reserve for bad debts there should be set up at the beginning of the year a reserve for the doubtful accounts already contained in the accounts receivable, and2511 the net addition to this reserve should be made during the taxable year and prior to the date of the closing of the books for that year. The real question presented by this appeal is whether a taxpayer changing from the basis of claiming as a deduction from gross income debts actually ascertained to be worthless to a deduction of a reasonable addition to a reserve for bad debts may, for the year in which the change is made, deduct both debts ascertained to be worthless during the year and a reserve set up for bad debts at the close of the year. We are of the opinion that the statute does not permit such a deduction. The income tax and excess-profits tax are each computed upon the basis of a 12-month period. A return for such period must reflect the actual gains, profits, and income of such period. Manifestly, a taxpayer which claims the deduction of a greater amount for debts ascertained to be worthless than properly belongs to such year is claiming a benefit not warranted by the statute. In the instant appeal the taxpayer has elected to deduct from gross income a reasonable addition to a reserve for bad debts. We are of the opinion that it is entitled to such deduction, but2512 not to the deduction of such an addition to a reserve for bad debts and also debts ascertained to be worthless during the year. The evidence of record shows that for the fiscal years ended September 30, 1921 to 1923, inclusive, gross sales were $292,033.22, 1067 $756,902.53, and $783,914.62, respectively. Debts ascertained to be worthless during the period total $16,157.32, or approximately .0088 per cent of gross sales. This computation does not take into account the large increase in gross sales during the last two years of the three-year period. We think that a reserve of 1 per cent of gross sales is a reasonable addition to a reserve for bad debts for each of the fiscal years ended September 30, 1922, and September 30, 1923. Upon this method of computation the taxpayer's bad-debt reserve at the close of each of the fiscal years ended in 1922 and 1923 would be as follows: Year ending Sept. 30, 1922:Bad-debt reserve, 1 per cent of sales$7,569.03Amount charged against such reserve4,302.14Balance in reserve3,266.89Year ending Sept. 30, 1923:Additions to bad-debt reserve, 1 per cent of sales7,839.15Total11,106.04Amount charged against reserve8,996.76Balance in reserve2,109.282513 We think, therefore, that the taxpayer is entitled to a deduction of a reasonable addition to reserve funds for the fiscal year ended September 30, 1922, of $7,569.03, and that this amount is inclusive of $4,302.14 claimed as a deduction for debts ascertained to be worthless and charged off within the year. Order of redetermination will be entered on 10 days' notice, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625078/	H. L. CARNAHAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Carnahan v. CommissionerDocket No. 34915.United States Board of Tax Appeals21 B.T.A. 893; 1930 BTA LEXIS 1775; December 23, 1930, Promulgated 1775 Taxpayer, on the cash receipts and disbursements basis, received a certificate of stock prior to tax year for legal services rendered to promoters of a corporation, which he immediately deposited in escrow according to State law and by order of the commissioner of corporations of the State. The certificate was not released to him until during the tax year. Taxpayer voted the stock during the escrow period and received dividends thereon, but he could not sell or transfer it without the written consent of the commissioner of corporations during that period. Held, the stock constituted income in the year in which the certificate was received by the petitioner. Lawrence H. Cake, Esq., for the petitioner. B. M. Coon, Esq., for the respondent. MCMAHON 893 This is a proceeding for the redetermination of a deficiency in income tax for the year 1924 in the amount of $762.81. The following errors are alleged: (1) Respondent erred in amending the petitioner's return of income for 1924 by adding thereto the value of 5,000 shares of the common stock of the Union Mortgage 894 Co. of California, the said shares having been received by the1776 petitioner in 1922 as compensation for personal services and held in escrow until 1924; (2) respondent erred in finding that the release of the said shares of stock from escrow in 1924 constituted an accrual of income to the petitioner in 1924. FINDINGS OF FACT. The petitioner is an individual, resident of Los Angeles, Calif.The Union Mortgage Co. of California is a corporation organized under the laws of Delaware during 1921, having an authorized capital stock consisting of 500,000 shares of preferred stock of the par value of $10 per share, without voting power, and 500,000 shares of common stock of no par value. Under the "Blue Sky Law" of California, called the "Corporate Securities Act," adopted in 1917, the company, before selling or issuing any shares of its capital stock in California, was required to secure from the commissioner of corporations a permit authorizing it to do so, in which permit the commissioner was authorized to provide the terms and conditions upon which the stock thereby authorized should be sold or issued. The Union Mortgage Co. being desirous of obtaining such a permit, accepted a written proposal made to it by Berman and Aldrich. The substance1777 of this proposal was that for 100,000 shares of its common stock, Berman and Aldrich would procure suitable offices, engage the necessary office help and, during 1922, supervise the preparation of all necessary legal forms and the purchase of securities by the company, and otherwise act as its general managers. As the shares of stock were sold in units of one preferred and one common, one share of common was to be issued to the promoters for each unit sold until the 100,000 shares had been issued. January 13, 1922, the commissioner of corporations issued a permit to the company, authorizing it to sell 100,000 shares of preferred and 100,000 shares of common in units of one share of preferred and one of common at $12.50 per unit. In each subscription for shares under the permit, the subscriber agreed to pay $10, the par value thereof, for each share of preferred subscribed, and the balance ($2.50) of the subscription price of $12.50 per unit for the common share subscribed therewith. One of the conditions of the permit was that "when issued, all certificates evidencing any of the shares herein in paragraph 2nd authorized to be issued to R. L. Aldrich and J. Berman, shall be1778 forthwith deposited with a depositary to be selected by said certificate holders and approved by the commissioner of corporations to be held as an escrow pending the further order of said commissioner; 895 that the receipt of such depositary for such certificates shall be filed with said commissioner and that while said certificates shall be so held, the holders of the shares evidence thereby shall not sell or offer for sale, or other wise transfer, or agree to sell or transfer such shares, until the written consent of said commissioner shall have been obtained so to do." During all the time herein mentioned prior to January 1, 1924, the petitioner and Oliver O. Clark were equal partners in the practice of law under the firm name of Carnahan & Clark, in Los Angeles, Calif. In December, 1921, the firm was employed under an oral contract by Berman and Aldrich to render such legal services to the corporation as might be required by it or by Berman or Aldrich in performing their agreement with it above mentioned. For such services Berman and Aldrich agreed to transfer to the petitioner, for his partner and himself, and the petitioner agreed to accept, when and as the same should1779 be issued by the corporation, 10,000 of the 100,000 shares of the common stock to be issued to them under the permit. The required services were performed prior to and during 1922. Berman and Aldrich, about March 14, 1922, executed and delivered to the petitioner an interim trust certificate. On May 11, 1922, the commissioner of corporations, in accordance with the conditions of the permit, consented in writing to the transfer by Berman and Aldrich to the petitioner, when and as issued, of 10 per cent of the 100,000 shares to be issued to them. In accordance with the permit and certificate of Berman and Aldrich, and the consent of the commissioner, the corporation issued to the petitioner in his name, December 14, 1922, its certificate of stock No. 344 for 10,000 shares of its common stock. This certificate when received by the petitioner, was deposited by him (in accordance with the condition of the permit) with a depositary selected by the petitioner and approved by the commissioner, to be held by it as an escrow pending the further order of the commissioner. The depositary continued to hold the certificate until January 17, 1924, when the escrow was terminated by the commissioner1780 by an order and the certificate was then redelivered to the petitioner. The petitioner himself had formerly occupied the position of commissioner of corporations. As to stock deposited in escrow the practice was to permit transfers to be made except in cases where it affirmatively appeared to the commissioner that such transfers would be to the detriment of the corporation or were actually in effect fraudulent as between the parties to the transfer. In February, 1924, Clark transferred his half of the stock to A. L. Irish, and they requested the petitioner to have the same transferred to A. L. Irish on the books of the corporation. Before the 896 transfer was made, the petitioner purchased such 5,000 shares from A. L. Irish for $12,500, paying $2,500 in cash and giving an interest-bearing promissory note payable to him on or before one year thereafter for $10,000. Said note was paid prior to maturity. Since such purchase, the petitioner has resold from time to time all of the 5,000 shares so purchased, except 100 shares. No part of the 5,000 shares originally received by the petitioner in 1922 has been sold or otherwise disposed of. The petitioner was on the cash1781 receipts and disbursements basis. Dividends were paid to the petitioner on the stock held in escrow in October, 1923, and he voted the stock during all the time it was held in escrow. OPINION. MCMAHON: There is only one question involved in this case and that is, did the 5,000 shares of stock received by the petitioner as compensation for services rendered to the promoters of the corporation constitute income to him in 1922, when the stock was deposited in escrow, or in 1924, when it was finally released from the escrow, the petitioner being on a cash receipts and disbursement basis? The respondent, in computing petitioner's income for 1924, included the value of the shares as income and the petitioner contends that such action was erroneous. The Union Mortgage Co. of California, a Delaware corporation, before selling or issuing its stock in California, was required under the "Blue Sky Law" of that State to secure a permit from the commissioner of corporations. This corporation employed two promoters, Berman and Aldrich, to act as its general managers, for which they were to receive a maximum of 100,000 shares of the common stock of the corporation. Whenever shares of1782 common stock of the corporation were sold the promoters were to receive a like number of shares. The promoters in 1921 entered into an oral agreement with the partnership of Carnahan & Clark, of which the petitioner was a member, to the effect that the partnership was to render such legal services to the corporation as might be required, for which it was to receive 10,000 shares of the 100,000 to be issued to the promoters. Such services were performed either during or prior to 1922 and in March, 1922, Berman and Aldrich delivered an interim trust certificate to the petitioner for himself and his partner. Later on, in the same year, a certificate of stock for the 10,000 shares was issued by the corporation to the petitioner and was immediately deposited, in accordance with the terms of the permit issued by the commissioner of corporations, with a depositary. The only shares 897 in dispute are the original 5,000 issued to the petitioner as his portion of the partnership fee for services rendered. The evidence discloses that during all the time the stock in question was held in escrow the petitioner voted it and received the dividends thereon. Furthermore the petitioner1783 received the certificate for stock in his own name and deposited it in escrow in accordance with the requirements of the State law. The petitioner received all the benefits possible from the stock in question except the right of actual physical possession and unrestricted power of sale thereof. It is possible that the petitioner could have sold the stock by obtaining permission of the commissioner of corporations of the State. The evidence shows that as to stock deposited in escrow the practice was to permit transfers to be made except where it affirmatively appeared to the commissioner that such transfers would be to the detriment of the corporation or were actually in effect fraudulent as between the parties to the transfer. From a careful consideration of the proceeding, it is our opinion that the stock in question was income to the petitioner in the year 1922 and the respondent erred in taxing it to the petitioner in the year 1924. Reviewed by the Board. Judgment will be entered for the petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625080/	JOEL DRUM AND JOSEFA RITA DRUM, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentDrum v. CommissionerDocket No. 7428-93United States Tax CourtT.C. Memo 1994-433; 1994 Tax Ct. Memo LEXIS 443; 68 T.C.M. (CCH) 595; August 25, 1994, Filed 443 Decision will be entered under Rule 155. H, an attorney, moved to Sacramento, California, from Los Angeles, California, in 1985 to work for law firm 1. H's wife, W, remained in Los Angeles and worked for law firm 2. H quit his job in 1989 and primarily pursued a graduate degree at a school in Sacramento. On Dec. 16, 1989, following 14 months of virtual unemployment in Sacramento, H began working for law firm 2 under a 1-year employment contract. H rented a house in the Los Angeles area during this employment. H resided in the house with W, who owned a house in the area and who continued to work for law firm 2. H went back to Sacramento in Nov. 1990. He returned to Los Angeles in May 1991 to operate law firm 2 which he had purchased. Held: H and W failed to prove that Los Angeles was not their tax home during 1990; thus, we sustain R's determination that sec. 162(a)(2) does not allow H and W to deduct the rental payments for the house in the Los Angeles area. Held, further, we sustain R's determination of an accuracy-related penalty under sec. 6662(a) with respect to H and W's deduction of these payments. Joel Drum and Josefa Rita Drum, pro sese. For respondent: 444 John Y. Chinnapongse. LAROLAROMEMORANDUM OPINION LARO, Judge: This case is before the Court pursuant to a petition filed by Joel Drum and Josefa Rita Drum to redetermine respondent's determination of a $ 5,525 deficiency in their 1990 Federal income tax and a $ 1,105 addition thereto under section 6662(a). Section references are to the Internal Revenue Code in effect for the year in issue. Rule references are to the Tax Court Rules of Practice and Procedure. Joel Drum and Josefa Rita Drum are collectively referred to as petitioners and are separately referred to as Mr. Drum and Mrs. Drum, respectively. The parties submitted the case to the Court fully stipulated. See Rule 122(a). Following concessions, 1 we must decide: (1) Whether petitioners may deduct certain lease payments for a home in Encino, California, as traveling expenses under section 162(a)(2). We hold that they may not. (2) Whether petitioners are liable for an addition to tax under section 6662(a). We hold that they are. 445 BackgroundThe facts in the joint stipulation and accompanying exhibits are incorporated herein by this reference. When they filed their petition in this case, petitioners resided in Van Nuys, California. Petitioners were husband and wife during the year in issue. They filed a 1990 Form 1040, U.S. Individual Income Tax Return, and used the filing status of "Married filing joint return". Petitioners were married in 1985. In August 1985, while living in Los Angeles, Mr. Drum accepted a position as an attorney at a law firm in Sacramento, California (the Sacramento law firm). Mr. Drum moved to Sacramento 1 month later and began working at the Sacramento law firm. Petitioners purchased a house in Sacramento in 1986. Mr. Drum resided in Sacramento continuously until the early part of December 1989. 2446 Mr. Drum quit his job with the Sacramento law firm in October 1988. Mr. Drum pursued a degree of Masters of Business Administration at a State university in Sacramento from October 1988 through November 1989, 3 and he sought employment during those months as an office manager of a law firm in that city. On December 16, 1989, following 14 months of virtual unemployment in Sacramento, Mr. Drum began working as an office manager with the law firm in Los Angeles, California (the Los Angeles law firm), that employed Mrs. Drum. Mr. Drum agreed with the Los Angeles law firm to work for it for 1 year. Mr. Drum leased a house in Encino under a 1-year lease during the time that he was working for the Los Angeles law firm. 4 Petitioners and their daughter, who was born in January 1990, resided in this house. 5 Petitioners made payments of $ 13,400447 under the lease. Petitioners also leased their house in Sacramento to a third party during the same 1-year period. The lease underlying the Sacramento house provided that the lease was for the 1-year period from December 15, 1989, to December 14, 1990, and "should Lessee remain in possession of the residence with the consent of the Lessor after the expiration date of this lease a new tenancy from month to month shall be created between Lessor and Lessee". Mr. Drum returned to Sacramento in November 1990 and stayed there448 through May 1991. 6 In May 1991, Mr. Drum returned to Los Angeles to operate the Los Angeles law firm, which he had purchased. 7 Petitioners have lived together in the Los Angeles area with their daughter from May 1991 until the present. 8DiscussionWe must decide whether petitioners can deduct their lease payments for the home in Encino, California, 449 as traveling expenses under section 162(a)(2). Petitioners contend that they can because Mr. Drum was away from his tax home in Sacramento while temporarily working in Los Angeles in 1990. Respondent contends that they cannot primarily because petitioners' tax homes in 1990 were in Los Angeles. Petitioners bear the burden of proving that their tax homes were not in Los Angeles. Rule 142(a); New Colonial Ice Co. v. Helvering, 292 U.S. 435">292 U.S. 435, 440 (1934); Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 115 (1933); Daly v. Commissioner, 72 T.C. 190">72 T.C. 190, 197 (1979), affd. on rehearing 662 F.2d 253">662 F.2d 253 (4th Cir. 1981). The fact that the case was submitted to the Court fully stipulated under Rule 122 does not change or otherwise lessen their burden. Borchers v. Commissioner, 95 T.C. 82">95 T.C. 82, 91 (1990), affd. on other issues 943 F.2d 22">943 F.2d 22 (8th Cir. 1991). A taxpayer ordinarily may not deduct a personal expense. Sec. 262(b). A taxpayer may deduct a personal expense, however, to the extent that it was: (1) A reasonable traveling expense 450 (e.g., lodging, transportation, fares, and food); (2) incurred while away from home; and (3) an ordinary and necessary expense incurred in pursuit of a trade or business. Sec. 162(a)(2); Commissioner v. Flowers, 326 U.S. 465">326 U.S. 465, 470 (1946). The purpose behind this deduction is to alleviate the burden falling upon a taxpayer whose business requires that he or she incur duplicate living expenses by maintaining two places of abode. Tucker v. Commissioner, 55 T.C. 783">55 T.C. 783, 786 (1971); Kroll v. Commissioner, 49 T.C. 557">49 T.C. 557, 562 (1968); see also Harvey v. Commissioner, 283 F.2d 491">283 F.2d 491, 495 (9th Cir. 1960), revg. and remanding 32 T.C. 1368">32 T.C. 1368 (1959). Whether the taxpayer satisfies the three conditions necessary for this deduction is purely a question of fact. Commissioner v. Flowers, supra at 470; see also Frank v. United States, 577 F.2d 93">577 F.2d 93, 97 (9th Cir. 1978); Wills v. Commissioner, 411 F.2d 537">411 F.2d 537, 540 (9th Cir. 1969), affg. 48 T.C. 308">48 T.C. 308 (1967).451 The trial court's inferences and conclusions with regard to this factual matter are given due weight and are entitled to substantial deference. Commissioner v. Flowers, supra at 470; see also Wills v. Commissioner, supra at 540. Much litigation has centered about the determination of the situs of a taxpayer's tax home. In Commissioner v. Flowers, supra at 474, the Supreme Court held that a taxpayer may not deduct the expenses of traveling to and living at his place of employment unless the traveling was required by the exigencies of his employment, rather than by his "personal conveniences and necessities." In the Flowers case, the taxpayer's principal place of employment was Mobile, Alabama. The taxpayer, however, continued to live in Jackson, Mississippi, and he traveled to Mobile whenever his work required him to be there. The Court found that this travel was not required by the exigencies of his employment, but resulted from his personal choice to live in Jackson. The principles articulated in the Flowers case have subsequently been applied in other cases. From452 these cases, we understand that a taxpayer's principal place of business generally is his or her tax home, although his or her residence is in another city or is not in the same area as the place of employment.9Mitchell v. Commissioner, 74 T.C. 578">74 T.C. 578, 581 (1980); Kroll v. Commissioner, supra at 561-562. The rule is different, however, where a taxpayer's employment in another area is temporary as opposed to indefinite. Peurifoy v. Commissioner, 358 U.S. 59 (1958); Horton v. Commissioner, 86 T.C. 589">86 T.C. 589, 593 (1986). A taxpayer's tax home is his or her residence if the employment is temporary; the taxpayer's presence at a second location is considered to be away from home. Kroll v. Commissioner, supra at 562. A taxpayer's tax home is the location of his or her employment if the employment is indefinite or permanent; the taxpayer's presence at a second location is not considered away from home. Id. at 562. 453 Employment is temporary if it is foreseeable that the employment will be terminated within a short period of time. 10Mitchell v. Commissioner, supra at 581. Conversely, employment is indefinite if the prospects are that the employment will continue for an indefinite or "substantially long" period of time. Wright v. Hartsell, 305 F.2d 221">305 F.2d 221, 224 (9th Cir. 1962); Harvey v. Commissioner, 283 F.2d 491">283 F.2d 491, 495 (9th Cir. 1960), revg. 32 T.C. 1368">32 T.C. 1368 (1959). Employment that starts as temporary can later become indefinite. Chimento v. Commissioner, 52 T.C. 1067">52 T.C. 1067, 1073 (1969), affd. 438 F.2d 643">438 F.2d 643 (3d Cir. 1971). In this latter case, the location of the taxpayer's employment becomes his or her home. Kroll v. Commissioner, 49 T.C. 557">49 T.C. 557, 562 (1968). 454 Based on the limited record in this case, we hold that petitioners have failed to meet their burden of proving that Sacramento was Mr. Drum's tax home during 1990, and that Mr. Drum's employment in Los Angeles was merely temporary rather than indefinite. 11 Petitioners have also failed to prove that the lease expense for the house in Encino was otherwise required by the exigencies of their employment, rather than by their personal convenience and necessities. 455 As we understand petitioners' argument, Mr. Drum was "away from home" for purposes of section 162(a)(2) because: (1) He began working for the Los Angeles law firm not expecting to be employed in that city for a long period of time, (2) he returned to Sacramento in November 1990, and (3) his employment at the Los Angeles law firm did not actually exceed 1 year. We cannot agree with petitioners' argument and allegations; the record does not support their assertion that Mr. Drum's tax home was Sacramento or that Mr. Drum's work at the Los Angeles law firm was away from his tax home. Also, we are not persuaded that Mr. Drum believed that his employment in Los Angeles would be for a short period of time. Rather, we find that there was a reasonable probability known to him that he would work in Los Angeles for a long period of time. Petitioners rely heavily on the facts that the two leases were for 1 year each, Mr. Drum entered into a 1-year employment contract with the Los Angeles law firm, and Mr. Drum returned to Sacramento in November 1990. We view these facts in a less favorable light than petitioners do. Petitioners have introduced no evidence that shows either why the leases456 were for 1 year, or why Mr. Drum returned to Sacramento. 12 The record also does not support petitioners' contention that Mr. Drum's employment at the Los Angeles law firm lasted only 1 year. In this regard, however, the Court of Appeals for the Ninth Circuit has suggested that as little as 9 months may be an appropriate dividing line for satisfying the "long period of time test" articulated in Harvey v. Commissioner, 283 F.2d at 495. Doyle v. Commissioner, 354 F.2d 480">354 F.2d 480, 483 n.3 (9th Cir. 1966), affg. T.C. Memo. 1964-110. Mrs. Drum had lived in Los Angeles since her marriage to Mr. Drum, and petitioners had a child in January 1990. Given that Mr. 457 Drum purchased the Los Angeles law firm in or before May 1991, petitioners have left us hard pressed to conclude that Mr. Drum worked at the Los Angeles law firm during 1990 without the intent of making the Los Angeles area (e.g., Encino) his permanent place of employment and abode. 13 We believe that it was apparent to Mr. Drum during 1990 that there was a reasonable probability that he would be working in the Los Angeles area for a long time. Accordingly, we sustain respondent's determination that petitioners may not deduct any of the lease payments on the house in Encino. 14458 Respondent also determined that petitioners' underpayment of income tax for 1990 was due tonegligence, and, accordingly, that petitioners were liable for the penalty under section 6662(a). Section 6662(a) imposes an accuracy-related penalty equal to 20 percent of the portion of an underpayment that is attributable to negligence. 15Petitioners have the burden of establishing the incorrectness of respondent's determination that they are liable for an accuracy-related penalty under section 6662(a). Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 115 (1933); see also Allen v. Commissioner, 925 F.2d 348">925 F.2d 348, 353 (9th Cir. 1991),459 affg. 92 T.C. 1">92 T.C. 1 (1989); Bixby v. Commissioner, 58 T.C. 757">58 T.C. 757, 791-792 (1972). Petitioners must prove that they were not negligent, i.e., that they made a reasonable attempt to comply with the provisions of the Internal Revenue Code, and that they were not careless, reckless, or in intentional disregard of rules or regulations.16Sec. 6662(c). Petitioners' education and business experience are two factors that are considered in determining whether they were negligent in the preparation of their 1990 Federal income tax return. Sutor v. Commissioner, 17 T.C. 64">17 T.C. 64, 68-69 (1951). Mr. Drum is a well-educated attorney. Mrs. Drum was employed as a professional460 at the Los Angeles law firm during at least the 6-year period ending with the year in issue. All the same, petitioners chose to deduct the expense of a house in Encino. We find that they have failed to establish that they were not negligent in doing so. 17 Accordingly, we conclude that petitioners did not make a reasonable attempt to comply with the provisions of the Internal Revenue Code and sustain respondent's determination with respect to this penalty. We have considered all arguments made by the parties and, to the extent not discussed above, find them to be without merit. To reflect concessions by the parties, Decision will be entered under Rule 155. Footnotes1. On Mar. 7, 1994, the parties filed a stipulation of settled issues that resolved all issues in the case except for those mentioned below.↩2. Mrs. Drum worked and resided in Los Angeles from the time she married Mr. Drum until 2 weeks before the end of 1990, except for a brief period of time during 1986 and 1987 when she was employed and resided in Sacramento. Mrs. Drum worked as an office administrator at a law firm in Los Angeles during the year in issue, and the firm paid her wages of $ 29,581.↩3. The record does not indicate whether Mr. Drum attended the State university on a part-time or full-time basis, or whether Mr. Drum completed the Masters' program in Nov. 1989.↩4. Encino is proximate to Los Angeles. These two cities are also proximate to Van Nuys, California.↩5. At this time, Mrs. Drum owned a duplex in Van Nuys, California, that she had purchased before 1985 and that she continues to own today. The record does not indicate the use of the duplex during the period that Mr. Drum leased the house in Encino. The record also does not indicate whether the duplex in Van Nuys was Mrs. Drum's residence in Los Angeles during the period described in note 2.↩6. The record does not indicate where Mr. Drum stayed while he was in Sacramento, or whether he was working for the Los Angeles law firm during any part of the time that he was in Sacramento. The record also does not indicate the use of petitioners' house in Sacramento following the expiration of the lease on Dec. 14, 1990; e.g., whether it was sold, relet, etc.↩7. Mr. Drum negotiated to purchase the Los Angeles law firm before May 1991. The record does not indicate the dates on which these negotiations were conducted or the date on which the purchase was consummated.↩8. Petitioners lived in Mrs. Drum's duplex in Van Nuys from July 1991 through Sept. 1992.↩9. According to the standard articulated by the Court of Appeals for the Ninth Circuit, the circuit to which appeal lies in this case: in general, as between various possible "abodes," the abode or at least the locale of the abode which is located in the vicinity of the taxpayer's principal place of business or employment, or as close thereto as possible, will be considered the taxpayer's tax home for purposes of the travel expense deduction of section 162(a)(2). * * * [Coombs v. Commissioner, 608 F.2d 1269">608 F.2d 1269, 1275 (9th Cir. 1979), affg. in part, revg. in part, and remanding 67 T.C. 426">67 T.C. 426↩ (1976).]10. According to the slightly different standard articulated by the Court of Appeals for the Ninth Circuit, "An employee might be said to change his tax home if there is a reasonable probability known to him that he may be employed for a long period of time at his new station. What constitutes 'a long period of time' varies with circumstances surrounding each case." Harvey v. Commissioner, 283 F.2d 491">283 F.2d 491, 495 (9th Cir. 1960), revg. 32 T.C. 1368">32 T.C. 1368 (1959). At all events, any difference between the test of our Court and the test of the Court of Appeals for the Ninth Circuit does not affect the outcome of this case. See Abbott v. Commissioner, T.C. Memo. 1981-424↩.11. Petitioners have also failed to meet their burden of proof with respect to Mrs. Drum. A husband and wife may have separate tax homes for purposes of the travel deduction in sec. 162(a)(2), Foote v. Commissioner, 67 T.C. 1">67 T.C. 1 (1976), and we are required to decide the "away from home" issue as to each. Accord Linetsky v. Commissioner, T.C. Memo. 1994-306↩. Petitioners have presented insufficient evidence to disprove respondent's determination that Mrs. Drum's tax home was in Los Angeles, and the record adequately supports respondent's determination. Given that both petitioners resided in the house in Encino, and that both paid the rent due under the lease, we are left to assume that each petitioner paid one-half of the rent; the record does not indicate otherwise, and we take into account the fact that California is a community property State. Accordingly, for the foregoing reason, we sustain respondent's determination with respect to one-half of the lease payments without further comment.12. We also note that the lease for the Sacramento house contemplated that the lessee would remain in the house at the expiration of the 1-year period, and Mr. Drum was virtually unemployed in Sacramento for the 14-month period before his employment with the Los Angeles law firm.↩13. We recognize that petitioners owned a house in Sacramento. We also recognize, however, that Mrs. Drum owned a house in the Los Angeles area.↩14. Because we hold that petitioners were not "away from home" while living in Encino, we need not decide whether the lease payments met the other requirements under sec. 162(a)(2); i.e., the payments were a reasonable traveling expense and were an ordinary and necessary expense incurred in pursuit of a trade or business. See also Commissioner v. Flowers, 326 U.S. 465">326 U.S. 465, 470↩ (1946).15. Respondent determined that this accuracy-related penalty applied to the total deficiency reflected in her notice of deficiency. On brief, respondent ony asserted that petitioners were negligent with respect to reporting the lease expense. We assume that respondent abandoned her position that petitioners were negligent with respect to her other determinations listed in the notice of deficiency, and we so hold.↩16. Negligence has been defined as a lack of due care or a failure to do what a reasonable and prudent person would do under similar circumstances. Allen v. Commissioner, 925 F.2d 348">925 F.2d 348, 353 (9th Cir. 1991), affg. 92 T.C. 1">92 T.C. 1↩ (1989).17. The record does not indicate that petitioners consulted a tax professional with respect to their treatment of the lease payments, or that they deducted these payments based on the advice of such a professional.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625082/	Appeal of THE MARKENHEIM CO.Markenheim Co. v. CommissionerDocket No. 544.United States Board of Tax Appeals1 B.T.A. 1240; 1925 BTA LEXIS 2597; May 26, 1925, decided Submitted April 27, 1925. 2597 1. Under section 326, Revenue Act of 1918, tangible property, other than cash, purchased at foreclosure sale and thereafter bona fide paid in to a corporation for stock, must be included in invested capital at its actual cash value at the time paid in; it is immaterial that such value exceeds the price paid at the foreclosure sale. 2. The price paid for property at a foreclosure sale is merely evidence of value, and, in the face of evidence clearly showing a greater actual value, the plain language of the statute will be followed. 3. The words "bona fide," in section 326(a)(2), are to be construed in the light of the purpose of Congress to close the door to greater exemption, by means of "watered" stock, from excessprofits and war-profits taxes than the actual investment of the stockholders warranted, rather than in the light of the equitable principles applicable to concealed profits by promoters, directors, and prospective stockholders of corporations. S. F. Carr, Esq., for the taxpayer. John D. Foley, Esq., for the Commissioner. JAMES1240 Before JAMES, STERNHAGEN, TRAMMELL, and TRUSSELL. This is an appeal from a determination2598 of a deficiency in income and profits tax for the years 1919 and 1920 in the amount of $8,929.21. It does not certainly appear whether the entire deficiency is in issue. 1241 FINDINGS OF FACT. The taxpayer is a New York corporation, organized on or about September 20, 1902. On or about September 23rd it received a proposal from Randolph McNutt, John W. Gibbs, Ernest L. Frisbee, and Nelson M. Redfield, reading in full as follows: To: The Markenheim Company.We hereby submit the following proposition to the Markenheim Company. We will cause a conveyance to be made by the present owner, the Albany Savings Bank, of the property known as "The Markeen," at the northeast corner of Main and Utica Streets, Buffalo, N.Y., being the same property sold under Foreclosure sale on September 18, 1902, in the action entitled "Albany Savings Bank vs. Emily L. Laird, et al," The Markenheim Company, however to execute to said Albany Savings Bank a bond and purchase money mortgage conditioned for the payment of $115,000.00 as herewith submitted. We will also cause to be transferred and assigned to the Markenheim Company, 1. All of the property sold to George H. Minor, 2599 attorney, on September 8, 1902, at a chattel mortgage sale under a mortgage executed by Samuel E. Laird and Emily L. Laird to John Mulholland, excepting horse, wagon and harness and articles named in bill of sale of George H. Minor, attorney, to George Simpson. 2. Vendor's rights to property described in a conditional sales contract between Syracuse Crockery Company, vendor, and Samuel E. Laird, vendee, dated October 18, 1901. 3. Vendor's right to property described in a conditional sales contract between D. E. Morgan, Son & Allen Company, vendor, and Samuel E. Laird, vendee. 4. Vendor's rights to property described in a conditional sales contract between Brunswick-Balke-Collendar Company, vendor, and Samuel E. Laird, vendee, dated May 9, 1901. 5. Vendor's rights to property described in conditional sales contract, Meyers to Samuel E. Laird. We will also pay to the Markenheim Company the sum of $350.00 in money. And, in full consideration of and for the above mentioned payment, transfers and assignments, we will accept $20,200.00 in preferred stock and $70,200.00 in common stock of the Markenheim Company at its par value; said stock to be issued to the following2600 persons in the amounts stated, to wit: To: Randolph McNutt, $12,700.00 preferred and $37,700.00 of common. John W. Gibbs, $3,333.34 of preferred and $11,666.66 of common. Ernest L. Frisbee, $2,083.33 of preferred and $10,416.67 of common. Nelson M. Redfield, $2,083.00 of preferred and $10,416.67 of common. Said stock to issue upon completion of transfers. Dated, Buffalo, N.Y., this 23rd day of September, 1902. (Signed) RANDOLPH MCNUTT. (Signed) JOHN W. GIBBS. (Signed) ERNEST L. FRISBEE. (Signed) NELSON M. REDFIELD. Of the above persons, McNutt and Gibbs were two of the three incorporators and first directors of the taxpayer. Prior to September 23d, 1902, the property comprised in the foregoing proposal had been purchased by the Albany Savings Bank at a sale under foreclosure of a mortgage held by the said bank, and McNutt, Gibbs, Frisbee, and Redfield had paid $21,354.40 in cash to acquire title from the bank. The taxpayer paid for the property by executing and delivering to the Albany Savings Bank its bond and mortgage in the sum of 1242 $115,000 and by issuing preferred and common stock at par as follows: PreferredCommonRandolph McNutt$12,700.00$37,700.00John W. Gibbs3,333.3411,666.66Ernest L. Frisbee2,083.3310,416.67Nelson M. Redfield2,083.3310,416.6720,200.0070,200.002601 The actual cash value of the land, improvements, and personal property, which consists of hotel furniture, fixtures, and equipment, acquired by the taxpayer on the 23d day of September, 1902, as aforesaid, was, at the time of the acquisition thereof, at least the sum of $205,400. In determining the deficiency here in issue the Commissioner excluded from invested capital that portion of $90,400, capital stock as above set forth, in excess of $21,354.40, and from the deficiency depending upon that action of the Commissioner the taxpayer appeals. DECISION. The deficiency should be computed in accordance with the following opinion. Final decision will be settled on consent or on ten days' notice, in accordance with Rule 50. OPINION. JAMES: There is presented in this appeal the questions of law whether, under section 326 of the Revenue Act of 1918, the taxpayer's invested capital is to be computed on the basis of "actual value of tangible property, other than cash, bona fide paid in for stock or shares," or whether there is to be read into that section a limitation that, regardless of actual value, property which is purchased at a foreclosure sale may not thereafter be2602 paid in to a corporation by the purchasers for stock or shares and such stock or shares included in invested capital at a value in excess of the price then paid. The Commissioner relies upon article 836 of Regulations 45, which, so far as material, reads as follows: No claim will be allowed for a paid-in surplus in a case in which the additional value has been developed or ascertained subsequently to the date on which the property was paid in to the corporation, or in respect of property which the stockholders or their agents on or shortly before the date of such payment acquired at a bargain price, as for instance, at a receiver's sale. In so far as the above regulation expresses a mere rule of evidence as to the value of property so acquired, it is consistent with the decision of this Board in the . We see no reason to regard the receiver's sale or any other sale as more than evidence of value, and where, as in this appeal, the preponderance of the evidence is that the actual value was otherwise, the plain language of the statute must be followed and invested capital allowed on the basis of the actual value of2603 the property 1243 paid in for stock. The Commissioner stipulates that the value of the property was at least $205,400, which in our opinion entirely disposes of the matter. The Commissioner relies upon the well-known doctrine that directors or promotors may not make a concealed profit in their dealings with the transfer of property to a corporation. It would, perhaps, be sufficient to dispose of this contention by saying that there is no evidence before the Board that there was any concealed profit, but, on the contrary, all of the stock was issued to the purchasers of the property at the foreclosure sale, presumably in proportion to their contributions of cash required for that purpose. Apparently, the Commissioner places some significance upon the words "bona fide" as contained in section 326(a)(2). It seems to be his position that, under that section, before property can be paid in in good faith, there must have been strict compliance with all equitable rules involving the making of concealed profits, or, indeed, profits at all, by promoters, directors or prospective stockholders in connection with the transfer of property under the conditions existing in this and2604 similar cases, It seems to us more reasonable to interpret this section of the statute with reference to the effect, in terms of taxation, of the language used. We believe that what Congress was contemplating was the more or less notorious practice of issuing "watered" stock by corporations, the effect of which on invested capital would be, if actual values were not used, to allow a much greater exemption from excess-profits and war-profits taxes than the actual investment of the stockholders of the corporation warranted. This point has been fully discussed in the , and requires no further explanation here.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625084/	E. A. Vaughey and Mary B. Vaughey, et al. 1 v. Commissioner. Vaughey v. CommissionerDocket Nos. 1900-63 - 1905-63, 1935-63 - 1941-63, 3413-63, 3553-63.United States Tax CourtT.C. Memo 1965-253; 1965 Tax Ct. Memo LEXIS 77; 24 T.C.M. (CCH) 1369; T.C.M. (RIA) 65253; September 20, 196577 Held, the useful life, for computing depreciation, of petitioners' water distribution system was eight years. C. Delbert Hosemann, for the petitioners. Roger Rhodes, for the respondent. BRUCE Memorandum Findings of Fact and Opinion BRUCE, Judge: The respondent determined deficiencies in income tax for the calendar year 1959 in the following amounts: Docket No.PetitionerAmount1937-63E. A. Vaughey and Mary B.Vaughey$11,108.581900-63Deposit Guaranty Bank andTrust Company, Trusteefor Elizabeth Hayden Black-burn Trust of March 8,1952214.971901-63Deposit Guaranty Bank andTrust Company, Trusteefor Patricia Vaughey Trustof March 8, 1952217.961902-63Deposit Guaranty Bank andTrust Company, Trusteefor William Meacher Vaug-hey, Jr. Trust of March 8,1952217.961903-63Deposit Guaranty Bank andTrust Company, Trusteefor William TownsendBlackburn, Jr. Trust ofMarch 8, 1952214.971904-63Jack D. Skinner618.091905-63W. M. Vaughey and Gene-vieve C. Vaughey8,501.091935-63Deposit Guaranty Bank andTrust Company, Trusteefor Mary Madden Black-burn Trust of March 8, 1952$ 214.971936-63Deposit Guaranty Bank andTrust Company, Trusteefor John Cowman VaugheyTrust of March 8, 1952217.961938-63Deposit Guaranty Bank andTrust Company, Trusteefor Genevieve SandraVaughey Trust of March 8,1952217.961939-63Clifford J. Hans and Irline C.Hans754.351940-63Deposit Guaranty Bank andTrust Company, Trusteefor Mary Byrnes VaugheyTrust of March 8, 19521,626.951941-63Deposit Guaranty Bank andTrust Company, Trusteefor Emmett Vaughey Black-burn Trust of March 8,1952214.973413-63Robert L. Hoss and ElaineHoss4,263.323553-63W. T. Blackburn and Ros-anna M. Blackburn5,113.4678 The sole issue remaining for decision is what was the useful life, for purposes of computing depreciation, of a water distribution system constructed and operated by a partnership of which the petitioners were members. Findings of Fact Some of the facts have been stipulated and the stipulation, together with the exhibits attached thereto, is incorporated herein by this reference. The petitioners E. A. Vaughey and Mary B. Vaughey, Jack D. Skinner, W. M. Vaughey and Genevieve C. Vaughey, and Clifford J. Hans and Irline C. Hans resided in Jackson, Mississippi, and filed their Federal income tax returns for 1959 with the district director of internal revenue at Jackson, Mississippi. The petitioners Robert L. Hoss and Elaine Hoss, and W. T. Blackburn and Rosanna M. Blackburn resided in Denver, Colorado, and filed their Federal income tax returns for 1959 with the district director of internal revenue at Denver, Colorado. The Deposit Guaranty Bank and Trust Company, as Trustee, respectively, for the Elizabeth Hayden Blackburn Trust, the Patrica Vaughey Trust, the William Meacher Vaughey, Jr. Trust, the William Townsend Blackburn, Jr. Trust, the Mary Madden Blackburn Trust, the79 John Cowman Vaughey Trust, the Genevieve Sandra Vaughey Trust, the Mary Byrnes Vaughey Trust, and the Emmett Vaughey Blackburn Trust, all of March 8, 1952, filed Federal income tax returns for each of such trusts for the taxable year 1959 with the district director of internal revenue at Jackson, Mississippi. The partnership, Vaughey, Blackburn and Vaughey, filed its partnership income return (Form 1065) for the year 1959 with the district director of internal revenue at Jackson, Mississippi. Petitioners are all members of the partnership Vaughey, Blackburn and Vaughey (hereinafter sometimes referred to as the partnership), formed January 1, 1958, to construct, operate, and maintain a water pipeline system in the State of Colorado to serve the oil industry in the conduct of oil and gas operations and water flood operations in the secondary recovery of oil and gas. Prior to January 1, 1958, there existed a partnership composed of E. A. Vaughey, W. M. Vaughey and W. T. Blackburn, operating under the name of Vaughey and Vaughey. All the water sales contracts and other documents hereinafter mentioned which were executed by Vaughey and Vaughey were assigned in due course to the partnership, 80 Vaughey, Blackburn and Vaughey. Prior to the taxable year 1959, Vaughey and Vaughey entered into seven water sales contracts with the operators of certain oil fields in Washington, Morgan, and Adams Counties in Colorado. Two other similar contracts with operators in Morgan and Washington Counties were entered into subsequent to 1959. Except for those nine, no other operators in the area entered into contracts with the partnership for various reasons attributable to their own operations, such as availability of water from shallow wells, recycling, and water drive. In each of these contracts, Vaughey and Vaughey, as seller, agreed to deliver to the specified oil field during the term of the contract the amount of water required by the operator, as buyer, up to and including certain specified maximum amounts. The buyer agreed to take or pay for a certain minimum number of barrels of water per month. In general, the contracts were to continue for a "primary term," commencing with the date seller was ready and able to deliver water, or until the total payments to be made by the buyer to the seller should equal the specific amount designated therein, sometimes referred to as the "period81 of minimum take," and thereafter from year to year until cancelled. After the primary term or period of minimum take, the buyer was not obligated to take any specific quantity of water and could cancel the contract on 90 days' written notice to the seller. If, after the period of minimum take, the buyer failed to take any water for water flood purposes for a period of 12 months, the seller could cancel the contract upon 30 days' written notice to the buyer. Buyer agreed to pay seller at the rate of 4.8 cents per barrel of 42 gallons of water delivered or contracted for, provided further, however, that if, during the extended period of the contract, seller's actual cost exceeded the price buyer was then paying, upon notice of such fact by the seller, buyer was obligated to pay seller its actual cost of delivering water thereafter to buyer. In the latter event, four of the contracts (Nos. 2, 4, 6 and 8 of the schedule hereinafter set forth) provided that neither depreciation nor depletion was to be included in seller's cost of operations. In three of the contracts (Nos. 3, 5, and 7 of the schedule hereinafter set forth) the buyer could, if it so desired, take over the actual operation, 82 but in that event buyer was obligated to pay seller an amount equal to its monthly unrecovered depreciation not to exceed ten percent of the seller's total investment. The following is a schedule of the nine water sales contracts entered into, showing the name of the operator of the oil field, the date the contract was entered into, the oil field for which water was contracted, the maximum and minimum take, the primary term or period of minimum take, and the date the contracting operator began using water: PrimaryMaximumMinimumTermTakeTakeor PeriodBeganBarrelsBarrelsof Mini-UsingOperatorDateFieldPer DayPer Monthmum TakeWater47 mos. or1. Monsanto Chemical Co.11/ 8/57Little Beaver East7,00091,260$201,6009/19/582. Continental Oil Co.11/18/57Little Beaver20,000304,200$705,00010/19/583. Continental Oil Co. &Others2/10/58Plum Bush Creek10,000150,000$374,4006/10/594. Sinclair Oil & Gas Co.2/25/58South Kejr2,50038,025$ 86,4009/19/585. Sohio Petroleum Co. &57 mos. orOthers4/ 7/58Kejr4,50053,235$141,0006/ 6/596. Sinclair Oil & Gas Co.4/ 8/58Badger Creek7,000106,470$230,4009/19/587. Champlin Oil & Ref.Co. & Others7/29/58Phegley2,00036,600$103,68010/ 6/598. Joseph L. Cramer &12 mos. orOthers6/28/60Luster1,50022,916$ 52,80010/29/609. Monsanto Chemical Co.2/21/61Nugget10,00091,260$ 50,0004/14/6183 Prior to the execution of any of the contracts, Robert L. Hoss, an experienced grauduate petroleum engineer, made a study of the oil reserves of the various oil fields in the area to be served and estimated, by years, the water requirements the seven initial fields contracted for would need for the secondary recovery of oil. According to the forecast, prepared by Hoss in early 1957, two of the fields (South Kejr and Badger Creek) would require water for a period of six years, three (Little Beaver East, Kejr, and Phegley) for eight years, one (Plum Bush Creek) for eleven years, and one (Little Beaver) for twelve years. The total annual water requirements as so estimated were as follows: YearBarrels112,045,000216,279,000313,711,22549,367,72556,265,22564,056,61072,578,72581,841,4259584,00010419,75011261,3401289,425Total67,499,450Based upon Hoss' engineering report and an estimated cost of constructing and operating the proposed water pipeline and related facilities, E. L. Wehner, of Houston, Texas, who is a certified public accountant and a partner in the accounting firm of Arthur Andersen & Company, and who is84 a person with wide experience in the accounting aspects of the oil, gas and pipeline business, made an economic analysis of the project to determine what the cash flow from the project might be, the means of financing, and the sales price that would have to be received to make it economically feasible, and prepared a twelve-year forecast of earnings. His report, dated May 15, 1957, used a sales price of 4.7 cents per barrel in computing earnings rather than the 4.8 cents later contracted for. According to Wehner's analysis, the cost of the water to be delivered would exceed the sales price of 4.7 (or 4.8) cents per barrel by the end of the eighth year and would be 7.54 cents for the ninth year, 10.5 cents for the tenth year, 16.8 cents for the eleventh year, and 49.27 cents for the twelfth year. These rates would make it increasingly uneconomical for the oil operators to purchase water for flooding operations after the eighth year. The water distribution system, consisting of the primary wells, a pumping station, approximately 49 miles of pipeline, meters and related facilities, was constructed by Vaughey and Vaughey in 1957 and 1958 and is presently being operated by the partnership. 85 The various operators contracted with began using water on the dates indicated in the above schedule. Six of the initial seven operators had paid out their minimum take within four years. All of the fields served by the water pipeline system, including the other one of the initial seven and the two additional ones contracted for, had reached and paid out their minimum take at the time of the trial, well within eight years after the commencement of operations. In accordance with the terms of the contracts permitting the buyer to cancel the contract on 90 days' notice to the seller after the contract term or "period of minimum take," the contracts for four of the fields have been terminated: Little Beaver on April 1, 1964; Little Beaver East on August 1, 1964; Phegley on September 1, 1964; and Badger Creek on September 8, 1964. In connection with his economic analysis and twelve-year forecast of operations, Wehner showed depreciation over a four-year period, computed on a unit of production basis, with a salvage value of $300,000. On its information return (Form 1065) for the year 1959, the partnership reported depreciation of the water distribution system by the double declining balance86 method on the basis of an eight-year useful life. The petitioners claimed their respective distributive shares of this depreciation as a deduction on their Federal income tax returns for 1959. In the statutory notice of deficiency, respondent determined that the depreciation of the water distribution system should have been computed on the basis of a twelve-year useful life. The water pipeline would have a physical life in excess of twenty years if continued in use for that purpose. The other equipment, including pumps and appurtenant appliances, would have a physical life in excess of twelve years. The useful life of the water distribution system, for depreciation purposes, is eight years. Opinion The sole issue for decision is whether, for the purpose of computing depreciation, the useful life of the water distribution system was eight years, as contended by the petitioners, or twelve years, as determined by the respondent. There is no dispute as to the partnership's basis or the method of computation used. It is stipulated that the equipment involved would have a physical life in excess of twelve years if continued in use as a water distribution system. The term "useful87 life" is defined in Income Tax Regulations, section 1.167(a)-1(b), which states that "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 or business or in the production of his income." See, also, Massey Motors v. United States, 364 U.S. 92">364 U.S. 92 (1960). Th physical life of the parts is not determinative. See Illinois Pipe Line Co., 37 B.T.A. 1070">37 B.T.A. 1070, 1080 (1938). The partnership made a study of the project before entering into any of the contracts. The estimates were to the effect that the largest quantity of water would be required in the first four years of the project for filling reservoirs in the various fields and that the amount used would diminish rapidly thereafter, with only moderate or insignificant amounts called for after the eighth year. The cost of producing and delivering the water to the oil operators was calculated carefully. It was estimated that the cost would exceed the contract price after the eighth year and if the operators were to be required to pay that increased88 cost, as was contemplated and as the subsequent contracts provided, it would become increasingly uneconomical for the operators to purchase water after the eighth year. The pipeline and other equipment here involved were installed for the purpose of serving oil fields in a limited area by providing water for use in the secondary recovery of oil by flooding. When there is no further requirement of water for such use the equipment will have no further use in the partnership's business. The contracts with the seven original operators provided for a period of minimum take or fixed amount which approximated four years. This was to permit the partnership to recover its original investment in the project. After that point was reached, each operator could cancel on 90 days' notice. As the water requirements of the area served diminish, the cost per barrel to the partnership of producing the water will rise, and when this cost exceeds the contract price the operators are to pay the actual cost. The operators may in some cases take over the operation if the cost exceeds the contract price. And if the cost increases considerably, the operators may find it excessive in relation to the amount89 of oil recoverable and will refuse to buy. The testimony is to the effect that some six barrels of water are required for injection to produce one barrel of oil, that the operators' own water resources would provide about three barrels of what was needed, and that the partnership was supplying the additional three barrels required from outside sources. Thus, the additional water may not be vital to the operators, who may recycle their own water or may conclude that the cost of recovering additional oil is prohibitive. The respondent admits that under the contracts and the provisions for increasing the price as the cost increases a point will be reached when it is no longer economically feasible for the operators to buy water, but says that the evidence does not prove that this point will be reached at the end of eight years. The respondent contends that since two of the original fields involved were estimated as requiring water for eleven or twelve years, it will be necessary for the partnership to use the water system in its business for twelve years since it is obligated to furnish water as long as the operators require it. The respondent contends also that the partnership90 expected to enter into additional contracts with other operators in the area served by the water system and points out that since two such contracts were signed in 1960 and 1961 others might be made which will require continued use of the system after the eighth year. While the forecast made early in 1957 indicated that two of the original operators might require water for eleven or twelve years, the partnership at the end of 1959, after the first seven contracts were in effect, was in a position to make a more accurate estimate of the future use of the system. At that time the equipment had been in use for some fifteen months, the peak of greatest demand had already passed, and the attempts to secure additional users had proved unsuccessful, the larger operators in the area having water supplies sufficient for their needs. It seemed reasonable then to assume that in the cases of the two fields which might have a use for water after the eighth year, the increasing cost of furnishing it then would cause them to terminate their contracts. These considerations support the estimate adopted by the partnership in the tax returns for 1959 for computing depreciation on the basis of a useful91 life of eight years. As stated in Massey Motors, supra (p. 105), "prediction is the very essence of depreciation accounting." The original estimate made in 1957 was based in part upon the hope that some of the major operators in the area would enter into contracts after the pipeline was built. This hope did not materialize. The major operators had water supplies of their own and one of them refused to buy, even though the pipeline crossed its field. Two contracts were secured in 1960 and 1961, but these were for comparatively small quantities. The failure to secure more such contracts will increase the probability that the amount of water wanted after the eighth year will be so small that the cost of it to the operators will be excessive. The actual experience of the project subsequent to 1959 confirms the reasonableness of the estimate made by the partnership at that time. The field which was originally estimated as requiring water for twelve years terminated its contract at the end of six years. Three other fields originally estimated as needing water for six to eight years terminated their use within six years. Although two new fields entered into contracts, these92 were for comparatively small quantities. With only three of the original seven fields, plus the two newer ones, still taking water after six years, it now appears most likely that the amount of water which will be asked for after eight years will be insignificant and that the cost of supplying it will be prohibitive to the operators. The evidence supports the reasonableness of the petitioners' estimate, and we have found that the useful life of the system is eight years. Decisions will be entered under Rule 50. Footnotes1. Proceedings of the following petitioners are consolidated herewith: Deposit Guaranty Bank and Trust Company, Trustee for Elizabeth Hayden Blackburn, Trust of March 8, 1952, Docket No. 1900-63; Deposit Guaranty Bank and Trust Company, Trustee for Patricia Vaughey Trust of March 8, 1952, Docket No. 1901-63; Deposit Guaranty Bank and Trust Company, Trustee for William Meacher Vaughey, Jr. Trust of March 8, 1952, Docket No. 1902-63; Deposit Guaranty Bank and Trust Company, Trustee for William Townsend Blackburn, Jr. Trust of March 8, 1952, Docket No. 1903-63; Jack D. Skinner, Docket No. 1904-63; W. M. Vaughey and Genevieve C. Vaughey, Docket No. 1905-63; Deposit Guaranty Bank and Trust Company, Trustee for Mary Madden Blackburn Trust of March 8, 1952, Docket No. 1935-63; Deposit Guaranty Bank and Trust Company, Trustee for John Cowman Vaughey Trust of March 8, 1952, Docket No. 1936-63; Deposit Guaranty Bank and Trust Company, Trustee for Genevieve Sandra Vaughey Trust of March 8, 1952, Docket No. 1938-63; Clifford J. Hans and Irline C. Hans, Docket No. 1939-63; Deposit Guaranty Bank and Trust Company, Trustee for Mary Byrnes Vaughey Trust of March 8, 1952, Docket No. 1940-63; Deposit Guaranty Bank and Trust Company, Trustee for Emmett Vaughey Blackburn Trust of March 8, 1952, Docket No. 1941-63; Robert L. Hoss and Elaine Hoss, Docket No. 3413-63; and W. T. Blackburn and Rosanna M. Blackburn, Docket No. 3553-63.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625085/	Vincent M. and Annette K. Ravel v. Commissioner.Ravel v. CommissionerDocket No. 1207-66.United States Tax CourtT.C. Memo 1967-182; 1967 Tax Ct. Memo LEXIS 78; 26 T.C.M. (CCH) 885; T.C.M. (RIA) 67182; September 13, 1967Bruce Hallmark, 81 Suite 13A, El Paso National Bank Bldg., El Paso, Tex., for the petitioners. Harold Friedman, for the respondent. FAYMemorandum Findings of Fact and Opinion FAY, Judge: Respondent determined deficiencies in petitioners' Federal income taxes for the fiscal years ended June 30, 1959, 1960, 1961, and 1962 in the amounts of $11,547.62, $12,531.04, $12,412.30, and $30,775.41, respectively. Various issues raised in the deficiency notice have been agreed to by the parties. The sole issue for determination is whether annual payments of $2,400 made in the year ended June 30, 1959, by the El Paso General Hospital and in the years ended June 30, 1960, 1961, and 1962 by the R. E. Thomason General Hospital to acquire a nonforfeitable annuity for Vincent M. Ravel are includable in the taxable income of petitioners for each year or are they excludable, in whole or in part, by virtue of section 403(b), Internal Revenue Code of 1954. Findings of Fact Some of the facts have been stipulated, and the stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference. Vincent M. Ravel and Annette K. Ravel, husband82 and wife, had their legal residence in El Paso, Texas. They filed joint Federal income tax returns for each of the fiscal years ended June 30, 1959, 1960, 1961, and 1962 with the district director of internal revenue, Austin, Texas. Hereinafter, Vincent M. Ravel, individually, will be referred to as the petitioner. Petitioner is a practicing physician specializing in the practice of radiology. For some years prior to the years in question, petitioner had practiced in the El Paso area. During this time, he performed certain radiological work at the El Paso General Hospital. (This hospital is presently known as the R. E. Thomason General Hospital and will hereinafter be referred to as the hospital.) The hospital is a charitable hospital supported entirely by public tax monies. The services performed by it are strictly eleemosynary and no private patient can be kept there unless to remove him would be dangerous to health or unless there is no other space available. Prior to 1951, the hospital had no one specifically designated as radiologist. Various radiologists in El Paso gratuitously took turns at the hospital, but under this arrangement the hospital frequently was without the83 service of a qualified radiologist. This situation was, at the time the hospital was inspected for accreditation, deemed wholly unacceptable, and accreditation was denied. To remedy this situation, and after consideration of various alternatives, the hospital persuaded petitioner to consider a contract of employment whereby the hospital would be provided with a permanent radiology service which would assure continual coverage. In a letter agreement dated December 29, 1951, petitioner agreed with the hospital as follows: 1I hereby agree to operate the x-ray department in El Paso General Hospital, subject to the following conditions: 1. This agreement shall start on January 1, 1952 and will run till terminated by 90 days notice of myself or the board. Notice of such termination is given by the party desiring this termination to the other party at least three (3) months prior to the date fixed for termination. Such notice may be given at any time. The notice shall state the date of termination and shall be delivered to the notified party in person or by registered mail, return receipt requested. 84 3. I agree to furnish a Board Certified Radiologist who will be at the Hospital daily and who will also be available for call at all other times. 4. All fees from private and part paying patients shall be reasonable, and in so far as possible will be fixed by mutual agreement between the Radiologist and the Administrator of the Hospital, and will be collected by the Hospital. 5. I shall receive a guarantee of $500.00 per month plus 50% of collected fees from private and part paying patients. 6. You agree to furnish technicians, clerical help, supplies and equipment. 7. I agree, with the consent of the Administrator and the Staff to set up reasonable rules and regulations for the efficient operation of the Department of Radiology. 8. The foregoing is conditioned upon the approval of the Board of Directors for the Providence Memorial Hospital. 9. I understand this agreement contemplates my personal supervision and operation of the X-ray Department of the Hospital, and that my rights and duties under this contract are not assignable and cannot be delegated to someone else, although work may be done by others in my employ. In 1952, petitioner hired one Charles C. McVaugh85 (hereinafter sometimes referred to as McVaugh) and later formed a partnership with him. A second agreement between petitioner and McVaugh and the hospital was entered into on November 1, 1956, and provided in pertinent part as follows. 2We hereby accept employment to operate the X-Ray Department of El Paso General Hospital subject to the following terms: * 2. We agree to furnish a Board Certified Radiologist who will be at the Hospital daily or who will be available for call at all times. 3. All fees from private and part paying patients shall be reasonable, and will be fixed by the Administrator of the Hospital with the advice of the Radiologist and will be collected by the Hospital. In order to minimize the calculations of the fees on the part of the Hospital, 86 where numerous accounts would have to be analyzed at considerable time, effort and expense on the part of the business office, we agree to accept the recommendations of the business office by use of the following formula submitted by the auditor: * * * 4. We shall receive a guarantee of $300.00 monthly in addition to the percentage of fees from private paying patients. In conformance with the policy established by the Board of Directors, an annuity in the amount of $200.00 a month will be purchased by the hospital for Dr. V. M. Ravel. 5. The Hospital agrees to furnish technicians, clerical help, supplies and equipment. 6. Reasonable rules and regulations for the efficient operation of the Department of Radiology will be set up by the Administrator with the advice of the Radiologist. 7. We understand this agreement contemplates our personal supervision and operation of the X-Ray Department of the Hospital, and that our rights and duties under this contract are not assignable and cannot be delegated to someone else, although work may be done by others in our employ. 8. It is further understood that Dr. V. M. Ravel will be the Director of the Department of Radiology. This87 contract with petitioner and McVaugh was approved by the hospital board on December 17, 1956. Similar contracts were entered into between petitioner and the hospital on October 19, 1959, and again on June 21, 1961. All contracts with the exception of the 1951 contract contained 6-month termination clauses. At a time not specified, William H. Melton was added to the partnership of petitioner and McVaugh. During these various periods, the receipts under the hospital contracts were shared by the partners. This division applied to the guarantee and the percentage portions of the total receipts. In addition, after November 1956, in dividing these receipts, the fact that the annuity was being purchased by the hospital in the name of petitioner was taken into account. While the language of the contracts is not identical, the operation of the radiology service by petitioner was the same under each of them. The parties to these contracts contemplated that petitioner would, except for sporadic absences on account of illness, vacation, etc., personally perform the required services. In pursuance of this understanding, petitioner personally supervised and operated the X-ray Department of the88 hospital. He personally supervised technicians and saw that the examinations were properly conducted. In addition, he personally interpreted the x-rays and treated hospital patients. Because petitioner was required to bear full personal responsibility of the X-ray Department on a round-the-clock basis, the contracts provided that the diagnostic work could be delegated by him to another certified radiologist in order to cover the X-ray Department during a particular absence of the petitioner, such as a vacation. Ninety-five percent of the diagnostic work of the hospital, however, was personally performed by petitioner. Petitioner was also required to attend and participate in certain regularly scheduled teaching conferences at the hospital. Policies, rules, and regulations for the operation of the department of radiology were set by the hospital administration, although with the advice of the radiologist. Standards for the practice of radiology in the hospital, once set, were controlled by means of the "in-service committee" and the hospital administration. In addition, the fees of petitioner's radiological services were fixed by the hospital administration although with the advice89 of the radiologist. All nonphysician personnel in the department of radiology were employed by the hospital administration, and all personnel policies were made by the hospital administration. Patients were scheduled for radiological treatment by the hospital administration. In addition, during this period, the following items in the department of radiology were supplied by the hospital: all equipment, supplies, solution, film, developers, and telephone service. In general, petitioner went to the hospital daily, stayed until the work was done, returned on call when needed, and went on teaching rounds and to scheduled meetings. The amount of work required for accomplishing this was all the hospital required of him in his capacity. Though the contracts did not so provide, time off was available on special request and a meal allowance was given to petitioner and to all employees while they were at the hospital. The petitioner carried his own liability insurance but it was not the policy of the hospital to carry liability insurance on any of its personnel. The hospital did not withhold taxes from petitioner's compensation but did withhold a certain percentage for the County Employees90 Retirement Fund. The retirement fund withholding by the hospital occurred only in the case of those who were employees. In contrast to this arrangement, petitioner had another contractual arrangement by which he had agreed to direct the radiology department at a second hospital, Providence Memorial. Pursuant to this arrangement, he furnished all the supplies, hired all personnel, and had complete control over personnel policy. All that was provided by the hospital were the space and the equipment. At this latter hospital, petitioner received a percentage of gross fees and he himself paid all the expenses of the department, including salaries. The major portion of the actual operation of this department was supervised by petitioner's partners. Pursuant to the contract, on or about November 20, 1956, the hospital applied to Variable Annuity Life Insurance Company for a policy providing for a nonforfeitable annuity for petitioner. The annuity was issued on or about November 29, 1956, with petitioner as annuitant. The maturity date of the policy is November 20, 1978. Since November 1956 the hospital has contributed, pursuant to the contract, $200 each month for the annuity contract. 91 None of the amounts have been reported by petitioners in their joint Federal income tax returns, relying on the exclusion contained in section 403(b). Respondent, in his statutory notice of deficiency, determined that the amounts contributed by the hospital were not excludable from the gross income of petitioners pursuant to section 403(b). Opinion The sole issue for determination is whether annual payments of $2,400 made by the hospital to acquire a nonforfeitable annuity for petitioner are excludable, in whole or in part, by virtue of section 403(b), Internal Revenue Code of 1954. Section 403(b) provides, in part, as follows: (b) Taxability of Beneficiary Under Annuity Purchased by Section 501(c)(3) organization. * * (1) General rule. - If - (A) an annuity contract is purchased - (i) for an employee by an employer described in section 501(c)(3) which is exempt from tax under section 501(a), * * (B) such annuity contract is not subject to subsection (a), and (C) the employee's rights under the contract are nonforfeitable, except for failure92 to pay future premiums, then amounts contributed by such employer for such annuity contract on or after such rights become nonforfeitable shall be excluded from the gross income of the employee for the taxable year to the extent that the aggregate of such amounts does not exceed the exclusion allowance for such taxable year. The employee shall include in his gross income the amounts received under such contract for the year received as provided in section 72 (relating to annuities). (2) Exclusion allowance. - For purposes of this subsection, the exclusion allowance for any employee for the taxable year is an amount equal to the excess, if any, of - (A) the amount determined by multiplying (i) 20 percent of his includible compensation, by (ii) the number of years of service, over (B) the aggregate of the amounts contributed by the employer for annuity contracts and excludible from the gross income of the employee for any prior taxable year. (3) Includible compensation. - For purposes of this93 subsection, the term "includible compensation" means, in the case of any employee, the amount of compensation which is received from the employer described in paragraph (1)(A), and which is includible in gross income (computed without regard to sections 105(d) and 911) for the most recent period (ending not later than the close of the taxable year) which under paragraph (4) may be counted as one year of service. Such term does not include any amount contributed by the employer for any annuity contract to which this subsection applies. (4) Years of service. - In determining the number of years of service for purposes of this subsection, there shall be included - (A) one year for each full year during which the individual was a full-time employee of the organization purchasing the annuity for him, and (B) a fraction of a year (determined in accordance with regulations prescribed by the Secretary or his delegate) for each full year during which such individual was a part-time employee of such organization and for each part of a year during which such individual was a full-time or part-time94 employee of such organization. In no case shall the number of years of service be less than one. Respondent challenges petitioner's right to the benefit of any exclusion. He contends that the relationship between the hospital and petitioner is not that of employer-employee as required by section 403(b)(1)(A)(i). In the alternative, respondent contends that petitioner is not a full-time employee for the purpose of determining years of service under section 403(b)(4) and that either all or part of petitioner's receipts under the contract with the hospital do not qualify as "includible compensation" within section 403(b)(3). Both of these alternative contentions only affect the computation of the exclusion allowance under section 403(b)(2) which in turn establishes the maximum possible exclusion from gross income under section 403(b)(1). Initially, therefore, we must determine the nature of the relationship between the hospital and petitioner. In short, was petitioner an employee or was he an independent contractor. We are of the opinion that he was an employee of the hospital and that the provisions of section 403(b)(1)(A)(i) are applicable. 395 Whether a person is an employee or an independent contractor is a question of fact and is to be decided only after consideration of all of the particular circumstances of each individual case. See Chester C. Hand, Sr., 16 T.C. 1410">16 T.C. 1410 (1951). Having considered all the factors in the instant case, we are of the opinion that petitioner is an employee of the hospital. Initially we must look to the contracts to determine the relationship created thereby. The contract specifically provides that the agreement contemplated that petitioner would provide personal supervision and operation of the X-ray Department and that he would bear full responsibility in this regard. Respondent, however, notes that under another clause of the same contract petitioner only agreed to furnish a radiologist who would be at the hospital. He would have us read this clause so as to negate the conclusion that what the parties contemplated was petitioner's personal supervision. We do not consider this to be a proper interpretation of the contracts. Rather, the two clauses must be read together. We believe96 that both the hospital and the petitioner contemplated a situation in which petitioner was to personally operate and supervise the X-ray Department. This is borne out by the actual conduct of the parties under the contracts, to wit, petitioner was at the hospital daily and personally performed 95 percent of the diagnostic work. Petitioner testified, and we agree, that the purpose of the clause relied on by respondent was to enable him, during any absence from the hospital, to provide for another radiologist to cover the diagnostic function of the department for him. His ability to delegate this function during an absence was a necessity because under the contracts petitioner was responsible for providing, and the hospital required for accreditation, the availability of a certified radiologist at all times, day or night, every day of the year. We are of the opinion that to read the two clauses, as respondent has urged us to do, would be to do so in a vacuum and would be totally at odds with the intent of the parties and with their actual operation. We think it clear that the provisions of the contract, particularly in light of the actual conduct of the parties, make it clear that97 the relationship created was that of employer-employee. Respondent also argues that there is a lack of effective control by the hospital over the petitioner's actual services. It is our opinion, however, that this factor must be related to the circumstances of the type of services being performed. See Wendell E. James, 25 T.C. 1296">25 T.C. 1296 (1956). Petitioner is a professional man, a certified radiologist. We are convinced that the hospital, through the "in-service committee" in particular, "controlled" petitioner's activities sufficiently to satisfy the concept of control as an indicium of an employer-employee relationship. As we stated in the James case, supra, at 1301: [The] control of an employer over the manner in which professional employees shall conduct the duties of their positions must necessarily be more tenuous and general than the control over nonprofessional employees. * * The other factors of the relationship between the hospital and petitioner are, in the main, indicative of the relationship of employer-employee. Of particular note are the facts that petitioner98 was compensated by the hospital and not by individual patients and that because the hospital was a charitable institution petitioner was unable to treat any private patient there, except under emergency circumstances. In addition, the hospital, and not petitioner, had complete control over and paid for personnel, equipment, and supplies. The following statement appearing in the James case, supra, at 1300, is equally applicable to the facts before us: His employment was continuous and general, that is, to do the pathological [here radiological] and laboratory work necessary and customary in hospitals over an extended period of time for an annual salary. It was not to do such work for individual patients on a case basis. He was working for the hospital corporation by the year and not for individual patients "by the job." We are aware, as respondent points out, that petitioner did not work a fixed number of hours and that the hospital did not withhold taxes from his salary. Though the contracts do not contain the terms "employer," "employee," or "position," the second contract does describe the relationship as "employment"; however, we do not think that the presence or absence of99 such labels is decisive. Though those factors may be relevant, on the facts before us we hold that they are not controlling. Suffice it to say that having considered all of these factors and weighing them accordingly we have concluded that the record as a whole supports the holding that the relationship between the hospital and petitioner was that of employer-employee. 4In the alternative, respondent has argued that even if the relationship of employer-employee be found, petitioner, on the facts before us, is nonetheless precluded from any exclusion under section 403(b). The exclusion allowance of section 403(b)(2) is equal100 to 20 percent of the employee's includable compensation for the taxable year multiplied by the number of years of his service reduced by any amounts contributed by the employer which are excludable in prior taxable years. Thus, it is necessary, in order to apply the formula, to establish (1) includable compensation, (2) years of service, and (3) amounts contributed and excludable for any prior taxable year. In regard to the first element, "includable compensation," respondent submits that the portion of the total receipts constituted by the percentage of the fees charged by the hospital of private paying patients does not qualify because they did not result from the employee relationship. He concludes that the total of "includable compensation" is zero because the monthly guaranty is not separable from the nonqualifying percentage. In the alternative, he argues that the amount of compensation resulting from the employee relationship is limited to the amount of the guaranty. We are of the opinion that both the guaranty and the percentage of fees are "includable compensation" within the purview of section 403(b)(3). There is nothing in the language of the statute, nor in respondent's101 own regulations, that would tend to support his contention. Both the guaranty and the percentage were received by the petitioner-employee from the hospital-employer for his services to the hospital. The percentage arrangement for computing his compensation does not alter the fact that he was compensated by the hospital and not by individual patients. See Wendell E. James, supra.Cf. Saiki v. United States, 306 F. 2d 642 (C.A. 8, 1962). The fees were set by the hospital with petitioner's advice and were collected by the hospital. See also, S. Rept. No. 1983, to accompany H.R. 8381 (Pub. L. 85-866), 85th Cong., 2d Sess., p. 150 (1958). In reference to the second element, "years of service," under section 403(b)(4)(A) there is included one year for every year of full-time service. Under section 403(b)(4)(B), fractions of a year are computed for parttime employees or full-time employees. Respondent contends that because petitioner does not have fixed or regular hours or a minimum number of required hours it is, therefore, impossible to compute "years of service." 102 Respondent's theory is grounded upon the premise that petitioner is a parttime employee. Petitioner argues that he was a full-time employee during the period in question and that the lack of fixed hours, therefore, does not preclude the proper computation of "years of service." We agree with petitioner. Respondent's regulations set out the test of full-time employment as follows: (4) Full-time employee for full year. (i) * * In determining whether an individual is employed full-time, the amount of work which he is required to perform shall be compared with the amount of work which is normally required of individuals holding the same position with the same employer * * * (ii)(a) In measuring the amount of work required of individuals holding a particular position, any method that reasonably and accurately reflects such amount may be used. * * (c) In case an individual's position is not the same as another with his employer, the rules of this paragraph shall be applied by considering the same position with similar employers or similar positions with the same employer. [Regs. sec. 1.403(b)-1(f) 103 ] We are of the opinion that petitioner qualifies as a full-time employee within the meaning of the above-quoted regulation. Petitioner was personally responsible for all the radiology work at the hospital on a 24-hour, 365 days-a-year basis and the parties have stipulated that the amount of work the petitioner has always been required to perform for the hospital is the same amount as that which would be required of any other person in a similar relationship with the hospital. He personally performed 95 percent of the diagnostic work of the department. We are satisfied that the lack of fixed or a minimum number of required hours, on the facts before us, is not fatal to petitioner's case. The requirement of "full-time" must be viewed in relation to the type of employment under consideration. We are convinced that petitioner was a full-time employee, as the term is used by the statute. Having determined elements one and two, the third element is reduced to a mere mathematical computation which the parties can dispose of under Rule 50. We, therefore, hold that petitioner is entitled to the benefit of the proper exclusion under section 403(b). Decision will be entered under Rule*104 50. Footnotes1. Prior to contracting with petitioner, the hospital had contacted the American College of Radiology to insure the terms of the contract conformed to professional standards of ethics and propriety.↩2. Although this contract is between the hospital and petitioner and McVaugh rather than with petitioner individually, as are the others involved herein, it appears that the operation was the same under all the contracts. The final two contracts entered into on October 19, 1959, and June 21, 1961, were worded in the first person singular, as was the first contract dated December 29, 1951, set forth above.↩3. Respondent has conceded, for the purposes of this case, that the hospital may be considered as an organization described in section 501(c)(3) which is exempt from tax under section 501(a). The parties have also agreed that the annuity does not qualify under section 403(a)(1)↩ and that petitioner's rights under the contract are nonforfeitable, except for failure to pay future premiums.4. We have considered the authorities relied on by respondent and it is our opinion that they are factually distinguishable from the instant case. See: Azad v. United States, an unreported case (D. Minn. 1966), 18 A.F.T.R. 2d 5482; Willard Storage Battery Co. v. Carey, 103 F. Supp. 7">103 F. Supp. 7 (D.C.N.D. Ohio 1952). See also Saiki v. United States, 306 F. 2d 642 (C.A. 8, 1962), and Rev. Rul. 66-274, 2 C.B. 446">1966-2 C.B. 446↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625087/	CAROLYN P. PHILIPS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentPhilips v. CommissionerDocket No. 12532-88United States Tax CourtT.C. Memo 1991-56; 1991 Tax Ct. Memo LEXIS 71; 61 T.C.M. (CCH) 1883; T.C.M. (RIA) 91056; February 12, 1991, Filed 71 Decision will be entered under Rule 155. Hans G. Tanzler, III, for the petitioner. Steve R. Johnson, for the respondent. KORNER, Judge. KORNERMEMORANDUM FINDINGS OF FACT AND OPINION Respondent determined that petitioner had transferee liability for the following deficiencies in and additions to the Federal income tax of her husband, Benjamin Philips, Jr. (hereinafter sometimes referred to as transferor): Additions to Tax -- Section 1YearDeficiency6651(a)(1)6653(a)1973$ 1,421.77$ 2,829.23$ 1,035.12197412,028.463,007.121,063.68197522,256.755,564.191,572.46197660,576.5215,144.133,028.83197771,080.0017,770.004,091.85197857,116.0014,314.003,355.75197968,749.0017,187.003,899.45The parties have resolved many of the issues of this72 case. They agree that disposition of the following issues, which they have phrased in the following manner, will resolve their dispute: 2 (1) Whether, as a matter of law, on the conveyance of the transferor's separate property into entireties status, petitioner was a recipient of property at all, especially since the transferor is not joined in the case, and (2) whether, as a matter of law, the conveyance of property out of entireties status and into the sole ownership of petitioner was the conveyance of property that the Service could have reached in order to satisfy the transferor's unpaid tax liabilities. FINDINGS OF FACT This case was submitted under Rule 122. The stipulation of facts and attached73 exhibits are incorporated herein by this reference. Petitioner resided in Jacksonville, Florida, when she filed her petition. Petitioner and Benjamin Philips were married at all times relevant to this case. During the years at issue they filed Federal income tax returns on the "married filing separately" basis. The deficiencies and additions at issue relate to Benjamin Philips' returns. His liability for those amounts is not in dispute herein, and such liabilities existed prior to the transfers in question here. Respondent's assertions of transferee liability concern transfers of four properties: (a) a residence; (b) a purchase money note arising from the sale of a medical building; (c) two parcels of commercial real property; and (d) a parcel of vacant land. Each of these properties is located in Jacksonville, Florida. (a) The Residence: The residence was acquired by Benjamin and Carolyn Philips in 1957, as tenants by the entireties. On March 1, 1985, Benjamin transferred his interest in the residence to petitioner by quit-claim deed. (b) The Purchase Money Note: The purchase money note was received in connection with the sale of a medical building. Benjamin Philips74 owned that building in his individual capacity. On June 30, 1981, he sold his interest therein. In return, the purchasers assumed the indebtedness existing with respect to the building, and signed a purchase money note for $ 100,000 in favor of Benjamin and Carolyn Philips. On December 31, 1984, Benjamin conveyed his interest in the purchase money note to petitioner by an assignment of mortgage. (c) The Commercial Real Property: The commercial real property is divisible into two parcels, one containing a grocery store and the other a service station. Benjamin Philips acquired the grocery store portion in his individual capacity in 1951. On October 27, 1981, he executed a quit-claim deed, conveying this property to himself and petitioner "for the purpose of creating a tenancy by the entireties in the grantees." The service station portion of the commercial property was owned by Benjamin Philips' mother until her death in 1980. The sole beneficiaries under her will were Benjamin Philips and his brother, Edmond. On January 1, 1982, the service station parcel, along with other property, was distributed to Benjamin and Carolyn, and Edmond and his wife by a personal representative's75 deed. By partition deeds dated January 2, 1982, Benjamin and Carolyn, and Edmond and his wife divided the properties received. Petitioner and Benjamin thereby received the service station parcel, in consideration of their release of interests in other properties. On February 14, 1985, Benjamin transferred his interests in both the grocery store and the gas station properties to petitioner by warranty deed. (d) The Vacant Land: The vacant land was also received by petitioner and Benjamin via the 1982 personal representative and partition deeds. On September 2, 1982, they jointly executed a warranty deed conveying the vacant land to their son, Benjamin Philips III. Each of the transfers at issue took place in the State of Florida. The parties have stipulated that each property, when held by Benjamin and petitioner together, were held as tenants by the entireties. OPINION Transferee liability for Federal taxes owing can arise under either state or Federal law. See sec. 6901(a). Respondent's present determinations invoke the Florida fraudulent conveyance statute, Fla. Stat. Ann. sec. 726.01 (West 1988) (as effective for years before 1988): he argues that each of the above-described76 properties was fraudulently conveyed. Respondent bears the burden to prove this assertion. Sec. 6902(a). If he carries this burden, respondent may collect amounts of tax owed by the transferor, Benjamin, from his transferee, petitioner, to the extent of the value of the fraudulently conveyed property, plus interest. 3Liability under the Florida fraudulent conveyance statute generally requires proof of a variety of elements. See, e.g., United States v. Fernon, 640 F.2d 609">640 F.2d 609, 613 (5th Cir. 1981). However, our task in the present matter has been simplified by the parties' stipulated77 issues. We construe this stipulation to be the equivalent of a concession by petitioner that, except for the points discussed below, the remaining elements requisite to liability under the Florida statute are present in this case. The issues remaining for decision, applied to the facts of this case, as we have stated, are: (1) Whether, as a matter of law, on the conveyance of the purchase money note, the commercial real property, and the vacant land into entireties status, 478 petitioner was a recipient of property at all, especially since the transferor is not joined in this case, and (2) whether, as a matter of law, the conveyance of the residence out of entireties status and into the sole ownership of petitioner was a conveyance of property that respondent could have reached in order to satisfy the transferor's unpaid tax liabilities. 5Issue 1: Conveyances into EntiretiesPetitioner attacks respondent's assertion of liability with regard to the properties conveyed into entireties status on two related grounds: (1) that petitioner, in her individual capacity, never received any property interest, and (2) therefore, that the notice of transferee liability served upon her was deficient. These points focus on the nature of the entireties estate, and argue that it is an entity unto itself with substantive and procedural import. Resolution of these intermingled issues requires a preliminary distinction between the roles of state and Federal law in this controversy. It is well-established that state law determines the nature of property interests for purposes of Federal revenue acts. See, e.g., Aquilino v. United States, 363 U.S. 509">363 U.S. 509, 513, 4 L. Ed. 2d 1365">4 L. Ed. 2d 1365, 80 S. Ct. 1277">80 S. Ct. 1277 (1960). We must thus look to state79 law to determine whether petitioner was a recipient of property. Federal law defines how transferee liability may be asserted. Sec. 6901(a); Commissioner v. Stern, 357 U.S. 39">357 U.S. 39, 42-44, 2 L. Ed. 2d 1126">2 L. Ed. 2d 1126, 78 S. Ct. 1047">78 S. Ct. 1047 (1958). We will thus look to Federal law to assess the notice of liability. Having reviewed the appropriate authorities, we hold that, under Florida law, petitioner received an interest in property when the entireties estates were created: Florida law states that each spouse has an interest in entireties property. The tenancy by the entireties stems from the common law concept of a unity of husband and wife. This unity vests both spouses with possession. See Andrews v. Andrews, 155 Fla. 654">155 Fla. 654, 21 So. 2d 205">21 So. 2d 205, 206 (1945). Indeed, a "unity of possession," i.e., that both spouses own and control the whole estate, is one of the characteristics intrinsic to a tenancy by the entireties. See, e.g., Bechtel v. Estate of Bechtel, 330 So. 2d 217">330 So. 2d 217, 219 (Fla. Dist. Ct. App. 1976). The fact that one spouse's interest is not wholly independent of the other's does not render that interest a nullity. We therefore dismiss as overly formalistic80 petitioner's argument that only the entireties estate, as a separate entity, received a property interest. A tenancy by the entireties is not a juridical person, separate from the identities of the tenants themselves. We next address the sufficiency of respondent's notice of transferee liability. Section 6901(a) authorizes respondent to employ such notices when asserting transferee liability. Having found that petitioner was a recipient of property, 6 it follows that the notice sent to her, individually, was not deficient. Petitioner argues against this conclusion by citing Florida law requiring the joinder of both spouses in cases concerning entireties property. See, e.g., Ellis Sarasota Bank and Trust Co. v. Nevins, 409 So. 2d 178">409 So. 2d 178, 180 (Fla. Dist. Ct. App. 81 1982). While she admits that this joinder requirement is a rule of state law, petitioner argues that this rule should nonetheless be applied to respondent herein because it is "substantive," not "procedural." See Commissioner v. Stern, 357 U.S. 39">357 U.S. 39 at 42-44, 2 L. Ed. 2d 1126">2 L. Ed. 2d 1126, 78 S. Ct. 1047">78 S. Ct. 1047. We disagree. Section 6901(a) authorizes respondent to enforce liability by the same procedures as a tax deficiency. Issuing a statutory notice to a person determined to have liability is a basic part of that procedure. As the legislative history to the predecessor of section 6901 states: the liability of the transferee is collected in the same manner as the liability for tax. Section 274(a) [predecessor of sections 6212 and 6213] is thus incorporated by reference, but the result of such reference is that for procedural purposes the transferee is treated as a taxpayer would be treated, and under section 274(a) notice would be sent to the transferee (and not the taxpayer) in proceedings to enforce the liability of the transferee. [Conf. Rept. No. 356, 9th Cong., 1st Sess. (1926), 1939-1 C.B. (Part 2) 361, 372).]To hold otherwise would defeat the simplified procedure the transferee82 statute was enacted to create. See Commissioner v. Stern, supra.We therefore hold in favor of respondent on this issue (1). Petitioner received property upon creation of the entireties estates, and her transferee liability was properly asserted. It is the transfer of property, by or at the behest of Benjamin, unencumbered by entireties status, which was the fraudulent conveyance and which section 6901 permits respondent to reach. Bearing in mind the parties' stipulations/concessions, it follows that the transfers of the purchase money note, commercial real property, and vacant land into entireties properties were fraudulent conveyances, and that petitioner, as transferee, is liable for the agreed amounts. Issue 2: Conveyance Out of EntiretiesThe second issue for decision focuses on petitioner's individual receipt of the residence in 1985, via Benjamin's quit-claim deed. The Philipses previously held the residence by the entireties. It is uncontested that the creation of that estate predated any liability presently at issue, and was not fraudulent. We again look to state law to determine petitioner's "substantive" liability as a transferee. 83 Respondent asserts that the transfer at issue was a fraudulent conveyance; petitioner responds that no such liability arose. We agree with petitioner. A requisite element of a Florida fraudulent conveyance is that the transfer hinder, delay, or prejudice creditors. Ocklawaha River Farms Co. v. Young, 73 Fla. 159">73 Fla. 159, 74 So. 644">74 So. 644, 648-649 (1917); Bay View Estates Corp. v. Southerland, 114 Fla. 635">114 Fla. 635, 154 So. 894">154 So. 894, 900 (1934), overruled on another issue B.A. Lott, Inc. v. Padgett, 153 Fla. 308">153 Fla. 308, 14 So. 2d 669">14 So. 2d 669 (1943). In other words, the transfer must interfere with a creditor's ability to reach property. It thus follows that, had the creditor not been able to reach the property prior to its transfer, no fraudulent conveyance could have occurred. It is petitioner's position that respondent could not have reached the residence had it remained in the entireties estate. We agree. It is an established proposition of Florida law that the creditors of an individual spouse cannot reach property held by the entireties. 7 See, e.g., United States v. Gurley, 415 F.2d 144">415 F.2d 144, 14984 (5th Cir. 1969). Respondent therefore could not have reached the residence prior to its transfer, and thus no fraudulent conveyance occurred.Respondent argues against this conclusion. He states that he could have reached petitioner's interest in the residence before it was transferred out of entireties, and, as a result, it was fraudulently conveyed. In support, respondent cites his tax lien power under section 6321. While acknowledging that cases such as United States v. American National Bank of Jacksonville, 255 F.2d 504">255 F.2d 504 (5th Cir. 1958), specifically hold that one spouse does not have an interest in entireties property to which a Federal tax lien can attach, respondent argues that these*85 cases were "wrongly decided" "old cases" which have been superseded by two recent Supreme Court cases, United States v. National Bank of Commerce, 472 U.S. 713">472 U.S. 713, 86 L. Ed. 2d 565">86 L. Ed. 2d 565, 105 S. Ct. 2919">105 S. Ct. 2919 (1985), and United States v. Rodgers, 461 U.S. 677">461 U.S. 677, 76 L. Ed. 2d 236">76 L. Ed. 2d 236, 103 S. Ct. 2132">103 S. Ct. 2132 (1983). We disagree, and find the two cited cases distinguishable because neither one involved entireties property. National Bank of Commerce held that respondent may levy upon a joint bank account for taxes owing by only one co-depositor. Rodgers authorized a District Court to order the sale of a homestead property to satisfy the individual debts of a delinquent taxpayer. What sets these cases apart from the present situation is that in both cited cases the Court did no more than facilitate respondent's ability to reach property in which the taxpayer held an independent interest. See United States v. National Bank of Commerce, 472 U.S. at 723-725; United States v. Rodgers, 461 U.S. at 685-686. In the entireties context, no such independent interest exists. The Supreme Court noted this distinction in a footnote to its Rodgers opinion. 461 U.S. at 702 n. 31.16 We accordingly decline respondent's invitation to construe National Bank of Commerce and Rodgers as having overruled the American National Bank of Jacksonville line of cases. As stated, we hold for petitioner on this issue (2). Decision will be entered under Rule 155. Footnotes1. All statutory references are to the Internal Revenue Code, as in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, except as otherwise noted.↩2. We have accepted the parties' stipulated issues for decision because they are both factually and legally relevant. We note that the ability of parties to so stipulate issues is not absolute: only in circumstances such as these, where both the facts and law support the framed issues, are such stipulations allowable.↩3. The parties have agreed by stipulation as to the various amounts owing by petitioner as transferee, dependent upon our resolution of the issues presented. Accordingly, we do not discuss the values transferred. The parties have also stipulated the interest to be paid. We therefore do not discuss the appropriate rate or period of interest. Compare Store v. Commissioner, T.C. Memo 1985-405↩.4. We note that Florida law allows a spouse to convey real property into a tenancy by the entireties, see Fla. Stat. Ann. sec. 689.11(1) (West 1990), and allows personalty to be held by the entireties as well. See Winters v. Parks, 91 So. 2d 649">91 So. 2d 649, 651↩ (Fla. 1956).5. Any consideration of the conveyances of the purchase money note and commercial real property out of entireties status and into the sole ownership of petitioner is made unnecessary by our disposition of issue (1), infra↩.6. Once again, we point out that the value of property received is not at issue in this case: the parties have stipulated the dollar amounts of petitioner's transferee liability, depending upon our resolution of the issues for decision.↩7. An exception to this rule exists with regard to property fraudulently conveyed into entireties. See, e.g., issue (1), supra; Sample v. Natalby, 120 Fla. 161">120 Fla. 161, 162 So. 493">162 So. 493 (1935); Whetstone v. Coslick, 117 Fla. 203">117 Fla. 203, 157 So. 666">157 So. 666↩ (1934).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625089/	ESTATE OF S. S. FORREST, JR., DECEASED, KENT D. FORREST, INDEPENDENT EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEstate of Forrest v. CommissionerDocket No. 4393-89United States Tax CourtT.C. Memo 1990-464; 1990 Tax Ct. Memo LEXIS 509; 60 T.C.M. (CCH) 621; T.C.M. (RIA) 90464; August 28, 1990, Filed 509 An appropriate order will be issued and decision will be entered under Rule 155. Donald J. Dombrowski, for the petitioner. Richard T. Cummings, for the respondent. SCOTT, Judge. SCOTT MEMORANDUM OPINION This case is before the Court on petitioner's Motion for Partial Summary Judgment filed September 27, 1989, and respondent's Cross-motion for Partial Summary Judgment filed December 8, 1989. Respondent determined a deficiency in the estate tax of the Estate of S. S. Forrest, Jr., in the amount of $ 524,755.45. All issues have been disposed of by agreement of the parties, except whether the value of certain real property is includable in decedent's gross estate. The parties agree that if the conveyance to decedent by his grandparents of the property involved was of a life estate, the value of the property is not includable in decedent's gross estate, but if the conveyance was of a fee simple estate, the value of the property is includable in his gross estate. There is no dispute as to the facts and the parties agree that the remaining issue may be decided on the partial summary judgment motions. S. S. Forrest, Jr. (decedent), died510 on June 20, 1985, leaving children surviving him. Kent D. Forrest was appointed as independent executor of decedent's estate. The executor, who resided in Houston, Texas, at the time of the filing of the petition in this case, filed the estate tax return for decedent's estate with the office of the Internal Revenue Service in Austin, Texas. By deeds dated December 31, 1940, and December 20, 1941, decedent's grandparents conveyed to decedent and his brother, E. L. Forrest, certain interests in real property located in Lubbock and Crosby Counties, Texas. Each deed contained the following language: and by these presents do grant, sell and convey unto said Edwin L. Forrest and S. S. Forrest, Jr., as their individual property, they to share equally a life estate in and to the following described lands * * * * * * with remainder over, as to each of said grandsons, to their respective bodily heirs, as their individual property; but if either S. S. Forrest Jr., or Edwin L. Forrest die without leaving bodily heirs, his share shall go to the bodily heirs of his brother, whether the brother be living or deceased. In the event that there are no bodily heirs of the survivin511 brother, title shall be individually vested in the brother if he be living, or if dead title shall be vested in S. L. Forrest, his heirs or his assigns, forever * * * * * TO HAVE AND TO HOLD the above described premises, together with all and singular the rights and appurtenances thereto in anywise belonging, unto the said S. S. Forrest, Jr., and Edwin L. Forrest, and their bodily heirs * * * . In the notice of deficiency to the executor of decedent's estate respondent determined that the value of the real property conveyed to decedent by his grandparents is includable in decedent's gross estate. In his cross-motion for partial summary judgment respondent states that the value of this property is includable in decedent's gross estate since the rule in Shelley's case, which was followed by the Texas courts at the date of decedent's death, applies to the grant of real property to decedent from his grandparents creating a fee simple interest in the property in decedent. Petitioner contends that the rule in Shelley's case does not apply and that only a life estate was granted to decedent and therefore, the value of the property is not includable in decedent's gross estate. In512 support of this contention, petitioner argues that the trend in Texas has been not to apply the rule in Shelley's case unless the conveyance falls squarely under that rule and that the conveyance here involved does not fit squarely under the rule. In general, the rule in Shelley's case provides that if a grant of a freehold interest is made to a grantee with a remainder to the grantee's bodily heirs, the grantee will take a fee simple interest in the property. Under Texas law, the rule is applied if five conditions are satisfied. First, the grantee must be granted a freehold interest. Second, there must be a conveyance of a remainder interest. Third, both the freehold and the remainder interest must be conveyed in the same instrument. Fourth, the apparent remainder interest must be to the heirs of the holder of the initial freehold interest. Fifth, the freehold and apparent remainder interest must be of the same quality. . The first condition is satisfied by the grant of a life estate to decedent. The second condition is satisfied by the conveyance of an apparent remainder interest. The third513 condition is satisfied in that both the life estate and the apparent remainder interest are conveyed in the same document, the deed. The fifth condition is satisfied in that the life estate and the remainder interest are of the same quality. They are both legal interests. Accordingly, whether the rule in Shelley's case applies is determined here by whether the fourth condition is satisfied. Under Texas law, the rule in Shelley's case was only applicable in situations where the words "bodily heirs" in the deed were used in their technical sense. ; ; , affd. ; (Com. of Appeals of Texas 1919). In their technical sense, the words "bodily heirs" mean lineal descendants so that the property passes to an indefinite succession of takers from generation to generation. . If the words "bodily heirs" were used in the deed to decedent from his grandparents514 in their technical sense, the fourth condition would be satisfied and the rule of Shelley's case would apply under Texas law as in effect at the date of decedent's death. The decedent would have a fee simple interest in the property and the value of the property would be included in decedent's estate. Alternatively, if the words "bodily heirs" were not used in their technical sense, but were used to refer to the children of the holder of the freehold interest, the conveyance would create a life estate in decedent in the property with a remainder interest in his children. The rule of Shelley's case would not apply under these circumstances and the estate created in decedent would be a life estate. Therefore, the value of the property would not be included in decedent's gross estate. The meaning of the words "bodily heirs" as used by the grantor determines whether the fourth condition necessary to the application of the rule in Shelley's case is satisfied. The grantor's intent as to the application of the rule in Shelley's case is not relevant since the rule in Shelley's case is a rule of law. .515 However, it is material whether the instrument as a whole indicates that the grantor intended by use of the words "bodily heirs" to signify an indefinite succession of takers from generation to generation. . Prior to the abolition of the application of the rule in Shelley's case in Texas, the courts of that State had begun to look with disfavor on its application. The language of the deed or will must clearly establish the intent of the grantor to use the words "bodily heirs" in their technical sense for the rule to apply. For the Rule in Shelley's Case to convert "issue of her body" into heirs generally it must be the intention of the grantor to use those words in their technical sense of "heirs" so as to "pass from person to person through successive generations in regular succession." In other words, that the grantor intended the words "issue of her body" to mean the whole line of heirs. [Citations omitted.] . See also , affd. . The Texas courts have applied516 four rules of construction in determining whether the words "bodily heirs" are used in their technical sense: (a) Every part of an instrument should be harmonized and given effect to, if it can be done. If that cannot be done and it is found that the will [instrument] contains inherent conflict of intentions, the object of the grant being considered shall prevail. (b) If a will [instrument] or its parts are equally capable of two constructions, one consistent with an intention, on the part of the grantor to do that which it was lawful for him to do, and one consistent with an intention to do that which it was unlawful for him to do, the former will be adopted. (c) The rule that courts will confer the greatest estate on the grantee that the terms of the grant will permit is subordinate to the rule "that every part of the will should be harmonized and given effect to, if it can be done." (d) In a will [instrument] to a person for the term of his natural life and at his death to his "bodily heirs," the words "bodily heirs" thus employed, if from the entire text of the will it is shown that the words "bodily heirs" were used in the sense of children, are words of purchase517 and not of limitation. ; see also (Com. of Appeals of Texas 1932). In construing the instrument, all of its provisions should be looked to for the purpose of ascertaining what the real intention of the grantor was, and if this can be ascertained from the language of the instrument, then any particular paragraph of the deed, which considered alone would indicate a contrary intent, must yield to the intention manifested by the whole instrument. [Citations omitted.] . The intention of the grantor will prevail if it can be determined from the language of the deed. The deed granting the property here involved to decedent includes language granting the remainder interest, upon the death of the decedent, without bodily heirs, to the bodily heirs of the brother of the decedent whether the brother is living or dead. The term "heirs" refers only to those who, upon the death of another, are entitled to receive property of the decedent.518 A condition precedent to being an heir is that the person from whom the property is to be received is dead. It is a well accepted rule that when a person is still living, he has no heirs. Therefore, a conveyance to the heirs of a living person is void for uncertainty. . If the grantors to decedent intended to use the words "bodily heirs" in their technical sense, upon the death of the decedent without heirs the grant would be void for uncertainty if decedent's brother were still living. If the words "bodily heirs" are interpreted not in their technical sense, but as children, the entire language of the deed would be given effect. A remainder interest to the children of the living brother of the decedent is valid. Furthermore, the nontechnical use of the words "bodily heirs" in the remainder of the deed could be given effect. Under the first rule, construing the words to mean children harmonizes and gives effect to the entire deed. The deeds here involved are capable of two constructions. Under one construction, the words "bodily heirs" could be considered to be used in their technical sense519 and under the other construction the words "bodily heirs" could be interpreted to be used in their nontechnical sense to mean children. As both constructions are legal, the second rule of construction used by Texas courts is of no assistance in this case. The greatest estate that could be conferred on the decedent would be a fee simple estate. However, the rule that a will or deed will be interpreted to confer the greatest estate on the grantee that its terms will permit is subordinate to the first rule of construction, that every part of the will or deed should be harmonized and given effect. As stated above, under the first rule of construction, the Texas courts would not confer a fee simple estate upon the decedent, but would construe the words "bodily heirs" to mean children. Therefore, under the third rule of construction as under the first, decedent would have only a life estate. In determining if the words "bodily heirs" were intended in their technical sense, the language and context of the entire conveyance must be considered. ; As discussed under the first rule of construction,520 the context of the deed indicates that the words "bodily heirs" were used in a nontechnical sense to mean children. Therefore, under the fourth rule of construction of the Texas courts, the words "bodily heirs" do not refer to heirs generally, but only to children of decedent and children of decedent's brother. ; . A fact situation similar to the one here before the court is described in The grantor deeded property to her granddaughter "and at her death to the issue of her body, or their descendants, in accordance with the laws of descent and distribution." The words "issue of her body" were construed as meaning children. Accordingly, the Supreme Court of Texas held that the rule in Shelley's case did not apply and therefore the grantee held only a life estate in the property. . We conclude that the words "bodily heirs" s used in the deeds here involved were not used in their technical sense, but were used to mean children. Therefore, the requirements for the application521 of the rule in Shelley's case have not been satisfied. Accordingly, the decedent held only a life estate in the real property conveyed to him by his grandparents. We will, therefore, grant petitioner's motion for partial summary judgment and deny respondent's cross-motion for partial summary judgment. An appropriate order will be issued and decision will be entered under Rule 155.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625090/	Petroleum Exploration, Petitioner, v. Commissioner of Internal Revenue, Respondent. The Wiser Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Petroleum Exploration, Petitioner, v. Commissioner of Internal Revenue, RespondentPetroleum Exploration v. CommissionerDocket Nos. 24698, 24699, 25213United States Tax Court16 T.C. 277; 1951 U.S. Tax Ct. LEXIS 283; February 5, 1951, Promulgated 283 Decisions will be entered for the respondent. Petitioners on March 2, 1937, acquired an oil and gas lease providing conveyance of the property for oil and gas mining purposes, for a period of 10 years or as long as oil or gas was produced, providing that if no well be commenced by March 2, 1938, the lease would terminate unless the lessee should have paid a cash rental for the privilege of deferring commencement of a well, and providing for similar delay by rental payment for 10 years. The rental was paid before March 2, 1938. In September 1938 oil was discovered and six wells were drilled and a large amount of oil was produced. On January 31, 1939, petitioners sold and assigned their rights to another. The oil already produced was not included. Held, that the property sold was acquired on March 2, 1937, and not when oil was discovered in September 1938; therefore gain on the sale was long term gain excludible under section 711 (b) (1) (B) in the computation of excess profits net income. Held, also, that a petitioner and a corporation, 75 per cent of the stock of which it acquired in 1945, were a "chain" under section 713 (g) (5) (B) resulting in a net capital reduction284 in the computation of excess profits credit and unused excess profits credit for 1945 and 1946. William J. Brennan, Esq., and John Wiseman, C. P. A., for the petitioners.A. W. Dickinson, Esq., for the respondent. Disney, Judge. DISNEY277 These cases, duly consolidated, involve, after concessions made, eliminating consideration of certain deficiencies in income tax and declared value excess-profits tax, taxes as follows:Excess profitsPetitionerYeartax deficiencyPetroleum Exploration Docket No. 24698.1941$ 66,494.91194229,545.85194339,102.61194476,389.98Petroleum Exploration Docket No. 25213.1945$ 1,206.40Wiser Oil Co. Docket No. 24699.1941$ 51,048.6019427,112.85In addition, by amended answer, the respondent claimed additional deficiencies against Petroleum Exploration as285 follows: $ 78,715.40 instead of $ 66,494.91 for 1941, and $ 31,122.03 instead of $ 1,206.40 for 278 1945. Claims for refund were filed as to 1941 and 1942 by both petitioners. Two questions are presented: (a) The time petitioners had held oil property sold on January 31, 1939; and (b) whether the acquisition of certain stock by Petroleum Exploration in 1945 causes capital reduction for purposes of excess profits credit, and of any unused excess profits credit.FINDINGS OF FACT.Facts were stipulated by the parties, and such stipulation is by reference made a part of our findings. We set forth here, with findings of facts not stipulated, only such portion of the stipulated facts as are considered necessary for outlining the facts involved.The petitioners are corporations.The excess profits tax returns here involved were filed with the collector for the West Virginia district at Parkersburg, West Virginia.On March 2, 1937, one Laura Maxwell executed to petitioner Wiser Oil Company an oil and gas lease on 70 acres of land in Marion County, Illinois. The lease provided, in pertinent part, that in consideration of $ 35 paid, and the covenants and agreements of the lease, the286 lessor "has granted, demised, leased and let, and by these presents does grant, demise, lease and let unto the said lessee for the sole and only purpose of mining and operating for oil and gas and of laying of pipe lines, and of building tanks, powers, stations and structures thereon, to produce, save and take care of said products," 70 acres of land in Marion County, Illinois, (consisting of tracts of 10, 20, and 40 acres) for 10 years from date "and as long thereafter as oil or gas or either of them is produced from said land by Lessee"; that one-eighth of oil or gas should be paid to the lessor; that "If no well be commenced on said land on or before the 2nd day of March, 1938 this lease shall terminate as to both parties, unless the Lessee shall on or before that date pay or tender to the Lessor or to the Lessor's credit" in a named bank $ 17.50, "which shall operate as a rental and cover the privilege of deferring the commencement of a well for twelve (12) months from said date. * * * In like manner and upon like payments or tenders, the commencement of a well may be further deferred for like periods of the same number of months successively. And it is understood and287 agreed that the consideration first recited herein, the down payment, covers not only the privilege granted to the date when said first rental is payable as aforesaid, but also the Lessee's option of extending that period as aforesaid, and any and all other rights conferred"; that the lessee should have the right to use, free of cost, gas, oil, and water produced on the land for lessee's operations, except water from the wells of lessor, and that:Lessor hereby warrants and agrees to defend the title to the lands herein described, and agrees that the Lessee shall have the right at any time to redeem 279 for Lessor, by payment, any mortgage, taxes or other liens on the above described lands, in the event of default of payment by Lessor; and be subrogated to the rights of the holder thereof, and the undersigned Lessors, for themselves and their heirs, successors, and assigns, hereby surrender and release all rights of dower and homestead in the premises described herein, insofar as said right of dower and homestead may in any way affect the purposes for which this lease is made, as recited herein.No well was commenced by March 2, 1938, but the rental was paid on February 23, 288 1938, by Wiser Oil Company, the petitioners contributing the amount in equal portions. The lease was recorded on April 22, 1938.By instrument entitled "Mineral Deed," dated July 20, 1937, Laura Maxwell conveyed to B. J. Dining one-half of the oil and gas that might underlie the 40 acres and 10 acres above mentioned, subject to any recorded oil and gas lease theretofore executed. This instrument was recorded on the date of its date, July 20, 1937.By like instrument entitled "Mineral Deed," dated July 20, 1937, B. J. Dining conveyed to F. L. Kelley fifteen-thirty-seconds of the oil and gas that might underlie the 40 acres and 10 acres above mentioned. This instrument was recorded on July 22, 1937.By like instrument entitled "Mineral Deed," dated September 30, 1937, F. L. Kelley and wife conveyed this fifteen-thirty-seconds to Tuesday Oil Company.By instrument entitled "Mineral Deed," dated February 26, 1938, Laura Maxwell conveyed one-seventh of the oil and gas that might underlie the 10 acres, 20 acres and 40 acres above mentioned to A. R. Thompson, subject to any recorded oil and gas lease. This instrument was recorded March 2, 1938.On August 20, 1938, A. R. Thompson and 289 wife executed to F. L. Kelley an instrument entitled "Oil and Gas Lease," on the 10 acres and 40 acres above mentioned.By instrument entitled "Assignment of Oil and Gas Lease," dated September 29, 1938, F. L. Kelley, by the name of Forrest L. Kelley, and wife, assigned all right, title and interest under the instrument mentioned next above to Tuesday Oil Company.On August 24, 1938, The Wiser Oil Company entered into an agreement with Kingwood Oil Company, whereby the latter agreed to drill a test well on the 20 acres above mentioned. Pursuant to this agreement, Kingwood Oil Company located a test well on the 20 acres on August 30, 1938, and completed the same on September 14, 1938. Thereafter two additional wells were completed on the 20 acres, one on September 24 and the other on October 6, 1938. Oil was found in all three of these wells which were equipped for production and oil produced therefrom. Production therefrom commenced on September 22 and 30, and October 11, 1938, respectively. Pursuant to this 280 agreement, The Wiser Oil Company assigned one-half of its interest in the 20 acres to Kingwood Oil Company on September 20, 1938.On September 7, 1938, The Wiser290 Oil Company entered into a similar agreement with Kingwood Oil Company with respect to the 10 acres and 40 acres. Pursuant thereto, Kingwood Oil Company thereafter commenced (a) one well on the 40 acres, and completed it on September 30, 1938; and (b) two wells on the 10 acres, and completed them, one on October 14 and the other on October 20, 1938. Oil was found in all three of these wells which were equipped for production and oil produced therefrom. Production therefrom commenced on October 4, 24, and 26, 1938, respectively. Pursuant to this agreement, The Wiser Oil Company assigned one-half of its interest in the 10 acres and 40 acres to Kingwood Oil Company on January 5, 1939.To and including January 31, 1939, when the property was sold to The Texas Company, 160,336.36 barrels of oil had been produced from these six wells. The portion thereof of each of Petroleum Exploration and The Wiser Oil Company was 35,073.74 barrels, none of which was included in the sale of the property to The Texas Company.On October 1, 1938, Tuesday Oil Company, plaintiff, filed its complaint against The Wiser Oil Company and Kingwood Oil Company, defendants, in the District Court of the United291 States for the Eastern District of Illinois, claiming superior title to the majority interest in the oil underlying the 10 acres and 40 acres above mentioned, and praying that the defendants be enjoined from further operating the premises and that the plaintiff be admitted to the sole operation thereof. The defendants answered on October 21, 1938. Afterward, on December 19, 1938, the action was dismissed on motion of the plaintiff. Upon payment of $ 5,000 to Tuesday Oil Company by Petroleum Exploration and The Wiser Oil Company, in equal portions, Tuesday Oil Company (a) executed and delivered a ratification dated December 30, 1938, of the lease by Laura Maxwell on March 2, 1937; (b) executed and delivered an assignment dated December 30, 1938, to The Wiser Oil Company, of all interest in the lease from A. R. Thompson and wife to F. L. Kelley, and (c) moved the entry of the order of dismissal.The Wiser Oil Company in the transactions above referred to in which it took part was acting in behalf of both itself and Petroleum Exploration as joint adventurers.On January 31, 1939, the petitioners and Kingwood Oil Company assigned their interest to The Texas Company, including the operating292 equipment. Each petitioner received as gross sales price $ 138,112.50, resulting in capital gain of $ 136,583.10, after deduction of $ 4,688.73 cost and $ 3,159.33 depreciation. The $ 4,688.73 cost consisted of one-half of: $ 5,000 paid to Tuesday Oil Company in connection with the 281 ratification above recited, $ 1,175.46 attorneys' fees and expenses in the litigation with Tuesday Oil Company, and $ 3,202 for miscellaneous tanks, pipes and fittings for running oil. In its excess profits tax return for the taxable years each petitioner determined excess profits credit by including in excess profits net income its capital gain from the transaction of January 31, 1939, as short term capital gain. The Commissioner, in the determination of deficiency, treated it as long term capital gain and excluded it in computing excess profits credit.On April 17, 1945, Petroleum Exploration received from Southern Petroleum Exploration $ 825,000 par value of the latter's preferred stock for $ 183,000 in cash and $ 642,000 of the notes of the latter held by the former. The circumstances under which this exchange was made are as follows:(a) On April 17, 1945, Petroleum received, and on 293 every subsequent day up to and including December 31, 1946, continued to hold, 8,250 shares of the preferred stock of Southern Petroleum Exploration, a domestic corporation, which 8,250 shares constituted at all times material hereto 75 per cent of the preferred stock outstanding. For all purposes material hereto, the adjusted basis (for determining loss upon sale or exchange) of such shares is $ 825,000. Petroleum, for said 8,250 shares of preferred stock of Southern Petroleum Exploration, paid Southern Petroleum Exploration $ 183,000 in cash and cancelled $ 642,000 face value of notes of Southern Petroleum Exploration payable to Petroleum.(b) On April 17, 1945, Petroleum already held, and on every subsequent day up to and including December 31, 1946, continued to hold, 375 shares of common stock of Southern Petroleum Exploration, which shares had been acquired on April 1, 1925. At all times material hereto such 375 shares of common stock constituted 75 per cent of the common stock outstanding. For all purposes material hereto, the adjusted basis (for determining loss upon sale or exchange) of such shares is $ 18,750.(c) At no time material hereto was any class of stock of Southern294 Petroleum Exploration issued or outstanding other than the classes described in subparagraphs (a) and (b) immediately above.(d) At no time material hereto did Petroleum have more than one class of stock and Southern Petroleum Exploration did not own any of it.(e) At no time material hereto did any corporation whatever own as much as 50 per cent of Petroleum's stock.During the period from the beginning of the calendar year 1940 to and including December 31, 1946, Petroleum did not acquire or dispose of any stock of any corporation, other than Southern Petroleum Exploration, in which it owned more than 50 per cent of the total combined voting power of all classes of stock entitled to vote, or 282 more than 50 per cent of the total value of shares of all classes of stock.On no day within the period from April 17, 1945, to and including December 31, 1946, did the adjusted basis (for determining loss upon sale or exchange) of the 8,250 shares of preferred stock of Southern Petroleum Exploration described in paragraph (a) above exceed the excess of the aggregate of the adjusted basis (for determining loss upon sale or exchange) of stock in all domestic corporations and of obligations295 described in section 22 (b) (4) of the Internal Revenue Code held by Petroleum on such day over the aggregate of the adjusted basis (for determining loss upon sale or exchange) of stock in all domestic corporations and of obligations described in section 22 (b) (4) of the Internal Revenue Code held by Petroleum as of the beginning of the calendar year 1940.In the oil industry, the principal bases upon which oil-producing properties are bought and sold are (1) the estimated recoverable reserves of oil in place and (2) the expected rate of their recovery. There is no now known method of obtaining oil from a subterranean stratum other than by piercing it with a well drilled from the surface.OPINION.(a) For what period had the petitioners held the oil property sold by them to The Texas Company on January 31, 1939? 1 The petitioners' view is that under the lease of March 2, 1937, it was optional with the lessee to explore the leased premises; that it had no interest in the oil, if any, that might underlie the premises until it had exercised the option to explore and found the oil; that according to the economic and practical consequences of the transaction the property sold by petitioners296 to The Texas Company on January 31, 1939, was their interest in the oil in place under the premises, together with the operating equipment which had been installed for its recovery, and that the property so sold was not acquired earlier than September 14, 1938, when the oil in place was first found. The respondent contends that the property sold on January 31, 1939, was the oil and gas lease made on March 2, 1937; that the property had been held since March 2, 1937, and that the capital gain on the sale was therefore long term capital gain.The parties have briefed297 this question at length, and many cases have been cited showing the thought, not always consistent, devoted by the courts to theories as to the fugacious nature of oil and gas, 283 the interpretation of "unless" and "or" leases, with more particular reference to the law of Illinois, the situs of the land here involved, and the nature of rights to oil and gas as related to such questions as depletion, conveyance, etc. It is not considered necessary to discuss the many citations accumulated. No case involving exactly the question here posed is presented. After study of the authorities cited, and others not suggested, we are of the opinion that the petitioners have not shown that what was sold on January 31, 1939, was (for purposes of sections 711 (b) (1) (B) and 117 of the Internal Revenue Code, as to capital gains and losses and exclusion of long term capital gains and losses from excess profits net income) not the same as acquired on March 2, 1937, and therefore have not shown that the sale resulted in short term capital gain. Though discussing the "option" involved in the "unless" lease here involved, the petitioners on brief argue that there is little difference save in298 form between an "unless" lease and an "or" lease with a surrender clause. Analysis of the many cases on the general nature of oil and gas leases, with recognition that in Illinois, as in other states except Texas, oil in place is not recognized as the subject of ownership, leads us to the conclusion that the petitioners on January 31, 1939, disposed of essentially the same basic rights as acquired when the lease was made, and that the petitioners' theory of change to a property in the oil and gas in place upon the discovery of oil late in 1938 can not be sustained. The petitioner cites Bonwit Teller & Co. v. Commissioner, 53 Fed. (2d) 381, for the statement that "upon the lessee's electing to exercise its option to explore and its discovery of oil, the delay rentals ceased and it acquired a new term for a new consideration, that is, as long as the oil should be produced, for one-eighth thereof." The Bonwit Teller case is no authority for such view. It involved no oil and gas lease, but a lease upon improved premises in New York City and the question whether, in computing exhaustion for tax purposes, the exhaustion could be extended beyond 299 the 19-year term of the lease because of an option to renew for 21 years at a rental to be determined by appraisal, which "renewal privilege had not been exercised and may never be." We find nothing in the case helpful here. Upon execution of the leases here the lessees acquired the right to explore for, produce, remove and sell oil and gas. That right was assigned by them on January 31, 1939. It is to be noted that the conveyance carefully did not cover the oil which had been produced up to that time. In short, there was not conveyance of oil reduced to possession, but of the right in futuro to reduce it to possession. That right was obtained in the lease on March 2, 1937. It is true that at that time there was also the right to delay the search for oil by payment of annual rentals, for 10 years, the necessity for payment of which rentals ceased with development of oil; but from the inception of 284 the lease, to the assignment, there inhered in the contractual relations of the parties the right of the lessee at any time to explore for oil or gas for 10 years, and if exploration was successful to continue to so explore, and to take and sell the products, so long as300 oil or gas was produced. This right was not essentially altered by the discovery and production of some oil about September 1938. Thereby, in strict accord with the rights conferred by the lease, some oil was reduced to possession. But that does not mean, as the petitioners contend, that then and thereby the petitioners acquired a new and different right to the remainder of the oil, in place, so that they could and did on January 31, 1939, sell a property right not owned prior to September 1938. The lessees' right, as to oil in the ground, remained one merely to explore for, bring it to the surface and dispose of it. Because six wells had produced oil did not necessarily mean that others would do so. A "dry hole" may be encountered a short distance from a producing well. Though a well, or six wells, may demonstrate the probability of underlying oil, such oil may, unless earlier secured by extraction from the ground, be depleted and taken to some extent at least by offsetting wells on adjoining land, so far at least as the oil lies near boundary lines, and the lessee must protect against this. 2 This demonstrates that the lessee by discovering oil does not become the owner301 thereof in place, but merely continues to have his lease-given right to reduce to possession the oil, which, by lack of diligence, if it is near boundaries, he may never possess.The petitioners appear to think that merely because one or more wells are drilled on a lease to oil sands and oil is found that the entire subterranean oil in place has become the property of the lessee. It is true that the word "find" as used in some cases refers to ownership of oil found; but it is clear from the weight of authority that ownership of the oil reservoir under a lease results not merely from discovery but by its reduction to possession. The Supreme Court in Ohio Oil Co. v.Indiana (No. 1), 177 U.S. 190">177 U.S. 190, finds such ownership "after the result 302 of his borings has reached fruition to the extent of oil and gas by himself actually extracted and appropriated," and later "when they [oil and gas] escape and go into other land or come under another's control the title of the former owner is gone." In Jones v. Forest Oil Co., 44 Atl. 1074, it is thus expressed: "actually in his grasp and brought to the surface" and "actually reduced by him to possession." Of course, oil brought to the surface belonged to the lessees here; but that was not the subject of the sale on January 1, 1939. We can not agree that, except as to oil reduced to possession, the lessees 285 had, merely by discovery of some oil, become the owners of the other oil, in place. That the Federal revenue law allows a right to depletion proves nothing different. Depletion is based upon economic interests and not on "oil in place." Though, of course, the discovery of oil about September 1938 increased the value of the lessees' rights, that was only because of demonstration of the increased probability of profitable extraction of oil from the wells drilled, or others, over the previous uncertainty as to production, but there was303 no new right to the oil in place. It has often been held that the object of a lease is development and that failure to continue reasonable development after discovery may be ground for cancellation of lease, at least as to undeveloped portions. 3 This indicates that the lessee owns, not the underlying oil in place by finding some oil, but the contractual right to produce it. But this right he had from the day of execution of the lease; and this is the right which the petitioners assigned to The Texas Company. One of the leading cases on the nature of oil and gas leases is Rich v. Doneghey, 71 Okla. 204">71 Okla. 204, 177 Pac. 86. It points out that mere discovery does not give title to oil in place and at the same time defines the essential nature of a lease, as follows:* * * Although there had been in terms a purported conveyance of all the oil and gas in the place, yet, by reason of the nature of these substances, no title thereto or estate therein would have vested, but only the right to search for and reduce to possession such as might be found; and when reduced to possession, not merely discovered, title thereto and an estate therein304 as corporeal property would vest, * * [Citations] Though denominated a lease, and in deference to custom will be so referred to herein, the instrument before us, strictly speaking, is not such, but is in effect a grant in praesenti of all the right to the oil and gas to be found in the lands described, with the right for a term of five years to enter and search therefor, and, if found, to produce and remove them, not only during said term, but also as long thereafter as either is produced, and to occupy so much of the surface of the land as may be necessary for the purpose of exploration or production, or both. [Emphasis added.]Cases such as Helvering v. San Joaquin Fruit & Invest. Co., 297 U.S. 496">297 U.S. 496, involving mere options, later exercised to purchase property, are found of no help here. In common parlance petitioners bought a lease, and sold it. They might have sold it before finding oil. They received more for it because they had made discovery. But they assigned no right or property not possessed before discovery. They did not possess title to oil in place, except when reduced to possession, either before or after discovery of oil in305 one well, or six wells, but only the original right to extract and sell it. Triger et al. v. Carter Oil Co., 372 Ill. 182">372 Ill. 182, 23 N. E. (2d) 55; Ohio Oil Co. v.Indiana, supra. In the recent case of Phillips Petroleum Co. v. Jones, 176 Fed. (2d) 737, 286 it was held that an "unless lease," such as here involved, "is a chattel real, a profit a prendre, or an incorporeal hereditament, which grants only the exclusive right * * * to explore by drilling operations; to reduce the possession, and thus acquire title to the oil and gas, which is personalty." Pointing out that an oil and gas lease is within the statute of frauds as to real estate, is a conveyance within homestead laws, and a grant of real property with reference to breaches of covenants as to real property, and possesses many other attributes of realty, the court concludes that the lease is realty for stamp tax purposes, when executed conveying lands, tenements and other "realty." Though of course not involving this particular question, the case is in principle opposed to the idea that prior to production306 an "unless" lease is nothing more than an option for any purpose, as in effect petitioners contend. In Ewert v. Robinson, 289 Fed. 740, a lease is called more than a mere license. Gloyd v. Midwest Refining Co., 62 Fed. (2d) 483, relied upon by the petitioners, says that an "unless" lease is "more than a mere option to acquire a right." If based on a consideration it gives the lessee a present right or license to enter upon the leased premises and explore for and develop oil or gas therein and the right, on the performance of certain conditions, to extend that license to enter and explore. " * * it is a present existing right which he may exercise with respect to the leased premises, and not a mere option to acquire such a right." Equitable relief was granted against an attempt to cancel the lease for failure to pay rental on time. After reviewing many cases, none precisely in point but involving principles here of interest, we conclude and hold that the petitioners held the property sold on January 31, 1939, from March 2, 1937, therefore that the capital gain upon the sale was long term and properly excluded307 from computation of excess profits net income as to the years involved here.(b) There remains for consideration the question whether the acquisition and holding by Petroleum Exploration of $ 825,000 in stock of Southern Petroleum Exploration, in 1945, resulted in a net capital reduction under section 713 (g) (5) of the Internal Revenue Code. The issue was raised by respondent's affirmative answer. The facts were stipulated, as set forth above, but need not be again recited here, for the parties are in tacit if not verbal agreement that the answer depends only upon whether two corporations constitute a "chain" within section 713 (g) (5). It is not suggested that the facts do not308 otherwise come under the statute. Petitioners merely suggest that, though mindful of our opinion in Morganton Full Fashioned Hosiery Co., 14 T.C. 695">14 T. C. 695, that two links form a chain, they do not agree that Petroleum Exploration as parent corporation and Southern Petroleum Exploration as "offspring" can be a chain. No distinction is suggested and in the Morganton case the two links were the petitioner as *287 parent corporation and its wholly owned subsidiary, and we specifically held that "chain" included parent and subsidiary. We hold that the Morganton case controls here, therefore that net capital reduction resulted from the acquisition and holding of the stock in 1945.Decisions will be entered for the respondent. Footnotes1. This fact is of prime importance here because it determines whether, in computing petitioners' excess profits credits (including any unused excess profits credits of Petroleum Exploration), the gain on the sale on January 31, 1939, represents long term capital gain not to be included in excess profits net income for 1939. In other words, this question affects the amount of excess profits credit under section 711 (b) (1) (B) of the Internal Revenue Code↩.2. Coffinberry v. Sun Oil Co., 67 N.E. 1069">67 N. E. 1069; Cooper v. Ohio Oil Co., 108 Fed. (2d) 535; Phillips Petroleum Co. v. Taylor↩, 116 Fed. (2d) 994.3. Sauder v. Mid-Continent Petroleum Corp., 292 U.S. 272">292 U.S. 272; Thomason v. United Gas Public Service Co., 98 Fed. (2d) 526; Myers v. Shell Petroleum Corp., 110 Pac. (2d) 810; Huggins v. Daley, 99 Fed. 606↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625092/	DOUGLAS AND PEARLINE WILKERSON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentWilkerson v. CommissionerDocket No. 3158-89United States Tax CourtT.C. Memo 1990-210; 1990 Tax Ct. Memo LEXIS 229; 59 T.C.M. (CCH) 476; T.C.M. (RIA) 90210; April 25, 1990, Filed 229 Decision will be entered under Rule 155. Douglas and Pearline Wilkerson, pro se. Alan Friday, for the respondent. COUVILLION685 MEMORANDUM FINDINGS OF FACT AND OPINION This case230 was heard pursuant to section 7443A(b) 1 and Rule 180 et seq. 1Respondent determined the following deficiencies in petitioners' Federal income taxes and additions to tax for the years indicated: Additions to TaxSectionSectionSectionYearDeficiency6653(a)(1)6653(a)(2)6661(a)1984$ 4,879.00$ 243.95--1985$ 5,462.00$ 273.10 ** $ 1,366.001986$ 1,347.00------Several adjustments were made in the notice of deficiency. Petitioners231 conceded all adjustments except (1) their claim to deductions for business expenses in excess of amounts allowed by respondent, and (2) the additions to tax. The parties stipulated to some of the facts, which are incorporated herein by reference. At the time the petition was filed, petitioners were residents of Monroeville, Alabama. During the years in question, Douglas Wilkerson (petitioner) was employed full time as a mechanic for Vanity Fair Mills, Inc., at Monroeville, Alabama. In addition, petitioner operated a sole proprietorship at home known as "Wilkerson Welding and Repair." On their 1984 and 1985 returns, petitioners reported their income and expenses from the welding and repair business on Schedule C of their returns. For 1986, however, petitioners did not file a Schedule C for this activity because petitioner realized a loss and was not aware that the loss could be reported to offset other income. In the audit of petitioners' returns for 1984, 1985, and 1986, respondent made several adjustments to the Schedule C items of income and expense reported on the 1984 and 1985 returns. In addition, respondent determined gross income, expenses, and a net profit for the232 welding and repair activity for 1986, as to which petitioners had not filed a Schedule C. Petitioners agreed to respondent's adjustments to all items of income and expense related to the welding and repair business except the following: ClaimedAllowed byAmountYearExpenseon ReturnRespondentDisallowed1984Commissions$ 18,154.72$ 5,417.00$ 12,737.721985Job Expenses$ 9,822.50$ 5,223.00$ 4,599.501986Commissions/Labor -0-$ 9,100.00$ 600.00 *686 The question is solely one of substantiation. Petitioner contends that the amounts disallowed represented cash payments which were necessary while he was out on certain jobs, such as gasoline for his trucks, welding rods, steel, or other233 materials. He also cited another example of once having hired a pedestrian from the street to help unload a refrigerator, for which he paid $ 20 cash to the person, whom he did not know and had never seen since. In such situations, petitioner believed it was impractical to obtain receipts for such expenses. Petitioner testified that he always noted such expenses, when incurred, and entered these amounts in the books and records he maintained for his welding and repair activity. He argued that the nature of his activity was such that it constantly required payment, on the spot, of such expenses in cash and, because respondent did not challenge the adequacy of his books and records, the amounts shown on his records should be accepted for income tax purposes. Petitioner did not produce any receipts or other documentary information to substantiate the amounts at issue. Respondent pointed out that, as to all expenses allowed, shown above, the allowance was based upon receipts petitioner procured from vendors and suppliers during the course of the audit, which satisfied respondent's agent as adequate proof of the expenditure. The other amounts were disallowed because petitioner could234 not produce receipts or provide other evidence that such expenses had been incurred and in fact paid. The determinations reflected by respondent in a notice of deficiency are presumed correct, and the burden is on petitioner to establish that the determinations are incorrect. Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933); Rule 142(a). Section 6001 provides, in pertinent part, that "Every person liable for any tax * * shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe." Section 1.6001-1(a), Income Tax Regs., provides, in pertinent part, that "any person subject to tax under subtitle A of the Code * * , shall keep such permanent books of account or records, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return of such tax * ." It is undisputed that petitioner maintained accounting or bookkeeping records with respect to his welding and repair activity. However, that alone does not relieve the taxpayer of establishing235 proof of an entry in his records or that an item, if entered as an expense, was ordinary and necessary in connection with the trade or business. The regulation cited requires records "sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return." Section 1.6001-1(a), Income Tax Regs. In other words, the taxpayer must substantiate the entries in his books and records. In Consolidated-Hammer Dry Plate & Film Co. v. Commissioner, 49 T.C. 153">49 T.C. 153, 171 (1967), affd. 409 F.2d 1077">409 F.2d 1077 (7th Cir. 1969), this Court disallowed deduction of real estate taxes evidenced by a bookkeeping entry without proof of further substantiation. The Court, therefore, is skeptical that the nature of petitioner's business required on the spot cash payments anywhere near the amount of $ 12,737.22 petitioner claimed for 1984, or the other amounts claimed for 1985 and 1986. The Court, however, is satisfied that petitioner, at times, was required to make cash payments in which obtaining receipts or other evidence of substantiation might not be readily available or practical and236 that, in fact, petitioner made such payments during the years in question. Making "as close an approximation as [we] can, bearing heavily if [we] choose upon the taxpayer whose inexactitude is of his own making," Cohan v. Commissioner, 39 F.2d 540">39 F.2d 540, 544 (2d Cir. 1930), the Court finds that petitioners are entitled to an additional $ 250 expense for each of the years in question representing cash payments in connection with their welding and repair activity. The additions to tax, under section 6653(a)(1) and (2), were determined for petitioners' 1984 and 1985 tax years. The section 6653(a)(1) addition applies to the entire underpayment if any part of the underpayment is attributable to negligence or intentional disregard of rules or regulations, whereas the section 6653(a)(2) addition applies only to that part of the underpayment attributable to negligence or intentional disregard of rules or regulations. Petitioner 687 argued that, because he maintained accounting records, he did not negligently or intentionally disregard rules or regulations, even though some of his expenses may not have been substantiated to sustain their deduction for income tax purposes. 237 This argument, however, does not adequately address the issue. For example, there were several other adjustments to petitioners' business activity which petitioners conceded and which do not appear to have been adjusted due to lack of substantiation. For example, petitioners claimed an expense deduction of $ 6,905 in 1985 for "Equipment Purchase" in connection with their welding and repair business, all of which was disallowed by respondent. Although the reason for the disallowance is not recited in the notice of deficiency, it is evident that petitioners attempted to claim as a current expense the cost of depreciable property, and thus petitioners negligently or intentionally disregarded rules or regulations. Petitioners failed to present any evidence with respect to the section 6653 additions to tax, other than their argument that their books and records accurately reflected the manner in which they accounted for their expenses. The Court notes further that the notice of deficiency determined the section 6653(a)(2) addition to tax only to a portion of the underpayment for each year, which reflects a determination by respondent that a portion of the underpayments was not due to238 negligence or intentional disregard of rules or regulations. Without any further proof from petitioners, the additions to tax under section 6653(a)(1) and (2), as determined by respondent, are sustained. For the 1985 tax year, respondent determined an addition to tax under section 6661. Section 6661(a) provides for an addition to tax of 25 percent of the amount of any substantial understatement of income tax. If the amount of tax required to be shown on the return exceeds the amount of tax actually shown on the return by the greater of $ 5,000 or 10 percent of the amount required to be shown, there is an "understatement" which is "substantial." Section 6661(b)(1) and (2). Based on the notice of deficiency, there is a substantial understatement of tax for petitioners' 1985 tax year, and it is evident that a substantial understatement will exist after allowances are provided under Rule 155 for the additional expense of $ 250 allowed earlier in this opinion. Section 6661(c) vests authority in the Secretary to waive all or any part of the addition to tax on a showing by the taxpayer that there was reasonable cause for the understatement (or part thereof), and that the taxpayer acted239 in good faith. Respondent did not waive the section 6661 addition in this case, and petitioners did not raise, as an issue, whether a waiver was requested and, if a waiver was requested and denied, that such denial by respondent was an abuse of discretion. See Mailman v. Commissioner, 91 T.C. 1079">91 T.C. 1079, 1083 (1988). Accordingly, the applicability of section 6661(c) is not at issue here. The only other situation in which petitioners could be exonerated is section 6661(b)(2)(B), which allows a reduction of the understatement of tax if there was substantial authority for the tax treatment of the items at issue, or there was adequately disclosed in the return or in a statement attached to the return all the relevant facts affecting the tax treatment of the items at issue. Petitioners presented no evidence which would satisfy the requirements of section 6661(b)(2)(B); consequently, the addition to tax under section 6661(a) is sustained. 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 for the years at issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩. 50% of the interest due on an underpayment of $ 3,553.00. ** 50% of the interest due on an underpayment of$ 1,501.00.↩*. Although petitioners did not report their welding and repair activity on a Schedule C or on any other part of their 1986 income tax return, their books and records reflected this $ 600 expense item which respondent declined to allow during the audit.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625041/	Haywood P. Martin and Rose Marie Martin, Petitioners, v. Commissioner of Internal Revenue, RespondentMartin v. CommissionerDocket No. 79518United States Tax Court38 T.C. 188; 1962 U.S. Tax Ct. LEXIS 142; May 1, 1962, Filed 142 Decision will be entered under Rule 50. Petitioners owned a piece of real estate and contracted with builders for the erection of a residence thereon at a fixed price. At the time the house was completed unpaid mechanics and materialmen filed liens against petitioners' property. In order to prevent foreclosure and the loss of their house petitioners paid and satisfied these claims, such payments being in excess of $ 6,000. At that time the debts owed by the builders, to which petitioners were subrogated by such payments, were uncollectible as against the builders. During each of the taxable years petitioners deducted $ 1,000 on account of nonbusiness bad debts, which deductions were disallowed by respondent. Held, petitioners entitled to such deductions. Haywood P. Martin, pro se.Ferd J. Lotz, Esq., for the respondent. Kern, Judge. KERN 188 Respondent determined deficiencies in petitioners' income taxes for the years 1953, 1954, and 1955 in the respective amounts of $ 352.72, $ 615.86, and $ 253.17. These deficiencies arise by reason of respondent's disallowance of certain deductions claimed by petitioners in each of the years involved. Certain adjustments143 made by respondent in a statement attached to the statutory notice of deficiencies were not assigned as error and are not in controversy herein.By appropriate assignment of error petitioners contest the correctness of respondent's "disallowance * * of a nonbusiness bad debt deduction in the amount of $ 1,000 for each of the years 1953 to 1955, 189 inclusive, representing the amounts allowable as short-term capital losses in each of said years," and his "disallowance * * in the year 1953 of contributions, taxes and interest in the total amount of $ 943.23." By stipulation it was agreed that in the event we decide the bad debt issue in petitioners' favor they are entitled to the itemized deductions for contributions, taxes, and interest in the total amount of $ 943.23 for the year 1953 instead of the standard deduction of $ 1,000 allowed by the respondent in lieu of the itemized deductions claimed by petitioners.The only question remaining for our decision is whether petitioners are entitled to a nonbusiness bad debt deduction in each or any of the years involved herein.FINDINGS OF FACT.Some of the facts have been stipulated. The stipulation of facts, together with the144 exhibits attached thereto, is incorporated herein and made a part of our findings of fact by this reference.Petitioners are husband and wife who reside in Falls Church, Virginia. They filed joint Federal income tax returns for the taxable years 1953, 1954, and 1955 with the district director of internal revenue at Richmond, Virginia.In March 1948 petitioners owned certain property in Fairfax County, Virginia, upon which they desired to construct a house. After preparing plans and specifications and obtaining competitive bids from various contractors they entered into a fixed-price contract for the construction of their home with Thelma L. Taylor and Robert Henry, sometimes hereinafter referred to as Taylor and Henry, respectively, who signed the contract as partners. Petitioners also applied for and received loans from First Federal Savings and Loan Association of Washington, D.C., hereinafter referred to as First Federal, in order to finance the construction.Under its contract with petitioners First Federal made "progress payments" to the builders as the work progressed with which services rendered and materials furnished in the construction of the house were to be paid, and145 no payments were to be made unless the work had actually been done and the materials used by the builders paid for.Construction proceeded as planned until it became apparent that it was slowing down because of a lack of building materials. There were also rumors that the builders were having financial difficulties and that they were not paying their bills. When the work was about 50 percent completed Taylor disappeared and has not been heard from since. Her partner, Henry, remained on the job, supervised the work, and ordered the materials needed to complete the job.As a part of their contract petitioners had required the builders to obtain a surety bond to protect petitioners and the lending institution. 190 The bond was turned over to First Federal, but it was subsequently discovered that the signature of the bondsman who was formerly an employer of Taylor had been forged to the bond by Taylor.At or about the time the home was completed various mechanics and materialmen filed liens against petitioners' house as security for various amounts due for services and supplies furnished and for which they had not been paid by either Taylor or Henry.Petitioners were advised146 by counsel that they would lose their home unless these claims were satisfied. Accordingly and in the exercise of sound business judgment the petitioners paid and satisfied these claims secured by the liens in order to protect their property which stood as security for the liens. The debts owed by Taylor and Henry to the mechanics and materialmen were uncollectible as against Taylor and Henry at the time they were paid and satisfied by petitioners.In 1950 petitioners entered suit against Taylor, Henry, and First Federal for the amounts paid. None of the pleadings in this suit have been introduced in evidence herein. Petitioners were unable to obtain service of process on Taylor, and it was only with considerable difficulty that they were able to serve process on Henry.Neither Taylor nor Henry appeared at the trial or offered any defense whatsoever, and a default judgment was entered against Henry on April 22, 1953, in the amount of $ 11,547.89. First Federal defended the action and, after a jury trial which lasted 6 days, settled petitioners' claims against it for $ 1,500 sometime during the year 1953.In 1953, after entry of judgment against Henry, petitioners found that he147 had no funds and no property in his own name against which they could enforce the judgment. No inquiry into Henry's financial standing was made prior to the institution of suit by petitioners' counsel, but it was known that Henry was engaged in other construction activities at the time suit was instituted in 1950. Petitioners' counsel undertook to prosecute their cause on a contingent-fee basis, with the expectation that he would be paid from any amounts recovered from the defendant.On their income tax returns petitioners deducted as a bad debt the amount of $ 1,000 in each of the years involved, as illustrated by the following entry which appeared on their return for the year 1955:Bad debt:Judgment approx$ 10,500Claimed this year1,000Claimed in prior years2,000 Balance to be claimed in future7,500191 During the taxable years the petitioners owned worthless nonbusiness debts due from Taylor and Henry in a total amount in excess of $ 6,000. These debts were worthless when petitioners became the creditors of such debts by reason of their involuntary payment of the original creditors.OPINION.The question presented by this case concerns the148 propriety of a deduction of $ 1,000 taken by petitioners in each of the taxable years on account of the circumstances set forth in our findings of fact.Respondent contends that the payments made by petitioners to the unpaid materialmen and mechanics "resulted in losses instead of bad debts which, the petitioners, as individuals, may not deduct" under any provision of the Internal Revenue Code 1 and, in the alternative, that if the payments resulted in debts owned by petitioners they were valueless at the time of their creation and could not have become worthless.Respondent also argues halfheartedly that the payments made by petitioners constituted capital expenditures which should be added to their basis for the property. This argument is without merit. ; .149 We analyze the transactions here involved as follows:When petitioners made the payments here involved they became subrogated to the debts owed to the mechanics and materialmen by the contractors and thereby became creditors of the contractors. . These payments were made and the debtor-creditor relationship between the contractors and petitioners arose involuntarily on petitioners' part. They made the payments, not as gifts or contributions to capital, cf. , but because they were advised by counsel that if they did not make them they would lose their home which, under the Virginia statutes, stood as security for the claims paid. In our opinion there is no distinction in principle between the circumstances of this case and those in , , and . See , 150 in which payments made to protect the payors' interest in property were referred to as "made mandatory by what they considered sound business judgment." (Emphasis supplied.) Where, as in this case, sound business judgment makes mandatory the payment of claims which are in effect secured by the property of the payor in order to prevent the loss of such property on foreclosure, the payment is, for all practical 192 purposes, quite as "involuntary" as it would be had the payor been a formal guarantor of the debts represented by the claims. Therefore, the creation of a debtor-creditor relationship as between the owner of the property and the original obligor of the claims as a result of subrogation was involuntary, and consequently the worthlessness of the debts at the time they were thus created 2 is irrelevant in considering their deductibility.The case of ,*151 is distinguishable since in that case the payment of the debts resulting in subrogation was not involuntary but was motivated by tax considerations.Because of certain omissions of proof we are unable to determine the exact total net principal amount of the debts to which petitioners became subrogated by reason of the payments here involved. Obviously, the amount of the judgment later obtained represents to a great extent the total principal amount of such debts, but it may also represent a relatively small amount of interest; and the unpaid balance of such debts may also have to reflect an adjustment on account of the settlement with First Federal. However, this case involves the deductibility over the 3 taxable years of a total amount of only $ 3,000 of such debts. It seems clear to us from the record (and respondent makes no argument to the contrary) that the total amount of the claims of mechanics and materialmen paid by petitioners was in excess of $ 6,000, and we have so found.The issue presented herein is decided in favor of petitioners.Decision will be entered under Rule 50. Footnotes1. The record herein does not justify a conclusion that there was a theft loss and petitioners do not so contend. Cf. .↩2. The finding as to the worthlessness of these debts at that time is made by reason of a lack of satisfactory proof to the contrary.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625094/	Paul Caspers and Ella Andre Caspers, His Wife, Petitioners, v. Commissioner of Internal Revenue, RespondentCaspers v. CommissionerDocket No. 82431United States Tax Court44 T.C. 411; 1965 U.S. Tax Ct. LEXIS 69; June 23, 1965, Filed 69 Decision will be entered under Rule 50. 1. Petitioner, Paul Caspers, has been engaged in the real estate business for more than 40 years. He was so engaged during the years 1953, 1954, and the taxable year 1956. An internal revenue agent examined petitioner's books and records for 1953 and 1954 to determine if his business income had been properly reported. The agent proposed to make nine specific adjustments to petitioners' income. In January 1956 petitioner was indicted and charged with a violation of section 201, title 18, U.S.C. Petitioner was tried; the jury disagreed; and the indictment, on motion of the Government, was dismissed. During 1956 petitioner paid an attorney $ 5,000 for legal services in defending petitioner at the trial. Held, petitioner is entitled to deduct the amount paid as an ordinary and necessary expense under section 162(a), I.R.C. 1954.2. Held, petitioners correctly reported a dividend of $ 11,500 received by them during 1956 on common stock of the St. Louis-San Francisco Railway Co. McCullough v. United States, 344 F. 2d 383 (Ct. Cl. Apr. 16, 1965), and Banister v. United States, 236 F. Supp. 97270 (E.D. Mo.), applied and followed. John M. Kiely, for the petitioners.Jay B. Kelly, for the respondent. Arundell, Judge. ARUNDELL411 OPINIONRespondent determined a deficiency in income tax for the calendar year 1956 in the amount of $ 4,993.07.412 The only error originally assigned was that the respondent erred in determining "that the deduction of $ 9,000.00 for legal expense claimed in your Federal income tax return for the taxable year71 ended December 31, 1956 is not allowable under Section 212, Section 162, or any other section of the Internal Revenue Code of 1954 for the reason that the expenditure was not an ordinary or necessary expense incurred in connection with the determination of any tax liability nor in the conduct of a trade or business."In a stipulation of facts "ordered and received and made a part of the record in this case," the parties have agreed "that of the total amount of $ 9,000 disallowed $ 4,000 thereof is allowable as a deduction for legal fees paid in said taxable year. The balance of $ 5,000 of the amount claimed as a deduction for legal expenses for the taxable year 1956 is still in dispute."By an amendment to petition duly filed, petitioners alleged "that in their return for 1956 they showed as income and paid the tax thereon the sum of $ 11,500.00 received by them as dividends on common stock of the St. Louis-San Francisco Railway Co. That 76% of said sum, or $ 8,740.00, was nontaxable by reason of the fact that said sums represented distributions from other than earnings and profits of the said Railroad." By reason of this amendment, petitioners prayed that this Court determine there72 is no deficiency due and that petitioners are entitled to a refund.Respondent, by an amendment to his answer, asserted a claim for an increased deficiency in the amount of $ 4,154.25, based on gain realized by the petitioners on the exchange of certain securities in the taxable year 1956. In the above-mentioned stipulation of facts, the "Petitioners concede the correctness of the adjustment upon which the increase in the statutory deficiency previously determined is based." Thus, there remains for our decision two issues, namely, (1) the legal fee issue, and (2) the $ 11,500 dividend issue.All of the facts were stipulated. The stipulation is incorporated herein by reference and summarized below under the respective issues.Petitioners are husband and wife and reside in Chicago, Ill. They filed a joint Federal income tax return for the taxable year 1956 with the district director of internal revenue at Chicago.The Legal Fee IssuePetitioner Paul Caspers, hereinafter referred to as petitioner, has been engaged in the real estate business for more than 40 years and has held various offices with the Chicago Real Estate Board. He was so engaged during the years 1953, 1954, and73 the taxable year 1956. For the years 1953, 1954, and 1956, the income of the petitioner consisted of salary, appraisal fees, dividends, and rental income from properties owned by the petitioner and his wife.413 During 1955 an internal revenue agent examined petitioner's books and records for 1953 and 1954 to determine if petitioner's business income had been properly reported. The agent proposed to make nine specific adjustments to petitioners' income for those years as follows:1. Adjustment of the sales tax deduction.2. Disallowance of the real estate tax deduction and capitalization thereof.3. Disallowance of deduction for repairs and capitalization thereof.4. Disallowance of deduction for attorney's fees and capitalization thereof.5. Disallowance of deduction for revenue stamps and title search and capitalization thereof.6. Adjustment of capital gains.7. Adjustment of travel expense.8. Adjustment of entertainment expense.9. Increase of depreciation expense.In January 1956 petitioner was indicted and charged with a violation of section 201, title 18, of the United States Code. The indictment is as follows:In the United States District Court for the Northern74 District of Illinois Eastern DivisionUnited States of America vs. Paul CaspersNo. 56 CR630Vio.: Section 201, Title 18,United States Code.The January 1956 Grand Jury charges:That on or about October 17, 1955, at Chicago, Illinois, in the Northern District of Illinois, Eastern Division,PAUL CASPERS,defendant herein, unlawfully, willfully and knowingly did give a sum of money, to wit, $ 400.00, to a certain Arthur W. Hill, who was then and there an officer and employee of the United States, to wit, an Internal Revenue Agent, as the defendant then and there well knew, with intent to influence the said Arthur W. Hill's decision and action on the question and matter of the audit made by the said Arthur W. Hill of the personal income tax returns of the defendant for the years 1953 and 1954, which said question and matter was then pending before the said Arthur W. Hill in his official capacity as an Internal Revenue Agent in the Internal Revenue Service of the Treasury Department; in violation of Section 201, Title 18, United States Code.A True Bill:FOREMAN.UNITED STATES ATTORNEY.Petitioner was tried on the above indictment before a jury. At the75 conclusion of the trial, the jury failed to agree and was discharged. The cause was continued to be set for a new trial. Before a date was set, however, the court, on motion of the Government by the U.S. attorney, "Ordered that the Indictment herein be and the same is hereby dismissed."414 During the taxable year 1956 petitioner paid his attorney the amount of $ 5,000 for legal services rendered by him in the trial of the criminal case.On their joint return for 1956 petitioners claimed among their itemized deductions on page 2 of their return a deduction for "Legal and Professional fees $ 9,650.00." The respondent disallowed $ 9,000 of the amount claimed and in a statement attached to the deficiency notice explained the disallowance thus:(e) It is determined that the deduction of $ 9,000.00 for legal expense claimed in your Federal income tax return for the taxable year ended December 31, 1956 is not allowable under Section 212, Section 162, or any other section of the Internal Revenue Code of 1954 for the reason that the expenditure was not an ordinary or necessary expense incurred in connection with the determination of any tax liability nor in the conduct of a trade 76 or business.The last paragraph of the stipulation of facts is as follows:32. The legal expenses claimed as a deduction by the petitioner for the taxable year 1956 in the amount of $ 9,000, which amount respondent disallowed as a deduction, was not paid or incurred in connection with the determination of deficiencies in income taxes paid by the petitioner for the taxable years 1953 and 1954.From the facts stipulated we find as an ultimate fact that the indictment against petitioner arose out of and was proximately connected with petitioner's real estate business.The sections of the Internal Revenue Code of 1954 that are here involved are in the margin. 177 We think the $ 5,000 petitioner paid to his attorney is deductible under section 162(a). The causal connection between his business and the payment of the fee was never broken. The real estate business conducted by petitioner was extensive. He had many items of income and many items of deductions. He, of course, was required to file income tax returns for 1953 and 1954. In due time such returns were examined by a revenue agent who proposed to make several changes in the items reported. A reading of the indictment clearly shows that it grew out of this examination. Petitioner was tried under the indictment but was not convicted. Later, the indictment was dismissed. The $ 5,000 fee here in question would not have been paid but for petitioner's income and deductions pertaining to his real estate business.415 In Kornhauser v. United States, 276 U.S. 145">276 U.S. 145, the Supreme Court held "that where a suit or action against a taxpayer is directly connected with, or, as otherwise stated * * * proximately resulted from, his business, the expense incurred is a business expense within the meaning of section 214(a), subd. 1, of the act." 2 See also 78 Commissioner v. Heininger, 320 U.S. 467">320 U.S. 467; and Lilly v. Commissioner, 343 U.S. 90">343 U.S. 90.We have held in several cases that where a taxpayer is charged with a criminal offense which grew out of the legitimate business transactions of the taxpayer and the taxpayer is tried but not convicted, the cost of such trial, including attorney fees, is deductible as ordinary and necessary business expenses. Morgan S. Kaufman, 12 T.C. 1114">12 T.C. 1114; John W. Clark, 30 T.C. 1330">30 T.C. 1330; and Commissioner v. Shapiro, 278 F. 2d 556 (C.A. 7, 1960), affirming a Memorandum Opinion of this Court.In Morgan S. Kaufman, supra, the taxpayer was a lawyer. He was indicted for conspiracy to obstruct justice. He paid attorneys' fees and other expenses in connection with 79 two trials. In each case the jury disagreed and finally a nol-pros was entered. In holding that the expenses were deductible as ordinary and necessary expenses under section 23(a)(1) of the 1939 Code, which is substantially the same as section 162(a) of the 1954 Code, we said in part:The petitioner claims the deductions under section 23(a) (1) of the Internal Revenue Code. The respondent does not rely upon the disbarment, but argues that it would be neither ordinary nor necessary for a lawyer in the course of his practice to have to defend himself against a criminal charge of conspiracy to obstruct justice and to defraud the United States. However, it is sufficient if the basis of the indictment was connected with and grew out of the legitimate business transactions of the petitioner. Kornhauser v. United States, 276 U.S. 145">276 U.S. 145; Commissioner v. Heininger, 320 U.S. 467">320 U.S. 467; Citron-Byer Co., 21 B.T.A. 308">21 B.T.A. 308. The indictment was directly connected with and proximately resulted from the petitioner's practice of law. It must be assumed that the petitioner's transactions out of which the 80 charge grew were legitimate, since a defendant is presumed innocent until proven guilty, and the petitioner was never proven guilty. Hal Price Headley, 37 B.T.A. 738">37 B.T.A. 738. Cf. Commissioner v. Heininger, supra;Greene Motor Co., 5 T.C. 314">5 T.C. 314. * In Commissioner v. Shapiro, supra, Rae Shapiro, who was the wife of Michael Shapiro, filed returns for the years 1941 through 1944, including therein the income of a business she conducted under the name of "Shapiro's." The returns were investigated and in 1946 the respondent determined deficiencies in tax and additions to tax for fraud. In July 1950 both Michael and Rae were indicted for attempting to defeat and evade tax due and owing by Rae by filing false and fraudulent tax returns. Later, the indictment was dismissed 416 as to Rae. The Seventh Circuit affirmed our holding as to Rae that the attorneys' fees paid for services in the defense of Rae which resulted in the dismissal of the indictment against her were deductible as ordinary and necessary expenses of her business. In the course of our opinion, 81 we had said:The respondent also contends that the litigation arose over the filing of personal income tax returns and hence the fees could not be regarded as business expenses. But the evidence shows that the income reported on the returns or involved in the dispute came from a business operated as a sole proprietorship. Necessarily the profits of such a business had to be reported on individual returns or joint returns of husband and wife. The litigation concerned business income and the costs of such litigation are business expenses and are deductible except where a conviction results and public policy denies the deduction. * * Where there is an indictment, but the prosecution is ended without a conviction the presumption must prevail that the defendant is not guilty and the costs of the defense are deductible. Morgan S. Kaufman, 12 T.C. 1114">12 T.C. 1114 * * In the instant case there was no conviction and no question of public policy is involved. Suffice it to say, we can see no distinction between Shapiro where Rae was indicted for allegedly filing false and fraudulent returns and the instant case where petitioner was indicted for allegedly attempting82 to bribe a revenue agent. In both cases the prosecution ended without a conviction and the presumption must prevail that the defendant was not guilty and that the costs of defense are deductible as a business expense. Morgan S. Kaufman, supra.It is not too clear what the parties meant by paragraph 32 of the stipulation which we have previously set out in full herein. In the first place, the parties had previously stipulated that only $ 5,000 of the $ 9,000 was still in dispute. Petitioners have made no reference to paragraph 32 anywhere in their briefs. It seems to us that the stipulation comes close to stipulating a conclusion of law which, if it does, we would disregard. See Ohio Clover Leaf Dairy Co., 8 B.T.A. 1249">8 B.T.A. 1249, rehearing denied 9 B.T.A. 433">9 B.T.A. 433. However, since we hold that petitioner is entitled to deduct the $ 5,000 as a business expense under section 162(a) of the 1954 Code, we need not pursue the matter further.We hold for petitioners on this issue.The $ 11,500 Dividend IssuePetitioner purchased or received in exchange shares of stock in the St. Louis-San Francisco Railway83 Co. (hereinafter referred to as Frisco) on the dates and in the number of shares as follows:Preferred stockNumber ofDate:sharesJuly 1949300Oct. 1, 1953700[These shares were exchanged on Sept. 21, 1956, for 5-percent income debentures in the face amount of $ 100,000, Series A, due Jan. 1, 2006, and 250 shares of common capital stock of the Frisco.] 417 Common stockNumber ofDatesharesApr. 22, 19472,000June 3, 19472,000Jan. 28, 19481,000May 25, 1949500Mar. 23, 1956250Sept. 21, 19561 250On December 6, 1956, petitioner made a gift of 1,000 shares of common stock of Frisco. During the taxable year 1956 petitioner received distributions from Frisco on the shares of common stock so held in the amount of $ 11,500. These distributions of $ 11,500 were included as dividend income in petitioners' joint Federal income tax return for the taxable year 1956.Frisco was incorporated under the laws of the State of Missouri on August 24, 1916, and succeeded as of November 1, 1916, to certain properties84 formerly of the St. Louis & San Francisco Railroad sold at foreclosure on July 19, 1916, in accordance with the terms of a plan of reorganization. The 1916 sale was confirmed by the Federal District Court at St. Louis on August 29, 1916. St. Louis & San Francisco Railroad Co. was itself a reorganization in 1896 of the St. Louis & San Francisco Railway Co. Frisco is engaged as a common carrier in the business of transporting persons and property by rail in Missouri and, directly and through subsidiaries, in eight other States. Its principal office is located at 906 Olive Street, St. Louis 1, Mo. At all times it has filed its Federal income tax returns on a calendar year basis utilizing the accrual method of accounting.For the purposes of this proceeding only, Frisco had post-March 1, 1913, accumulated earnings and profits as of December 31, 1932.On November 1, 1932, upon petition of a creditor, James M. Kurn was appointed receiver of the properties of Frisco by the U.S. District Court for the Eastern District of Missouri, Eastern Division (hereinafter referred to as the court). John G. Lonsdale was appointed coreceiver on November 5, 1932. The properties of Frisco were operated85 by the receivers until October 1, 1933, upon which date the properties were transferred to trustees appointed by the court in proceedings under section 77 of the Bankruptcy Act. Kurn and Lonsdale were named trustees. Subsequently these individuals died and Frank A. Thompson was appointed sole trustee. Pursuant to a plan of reorganization confirmed by the court on November 15, 1945, Frisco was reorganized effective January 1, 1947. On the effective date of the reorganization, the properties were transferred by the trustee to Frisco 418 pursuant to the plan of reorganization. Frisco has continuously owned and operated such properties since January 1, 1947.At December 31, 1932, Frisco had outstanding approximately $ 303 million in debt securities. With minor reductions, these securities were outstanding during the entire period of the receivership and reorganization proceedings. Interest matured and was accrued on such outstanding securities during the period of the receivership and the reorganization proceedings in the aggregate amount of approximately $ 180,900,000 and such interest was deducted in the computation of net income subject to Federal income tax in the returns86 filed during the reorganization period in the names of the receivers, trustees, or trustee, followed by "St. Louis-San Francisco Railway Company, Debtor." Of this amount, approximately $ 3 million was canceled in 1943 and approximately $ 76,500,000 was paid to the security holders in cash prior to, or contemporaneously with, the effective date of the reorganization.Under the terms of the reorganization plan as approved by the Interstate Commerce Commission and the courts, the previously outstanding common and preferred stocks were eliminated as worthless and the holders of the several classes of indebtedness received new bonds, preferred stock, common stock, and cash, and Frisco's previously outstanding indebtedness was canceled. Such new stocks and securities were received by the old creditors in full and complete satisfaction of their claims against the debtor.Incident to the reorganization the Frisco charter was amended to cancel its original stock and to abolish the rights of the holders thereof.The reorganized company opened a new set of books as of January 1, 1947, with an entry to reflect the obligations and securities it assumed. Frisco made no entries on either the old87 or new books with respect to any of its prior obligations, defaulted interest accruals, and stock; they were merely left outstanding on the old books.In its Federal income tax return for each of the years 1933 through 1941, Frisco, which computed its income according to the accrual method of accounting, reported net losses after accruing interest on its long-term debt. It reported net income for each of the years 1942 through 1946. Nevertheless, due to the losses reported during the years 1933 through 1941, Frisco reported aggregate losses (as adjusted in some years by the internal revenue agent on audit) during the entire period of the reorganization of $ 50,958,028.90. The income tax returns of Frisco for the years 1931 through 1939 were accepted as filed by the respondent without any audit. The Federal income tax returns of Frisco for the years 1940 through 1946 were examined by the respondent and interest accrued on its debt obligations was allowed for each of such years.419 In the year 1956 distributions made to stockholders as such exceed Frisco's current earnings and profits for the year 1956.Paragraph 20 of the stipulation is, in part, as follows:20. If it be88 determined that the Frisco, by reason of its reorganization effective as of January 1, 1947, had zero earnings and profits at December 31, 1946, then the Frisco, as of December 31, 1955, had accumulated in current earnings and profits sufficient to cover the distributions made in 1956, and, therefore, the petitioner's asserted claim of a refund for the taxable year 1956 is without merit. * Other stockholders of Frisco have taken this same issue to the U.S. District Court, Eastern District of Missouri, Eastern Division, No. 62 C 351(1); and to the U.S. Court of Claims, No. 275-62. See Banister v. United States, 236 F. Supp. 972 (E.D. Mo.), and McCullough v. United States, 383">344 F. 2d 383 (Ct. Cl., Apr. 16, 1965). In both of these cases the issue was decided in favor of the Government and against the plaintiffs.We quote with approval the court's opinion in Banister v. United States, supra, in which the court said:By stipulation of the parties and as the obvious result of the reorganization, the Frisco emerged freed of its old debts, leaving none outstanding to cause a deficit89 such as is now claimed by the plaintiffs. To allow plaintiffs' contentions to prevail in this case would be to give Frisco a position of "having its cake and eating it too." It would be allowing Frisco to proceed through bankruptcy and reorganization and thereby obtain a complete discharge of its liabilities but yet being able to continue its operations. Then, despite the discharge of the old debts in the reorganization, plaintiffs would have Frisco now use the pre-reorganization deficit created by those liabilities to offset its earnings and profits of subsequent business years. It is a double benefit that is sought: Escape of liability for its debts, but also escape from taxation of its shareholders by taking advantage of its former operating deficit. It was not the purpose of either the bankruptcy or the tax laws to permit such a doubled advantage. As of the 1947 reorganization of Frisco it received a clean slate; it was able to continue operations as a going concern, free of its former economic burdens. But, along with this fresh start went the duties and burdens shared by all businesses, one of these being taxation of its own income and the dividend income of its shareholders, 90 and the distribution of dividends by a corporation to its shareholders does not lose its true nature by the distributing corporation merely calling it one out of capital. There was no existing deficit which Frisco could take advantage of and thereby make its distribution one out of capital. Therefore, the only result is that it was a dividend paid out of earnings and profits to shareholders and fully taxable to them as dividend income.Judge Collins, in his opinion in McCullough v. United States, supra, stated:Thus, this court holds that, upon completion of the Frisco reorganization, the preexisting deficit was wiped out. * Our decision that the deficit in earnings and profits did not survive the reorganization is fatal to plaintiffs' position regarding this issue. (See finding 17(i), infra.) * ** * * *420 This court does not accept the contention of plaintiffs that November 1, 1932, the date upon which the Frisco receivership was commenced, was the decisive date with regard to the alteration of the earnings and profits account. There is, in our opinion, no warrant for extending the "full priority rule" to the lengths which91 plaintiffs request. The recapitalization became effective on January 1, 1947, and that date must be considered as the time when the Frisco's earnings and profits became zero (i.e., when the aggregate deficit of the years. 1933 through 1947, was eliminated).* * * In conclusion, we hold that the distribution which plaintiffs received from the Frisco in 1957 and 1958 were fully taxable as ordinary income. * We are in entire agreement with the opinions in the two decisions just quoted from and, therefore, hold that the distribution of $ 11,500 received by petitioners during 1956 on the common stock of Frisco is fully taxable.It may be noted in passing that the Court of Claims' finding of fact 17(i) 3 is in all material respects the same as that part of paragraph 20 of the stipulation we have previously set out herein.92 We hold for the respondent on this issue.Decision will be entered under Rule 50. Footnotes1. SEC. 162. TRADE OR BUSINESS EXPENSES.(a) In General. -- There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * SEC. 212. EXPENSES FOR PRODUCTION OF INCOME.In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year -- * * * (3) in connection with the determination, collection, or refund of any tax.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.↩2. Sec. 214(a)(1), Revenue Act of 1918, which is substantially the same as sec. 162 (a), I.R.C. 1954↩.1. These shares were received in exchange for preferred stock and were issued ex dividend for the remainder of 1956.↩3. "17. The parties stipulated as follows with respect to the consequences flowing from various possible rulings herein by the Court:"(i) If it be determined that the Frisco, by reason of its reorganization effective as of January 1, 1947, had zero earnings and profits at December 31, 1946, then the Frisco, as of December 31, 1955, had accumulated and current earnings and profits sufficient to cover all distributions during the years in suit subsequent to that date, and plaintiffs have no right to recover under this issue."↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625042/	E. George Schaefer and Virginia P. Schaefer v. Commissioner.Schaefer v. CommissionerDocket No. 69890.United States Tax CourtT.C. Memo 1959-229; 1959 Tax Ct. Memo LEXIS 35; 18 T.C.M. (CCH) 1110; T.C.M. (RIA) 59229; November 9, 195935 Prior to 1954 petitioner E. George Schaefer, the publisher of a weekly investment newsletter, kept his books and filed his income tax returns on the cash basis; prepaid subscription income was included in net income in the year received. On his returns for the taxable years 1954 and 1955 petitioner deferred including prepaid subscriptions in net income. Held, respondent correctly determined that the prepaid subscriptions constituted taxable income in the years of receipt. George M. Mott, Esq., 901 Hume Mansur Building, Indianapolis, Ind., for the petitioners. Robert E. Johnson, Esq., for the respondent. VAN FOSSAN Memorandum Findings of Fact and Opinion Respondent determined deficiencies in petitioners' income36 taxes for the taxable years 1954 and 1955 in the amounts of $9,153.92 and $20,100.55, respectively. The only question is whether certain prepaid subscription income should have been included in taxable income in the years received. Another issue concerning business expenses was abandoned. Findings of Fact Some of the facts are stipulated, the stipulation being incorporated herein by this reference. Petitioners are husband and wife, residing in Indianapolis, Indiana. They filed joint Federal income tax returns for the taxable years 1954 and 1955 with the director of internal revenue at Indianapolis, Indiana. For convenience, E. George Schaefer will hereinafter be referred to as petitioner. On April 26, 1948, petitioner filed an application with the United States Securities and Exchange Commission for registration as an investment adviser. In his application he stated that he planned to issue a weekly letter explaining the Dow theory. His registration with the Securities and Exchange Commission as an investment adviser became effective May 26, 1948. Petitioner began publishing "The Dow Theory Trader," a weekly investment newsletter, in 1948. He accepted advance payments37 for subscriptions, using a subscription blank which contained the following statement: "Pro-rata money-back guarantee any time subscriber wishes to cancel, for any reason whatever." On September 29, 1952, the Pennsylvania Securities Commission issued a cease and desist order, notifying petitioner that he was not registered under the Pennsylvania Securities Act and that consequently he was prohibited from carrying on his investment advisory business in Pennsylvania. On approximately January 6, 1953, petitioner filed with the Pennsylvania Securities Commission an application for registration as an investment adviser. This application was followed by a statement of petitioner's financial condition as of January 5, 1953. By letter dated January 19, 1953, the Secretary of the Pennsylvania Securities Commission advised petitioner's attorney that the financial statement which had been supplied did not disclose any information as to subscriptions paid in advance and for which literature had not yet been furnished. Petitioner replied, by affidavit, that he had 69 subscribers residing in the State of Pennsylvania, and that these subscriptions had expiration dates ranging from February 3, 1953, to38 January 24, 1954. On February 2, 1953, the Secretary of the Pennsylvania Securities Commission wrote petitioner's attorney, as follows: "In the last part of our letter of January 19th we asked for information concerning the total amount which has been paid in advance for subscriptions to literature which has not as yet been issued. In the financial statement as of January 5, 1953 no provision was made for any such sum. You are, therefore, requested to forward an amended financial statement in which the total of advanced payments are clearly set forth." On April 10, 1953, petitioner submitted a revised statement of his financial condition as of January 5, 1953. This revised statement reflected the amount of advance payments for subscriptions to literature which had not been issued as of that date. In a transmittal letter petitioner's attorney called attention to $15,000 of additional life insurance placed in effect to secure the potential liability arising from the advance payments. The revised financial statement appears below: ASSETSCURRENT ASSETS: Cash in bank, FletcherTrust Co., Indianapo-lis, Indiana$ 2,037.49Paper and other sup-plies574.76$ 2,612.25OTHER ASSETS: Mailing lists (approxi-mately 95,000 names)3.00Cash surrender value,life insurance - facevalue $22,000.00 -pledged as securityfor bank loan - seenote4,173.644,176.64EQUIPMENT ANDPROPERTY: Office equipment1,710.00Real estate - located at3636 Salem St., Indian-apolis, Indiana11,000.00Personal prop-erty: House fur-nishings $1,500.00Automobile 2,000.003,500.0016,210.00INVESTMENTS: Brokerage account, Thomson andMcKinnon - at market value1,450.00$24,448.89LIABILITIES AND NET WORTHCURRENT LIABILITIES: F.I.C.A. and federalincome taxes withheld$ 163.84Margin account payable- Thomson and Mc-Kinnon354.32Unearned income - sub-scriptions11,290.89$11,809.05OTHER LIABILITIES: Mortgage payable - on3636 Salem St. prop-erty5,419.70Automobile loan - se-cured by 1951 Nash1,264.80OTHER LIABILITIES: -Cont'dBank loan - secured bycash value of life in-surance on life ofE. George Schaefer$ 2,950.00$ 9,634.50$21,443.55E. GEORGE SCHAEFER - NETWORTH3,005.34$24,448.8939 On April 17, 1953, the Pennsylvania Securities Commission issued a certificate evidencing petitioner's registration as an investment adviser. No formal hearings were held before the Pennsylvania Securities Commission in connection with petitioner's application and certification. "The Dow Theory Trader" had good public acceptance and its subscription list increased approximately threefold from 1953 to 1955. Prior to 1954 petitioner kept his books and filed his returns on the basis of cash receipts and disbursements; prepaid subscription income was included in net income in the year received. On his returns for the taxable years 1954 and 1955 petitioner deducted from gross receipts the respective amounts of $25,016.95 and $57,799.81 under the designation "Unexpired Subscriptions." On his return for the taxable year 1955 he added to income under the designation "Unexpired Subscriptions from Prior Year" the sum of $25,216.55. Respondent's administrative file contains no record of an application by petitioner to change his method of accounting and no such application is attached to his returns for either 1954 or 1955. Respondent determined that the prepaid subscriptions constituted40 taxable income in the year of receipt. Opinion VAN FOSSAN, Judge: The question is whether prepaid subscription income, received by petitioner during the taxable years 1954 and 1955, should have been included in taxable income in the year received. Prior to the taxable years here involved petitioner kept his books and filed his returns on the cash receipts and disbursements method. Prepaid subscriptions were included in net income in the year received. On his returns for the taxable years 1954 and 1955 petitioner deducted prepaid subscription income from gross receipts. The prepaid subscription income deducted on the 1954 return was added to income on petitioner's return for 1955. Generally, under the cash receipts and disbursements method all items which constitute gross income are to be included in taxable income in the year actually or constructively received. Sec. 1.446-1(c)(1)(i), Income Tax Regs.Section 446(a) of the Internal Revenue Code of 1954 provides 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." The term41 "method of accounting" includes not only the over-all method of accounting but also the accounting treatment of any item. Sec. 1.446-1(a)(1), Income Tax Regs. Except as otherwise expressly provided, a taxpayer who changes his method of accounting must secure the consent of the Commissioner before computing his income for purposes of taxation under the new method. Sec. 1.446-1(e)(2)(i), Income Tax Regs.There is no evidence that petitioner requested respondent's permission to change his accounting method for either 1954 or 1955, and petitioner makes no claim that such permission was ever sought. It would thus appear that petitioner, who had previously reported income on the cash basis, including prepaid subscriptions in taxable income when received, should have, in the absence of permission to the contrary and in accord with the cash basis of accounting, continued to include prepaid subscriptions in taxable income when received. Petitioner contends that the method of accounting used should not be a factor in determining the year in which prepaid subscriptions are to be taxed. In support of his contention he cites Beacon Publishing Co. v. Commissioner, 218 F. 2d 697 (1955),42 reversing 21 T.C. 610">21 T.C. 610 (1954), but when the decision in that case is studied in the light of the facts there present, it is not found to be in conflict with the view that we take in the present case. It is established beyond question that earnings received under a claim of right without restriction as to disposition must be reported, even though it may still be claimed that the taxpayer is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent. North American Oil v. Burnet, 286 U.S. 417">286 U.S. 417 (1932); United States v. Lewis, 340 U.S. 590">340 U.S. 590 (1951); Curtis R. Andrews, 23 T.C. 1026">23 T.C. 1026 (1955). Petitioner fits precisely within this rule. He received prepaid subscription income in consideration for his promise to furnish the subscriber with a specified number of issues of "The Dow Theory Trader." The money was his to do with as he liked, subject only to the contingency that some subscribers might demand a refund. The prepaid subscriptions should have been included in taxable income when received. The fact that some portion of the money might have to be refunded in a future year does not render*43 the rule inapplicable . Brown v. Helvering, 291 U.S. 193">291 U.S. 193 (1934). We hold that respondent properly included petitioner's prepaid subscriptions in income in the year of receipt. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625096/	JOHN H. MILAM, JR., Petition v. COMMISSIONER OF INTERNAL REVENUE, RespondentMilam v. CommissionerDocket No. 30163-83.United States Tax CourtT.C. Memo 1986-218; 1986 Tax Ct. Memo LEXIS 392; 51 T.C.M. (CCH) 1099; T.C.M. (RIA) 86218; May 29, 1986. John H. Milam, Jr., pro se. Vallerie Volesko, for the respondent. TANNENWALDMEMORANDUM FINDINGS OF FACT AND OPINION TANNENWALD, Judge: Respondent determined deficiencies against petitioner in the amount of $5,290.53 for the 1980 taxable year and $3,023 for the 1981 taxable year. The issues for decision are whether petitioner (1) was away from home during 1980 and 1981 so as to be entitled to deduct travel and living expenses under section 162, 1 and (2) entitled to moving expenses for 1981 beyond those allowed by respondent. FINDINGS393 OF FACT Petitioner resided in Corona, New York at the time he filed his petition herein. He filed timely Federal income tax returns as a single person for the taxable years ending December 31, 1980 and 1981, respectively. His 1980 return listed Macon, North Carolina as his address. Petitioner is a plumber by trade and was a member of Plumbers Union Local No. 2 during the taxable years in issue. The Union's office is located in New York, New York. Petitioner lived and worked in the New York area during the period 1970 - 1976. Thereafter, having been unable to find work for which he was trained in the New York area, he sought and obtained work as a steam fitter/pipe fitter as follows: Places of EmploymentDates EmployedClow Darling08/76 - 11/76Box 578Thunder Bay, OntarioBechtel Company Ltd.11/76 - 12/76Bag Service #6Corunna, OntarioPetro Chem Projects Ltd.09/77 - 11/77P.O. Box 90Terrace Bay, OntarioTVA Watts Bar Nuclear Plant07/78 - 05/80P.O. Box 2000Spring City, TennesseeBechtel Petroleum06/80 - 03/81P.O. Box 20140Philadelphia, PennsylvaniaHydraulic Plumbing & Heating04/81 - Present215-45 Northern Blvd.Bayside, New York394 Prior to 1981, petitioner's wife (from whom he was divorced in April 1981) and two children lived in the New York area. At some point in 1980 while petitioner was working in Spring City, Tennessee, he moved them to Woodbridge, Virginia which was 550 miles from Spring City but closer to Spring City than New York. During the period when he worked for the Tennessee Valley Authority, petitioner lived in an apartment in the vicinity of Spring City, Tennessee. During the period when he worked for Bechtel Petroleum, petitioner lived in a motor lodge in Mount Laurel, New Jersey, which is in the vicinity of Philadelphia. Petitioner did not maintain an apartment or any place of abode in New York during 1980 and until August 1981 when he took up New York residence in connection with his current employment. Petitioner incurred moving expenses of $1,975 in moving from New Jersey to New York in 1981. OPINION Section 162(a) permits a taxpayer to deduct "traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business." The burden of proving that395 he is entitled to deduct his claimed living expenses while working in Spring City and Philadelphia is on petitioner. ; Rule 142(a). The threshold question is whether petitioner maintained a home from which he was away during 1980 and 1981. Petitioner's contacts with the New York area were practically nonexistent during the taxable year 1980 and that portion of 1981 while he was working in Philadelphia. He maintained no place of abode in the New York area. He moved his wife (from whom he was apparently separated and later divorced) and his children to Woodbridge, Virginia sometime in 1980--a fact, which we think is a strong indication that New York was no longer his home. The only connection of petitioner with the New York area is his membership in the union and his apparent subjective intention to return to New York as and when the opportunity for employment there presented itself. Under all the circumstances, we are unable to conclude that petitioner's tax home was at a place other than where he worked during 1980 and 1981. ; ,396 on appeal (9th Cir., Jan. 13, 1986); . The fact that petitioner did not maintain a place of abode in New York is most significant and distinguishes and the other cases upon which petitioner relies. See also . Moreover, in view of his separation and divorce, petitioner's expenditures for maintenance of his wife and children do not represent duplicate expenses which should be taken into account. . Petitioner's maintenance of union membership in the New York local is far from sufficient to tip the scale in petitioner's favor. The same is true with respect to petitioner's subjective intent. ; . In view of our conclusion that petitioner was not "away from home," we have no need to consider whether his employment in Spring City and Philadelphia was temporary or indefinite. As far as petitioner's moving expenses in 1981 are concerned, the*397 only issue for decision is that of substantiation. Respondent allowed petitioner $1,475 of the claimed deduction of $3,128. We think that petitioner is entitled to an additional deduction of $500 for room and meals and we so hold. We note that the breakdown of the $1,475 allowed by respondent discloses that this additional allowance will not cause the $1,500 limitation of section 217(b)(3)(A) to be exceeded. Decision will be entered under Rule 155.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625043/	MICHAEL LYNDON HANNA, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentHanna v. CommissionerDocket No. 7015-91United States Tax CourtT.C. Memo 1992-256; 1992 Tax Ct. Memo LEXIS 278; 63 T.C.M. (CCH) 2917; May 4, 1992, Filed 278 Decision will be entered under Rule 155. Michael Lyndon Hanna, pro se. Harris Bonnette, for the respondent. DINANDINANMEMORANDUM OPINION DINAN, Special Trial Judge: This case was heard pursuant to the provisions of section 7443A(b) and Rules 180, 181, and 182. 1 For convenience and clarity, we have combined our findings of fact and opinion. Respondent determined a deficiency and additions to tax in petitioner's Federal income tax for the taxable year 1986 as follows: Additions to TaxSectionSectionSectionYearDeficiency6653(a)(1)(A)6653(a)(1)(B)6661(a)1986$ 3,228$ 307.3050% of the$ 1,537interest dueon $ 6,146After concessions by the parties, the issues for decision are: (1) Whether petitioner failed to report income of $ 7,116.22 in 1986, (2) whether petitioner failed to report income 279 in 1987 of $ 350 thereby reducing the amount of his net operating loss carryback from 1987 to 1986 accordingly, (3) whether petitioner's employment was of a temporary nature during 1986 such that he incurred miscellaneous deductible expenses related to the temporary employment, (4) whether petitioner's employment was of a temporary nature during 1987 such that he incurred miscellaneous deductible expenses related to the temporary employment which contributed to the amount of his net operating loss carryback from 1987 to 1986, (5) whether petitioner is liable for additions to tax pursuant to section 6653(a)(1)(A) and (B), (6) whether petitioner is liable for the addition to tax pursuant to section 6661(a), and (7) whether petitioner is liable for self-employment tax. Some of the facts have been stipulated. The stipulations of fact and accompanying exhibits are incorporated by this reference. Petitioner resided in Red Rock, Texas, at the time he filed his petition. 1 and 2. Unreported income for 1986 and 1987Respondent determined that petitioner failed to report income in the amounts of $ 7,116.22 and $ 350 for 1986 and 1987, respectively. Petitioner asserts that he did280 not fail to report income in either amount and that respondent's figure is either wholly unsupported or the result of double inclusion by respondent of certain receipts already accounted for by petitioner. We conclude that petitioner has satisfactorily demonstrated that $ 6,816.22 was erroneously determined by respondent as unreported income of petitioner for 1986. Petitioner has been engaged in the business of manufacturing furniture and the construction of log cabins for several years including 1986 and 1987. Almost all of petitioner's log cabin construction and the majority of his furniture manufacturing during 1986 and 1987 was performed pursuant to contracts with Mr. Bela Karoyli. As petitioner's work on projects for Mr. Karoyli progressed, the cost of a project as originally estimated would frequently be adjusted up or down to reflect the actual cost of the project. When such an adjustment was required, petitioner, as a matter of course, would submit a revised bill to Mr. Karoyli indicating the actual cost of the project. Petitioner referred to three separate instances in which respondent erroneously attributed income to him which was already included in his income. First, 281 respondent erroneously included a receipt for $ 5,560.22 issued by petitioner which was subsequently voided and replaced by a receipt for $ 6,967.35. It is clear from the record that the initial receipt was a partial payment for a cabin which was replaced and adjusted upward by a subsequent receipt to reflect further costs. Rather than disregard the voided receipt and include the replacement receipt, respondent included both amounts in her determination of petitioner's income. Since the initial receipt was voided and replaced by the second one, we conclude that respondent erroneously added the amount of the first receipt to the second receipt to overstate petitioner's income in the amount of $ 5,560.22. The second instance referred to by petitioner shows that respondent erroneously included a bill for $ 9,215 in petitioner's income rather than a receipt for $ 8,496. It is clear from the record that the amount of $ 9,215 was petitioner's initial estimate of a portion of the cost of a cabin he was constructing for Mr. Karoyli. However, the facts demonstrate that this amount was subsequently adjusted downward to $ 8,496 which amount was actually received by petitioner. Respondent282 included the initial amount in petitioner's income, disregarding the actual cost later actually paid to petitioner, and accordingly, we conclude that respondent overstated petitioner's income by $ 719 in this instance. The final error referred to by petitioner shows that respondent included a partial receipt in his income which was included as part of a larger subsequent receipt. Petitioner built an outdoor deck for Mr. Karoyli for which a total of $ 1,037 was charged and paid. Initially, petitioner billed Mr. Karoyli for 50 percent of the deck at $ 537. Subsequently, petitioner billed Mr. Karoyli for the whole deck at a cost of $ 1,037. The initial bill was never paid and the amount thereof was included in the final receipt. Respondent included both the $ 537 bill and the $ 1,037 receipt in petitioner's income. Thus, we conclude that respondent overstated petitioner's income by $ 537 in this instance. Altogether, petitioner has demonstrated that respondent overstated his unreported income for 1986 by $ 6,816.22. Since the total unreported income for 1986 in dispute is $ 7,116.22, we sustain respondent's determination as to the remaining $ 300. For 1987, respondent determined283 that petitioner had unreported income of $ 350 and that petitioner's net operating loss carryback from 1987 to 1986 should be reduced accordingly. Petitioner contends that he did not have any unreported income for 1987 as indicated by his records and that respondent has failed to provide any basis for her claim that he had unreported income of $ 350. At the outset, we note that 1987 is not a year over which we have jurisdiction to determine petitioner's tax liability since no deficiency for that year is before us. However, we may compute the correct amount of taxable income or net operating loss for a year not in issue as a preliminary step in our determination of the correct amount of net operating loss carryover or carryback to a year in issue. Sec. 6214(b); Hill v. Commissioner, 95 T.C. 437">95 T.C. 437, 439-440 (1990); Calumet Industries, Inc. v. Commissioner, 95 T.C. 257">95 T.C. 257, 275 (1990). We conclude that petitioner has demonstrated that he did not have $ 350 of unreported income for 1987. Petitioner presented books and records for 1987 which showed that he reported his income for 1987 accurately. Respondent's only support for her claim that petitioner284 had unreported income of $ 350 in 1987 is the bare assertion to that effect. In light of the evidence presented by petitioner, we conclude that petitioner did not have $ 350 of unreported income for 1987 and that his net operating loss carryback from 1987 to 1986 should not be reduced in that amount. 3 and 4. Petitioner's tax home during 1986 and 1987Respondent determined that petitioner was not entitled to travel and entertainment deductions claimed with respect to expenses incurred by him for travel to Huntsville, Texas. Respondent also determined that petitioner was not entitled to a portion of the expenses he claimed for car and truck expenses, insurance expenses, and repair expenses. Respondent based her disallowance of the aforementioned expenses upon her determination that Huntsville was petitioner's tax home during 1986 and 1987 and that the expenses disallowed were incurred by petitioner as a result of his travel to and from Huntsville which was personal in nature. Deductions are strictly a matter of legislative grace, and petitioner bears the burden of proving his entitlement to any deduction claimed. Rule 142(a); New Colonial Ice Co. v. Helvering, 292 U.S. 435">292 U.S. 435, 440 (1934).285 Section 262 provides generally that no deduction will be allowed for personal, living, or family expenses. However, where employment which is temporary gives rise to certain expenses which would otherwise be personal, such expenses may be considered as business expenses and not personal expenses. Peurifoy v. Commissioner, 358 U.S. 59 (1958). Section 162(a)(2) generally provides for the deduction of all ordinary and necessary expenses paid or incurred in carrying on a trade or business, including expenses for travel, meals, and lodging while away from home in pursuit of a trade or business. Our determination concerning the deductibility of petitioner's expenses turns upon whether petitioner incurred the expenses while he was away from home. A taxpayer's home, within the meaning of section 162(a)(2), is generally the area or vicinity of the taxpayer's principal place of employment rather than the location of his family residence. Mitchell v. Commissioner, 74 T.C. 578">74 T.C. 578, 581 (1980). An exception to this rule exists where the taxpayer's employment in a particular location is temporary, as opposed to indefinite or indeterminate. When a taxpayer286 undertakes employment which is merely temporary, the taxpayer may be considered to be away from home. Kroll v. Commissioner, 49 T.C. 557">49 T.C. 557, 562 (1968). In such a case, it would not be reasonable to expect the taxpayer to pick up and move his residence under the circumstances. Consequently, the expenses incurred on account of the place of temporary employment will be deductible. Steinhort v. Commissioner, 335 F.2d 496">335 F.2d 496, 504 (5th Cir. 1964), affg. T.C. Memo. 1962-233. The purpose behind the deduction for expenses incurred while a taxpayer is away from home is to ease the burden upon the taxpayer who, because of the exigencies of his trade or business, incurs additional and duplicative living expenses. Rosenspan v. United States, 438 F.2d 905">438 F.2d 905, 912 (2d Cir. 1971); Tucker v. Commissioner, 55 T.C. 783">55 T.C. 783, 786 (1971). Employment is considered temporary when it is expected that it will last for only a short period of time. Norwood v. Commissioner, 66 T.C. 467">66 T.C. 467, 469 (1976). Employment is indefinite in nature when the prospect is that the work will continue for an indeterminate287 and substantially long period of time. Boone v. United States, 482 F.2d 417">482 F.2d 417, 419 (5th Cir. 1973). Employment which is originally temporary may become indefinite due to changed circumstances, or simply from the passage of time. Garlock v. Commissioner, 34 T.C. 611">34 T.C. 611, 615-616 (1960). The question of whether employment is of a temporary or indefinite nature is essentially a factual one. No single element is determinative, and there are no rules of thumb, durational or otherwise. Peurifoy v. Commissioner, supra at 60-61. We conclude that each period for which petitioner was employed in Huntsville during 1986 and 1987 constituted employment of a temporary nature. During 1986 and 1987 petitioner completed the construction of several cabins, including furnishings, as well as various other projects, most of which were for a gymnastics center owned and operated by Mr. Karoyli. Petitioner's multiple employment relationships with Mr. Karoyli were negotiated at arm's length and were based upon a series of independent contracts, each of which concerned a separate project and was open to bidding by other parties in addition 288 to petitioner. After the completion of a contracted for project, petitioner had no expectation or guarantee that he would receive future work from Mr. Karoyli. Petitioner's employment with Mr. Karoyli was dependent on Mr. Karoyli's need for construction and petitioner's successful bid on the proposed project. While working on a project at the Karoyli facility, petitioner would stay 10-15 miles away in Huntsville which was the closest town to the site. That the Huntsville area was a temporary place of employment for petitioner is illustrated, in part, by the manner in which petitioner maintained his contacts with Huntsville. Petitioner was only present in Huntsville over the course of a construction project during which he would live out of a hotel until the project was completed. Petitioner never established a permanent relationship or contact of any sort with Huntsville. Before petitioner ever worked on a project for Mr. Karoyli in Huntsville, he lived and worked in Smithville, Texas. In addition, petitioner always maintained a residence in Smithville during the years in issue. When not working on a project for Mr. Karoyli, petitioner either resided in an apartment or lived289 with his grandmother in Smithville. Petitioner returned to Smithville between all of the Karoyli projects and during most weekends during the term of a project. That petitioner's home was Smithville is further evidenced by the presence of his furniture manufacturing business there where he worked and which he operated at all times relevant herein. The furniture which petitioner produced for Mr. Karoyli was manufactured at his Smithville business. Based upon our review of the record as a whole, we conclude that petitioner's employment in the Huntsville area was temporary in nature. Each project which petitioner worked on in Huntsville was of a short duration and did not carry any expectation of continued employment. Petitioner's temporary stays in Huntsville resulted from his successful bidding and were consistent with the general nature of the construction business. In addition, much of the expenses which petitioner incurred as a result of his stay in Huntsville were duplicative of expenses he had in Smithville. Accordingly, we conclude that petitioner's tax home was in Smithville during 1986 and 1987 and that the expenses petitioner incurred in 1986 due to his temporary employment290 in Huntsville are allowable and the expenses incurred in 1987 were properly included in the net operating loss carryback from 1987 to 1986. 5. Additions to tax for negligenceRespondent determined that petitioner was liable for the additions to tax for negligence or disregard of rules or regulations pursuant to section 6653(a)(1)(A) and (B) for 1986. Negligence under section 6653(a) is the lack of due care or the failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 947 (1985). Petitioner has the burden of proof on this issue. Bixby v. Commissioner, 58 T.C. 757">58 T.C. 757, 791 (1972). We conclude that petitioner is not liable for the negligence addition to tax. Petitioner presented us with books and records as well as supporting explanations which were not contradicted and which we find to be wholly credible. While petitioner appears to have made a few errors, we find that petitioner exercised due care and that the errors were not the result of negligence on petitioner's part. 6. Addition to tax for substantial understatement of taxSection 6661(a) provides291 for an addition to tax if there is a substantial understatement of income tax. The amount of the section 6661 addition to tax for additions assessed after October 21, 1986, is equal to 25 percent of the amount of any underpayment attributable to the substantial understatement. Omnibus Budget Reconciliation Act of 1986, Pub. L. 99-509, sec. 8002, 100 Stat. 1951; Pallottini v. Commissioner, 90 T.C. 498">90 T.C. 498, 501-502 (1988). An understatement is substantial if it exceeds the greater of 10 percent of the tax required to be shown on the return or $ 5,000. Sec. 6661(b)(1)(A). The understatement is reduced if it is based on substantial authority or is adequately disclosed on the return or in a statement attached to the return. Sec. 6661(b)(2)(A). At trial petitioner did not contend that he had substantial authority for the income which we have determined was unreported. Thus, if the Rule 155 computation reflects a substantial understatement within the meaning of section 6661(b)(1), the 25-percent addition provided by section 6661(a) will apply. 7. Self-Employment taxRespondent determined that petitioner was liable for self-employment tax due to the adjustments*292 which were made to his income. While many of respondent's adjustments have been eliminated or modified, petitioner's self-employment income has still been increased to a degree. Accordingly, petitioner's liability for self-employment tax based upon his increased income will be determined by the Rule 155 computation. Because of the foregoing, Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code in effect for the year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625045/	THE HAAS BUILDING COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Haas Bldg. Co. v. CommissionerDocket No. 32937.United States Board of Tax Appeals22 B.T.A. 528; 1931 BTA LEXIS 2106; March 4, 1931, Promulgated 2106 Where, subsequent to December 31, 1920, property is transferred to a corporation by an individual in exchange for more than 80 per cent, but less than 100 per cent, of the corporation's capital stock, and under section 203(b)(4) of the Revenue Act of 1924 no gain or loss is recognizable on account of such exchange, section 204(a)(8) of the Revenue Act of 1924 requires that the basis, in determining gain or loss on account of the sale of such property by the corporation, shall be the same as it would be in the hands of the transferor, and such requirement is not violative of the Constitution because all of the property owned by the corporation was not received from the controlling interest in such corporation. John C. Altman, Esq., for the petitioner. Eugene Meacham, Esq., C. E. Lowery, Esq., and Bruce A. Low, Esq., for the respondent. SEAWELL528 This proceeding involves deficiencies in income tax as determined by the Commissioner for 1924 and 1925 in the respective amounts of $1,685.06 and $4,160. The issue presented is whether in determining 529 the profit on the sale of certain securities the cost thereof to the petitioner's2107 transferor should be used as a starting point. The facts were stipulated. FINDINGS OF FACT. On March 19, 1924, Fannie K. Haas was the owner of the following securities, which had a cost basis to her, for income tax purposes, as follows: 1268 Shares of common stock of Midway Gas Co$53,8901595 shares of common stock of Southern California Gas Co23,9255000 shares of stock of Associated Oil Co82,0001000 shares of second preferred stock of San Joaquin Light & Power Corporation70,000$100,000 par value of San Francisco, Oakland & San Jose Consolidated Railway Co. 5% bonds (known and referred to as "Key Route Bonds")25,000On March 19, 1924, The Haas Building Company was a California corporation with its principal place of business at San Francisco, where it was engaged in the business of owning and operating real estate. On said date and also on April 8, 1924, the fair market value of the assets of said corporation, after deduction of all its liabilities, was at least the sum of $200,000. During the months of March and April, 1924, the total issued and outstanding capital stock of said corporation amounted to 3,000 shares of the par value of $1002108 per share, and said 3,000 shares of stock were at all times from March 1, 1924, to and including April 30, 1924 (at which latter date said corporation was duly dissolved in accordance with law), beneficially owned in equal shares by Walter A. Haas, Ruth H. Lilienthal and Eleanor H. Koshland. The said 3,000 shares of stock were acquired in equal amounts by said Walter A. Haas, Ruth H. Lilienthal and Eleanor H. Koshland in the year 1919 and continuously held by them in such equal amounts until April 30, 1924. The cost basis, for income tax purposes, to said Walter A. Haas, Ruth H. Lilienthal and Eleanor H. Koshland of said 3,000 shares of stock, was at least the sum of $200,000. On March 18, 1924, the petitioner, namely, The Haas Building Company, Inc., was organized under the laws of California, with an authorized capital of $2,000,000, divided into 20,000 shares, of the par value of $100 each. Said corporation was organized for the purpose of engaging in the business of owning and operating real estate and owning various securities and continued so to engage in business after its organization down to and including December 31, 1925. On March 19, 1924, The Haas Building Company2109 offered to transfer to petitioner all of its assets, subject to certain stipulated liabilities, 530 in exchange for the issuance by petitioner to The Haas Building Company of 2,000 shares of the capital stock of the petitioner and the assumption by the petitioner of the aforementioned stipulated liabilities. Said offer was accepted by petitioner on the last mentioned date. On April 8, 1924, the assets of The Haas Building Company were transferred and delivered to petitioner and petitioner issued and delivered to The Haas Building Company 2,000 shares of its capital stock, and assumed said liabilities. The cost basis to The Haas Building Company, for income tax purposes, of the assets transferred by said corporation to petitioner, was at least the sum of $250,000. On March 19, 1924, Fannie K. Haas offered to sell and transfer to petitioner the following described securities at the prices respectively set opposite said securities: 1268 shares of common stock of Midway Gas Co$253,6001595 shares of common stock of Southern California Gas Co199,3755000 shares of Associated Oil Co155,0001000 shares of second preferred stock of San Joaquin Light & Power Corporation95,000$100,000 par value "Key Route Bonds"70,000Total772,9752110 The consideration for the sale and transfer of the foregoing securities to the petitioner was the issuance to Fannie K. Haas of 10,000 shares of the capital stock of petitioner, said sale to be made as of March 19, 1924. The offer was accepted by petitioner on March 19, 1924. On April 8, 1924, said Fannie K. Haas transferred and delivered to petitioner said securities hereinabove enumerated and petitioner issued and delivered to Fannie K. Haas 10,000 shares of its capital stock. The fair market value of each of said securities hereinabove listed was, on March 19, 1924, the sum respectively hereinabove set opposite said securities. On April 30, 1924, upon the dissolution of The Haas Building Company, said Walter A. Haas, Ruth H. Lilienthal and Eleanor H. Koshland received in equal shares from The Haas Building Company the beneficial interest in said 2,000 shares of the capital stock of petitioner. At all times from April 8, 1924, down to and including December 31, 1925, the issued and outstanding shares of stock of petitioner were 12,000 and said 12,000 shares were held and owned as hereinabove shown. On April 8, 1924, petitioner, in opening its books of account, set up2111 the securities transferred to it at the market prices shown above as at March 19, 1924. Shortly subsequent to April 8, 1924, but prior to August 12, 1924, petitioner, in connection with a reorganization of San Francisco, 531 Oakland & San Jose Consolidated Railway Company, received 602 shares of prior preferred stock and 602 shares of preferred stock of Key System Transit Company in exchange for the above mentioned $100,000 par value of bonds of San Francisco, Oakland & San Jose Consolidated Railway Company. Immediately after said reorganization, the fair market value of said 602 shares of prior preferred stock was $48,358.66 and the fair market value of said 602 shares of preferred stock was $21,510.50. On August 12, 1924, petitioner sold said 602 shares of preferred stock of Key System Transit Company for the sum of $21,510.50. On January 10, 1925, in connection with a reorganization, petitioner exchanged the above mentioned 1,000 shares of second preferred stock of San Joaquin Light & Power Corporation for 455.8 shares of preferred stock of Western Power Corporation and cash in the sum of $47,578, and on the same date purchased two-tenths of a share of preferred2112 stock of Western Power Corporation for the sum of $17.50. On March 5, 1925, petitioner purchased 39 shares of preferred stock of Western Power Corporation for the sum of $3,412.50. During the month of October, 1925, petitioner sold the said 495 shares of preferred stock of Western Power Corporation for the net sum of $48,135.10. The aforementioned Walter A. Haas, Ruth H. Lilienthal, and Eleanor H. Koshland are children of said Fannie K. Haas, and on March 19, 1924, each of said children was over the age of 21 years. Neither The Haas Building Company nor Fannie K. Haas reported any gain or loss, for income tax purposes, for the calendar year 1924, in connection with the transfers by them to petitioner of the property and securities referred to above. And, likewise, Walter A. Haas, Ruth H. Lilienthal and Eleanor H. Koshland did not report any gain or loss, for income tax purposes, for the calendar year 1924, in connection with the receipt by them of the shares of stock of petitioner referred to above. In determining the profit on the sale of 602 shares of Key System Transit Company preferred stock, the Commissioner proceeded in the following manner: Cost to Fannie K. Haas of the bond ($100,000 par value) of the San Francisco, Oakland & San Jose Company which was exchanged on April 8, 1924, for 602 shares of prior preferred stock and 602 shares of preferred stock of the Key System Transit Company$25,000.00Market Value of 602 shares of prior preferred stock of Key System Transit Company on April 8, 192448,358.66Market value of 602 shares of preferred stock of Key System Transit Company on April 8, 192421,510.50Total market value of the above stock on April 8, 1924 ($48,358.66 plus $21,510.50)69,869.16Allocated cost to transferor (Fannie K. Haas) of 602 shares of preferred stock of Key System Transit Company - (21,510.50/69,869.16 X $25,000)$7,696.70Sales price on August 12, 1924, of 602 shares of preferred stock ofKey System Transit Company21,510.50Profit on sale13,813.802113 The profit from the sale of 495 shares of preferred stock of the Western Power Corporation was determined by the Commissioner in the following manner: Cost to Fannie K. Haas of 1,000 shares of second preferred stock of San Joaquin Light & Power Company which were exchanged for 455.8 shares of preferred stock of Western Power Corporation and cash in the amount of $47,5781 $65,000.00Cost to petitioner of 39.2 additional shares of preferred stock of Western Power Corporation3,430.00Total68,430.00Amount received in sale of 495 shares of preferred stock of Western Power Corporation in October, 1925 ($48,135.10), plus cash received at date of exchange ($47,578)95,713.10Profit on the sale27,283.10532 OPINION. SEAWELL: The parties are agreed that the sole issue for disposition is whether, in determining the profit from the sale by petitioner of certain securities in 1924 and 1925, the basis or2114 starting point should be the cost of such securities to Fannie K. Haas, the party by whom these securities (or those for which they were exchanged) were transferred to petitioner, or whether it should be their cost to petitioner. As indicated by the foregoing statement and by our findings, we are here concerned only with property received by petitioner from Fannie K. Haas in a transaction by which Fannie K. Haas transferred certain assets to petitioner in exchange for more than 80 per cent of petitioner's capital stock. As to this transaction the parties are agreed (and we think properly so) that section 203(b)(4) of the Revenue Act of 1924 is applicable and prevents a recognition of gain or loss to Fannie K. Haas for income tax purposes on account of such exchange. No gain or loss was reported by Fannie K. Haas with respect to the transaction; the Commissioner made the determination with which we are concerned on the basis of the applicability of section 203(b)(4) to the aforementioned transaction; and in its brief the petitioner made the following statement: 533 At the outset, it must be conceded by petitioner that Fannie K. Haas transferred to it certain property in2115 exchange for stock of petitioner and that immediately after the exchange, Fannie K. Haas was in control of petitioner, within the definition and purview of subdivision (b)(4) and subdivision (i) of Section 203 of the Revenue Acts of 1924 and 1926. It must further be conceded that since the property acquired by petitioner from Fannie K. Haas was acquired after December 31, 1930, that Section 204, subdivision (a)(8) of the Revenue Acts of 1924 and 1926 purports to fix as the cost basis of such property to petitioner, the same basis that such property had to Fannie K. Haas, the transferor. The issue then presented is the basis or starting point to petitioner in determining gain or loss on account of the sale of property which was received under conditions where section 203(b)(4) is applicable. Section 204(a)(8) of the Revenue Acts of 1924 and 1926 provides as follows: SEC. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that - * * * (8) If the property (other than stock or securities in a corporation a party to a reorganization) was acquired after2116 December 31, 1920, by a corporation by the issuance of its stock or securities in connection with a transaction described in paragraph (4) of subdivision (b) of section 203 (including, also, cases where part of the consideration for the transfer of such property to the corporation was property or money in addition to such stock or securities), then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made. The foregoing section provides in unmistakable terms that where the sale of such property is involved the "basis shall be the same as it would be in the hands of the transferor," with certain adjustments not here material. The contention of the petitioner, however, is that the transferor basis should not here be applied for the reason that in so doing the rights of third parties are adversely affected in a manner which is violative of the Constitution. That is, it is contended in effect that when the petitioner is required to pay a tax on the profit derived from the sale of property2117 received from Fannie K. Haas and when such profit is determined as the difference between the cost of such property to Fannie K. Haas and its selling price by petitioner, the stockholders of petitioner, who were not interested as owners of such property prior to the exchange, are indirectly being required to contribute to the payment of a tax on a profit, a part of which accrued to Fannie K. Haas prior to the exchange. In a sense this may be true, but we fail to see wherein such considerations would necessarily mean that a tax determined 534 upon such basis is inequitable, arbitrary, or confiscatory. Of course, in any case where we are concerned with a transaction by which the transferor received less than 100 per cent, but at least 80 per cent, of the total outstanding stock of the transferee corporation, the rights of third parties may be affected by the application of section 203(b)(4) and section 204(a)(8), but whether such effect is adverse, or even if adverse, whether it amounts to confiscation or is to be considered arbitrary in the sense that it would require the conclusion that the statute is unconstitutional, are entirely different questions. It is true that the2118 stock received by the minority interest in this case was not in the exact proportion in relation to the value of assets transferred as that of the party who received the controlling interest, but apparently the minority interest voluntarily carried out its part of the transaction and that with a full knowledge of the stock being issued to the majority interest. Well may there have been other considerations which induced the minority interest to consider the transaction fair and advantageous from its standpoint and which would offset the possible detriment to accrue to it on account of the additional tax here complained of when the transferor basis is used with respect to property received from the controlling interest. And even where stock is issued to the minority interest on the same terms as to the controlling interest, a similar objection might be raised on the ground that a proportionately greater amount of profit might have accrued with respect to one class of property than the other. The use of the transferor basis as set out in section 204(a)(8) has heretofore been upheld as not in violation of the Constitution. 2119 (certiorari denied, ), and . In both of the above cases it was pointed out that it was within the power of Congress to prescribe the use of the transferor basis where no tax was imposed on the profit resulting from the exchange by which the property was transferred to the corporation. While the question of the effect of a minority interest was apparently not raised, for reasons heretofore stated, we are of the opinion that this does not change the situation. Not only does the transferee corporation take the assets for which it exchanges its stock, subject to the burden of the income tax which might properly be assessed in the ultimate disposition of such assets, but also the minority interest may be said to have exchanged its assets for stock subject to the same condition with respect to any profit or losses which might be recognized on behalf of the transferee corporation. Cf. also 2120 , and . On the whole, we are satisfied that the use of the transferor basis with respect to the property with which we here are concerned is *535 required by section 204(a)(8) and we see nothing in the use of such basis, even where a minority interest is involved, which can necessarily be considered as arbitrary or confiscatory in the sense that it is violative of the Constitution. The Commissioner's action in using the transferor basis is accordingly approved, though the deficiency for 1925 should be recomputed, since in the deficiency notice the cost to Fannie K. Haas of 1,000 shares of second preferred stock of San Joaquin Light & Power Corporation stock was fixed at $65,000 whereas in the stipulation such cost is shown as $70,000 Reviewed by the Board. Judgment will be entered under Rule 50.Footnotes1. While the Commissioner used a cost to Fannie K. Haas of $65,000 for the 1,000 shares of second preferred stock of San Joaquin Light & Power Corporation, the parties have stipulated (as shown above) that the correct cost to her was $70,000. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625046/	LOUIS HOFFMANN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hoffmann v. CommissionerDocket No. 11922.United States Board of Tax Appeals14 B.T.A. 1364; 1929 BTA LEXIS 2946; January 17, 1929, Promulgated 2946 STATUTE OF LIMITATIONS. - Held, that assessment of the deficiencies in controversy is not barred by the statute of limitations. Frank Hormuth, Esq., for the petitioner. J. A. O'Callaghan, Esq., for the respondent. TRUSSELL 1364 The deficiencies in income taxes in controversy in this proceeding are in the amounts of $939.80 for the fiscal year ended January 31, 1919, and $828.01 for the fiscal year ended January 31, 1920, the assessment of which petitioner alleges is barred by the statute of limitations. 1365 FINDINGS OF FACT. Petitioner is a resident of Milwaukee, Wis.On March 8, 1919, petitioner filed his income-tax return for the calendar year 1918, and on March 10, 1920, he filed his return for the calendar year 1919. The following waiver was duly executed: FEBRUARY 20, 1924. IT:PA:3 MP-302-App INCOME AND PROFITS TAX WAIVER In pursuance of the provisions of subdivision (d) of Section 250 of the Revenue Act of 1921, Mr. Louis Hoffman of Milwaukee, Wisconsin, and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or2947 war-profits taxes due under any return made by or on behalf of the said individual for the year 1918 under the Revenue Act of 1921, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes", approved August 5, 1909. This waiver is in effect from the date it is signed by the taxpayer and will remain in effect for a period of one year after the expiration of the statutory period of limitation, or the statutory period of limitation as extended by any waivers already on file with the Bureau, within which assessments of taxes may be made for the year or years mentioned. (Signed) LOUIS HOFFMANN, Taxpayer.By D. H. BLAIR, Commissioner of Internal Revenue.At the request of petitioner and his counsel, the respondent adjusted his calendar year returns for 1918 and 1919 upon the basis of fiscal years ending January 31, 1919, and January 31, 1920, respectively, for the reason that petitioner was the member of a partnership which kept its accounts and made its returns upon the basis of its fiscal year ending January2948 31. Under date of February 9, 1925, and during the time petitioner's tax liability for the fiscal years ending January 31, 1919, and 1920, were still in controversy, the respondent addressed an original letter to petitioner requesting waivers for the said years and stating that if the waivers were not received the taxes would be recomputed upon the calendar year basis, which resulted in a larger deficiency than if computed upon the fiscal year basis. That letter was received by petitioner. On the same date respondent addressed a letter to petitioner's attorney stating that, "There is enclosed a carbon copy of a letter of this date addressed to the taxpayer." The said enclosure was a carbon copy of a letter dated February 9, 1925, and addressed to petitioner, but it was not a copy of the original 1366 letter above referred to dated February 9, 1925, and received by petitioner. Both the said original and the said carbon contained practically the same information, except that the carbon copy received by the attorney stated that if the waivers were not executed an immediate assessment of a total additional tax of $3,255.78 would be made upon a readjustment of the returns2949 on a calendar year basis. Relying upon the carbon as a copy of the original letter received by petitioner, and also wishing to avoid an immediate assessment, petitioner's attorney advised him to execute the waivers requested by respondent. Upon advice of counsel and with knowledge of his rights and remedies in respect to the assessment and collection of the taxes in controversy, petitioner executed the following waivers: IT:PA-3EPR-301 FEBRUARY 13, 1925. INCOME AND PROFITS TAX WAIVER (For taxable years ended prior to March 1, 1921) In pursuance of the provisions of existing Internal Revenue Laws Mr. Louis Hoffman, a taxpayer of 405-24th Avenue, Milwaukee, Wisconsin, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the fiscal year ended 1/31/19 under existing revenue acts, or under prior revenue acts. This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1925, and shall then expire except 1367 that if a notice of a deficiency in tax2950 is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board. (Signed) LOUIS HOFFMANN, Taxpayer.By D. H. BLAIR, Commissioner of Internal Revenue.IT:PA-3EPR-301 FEBRUARY 13, 1925. INCOME AND PROFITS TAX WAIVER (For taxable years ended prior to March 1, 1921) In pursuance of the provisions of existing Internal Revenue Laws Mr. Louis Hoffman, a taxpayer of 405-24th Avenue, Milwaukee, Wisconsin, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the fiscal year ended 1/31/20 under existing revenue acts, or under prior revenue acts. This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1925, and shall then2951 expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said board. (Signed) LOUIS HOFFMANN, Taxpayer.By D. H. BLAIR, Commissioner of Internal Revenue.On December 17, 1925, the respondent mailed the so-called 60-day deficiency letter advising petitioner as to his final determination with regard to the taxes in controversy and petitioner has appealed from that notice. OPINION. TRUSSELL: The facts and circumstances involved in both of the taxable years here in controversy and the claims of this petitioner are identical with those set forth in the case of , and under authority of that decision we hold that the assessment of the deficiencies for the fiscal years ending January 31, 1919 and 1920, is not barred by the statute of*2952 limitations. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625099/	R. L. TAYLOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentTaylor v. CommissionerDocket No. 6368-78.United States Tax CourtT.C. Memo 1980-376; 1980 Tax Ct. Memo LEXIS 212; 40 T.C.M. (CCH) 1206; T.C.M. (RIA) 80376; September 11, 1980, Filed 212 Held, amount of deduction for away from home travel expenses determined. D. Derrell Davis, for the petitioner. Patrick E. McGinnis, for the respondent. IRWINMEMORANDUM FINDINGS OF FACT AND OPINION IRWIN, Judge: By letter dated March 9, 1978 respondent determined a deficiency of $2,485.48 in petitioner's 1975 Federal income tax. The issue for our decision is whether petitioner is entitled to deduct under section 162(a) 1 certain travel expenses and, if so, whether petitioner has met the substantiation requirements of section 274(d). FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference. Petitioner was a resident of McGehee, Arkansas, when he filed his petition herein. 2213 Petitioner's 1975 Federal income tax return was filed with the Internal Revenue Service Center, Ogden, Utah. Petitioner has resided in Savannah, Georgia, during most of his life. Petitioner is an iron worker by trade and during 1975 petitioner was a member of the Savannah local of the iron worker's trade union. During the early part of 1975 petitioner worked in the Savannah area for Steel Erectors, Inc. At some time in the early part of 1975 petitioner was laid off his job by Steel Erectors. Petitioner thereafter filed for unemployment insurance compensation and sought other employment as an iron worker in the Savannah area. Through his local petitioner learned of employment opportunities in the Tacoma, Washington area. In late March of 1975, petitioner left Savannah and drove to Tacoma. Petitioner was employed in Tacoma by Wright Schuchart Harbor (Wright) for a scheduled 3-year construction project. The iron workers on this project, including petitioner, were employed on a seasonal basis. The project was scheduled in phases and as a consequence petitioner would be subject to layoffs by Wright as petitioner's portion of each phase was completed. While in Tacoma petitioner obtained a work permit from the Tacoma 214 local of the trade union. The Tacoma local maintained three lists of iron workers, entitled the A, B, and C lists. Petitioner was on the C list, which consisted of nonlocal members called "travelers" or "boomers." Members of the C list were the first workers to be laid off by an employer and the last workers to be called back by an employer when the layoff ended. In order to qualify for the B list, and the consequently greater job security, a traveler would have to work 600 to 800 hours per year for 2 years. As a result of the phase-method of the Wright project and petitioner's status with the Tacoma local, petitioner was laid off several times from the Wright project. During these layoffs, which usually lasted 1 or 2 weeks, petitioner stayed in Tacoma rather than returning to Savannah. Petitioner decided to stay in Tacoma because any employment opportunities which may have opened up there would have to be filled quickly. Petitioner obtained several jobs in the Tacoma area during the Wright layoffs. In or about late August of 1975 the first phase of the Wright project was completed and petitioner returned to Savannah by car. 3 Petitioner's efforts to obtain work in the Savannah 215 area were again unsuccessful. The Savannah local suggested to petitioner that his opportunities were better in Seattle or Alaska. Petitioner thereafter decided to return to Tacoma. Sometime around September 1975 petitioner drove from Savannah to Tacoma. Upon finding no work available in Tacoma, petitioner drove from there to Alaska, where petitioner found work with Fluor Alaska, Inc. (Fluor Alaska). 4 Petitioner stayed in Alaska for about 4 weeks, until he decided to return to Tacoma. Petitioner was not laid off or dismissed by Fluor Alaska. In early November, petitioner returned to Tacoma to accumulate hours in order to qualify for the B list. Petitioner remained in Tacoma until approximately December 25, 1975. Petitioner then drove back to Savannah, where he stayed until late January 1976, when petitioner returned to Tacoma. During 1975 petitioner stayed at his parent's home whenever he was in Savannah. Petitioner kept all of his possessions there except for a suitcase and a duffel bag which 216 he took to Tacoma. Petitioner paid no rent there but helped with the maintenance and upkeep. While he was away from Savannah petitioner periodically sent small amounts of money to his parents to help with their house and support. During 1975 petitioner stayed at the Siesta Motel whenever he was in Tacoma. Petitioner paid a weekly rental of $60 for a total of 34 weeks at the Siesta Motel, for which petitioner obtained receipts. 5 Petitioner kept no receipts or records of meals in Tacoma but estimated that he spent from $15 to $18 per day for meals while there. Petitioner worked 6 days per week while employed by Wright. During 1975 petitioner stayed in a camp provided by Fluor Alaska for the 4 weeks he was in Alaska. Petitioner was provided with meals and lodging there and incurred no expenses for those items. The parties have stipulated that the map mileage from Savannah to Tacoma 217 is 3,014 miles and the map mileage from Tacoma to Anchorage is 2,504. During 1975 petitioner made two round trips by automobile between Savannah and Tacoma and one round trip by automobile between Tacoma and Anchorage. At no time during 1975 did petitioner maintain a diary or other record of his odometer readings. Petitioner estimated from a road atlas that he drove 25,200 business miles during 1975. 6On his 1975 Federal income tax return petitioner deducted $6,750 for away from home travel expenses under section 162(a)(2). This deduction consisted of $3,330 for auto expense and $3,420 for meals and lodging. In the statutory notice of deficiency respondent disallowed the entire $6,750 deduction. OPINION Petitioner was an iron worker by trade. During 1975 petitioner was employed in Savannah. In March of 1975 petitioner traveled to Tacoma to look for work after being laid off in Savannah. Petitioner worked in Tacoma until late August of 1975, when he was laid off 218 there. Petitioner returned to Savannah for a short period and was unsuccessful in his attempts to find work there. Petitioner then returned to Tacoma where he also could not locate employment. Petitioner thereafter was employed in Alaska for approximately 1 month, after which he returned to Tacoma to improve his union status. Petitioner remained in Tacoma until late December of 1975, when he returned to Savannah. In late January 1976, petitioner again returned to Tacoma for work. On his 1975 Federal income tax return petitioner deducted $6,750 for away from home expenses under section 162(a) (2), which amount respondent disallowed in full. Section 162(a)(2) allows as a deduction all the ordinary and necessary traveling expenses, including amounts expended for meals and lodging which are not lavish or extravagant, paid or incurred while away from home in the pursuit of a trade or business. In order to qualify for a deduction under section 162(a)(2) three conditions must be met: the expenses must have been ordinary and necessary, the expenses must have been incurred while the taxpayer was "away from home" and they must have been incurred in the pursuit of the taxpayer's trade 219 or business. Commissioner v. Flowers, 326 U.S. 465 (1946). Respondent first contends that petitioner's 1975 home was in Tacoma, and that even if petitioner's home was Savannah, then petitioner's employment in Tacoma was indefinite rather than temporary. Petitioner argues that Savannah was his home during 1975 and that his employment in Tacoma was temporary. As used in section 162(a)(2) "home" means the vicinity of the taxpayer's principal place of business. Kroll v. Commissioner, 49 T.C. 557 (1968). Should a taxpayer elect to maintain his residence in an area other than his principal place of business then traveling expenses will be nondeductible personal expenses, section 262. An exception to this general rule of nondeductibility occurs when the taxpayer's employment is "temporary" rather than "indefinite," Peurifoy v. Commissioner, 358 U.S. 59">358 U.S. 59 (1958). When a taxpayer's employment is only temporary it is unreasonable to expect him to relocate his residence to the vicinity of such employment and thus the allowance of a deduction for travel expenses mitigates the impact upon the taxpayer of duplicate and additional living expenses. Verner v. Commissioner, 39 T.C. 749">39 T.C. 749, 754 (1963). 220 Temporary employment is employment the termination of which within a short period can be foreseen. Kroll v. Commissioner, supra, at 562. Whether employment is temporary or indefinite is essentially a question of fact. Verner v. Commissioner, supra, at 753; Cockrell v. Commissioner, 38 T.C. 470">38 T.C. 470, 479 (1962). Consideration must be given to whether, under the circumstances, it was reasonable to expect the taxpayer to move his residence to his place of employment. Kroll v. Commissioner, supra, at 562. Petitioner's initial stay in Tacoma (from late March 1975 until late August 1975) was temporary. Petitioner was hired to work on a projected 3-year construction project. Petitioner was not a member of the Tacoma local of the union and was allowed to work on the project only by reason of a permit granted by the Tacoma local, which permit granted petitioner only "C list" priority. Because of petitioner's union status in Tacoma he would be among the first workers to be laid off of the project and one of the last to be called back. Furthermore, the project was designed to be completed in phases. When petitioner's work was done on the first phase he was sure to be, and in fact was, laid off 221 until that phase was completed by all the workers on the project. At this time petitioner returned to Savannah to seek employment as an iron worker in that area. Petitioner's initial sojourn to Tacoma thus lasted for only 5 months. Furthermore, petitioner's family was in Savannah and petitioner had left most of his personal belongings there. However, upon petitioner's return to Tacoma in September of 1975 we find that petitioner's employment in Tacoma and Alaska was indefinite. Petitioner found no suitable employment in Savannah so he returned to Tacoma, where better opportunities existed. Petitioner's admitted reason for voluntarily returning to Tacoma from Alaska, where petitioner worked during September 1975, was to improve his union status with the Tacoma local chapter so that he could find more permanent work in Tacoma. At this time petitioner had apparently decided to make Tacoma his home for employment purposes and it is reasonable to expect that petitioner would have moved his residence to Tacoma at that time. It is unclear why petitioner returned to Savannah in late December of 1975 or even whether petitioner sought employment while there. However, petitioner soon 222 returned to Tacoma to work. Accordingly, we hold that petitioner's employment in Tacoma was temporary from March 1975 until August 1975 and was indefinite thereafter. Thus, only those expenses paid while petitioner's stay in Tacoma was temporary are deductible under section 162(a)(2). Respondent next contends that even if petitioner's employment in Tacoma was temporary, petitioner has failed to meet the substantiation requirements of section 274(d). Respondent's contention regarding section 274(d) is apparently limited to petitioner's automobile and meal expenses and not to petitioner's lodging expense at the Siesta Motel. Accordingly, we find that petitioner is entitled to deduct $1,320 for lodging from March 1975 until August 1975 (a period of 22 weeks at $60 per week). Section 274(d) provides: (d) Substantiation Required.--No deduction shall be allowed-- (1) under section 162 or 212 for any traveling expense (including meals and lodging while away from home), unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating his own statement (A) the amount of such expense or other item, (B) the time and place of the travel, entertainment, amusement, 223 recreation, or use of the facility, or the date and description of the gift, (C) the business purpose of the expense or other item, and (D) the business relationship to the taxpayer of persons entertained, using the facility, or receiving the gift. The Secretary or his delegate may by regulations provide that some or all of the requirements of the preceding sentence shall not apply in the case of an expense which does not exceed an amount prescribed pursuant to such regulations. Unless section 274(d) is satisfied no deduction for traveling expenses can be allowed; section 274(d) clearly supersedes, for such expenses, the rule established in Cohan v. Commissioner, 39 F.2d 540 (2nd Cir. 1930). See Sanford v. Commissioner, 50 T.C. 823">50 T.C. 823 (1968), affd. 412 F.2d 201">412 F.2d 201 (2nd Cir. 1969), cert. denied 396 U.S. 841">396 U.S. 841 (1969); Ashby v. Commissioner, 50 T.C. 409">50 T.C. 409 (1968). The taxpayer must establish the following elements of a travel expense by adequate records or sufficient evidence corroborating his own statement: (A) the amount of each separate expenditure, (B) the time and place of the travel, and (C) the business purpose of the expense. "Adequate records" requires the maintenance of an account book, 224 diary, statement of expense or similar record and documentary evidence which, in combination, establish each required element of the expenditure. Section 1.274-5(c)(2)(i), Income Tax Regs. Sufficient corroborating evidence must be direct evidence, such as a written statement or oral testimony of others, or the documentary evidence described in section 1.274-5(c)(2). Section 1.274-5(c)(3), Income Tax Regs.Petitioner deducted $3,420 for meals and lodging expense incurred while in Tacoma. Of this amount $1,380 represents expense for meals. 7 Petitioner presented absolutely no evidence concerning his expenses for meals except for his estimate made at trial that he spent $15 to $18 per day for meals. Consequently petitioner is not entitled to any deduction for his meals. Petitioner also claimed a deduction of $3,330 for automobile expense. Petitioner's 25,200 business miles claimed apparently consists of three round trips between Savannah and Tacoma 225 (about 6,028 miles per round trip) and one round trip between Tacoma and Alaska (about 5,008 miles). One of these trips between Savannah and Tacoma was made by airplane after petitioner's father's death and thus was erroneously included in petitioner's business mileage, see note 6, supra. Petitioner's $3,330 deduction was calculated as follows: 15"/mile for the first 15,000 miles$2,25010"/mile for additional miles (10,200)1,020Parking and tolls60$3,330The method employed by petitioner was identical to the method established in Rev. Proc. 74-23, 2 C.B. 476">1974-2 C.B. 476. 8226 Respondent maintains that the formula set forth in Rev. Proc. 74-23 does not constitute an exception to the substantiation requirements of section 274. Rev. Proc. 74-23 provides an alternative method for computing the amount of automobile expenses incurred for business purposes. Taxpayers must still meet the other elements of section 274(d) when the alternative method of Rev. Proc. 74-23 is utilized for computing away from home travel expenses. Section 3.07 of Rev. Proc. 74-23 clearly makes this distinction: For this method of computing automobile cost to be acceptable a self-employed individual or employee is required to establish his business mileage (A) for local transportation, in accordance with section 1.162-17(d) of the regulations, and (B) for other travel, in accordance with section 1.274-5. The provisions of such regulations relating to substantiation of the amount of an expenditure are inapplicable to deductions computed under this Revenue Procedure. 9227 Thus petitioner must still meet the requirements of section 274(d) with regard to the time and place of the travel and the business purpose of the travel. 10 While we have no doubt from petitioner's testimony that he incurred automobile expenses, petitioner's testimony alone is insufficient to meet the substantiation requirements of section 274(d), as modified by Rev. Proc. 74-23. 11Parking fees and tolls of $60 deducted by petitioner, which are separate items from the cost of operating an automobile and hence not subject to the alternative method of Rev. Proc. 74-23, must also be substantiated under section 274(d). Petitioner has presented no evidence regarding these items and therefore *228 cannot deduct such items. Decision will be entered under Rule 155. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as amended and in effect during the year in issue.↩2. Although the petition alleges that petitioner was a resident of Savannah, Georgia when the petition was filed, the parties have stipulated that petitioner resided in McGehee, Arkansas at that time and we accept this stipulation as fact.3. In May of 1975 petitioner's father passed away and petitioner traveled to Savannah by airplane for a short period.↩4. Petitioner's employment in Alaska was apparently near Anchorage.↩5. The receipts represent rental payments to the Siesta Motel for the period from March 28, 1975 to August 30, 1975 and for the period from October 2, 1975 to December 25, 1975. Apparently petitioner was enroute to or in Savannah and Alaska for the period between August 31, 1975 and October 1, 1975.↩6. Petitioner's estimated automobile mileage apparently consisted of three Savannah-Tacoma round trips and one Tacoma-Anchorage round trip, including the trip in May 1975 which petitioner testified he made by airplane.↩7. Petitioner's return did not differentiate between meals and lodging. We have reached the figure for meals by subtracting $2,040 (total 1975 lodging expenses, see p. 5 supra↩) from $3,420 (total 1975 claimed deduction for meals and lodging).8. Rev. Proc. 74-23 was modified by Rev. Proc. 77-40, 2 C.B. 574">1977-2 C.B. 574, for taxable years beginning after December 31, 1976, to allow 17" per mile for the first 15,000 business miles and 10" per mile for business miles in excess of 15,000. Rev. Proc. 74-23, as modified, was superseded by Rev. Proc. 80-7, 8 I.R.B. 24">1980-8 I.R.B. 24 and for transportation expenses paid or incurred after December 31, 1978 a deduction is allowed of 18.5" per mile for the first 15,000 business miles and 10" per mile for business miles in excess of 15,000. Rev. Proc. 80-7 was modified for transportation expenses paid or incurred after December 31, 1979 by Rev. Proc. 80-32, 29 I.R.B. 27">1980-29 I.R.B. 27↩, which allows a standard mileage rate of 20" per mile for the first 15,000 business miles and 11" per mile for business miles in excess of 15,000.9. See Ward v. Commissioner, T.C. Memo. 1979-165for the distinction between "local transportation" and "other travel." See also Gay v. Commissioner, T.C. Memo 1980-19↩.10. See Reinert v. Commissioner, T.C. Memo 1979-512">T.C. Memo. 1979-512, on appeal (8th Cir., July 17, 1980); Schneider v. Commissioner, T.C. Memo. 1978-447↩.11. Because of our finding that only petitioner's first stay in Tacoma was temporary petitioner could only have deducted his first automobile round trip between Savannah and Tacoma under section 162(a)(2) even had petitioner satisfied section 274(d).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625100/	ANNA MAE TROHIMOVICH, ESTATE OF RICHARD A. TROHIMOVICH, DECEASED, MERITA M. TROHIMOVICH, EXECUTRIX, AND MERITA M. TROHIMOVICH, INDIVIDUALLY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentTrohimovich v. CommissionerDocket No. 7879-78United States Tax CourtT.C. Memo 1991-323; 1991 Tax Ct. Memo LEXIS 372; 62 T.C.M. (CCH) 134; T.C.M. (RIA) 91323; July 15, 1991, Filed 372 Donald A. Cable, for the Estate of Richard A. Trohimovich, Deceased, and Merita M. Trohimovich, Individually. Anna Mae Trohimovich, pro se. Michael R. McMahon and Thomas N. Tomashek, for the respondent. SWIFT, Judge. SWIFTMEMORANDUM FINDINGS OF FACT AND OPINION This matter is before us on respondent's motion for judgment on the pleadings under Rule 120(a). 1 Respondent bases his motion on the allegation that petitioners fail to assert justiciable error on the part of respondent in determining deficiencies in petitioners' Federal income tax liabilities for 1974 and 1975. The record and documentary evidence submitted in support of respondent's motion for judgment on the pleadings establish the following. Petitioners resided in Aberdeen, Washington, at the time they filed their petition. Petitioner Anna Mae Trohimovich and her husband, Stanley J. Trohimovich filed tax-protester type joint Federal373 income tax returns for 1974 and 1975. Petitioners Merita M. Trohimovich was married to petitioners Richard A. Trohimovich (decedent). Petitioners Merita M. Trohimovich filed separate individual Federal income tax returns for 1974 and 1975. Petitioners Merita M. Trohimovich, however, did not declare on her tax returns for 1974 and 1975 her community income from Grays Harbor Motors, a partnership owned by decedent and Stanley J. Trohimovich that operated an automobile dealership. Decedent also filed tax-protester type separate individual Federal income tax returns for 1974 and 1975. On April 5, 1978, respondent issued his notice of deficiency to each petitioners and to Stanley J. Trohimovich with regard to their respective 1974 and 1975 Federal income tax liabilities. Adjustments in the notices of deficiency were based on petitioners' respective share of the income of Grays Harbor Motors. On July 10, 1978, petitioners and Stanley J. Trohimovich filed a joint petition in this matter. On July 12 and August 8, 1978, petitioners filed amendments to their petition. On May 11, 1981, the Court substituted Merita M. Trohimovich as executrix for the estate of her deceased husband. 374 On July 27, 1981, the Court severed Stanley J. Trohimovich from this case. Over the last 13 years, at petitioners behest, the Court has granted numerous continuances. At the most recent hearing on December 3, 1990, petitioners failed to make an appearance in person or through a representative. Petitioners have the burden of stating clear and concise assignments of each and every error alleged to have been committed by respondent in the determination of their deficiencies at issue in this case. Rule 34(b)(4). Judgment on the pleadings is appropriate where petitioners in their pleadings do not raise genuine issues of material fact with respect to respondent's determinations. Abrams v. Commissioner, 82 T.C. 403">82 T.C. 403, 408 (1984). See also Brayton v. Commissioner, T.C. Memo 1989-664">T.C. Memo 1989-664, affd. without published opinion 923 F.2d 861">923 F.2d 861 (9th Cir. 1991). Petitioners' pleadings made general allegations in error in respondent's determination of deficiencies in petitioners Federal income tax liabilities. Petitioners allegations represent tax protester contentions that courts have rejected many times. In Hatfield v. Commissioner, 68 T.C. 895">68 T.C. 895, 899 (1977),375 we stated: Any citizen may resort to the courts whenever he or she in good faith and with a colorable claim desires to challenge [respondent's] determination; but that does not mean that a citizen may resort to the courts merely to vent his or her anger and attempt symbolically to throw a wrench at the system. * * Petitioners' contentions do not raise "clear and concise assignments of error" regarding their liabilities for Federal income taxes, and therefore petitioners' claims herein do not warrant further consideration by this Court. Rule 34(b)(4). Petitioners also dispute generally respondent's ability to determine Federal income tax deficiencies using the bank deposits method. In the absence of available books and records that clearly reflect petitioners' income, respondent has latitude to choose among different methods of computing taxable income. Sec. 1.446-1(b)(1), Income Tax Regs. Numerous courts have upheld the use of bank deposits analyses in reconstructing taxpayers' income. United States v. Stone, 770 F.2d 842">770 F.2d 842, 844-845 (9th Cir. 1985); United States v. Soulard, 730 F.2d 1292">730 F.2d 1292, 1298-1300 (9th Cir. 1984); United States v. Helina, 549 F.2d 713">549 F.2d 713, 715-716, 720 (9th Cir. 1977).376 Petitioners have failed to provide respondent with either their books and records or the books and records of Grays Harbor Motors, and petitioners have failed to provide respondent with any other information from which respondent could determine specific amounts of petitioners' income. Rule 149(b). We conclude that use by respondent in this case of the bank deposits method was an acceptable method for reconstructing petitioners' taxable income for 1974 and 1975. Petitioners failed to raise any justiciable issues in their pleadings concerning the adjustments respondent made in his notices of deficiency issued to petitioners. Thus, petitioners are regarded as having conceded respondent's adjustments. Rule 34(b)(4). For the reasons stated, An appropriate order will be entered. Footnotes1. Unless otherwise indicated, 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/4625047/	Foresun, Inc., Petitioner, v. Commissioner of Internal Revenue, RespondentForesun, Inc. v. CommissionerDocket No. 91178United States Tax Court41 T.C. 706; 1964 U.S. Tax Ct. LEXIS 142; February 28, 1964, Filed 142 Decision will be entered under Rule 50. Held: Transactions between petitioner and certain individuals resulted in contributions to petitioner's capital, rather than a sale and loans, so that respondent properly disallowed interest deductions. Petitioner's basis in the contributed property is that of its transferor, section 113(a)(8)(B), I.R.C. 1939, not the "sale" price. Richard Katcher, for the petitioner.Eugene S. Linett, for the respondent. TRAIN, Judge. TRAIN706 Respondent determined deficiencies in the statutory notice and asserted increased deficiencies in an amended answer to the petition143 in the income tax liability of petitioner for the years and in the amounts as follows:Fiscal yearStatutoryAmendedendingnoticeanswerOct. 31 --1956$ 6,099.28$ 9,863.2619574,386.978,399.9819584,421.658,434.67The issues for decision are:(1) Whether petitioner is entitled to an interest deduction for amounts paid to Ada Osborn in each of the fiscal years ending October 31, 1956, 1957, and 1958;707 (2) Whether petitioner is entitled to an interest deduction for amounts paid to one of petitioner's shareholders and the wives of three others for the years in question; and(3) Whether petitioner is entitled to use $ 218,025 as the basis for depreciating certain property acquired from Ada Osborn in 1949.FINDINGS OF FACTSome of the facts have been stipulated and are hereby found as stipulated.The petitioner, Foresun, Inc. (sometimes hereinafter referred to as petitioner), is an Ohio corporation with its principal place of business at 165 Harriman, Bedford, Ohio. Petitioner was organized on September 2, 1949, and has, at all times material herein, been engaged in the business of owning and renting real estate. Petitioner's corporation144 income tax returns for the taxable years ending October 31, 1956, 1957, and 1958 were filed with the district director of internal revenue, Cleveland, Ohio. During each of the fiscal years in question petitioner employed an accrual method of accounting.At all material times, the outstanding stock of petitioner was owned as follows:Number ofSubscriptionShareholdersharespriceOffice(per share)Edwin H. Osborn5$ 100President.William P. Lindauer5100Vice president.Frank K. Byers, Jr5100Secretary.Arnold W. MacAlonan5100Treasurer.The Stalwart Rubber Co. (hereinafter sometimes referred to as Stalwart) is an Ohio corporation organized on June 5, 1937. At all material times, it has been engaged in the manufacture of industrial rubber products. The outstanding common stock of Stalwart was owned, at the dates indicated, as follows:Number of sharesShareholderSept. 10, 1949Dec. 31, 1958Herman W. Osborn8,4895,449Edwin H. Osborn9391,384Elizabeth J. MacAlonan9391,384Ellen E. Byers9391,384Margaret M. Lindauer9391,384Ada Osborn160380William P. Lindauer260Frank K. Byers, Jr260Lois Osborn260Arnold W. MacAlonan45305R. H. Tyrell5050Total 12,50012,500145 708 Herman W. Osborn (hereinafter sometimes referred to as Herman) and Ada Osborn (hereinafter sometimes referred to as Ada) were husband and wife. Herman died March 10, 1961. Their children and their children's spouses are as follows:ChildrenSpouseEdwin H. OsbornLois OsbornElizabeth J. MacAlonanArnold W. MacAlonanEllen E. ByersFrank K. Byers, Jr.Margaret M. LindauerWilliam P. LindauerR. H. Tyrell, now deceased, was not related in any way to the Osborn family.On July 7, 1944, Ada's preferred stock in Stalwart was redeemed in exchange for an unimproved lot and adjacent improved real property occupied by Stalwart in the conduct of its business. From July 7, 1944, to September 30, 1949, Stalwart leased the improved realty from Ada at an annual rental of $ 20,400. A business expense deduction of $ 7,000 per year for such rental was allowed by the Commissioner for the years 1944 to 1948, inclusive and was agreed to by Stalwart.Petitioner was incorporated on September 2, 1949, for the purpose of acquiring from Ada the improved property rented by Stalwart, together with the adjacent unimproved lot. Pursuant to such purpose, petitioner on September 10, 146 1949, made an "Offer to Purchase" (hereinafter referred to as the offer) that property (hereinafter referred to as the property) from Ada for $ 225,000, which she accepted on the same date.Under the terms of that offer, petitioner agreed to pay $ 225,000 for the property, consisting of $ 25,000 in cash and a second mortgage in the amount of $ 200,000, which mortgage was to be second in priority only to a first mortgage for $ 25,000. No payments on principal were to be made on the second mortgage until the first mortgage was paid in full, after which monthly payments of not less than $ 625 were to be paid on the second mortgage. Interest at the rate of 6 percent per annum was payable quarterly on the balance due on said mortgage, the first of such payments to be due 3 months after September 30, 1949.Petitioner's board of directors, at a meeting held on September 10, 1949, authorized the purchase of the property for $ 225,000 on the terms and conditions set forth in the offer.In order to purchase the property from Ada, petitioner borrowed $ 25,000 from the National City Bank of Cleveland (hereinafter referred to as National City Bank), Cleveland, Ohio. To evidence its 709 147 obligation to National City Bank, petitioner executed and delivered its promissory note to the bank for $ 25,000, dated September 19, 1949, payable 5 years from date in quarterly installments of $ 1,200 each, with interest at the rate of 4 percent per annum. This note was secured by a first mortgage on the property, which mortgage was recorded in the county recorder's office of Cuyahoga County, Ohio.Prior to making the $ 25,000 loan to petitioner, National City Bank had appraised the property at $ 201,000, of which $ 18,000 represented the value of the land and $ 183,000 the value of the buildings.West Brothers, Inc., on March 15, 1949, appraised the land at $ 7,560 and the replacement and sound values of the buildings at $ 398,114.99 and $ 282,243.14, respectively. This appraisal was the basis upon which petitioner relied in its offer to purchase the property from Ada for $ 225,000.Petitioner consummated the purchase by paying Ada $ 25,000 in cash and executing and delivering to her its cognovit installment note, dated September 30, 1949, in the amount of $ 200,000. This note provided for payments of not less than $ 625 per month, with interest at the rate of 6 percent per 148 annum, payable quarterly, principal payments not to commence until the first mortgage to National City Bank had been paid in full. The note was secured by a second mortgage on the property, dated September 30, 1949, which mortgage was recorded in the Cuyahoga County, Ohio, records on October 14, 1949, the same date on which the first mortgage to National City Bank was recorded.Pursuant to the offer to purchase, Ada executed a warranty deed to petitioner as grantee. This warranty deed, which was recorded in the Cuyahoga County, Ohio, records, had affixed to it U.S. internal revenue documentary stamps reflecting a total consideration of $ 225,000 for the transfer of the property to petitioner.After the above transactions petitioner's capital structure was composed of the $ 2,000 paid-in capital, the $ 25,000 indebtedness to National City Bank, and its obligation of $ 200,000 to Ada.The purpose of the above-described transaction was to secure for Ada a regular source of income during her lifetime and, in view of her ill health, to relieve her of the burdens of managing the property. At the time when Ada transferred the property to petitioner on September 10, 1949, she was 55 years149 old. The adjusted basis of said property in her hands was $ 27,500.On her Federal income tax return for 1949, Ada reported the transaction whereby she transferred the property to petitioner as an installment sale under the provisions of section 44 of the Internal Revenue Code of 1939.710 Subsequent to its acquisition by petitioner, the property was leased by petitioner to Stalwart at the following annual rentals:Fiscal year Oct. 31 --Rent1950 (12 1/2 months)$ 25,000195124,000195224,000195324,000195446,000195559,400195665,000195754,000195854,000For Federal income tax purposes, Stalwart has been allowed to deduct the entire amounts of the above rents.After World War II, Stalwart's business increased to such an extent that it required additional space for the conduct of its operations. To take care of its needs in this regard in the period between 1950 and 1952 Stalwart made leasehold improvements at a cost to it of $ 196,027.27. These included the construction of a new office building and the installation of a sprinkler system on the property which it leased from petitioner.In 1952 and 1953, due to the business conditions150 then prevailing, Stalwart was in need of working capital. Its efforts to obtain financing from its regular source of funds, National City Bank, proved unsuccessful. Stalwart then offered to sell the leasehold improvements to petitioner at Stalwart's cost and to pay additional rental for the property leased from petitioner. Petitioner accepted this proposal.To finance the purchase of these leasehold improvements, petitioner negotiated a $ 150,000 loan from Country Life Insurance Co. (hereinafter referred to as Country Life), Chicago, Ill. On August 11, 1953, Country Life agreed to lend petitioner $ 150,000, payable in 120 monthly installments of $ 1,250 each, with interest at the rate of 6 percent per annum, secured by a first mortgage; provided petitioner, among other things, assigned to Country Life the lease between petitioner and Stalwart providing for an annual rental of $ 48,000. This condition was accepted by petitioner on August 18, 1953.As of April 15, 1953, West Brothers, Inc., appraised the property owned by petitioner, and the leasehold improvements then owned by Stalwart and the subject of the proposed purchase by petitioner, as follows: 711 Replacement valueSound valueForesun:Land$ 10,080$ 10,080Buildings:Below ground$ 40,243$ 26,123Above ground340,587380,830217,677243,800Total 390,910253,880Stalwart: Leasehold improvements:Below ground36,50335,580Above ground269,628306,131252,106287,686Total 697,041541,566151 On November 27, 1953, petitioner executed its cognovit note in the amount of $ 150,000 to Country Life, payable in 120 equal monthly installments of $ 1,250 each, with interest at the rate of 6 percent per annum. This note was secured by a mortgage deed, dated November 27, 1953, which was recorded on December 15, 1953.As part of the transaction whereby petitioner borrowed $ 150,000 from Country Life, Arnold W. MacAlonan, an officer and shareholder of petitioner, approached Ada with a view to having her take a new $ 200,000 note and mortgage in substitution for the existing mortgage in order to help petitioner consummate its purchase of the leasehold improvements from Stalwart. Ada agreed to take a secondary position to Country Life's loan of $ 150,000.Pursuant to her agreement, Ada surrendered to petitioner its cognovit installment note, dated September 30, 1949, payable to her, and on March 22, 1954, canceled of record the second mortgage securing said note.Upon surrender to it of this $ 200,000 note, petitioner executed and delivered to Ada a new cognovit installment note, dated December 5, 1953, in the amount of $ 200,000. This note contained the same terms and conditions152 set forth in its original note except that it was subject to the first mortgage of $ 150,000 to Country Life. This note was secured by a second mortgage on the property dated December 5, 1953. The second mortgage was not recorded as one of the conditions of the loan from Country Life.On December 10, 1953, petitioner purchased the leasehold improvements from Stalwart at the latter's cost and, in payment therefor, executed and delivered to Stalwart two promissory notes dated December 10, 1953, in the amounts of $ 140,027.27 and $ 56,000. With respect to the $ 140,027.27 note, petitioner paid to Stalwart $ 16,000 on March 8, 1954, and paid the balance of $ 124,027.27 on March 22, 1954. The $ 56,000 note was paid by petitioner on February 19, 1954.712 As part of the transaction whereby petitioner purchased the leasehold improvements from Stalwart, Edwin Osborn, Ellen Byers, Margaret Lindauer, and Elizabeth MacAlonan (hereinafter sometimes referred to as the individual note holders) each advanced to petitioner the sum of $ 9,500. Petitioner executed and delivered to each its unsecured "promissory demand note" in the face amount of $ 9,500. The amounts which the individual153 note holders advanced to petitioner were borrowed by them from National City Bank, which loan was evidenced by a note secured by four insurance policies on the life of Herman in the amount of $ 40,000 each. Also, Herman advanced $ 8,500 to petitioner which he borrowed from National City Bank. The National City Bank note in the amount of $ 38,000 was paid on April 13, 1961.Petitioner used the funds it obtained from Country Life, from the individual note holders, and from Herman, to pay for the leasehold improvements purchased from Stalwart and to pay the balance due on its $ 25,000 note, dated September 30, 1949, to National City Bank. The mortgage securing the National City Bank's $ 25,000 note was canceled of record on March 22, 1954.In June 1953, Stalwart purchased all of the outstanding shares of Jasper Rubber Co., a Georgia corporation located in Jasper, Ga. On September 30, 1955, petitioner purchased the land and buildings owned by Jasper Rubber Co. for $ 152,047.85. The purchase price was paid by petitioner by executing and delivering to Jasper Rubber Co. its promissory note in the amount of $ 10,800, and assuming a first mortgage on the property in the amount of $ 141,247.85, 154 with interest at 5 percent per annum. Petitioner paid the $ 10,800 note by making payments of $ 5,400 each in December 1957 and February 1960.The second mortgages which petitioner executed in favor of Ada required that policies of insurance on the property acquired from her in the event of loss be made payable to her "as her interest may appear." Pursuant to the provisions of the mortgages, at all times material hereto petitioner's insurance policies on the acquired property contained a standard mortgage clause stating that the proceeds in the event of loss or damage were payable to National City Bank as first mortgagee and Ada as second mortgagee, or Country Life as first mortgagee and Ada as second mortgagee, as the case might be.In a safe located in her home, Ada has kept possession of the $ 200,000 cognovit installment note and the second mortgage securing the note which had been executed and delivered by petitioner to her as evidence of its obligation arising out of the 1949 transfer of property to petitioner.As of October 31, 1958, petitioner had reduced its note obligation to Country Life from $ 150,000 to $ 78,750. As of September 1962, the balance of that note was $ 155 20,000.713 At all times material hereto, the books of petitioner have reflected an obligation of $ 200,000 to Ada with respect to the transaction which took place in 1949, and petitioner has paid annually to Ada an amount equal to 6 percent of the face amount shown on its $ 200,000 note. Petitioner has never made any payments of principal to Ada on the note.The sources of funds available to petitioner from which to make payments on its obligation to Ada are rental income from the property leased to Stalwart and from the property located in Jasper, Ga.There was no understanding, written or otherwise, between Ada and petitioner that, if for any reason petitioner did not pay the interest or principal it was obligated to pay pursuant to the terms of the $ 200,000 cognovit installment note, Ada would not enforce the rights which she has under the notes and the mortgages securing them.Ada has never been an officer or director of petitioner and has never taken part in the conduct of its business.Petitioner's books and records have at all times material hereto reflected as a liability its $ 38,000 obligation to the individual noteholders.Petitioner has not made any payment of 156 principal on the notes totaling $ 38,000 to the individual noteholders.At all times material hereto, petitioner has paid annually to the individual noteholders an amount equal to 5 percent of the face amount shown on the notes executed and delivered by it to them.There is no agreement between petitioner and the individual noteholders that they will not enforce collection of the notes.The transactions between petitioner and Ada and the individual noteholders constituted contributions to petitioner's capital.OPINIONIssue 1The issue is whether petitioner is entitled to deduct the annual payments of $ 12,000 made to Ada as interest. The answer to this question depends upon whether the transaction whereby Ada transferred the property to petitioner was a sale as contended by petitioner or was a contribution to capital as contended by respondent.There is no question here with respect to the form of the instruments involved. Respondent recognizes that the conveyance by Ada to petitioner was in the form of a sale of the property to petitioner and that the note and mortgage given by petitioner to Ada were in form an ordinary promissory note and mortgage. The record also shows157 that the transaction was recorded on the books of petitioner and Ada as a sale of property in return for a note and mortgage. Cf. Gooding Amusement Co., 23 T.C. 408">23 T.C. 408, 418 (1954), affd. 236 F. 2d 159 (C.A. 6, 1956).714 It is respondent's position that in spite of the clear form that the substance of the transaction was not a sale but was rather a contribution by Ada to petitioner's capital. Respondent contends that Ada did not intend to create a bona fide debt as between herself and petitioner, but intended to embark upon petitioner's corporate adventure, taking the attendant risks of loss.There is no one factor which is determinative in resolving the question here presented; each case must be determined by weighing the facts peculiar to it. John Kelley Co. v. Commissioner, 326 U.S. 521">326 U.S. 521 (1946). There have been numerous decided cases involving whether purported sales of property or loans were in fact contributions to capital and various criteria have been pointed out as guidelines in determining whether the transaction is in substance what it purports in form to be. The name given158 to the instrument is not conclusive but is to be considered along with other facts. Presence or absence of a maturity date for the indebtedness, the right of the creditor to enforce the payment of principal and interest, participation in management, whether the creditor subordinates his debt to those of the other corporate creditors, whether the corporation is adequately capitalized, identity of interest between creditor and stockholders, whether the advance was at the time of the organization of the corporation, and the ability of the corporation to obtain loans from outside lending institutions, are all among the factors to be considered in determining the ultimate fact. O. H. Kruse Grain & Milling v. Commissioner, 279 F. 2d 123 (C.A. 9, 1960), affirming a Memorandum Opinion of this Court; Wilbur Security Co., 31 T.C. 938">31 T.C. 938 (1959), affd. 279 F. 2d 657 (C.A. 9, 1960); and Clyde Bacon, Inc., 4 T.C. 1107">4 T.C. 1107 (1945). In the application of these criteria, it is the intent of the parties which is determinative, but this intent must be gleaned from consideration of all159 pertinent factors in the case. Isidor Dobkin, 15 T.C. 31">15 T.C. 31, 33 (1950), affd. 192 F. 2d 392 (C.A. 2, 1951).Upon consideration of all the facts in the instant case, we conclude that the purported sale by Ada to petitioner was in substance nothing more than a contribution to capital. Petitioner states, "the only conceivable factor missing from this transaction is that petitioner has not made any principal payments on the note." However, on the facts of this case, we consider this failure to make principal payments to be very significant. Despite the testimony of Ada and her son-in-law, Arnold W. MacAlonan, we do not believe that there was ever any intention to make any payments on the principal of the purported note. From the facts of this case, it seems apparent that the shifting of property and papers was nothing more than a transparent tax-savings 715 device to generate interest deductions and a stepped-up basis for the petitioner. The purported transactions give off an unmistakably hollow sound when tapped.In 1944, Ada acquired the property from Stalwart, a corporation controlled by her husband and other family 160 members. For the period July 7, 1944, to September 10, 1949, Stalwart paid Ada a yearly rental of $ 20,400 per year. Petitioner asserts that in 1949 Ada "was desirous of selling the Osborn property to secure for herself a regular source of income during her lifetime and, because of her ill health, to relieve herself of the burdens of managing the property," so that Ada sold the property to petitioner.There are a number of infirmities in the argument petitioner seeks to base on the foregoing assertion. It is difficult to understand what managerial problems could be involved in leasing property to a corporation controlled by Ada's family in view of the close working relationships she had with them, and there is no evidence of such difficulties. But even assuming this claim to be true, we fail to see how Ada could be relieved of any financial problems by selling the property. If petitioner had really intended to repay the principal amount to her, any repayments would have required her to reinvest in something else that would also give her the secure income she purportedly sought. We also find it difficult to see how Ada could have had any more security than by leasing the property161 to Stalwart. It would appear that Ada's secure income could only be maintained under the purported sale if no payments were made on the principal of the note and only "interest" payments were made.The downpayment of $ 25,000 gave some semblance of bona fides to the transaction; however, we think this payment was mere "window dressing." Petitioner had to borrow the money and give a first mortgage on the property, thus delaying any principal payments to Ada for 5 years, by means of which her "secure income" was preserved for an additional length of time. Furthermore, the presence of consideration need not preclude a contribution to capital. Cf. Commissioner v. McKay Products Corp., 178 F. 2d 639 (C.A. 3, 1949), reversing 9 T.C. 1082">9 T.C. 1082 (1947).As for Stalwart's sudden need for working capital in 1953 being the reason for subrogating Ada's mortgage a second time, we think this was again one of those transactions with a distinctly hollow ring, done primarily to further postpone the principal payments on Ada's "note." Stalwart began putting these improvements on the property shortly after the purported sale in 1949, establishing162 a plausible reason for trying to get the property out of Ada's estate. With the improvements, the property might have a value of as much as 716 $ 500,000 in Ada's estate. Under the purported sale, Ada would only be holding, at most, a $ 200,000 note. In addition, if no "principal payments" were made, Ada would get her "secure income."It seems more than coincidental that Stalwart would need working capital at just about the same time as Foresun's $ 25,000 note to National City Bank was almost paid off. The purported sale of the leasehold assets to petitioner appears to be nothing more than a cog in the overall plan.The 1953 transaction could have done nothing but prejudice Ada's position. Petitioner argues that she had increased security because of the leasehold improvements. However, since these were presumably fixtures, they were already security. Teaff v. Hewitt, 1 Ohio St. 511 (1853); Roseville Pottery v. County Board of Revision, 149 Ohio St. 89">149 Ohio St. 89, 77 N.E. 2d 608 (1948). This is but another indication that Ada was willing to, and in fact testified that she would, go through the same163 subordination if necessary, to help petitioner and/or Stalwart. 1Petitioner has made much of the fact that Ada was not a shareholder. Petitioner argues that the cases relied on by respondent all involved closely held corporations where shareholders made advances to a controlled corporation. This argument has been decided adversely to petitioner in another context. In Brown Shoe Co. v. Commissioner, 339 U.S. 583">339 U.S. 583 (1950), the Supreme Court decided that persons other than stockholders could make contributions to capital, a principle now codified in section 362(c) of the 1954 Code. See also Edwards v. Cuba Railroad, 268 U.S. 628">268 U.S. 628 (1925); Liberty Mirror Works, 3 T.C. 1018">3 T.C. 1018, 1025 (1944);164 Commissioner v. McKay Products Corp., supra;Zephyr Mills, Inc. v. Commissioner, 279 F. 2d 494 (C.A. 3, 1960), affirming per curiam a Memorandum Opinion of this Court; Veterans Foundation, 38 T.C. 66 (1962), affd. 317 F. 2d 456 (C.A. 10, 1963). In the instant situation, Ada's dealings with petitioner indirectly benefited her in the same manner as the "contributors" derived benefits in the above-cited cases. Her testimony clearly indicates that she placed the business interests of petitioner 717 and Stalwart foremost as long as she received her steady income.If we look solely at the "note" and nothing else, it appears that the "note" has a reasonably certain maturity date. However, we do not believe that petitioner had any real intention of making any "principal payments," as evidenced by the subsequent extensions granted to petitioner by Ada. The high ratio of debt to equity lends additional support to respondent's contention that the transactions in question were contributions to capital rather than bona fide loans. Petitioner argues that cases involving165 "thin capitalization" are not in point because Ada was not a shareholder. Again we point out that this is not a necessary requirement. Petitioner would have us treat Ada as an unrelated third party acting in her own best interest. While it is true that transactions are not to be disregarded merely because of a family relationship, such relationship is a potent reason for giving close scrutiny to the transaction. Sun Properties v. United States, 220 F. 2d 171 (C.A. 5, 1955). The real question is whether the transaction was what it purported to be, regardless of the identity of the parties.Petitioner argues that subordination alone is not sufficient to convert debt into capital. With this proposition we agree. However, it is a factor to be considered. It is true that there was no subordination to general creditors, but this does not tell the entire story. Under petitioner's operation, in which it was little more than a rent collector, there were no general creditors of any significance. Thus, petitioner's day-to-day operations could be carried on without fear of reprisal by general creditors. Petitioner's only expenses aside from "interest" 166 and depreciation, were taxes, insurance, and office expense, the total of which did not exceed $ 8,000 in any year before us. Thus, Ada was really in the position of being a preferred shareholder, not a creditor. See United States v. Title Guarantee & Trust Co., 133 F. 2d 990, 993 (C.A. 6, 1943). Before receiving the property from Stalwart in 1944, she was a preferred shareholder of Stalwart; now she is in effect a preferred shareholder of petitioner, receiving a steady income from her "sale" of the property to petitioner. If petitioner were dissolved and there were any assets left after the first mortgage was paid, Ada would receive the remainder, up to the amount of her investment. She was also assured of a yearly payment on her investment. There is no question that under the "mortgage" and "note" Ada could have enforced her "debt," but we 718 do not believe she ever would have done so. The potential beneficiaries of her estate were the same persons who would benefit from her "loan" to petitioner, and we accord little weight to Ada's testimony that she intended to have her estate enforce this "debt," especially if this would be to 167 the detriment of the persons or corporations involved here. Cf. Gooding Amusement Co., supra at 418-419.Petitioner's reliance on our decision in Warren H. Brown, 27">27 T.C. 27 (1956), is misplaced. The factors which distinguished that case from Gooding Amusement Co., supra, are not present here. In Brown all installments due had been paid, an underlying independent business purpose was present, and there was a low debt to equity ratio.After a consideration of all the facts, we are led inescapably to the conclusion that Ada did not "sell" anything to petitioner but in fact made a contribution to capital.Issue 2Petitioner contends that it is entitled to deduct as interest the amounts paid to the individual noteholders. Petitioner's argument is substantially the same as in Issue 1: that three of the individual noteholders were not shareholders and that the "loans" were evidenced by demand notes. Respondent contends that the "loans" were in fact contributions to capital.Petitioner could not borrow any more money from lending institutions and consequently had to rely on the family168 members for additional capital. After almost 10 years no payments have been made on these notes other than purported "interest" payments. These notes are payable on demand, not at a fixed maturity date. Essentially, the daughters knew nothing about the "loans" other than that they were made on the advice of their husband-stockholders. Their testimoney was that they would not enforce their obligation if it would be detrimental to the company. Again, we note that the fact the three daughters were not denominated "shareholders" is not controlling.While it is true that there is no rule which permits the Commissioner to dictate what portion of a corporation's operations shall be provided for by equity financing rather than by debt, it is equally true that what was intended is a question to be decided from all the facts. Based upon the record, we hold that the advances by the individual noteholders were in fact contributions to capital. Accordingly, respondent's determination on this issue is sustained.719 Issue 3In an amended answer, respondent claimed that petitioner's basis in the property for depreciation purposes should be Ada's basis of $ 27,500 rather than the169 $ 218,025 "sale" price used by petitioner. Having found that Ada made a contribution to capital rather than a sale, we agree with respondent. Secs. 114(a), 113(a)(8)(B), and (b), I.R.C. 1939. 2170 Decision will be entered under Rule 50. Footnotes1. When asked why she was confident that the security for her second mortgage was adequate, she replied:Well, knowing the company as they were, I felt I would be sure that I would get it [the principal amount] * ** * * Well, it was just my trust I guess.↩2. SEC. 114. BASIS FOR DEPRECIATION AND DEPLETION.(a) Basis for Depreciation. -- The basis upon which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the adjusted basis provided in section 113(b) for the purpose of determining the gain upon the sale or other disposition of such property.SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.(a) Basis (Unadjusted) of Property. -- The basis of property shall be the cost of such property; except that -- * * * (8) Property acquired by issuance of stock or as paid-in surplus. -- If the property was acquired after December 31, 1920, by a corporation -- * * * (B) as paid-in surplus or as a contribution to capital, then the basis shall be the same as it would be in the hands of the transferor * ** * * *(b) Adjusted Basis. -- The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis determined under subsection (a), adjusted as hereinafter provided.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625049/	Estate of Michael A. Doyle, Decd., Lawrence A. Doyle, Executor, Petitioner, v. Commissioner of Internal Revenue, RespondentDoyle v. CommissionerDocket No. 70414United States Tax Court32 T.C. 1209; 1959 U.S. Tax Ct. LEXIS 89; September 18, 1959, Filed 89 Decision will be entered under Rule 50. 1. Amounts deposited by decedent in two bank accounts, one in the name of "Michael A. Doyle, Sr. or Michael A. Doyle, Jr." and the other in the name of "Michael A. Doyle, Sr. Trustee for Michael A. Doyle, Jr.," held to be includible in gross estate of decedent for estate tax purposes.2. The value of certain United States Savings Bonds purchased by the decedent in his lifetime held to be includible in his gross estate for estate tax purposes. Richard H. Valentine, Esq., for the petitioner.Sheldon Seevak, Esq., for the respondent. Raum, Judge. RAUM1209 OPINION.The Commissioner determined a deficiency in estate tax in the amount of $ 9,769.71, with respect to the estate of Michael A. Doyle, Sr. Of the various adjustments resulting in that deficiency only three are now in dispute. They present the question whether there should be included in the decedent's gross estate: (a) 91 $ 7,305.95 of a larger amount on deposit at the date of the decedent's death in the Morris County Savings Bank in the name of "Michael A. Doyle, Sr. or Michael A. Doyle, Jr."; (b) $ 10,981.96 of a larger amount on deposit at the date of decedent's death in the First National Iron Bank in the name of "Michael A. Doyle, Sr. Trustee for Michael A. Doyle, Jr."; and (c) United States Savings Bonds valued at $ 1,884 at the date of decedent's death which had been purchased by him during his lifetime and registered in the names of "Michael Doyle or Michael Doyle, Jr." and "Michael Doyle, Jr. or Michael Doyle, Sr."The parties have stipulated the following facts:1. That the decedent, Michael A. Doyle, died testate, a resident of Morris County, State of New Jersey, on September 14, 1953.2. That at the time of decedent's death he left surviving two sons, namely, Lawrence A. Doyle and Michael A. Doyle, Jr.3. That Lawrence A. Doyle was appointed executor of the estate of Michael A. Doyle, deceased, by the Surrogate of Morris County on September 25, 1953.4. That Lawrence A. Doyle as executor of the estate of Michael A. Doyle, deceased, filed a federal estate tax return on June 9, 1955, with92 the Director of Internal Revenue, Newark, New Jersey.5. That at decedent's death, there was on deposit in the Morris County Savings Bank at the sole office of said bank in Morristown, New Jersey, in Account No. 101170, the sum of $ 9,713.33, and the title of the account on the passbook was "Michael A. Doyle, Sr. or Michael A. Doyle, Jr." The sum of $ 2,407.38 was 1210 deposited on December 27, 1951, in said account from funds belonging to Michael A. Doyle, Jr. The following amounts were deposited in said account by Michael A. Doyle, Sr. on the dates indicated:DateAmount12/26/51$ 2,000.006/12/52800.0012/31/522,000.005/7/531,000.006/11/53312.508/4/531,000.00Total$ 7,112.50Dividends were credited to said account on the dates indicated in the following amounts:DateDividend4/1/52$ 24.787/1/5224.9310/1/5229.5812/29/5229.743/31/5341.156/30/5343.27Total$ 193.45There were no withdrawals from the account at any time prior to the decedent's death.6. That at the decedent's death, there was on deposit in The First National Iron Bank at the sole office of said bank in Morristown, New Jersey, in Account93 No. 13512, the sum of $ 11,124.96, and the title of the account on the passbook was "Michael A. Doyle, Sr. Trustee for Michael A. Doyle, Jr." The sum of $ 143 was deposited on April 16, 1946, in said account from funds belonging to Michael A. Doyle, Jr. From March 14, 1935, to April 1, 1950, a total of $ 10,362.69 was deposited in said account by Michael A. Doyle, Sr. Interest credited to the account from March 14, 1935 to September 14, 1953, was $ 619.27. There were no withdrawals from the account at any time prior to the decedent's death.7. That decedent during his lifetime purchased United States Savings Bonds and had these registered as follows: "Michael Doyle or Michael Doyle, Jr." and "Michael Doyle, Jr. or Michael Doyle, Sr." The value of these bonds at the date of death was $ 1,884.(a) The Morris County Savings Bank Deposit. -- As the stipulated facts disclose, there was on deposit in the Morris County Savings Bank $ 9,713.33 at the time of decedent's death. Of that amount, $ 7,305.95 was attributable to deposits made by the decedent.The evidence shows that Michael, Jr., was born in 1930; that after his mother died in 1946 he lived with the decedent in the latter's94 home; that he attended Notre Dame University from September 1949 to June 1953, being away from home during that period except for summer recesses; and that he was in the military service from July 1953 to May 1955. The evidence further shows that the decedent 1211 gave Michael, Jr., possession of the passbook for the Morris County Savings Bank account; that it was kept in a desk in Michael, Jr.'s bedroom; that decedent knew it was there, and had free access to it; that decedent never gave any reason for depositing money in their joint names; that Michael, Jr., considered the funds to be his and assumed he could do anything he wanted with them "so long as it was not contrary to anything that he [decedent] may have thought."New Jersey Laws 1948, ch. 67, p. 352, sec. 218 (N.J. Stat. Ann. sec. 17:9A-218), applicable to joint accounts, provide as follows:When a deposit has been or shall be made with a banking institution in the names of two persons, payable to either, or payable to either or to the survivor, any moneys to the credit of the account may be paid to either of said persons during the lives of both and, in the case of the death of either of said persons, the moneys 95 to the credit of the account shall, unless otherwise provided in the deposit contract, be paid to the survivor, and the legal representative of the one dying shall have no right thereto notwithstanding that such moneys or any part thereof may have been the property of the one dying. Nothing in this section shall impair the rights, if any, of creditors of either depositor.The New Jersey courts have held that this statute does not raise a conclusive presumption of the survivor's title where funds are deposited in an account in the name of one individual and/or another person. Farris v. Farris Engineering Corporation, 7 N.J. 487">7 N.J. 487, 81 A. 2d 731; Rush v. Rush, 138 N.J. Eq. 611">138 N.J. Eq. 611, 49 A.2d 238">49 A. 2d 238. In the latter case, which arose under a predecessor section which was substantially similar to section 17:9A-218, the court said (49 A. 2d at 241):It [the predecessor of sec. 17:9A-218] lays down a rule of evidence rather than of substantive law. Apart from the measure of protection afforded the bank depository in the making of payments from joint accounts, 96 which would seem to be its primary function, the act at the most raises a rebuttable presumption of the survivor's title to the balance of the credit in case of the death of either, where the deposit has been made in the name of two persons, "payable to either, or payable to either or to the survivor." Such constitutes presumptive evidence of an interest by survivorship which stands until overthrown by proof contra. It is inconceivable that the Legislature intended to raise an irrebuttable presumption of what is in effect a joint tenancy where, for instance, the account is merely made payable "to either" of the codepositors. This ordinarily, simply evidences an intent that either may draw from the account. The statute does not purport to render the contract between the bank and the codepositors, as revealed by the pass book or book entries, conclusive evidence of the depositors' interests inter se. * * In the instant proceeding petitioner seeks to rebut the presumption raised by the New Jersey statute that decedent's son Michael acquired title to the amounts deposited by decedent in the account by right of survivorship upon the death of decedent. Petitioner urges that the decedent97 made a gift inter vivos to Michael, Jr., of 1212 the entire amount of the deposits prior to his death; that he retained no interest whatsoever in such deposits which could pass to Michael, Jr., at the time of his death; that the entire account became the sole property of Michael, Jr.; and that the account was maintained in joint form for convenience only.While the record supports a finding that the decedent gave his son a joint interest in the account, we are not satisfied on the evidence that he intended to do more than that and irrevocably gave his son the entire account. Michael, Jr.'s testimony itself recognized that the father retained some control over the account, for he stated that he assumed he could do anything he wanted with the money "as long as it was not contrary to anything he [decedent] may have thought." There was no clear-cut evidence that the father intended to strip himself of all rights in the deposited funds, or that he was making an irrevocable gift to Michael, Jr. On the contrary, it seems plain that although he intended to benefit his son, that benefit was to take the form of giving his son a joint interest in the deposited funds. Certainly, if the98 son had predeceased his father, the evidence before us is not such as would have precluded his father from successfully claiming the balance in the joint account for himself. That Michael, Jr., may have had possession of the passbook loses much of its significance in the light of the fact that possession by him would have been appropriate also if he were given only a joint interest as opposed to sole and irrevocable ownership of the account. Moreover, it appears that the decedent had free access to the passbook at all times.We cannot say from such testimony as was offered that the decedent ever delivered the passbook to Michael, Jr., with the intent of making a present gift of the moneys deposited in the account. He never told Michael, Jr., that he was making any such gift. And we cannot conclude that he stripped himself of all interest in and control over the deposited funds. We think he did intend to give his son a joint interest in the account; but the gift of such a joint interest brings into play section 811(e), I.R.C. 1939, which justified the Commissioner in including in the gross estate that portion of the amount on deposit at the decedent's death that had its source99 in deposits previously made by the decedent.(b) The First National Iron Bank Account. -- This account was in the name of "Michael Doyle, Sr., Trustee for Michael A. Doyle, Jr." and the Commissioner has included in the decedent's gross estate $ 10,981.96 of the balance in the account on the date of death. The amount so included was attributable to deposits previously made by the decedent.1213 Petitioner contends that this account constituted a valid irrevocable trust for the benefit of decedent's son, Michael, Jr., and the money in this account at the time of decedent's death is not includible in the gross estate.New Jersey Laws, 1932, ch. 40, p. 59, sec. 1, in effect when this account was opened in 1935, 1 provided as follows:Whenever any deposit shall be made with any savings bank, trust company or bank by any person in trust for another, and no other or further notice of the existence and terms of a legal and valid trust shall have been given in writing to the savings bank, trust company or bank, in the event of the death of the trustee, the same or any part thereof, together with the dividends or interest thereon, shall be paid to the person in trust for whom the100 said deposit was made, or to his or her legal representatives and the legal representatives of the deceased trustee shall not be entitled to the funds so deposited nor to the dividends or interest thereon notwithstanding that the funds so deposited may have been the property of the trustee; provided, that the person for whom the deposit was made, if a minor, shall not draw the same during his or her minority without the written consent of the legal representatives of said trustee.The meaning and effect of this statute, and N.J. Rev. Stat. sec. 17: 9-4, 1937 which is identical in all material respects, have been discussed by the New Jersey courts in numerous instances. Thatcher v. Trenton Trust Co., 119 N.J. Eq. 408">119 N.J. Eq. 408, 182 Atl. 912; Travers v. Reid, 119 N.J. Eq. 416">119 N.J. Eq. 416, 182 Atl. 908; Abruzzese v. Oestrich, 138 N.J. Eq. 33">138 N.J. Eq. 33, 47 A. 2d 883; Hickey v. Kahl, 129 N.J. Eq. 233">129 N.J. Eq. 233, 19 A. 2d 33; Bendix v. Hudson County National Bank, 142 N.J. Eq. 487">142 N.J. Eq. 487, 59 A. 2d 253.101 In the latter case, the court stated (59 A. 2d at 256), that the statute did not give rise to a conclusive presumption of the existence of an intention to make an absolute gift inter vivos or to create an irrevocable trust; that it laid down a rule of evidence rather than of substantive law; and that apart from the protection afforded the depositary, the evident purpose was to raise, as between the depositor and the putative cestui inter se, a rebuttable presumption of an inter vivos gift or trust from the form of the account, nothing more. In Hickey v. Kahl, the Court of Chancery, (19 A. 2d at 38) stated that:The act is somewhat involved in its phraseology but I think its intent plain and that it is my duty to give effect to such intent, which I find to be that when one (donor) opens an account in a savings bank in his name in trust for a named beneficiary (donee) and there is no evidence as to the intent of the donor which can be shown after the donor's death, other than as can be gathered from the form in which the account was opened, the intent of the donor shall be taken to be to create an 102 immediately effective trust for the benefit of the donee, over 1214 which the donor reserves a power of revocation, as evidence of which he retains possession of the passbook, and that so much of the funds deposited in that trust account over which the donor has failed to exercise his power of revocation shall belong to the donee free from any claim thereto on the part of the donor's legal representatives. In such a case the only effect of the donor's death is to terminate his power of revocation. * * * [Italics supplied.]In Abruzzese v. Oestrich, the Court of Chancery stated (47 A. 2d at 889) that this power of revocation is inconsistent with a right in the donee to the possession or enjoyment of the fund in the donor's lifetime.103 In Bendix v. Hudson County National Bank, 59 A. 2d at 256, the court said:The mere opening of a bank account in the name of the depositor in trust for another is not conclusive of an intention to make an absolute gift of the subject matter or to place it irrevocably in trust. The transaction may have taken that form for a reason not involving a donative intent. It is necessary that there be "some unequivocable act or declaration clearly showing that an absolute gift or trust was intended". Nicklas v. Parker, supra [69 N.J. Eq. 743, 61 Atl. 269].Petitioner urges that it should be inferred from the evidence, and found as a fact, that under New Jersey law there was a valid irrevocable trust for the benefit of the decedent's son Michael. The evidence relied on is that the deposits were made by the decedent in the account during the minority of his son; that the deposits were made at the same time as decedent made gifts to his other son, Lawrence; that decedent on these occasions said to Michael, "Mike, I am doing this for Larry, but I am also putting this in the bank for you"; and that decedent never made any withdrawals from the account. Other104 evidence reveals that the passbook for the account was retained by the decedent and kept in his desk in his office.We are unable to find from the evidence that there was any unequivocal act or declaration by the decedent during his lifetime indicating an intention to surrender dominion and control of the deposits he made in the account. While it appears that he was making the deposits for his son and made no withdrawals from the account during his lifetime, his retention of possession and control over the passbook gave him the power to make such withdrawals had he chosen to do so. He did not therefore strip himself of ownership and control of the amounts deposited, and this retention of ownership and control rebuts any presumption of gift that may arise from the form of the account. Cf. Howard Savings Institute v. Baronych, 8 N.J. Super. 238">8 N.J.Super. 238, 73 A. 2d 853, 856. It also requires the inclusion of the amount which decedent had deposited in the account in his gross estate for estate tax purposes either under section 811(a), as property in which he had an interest at the time of his death, or under section 1215 811(c)2 as a transfer105 of property which was intended to take effect in possession and enjoyment at or after his death, or under section 811(d), 3 if a trust was created, as a transfer which, at the date of his death, was subject to the exercise by him of a power of revocation.106 Petitioner argues on brief that since the respondent in his notice of deficiency included the First National Iron Bank account in decedent's estate as "jointly owned property" and the evidence discloses that it was not jointly owned property, this Court should decide the issue involving this account in its favor. We do not agree. In the petition it is alleged that the respondent erred in including the account in decedent's gross estate "because decedent had no interest in said property at the time of his death," and this allegation was denied by respondent in his answer. At the trial the respondent's counsel stated in his opening statement that he was contending that a valid irrevocable trust was not created by the account and that any interest Michael acquired in the funds deposited by the decedent therein did not take effect in possession and enjoyment until decedent's death. And the petitioner's counsel in his opening statement announced that he proposed to prove that the money in the account was held by the decedent under an irrevocable trust. In the circumstances we think it apparent that petitioner was aware that the issue was whether decedent retained any interest in the107 account at the date of his death which warranted its inclusion in his gross estate under section 811 of the Internal Revenue Code of 1939. It did not sustain its burden of proving that the decedent did not retain such an interest, and the determination of the respondent must be approved even though the reason assigned by him in the notice of deficiency for the inclusion of the account in decedent's gross estate may not have been strictly accurate. Cf. Helvering v. Gowran, 302 U.S. 238">302 U.S. 238, 245, rehearing denied 302 U.S. 781">302 U.S. 781; Alexander Sprunt & Son, Inc. v. Commissioner, 64 F.2d 424">64 F. 2d 424, 427 (C.A. 4); Bennett's Travel Bureau, 29 T.C. 350">29 T.C. 350, 356-357.(c) Savings Bonds. -- The remaining issue relates to United States Savings Bonds registered in the name of "Michael Doyle or Michael 1216 Doyle, Jr." and "Michael Doyle, Jr. or Michael Doyle, Sr." which were purchased by decedent during his lifetime. The respondent determined that the value of these bonds was includible in decedent's gross estate. Petitioner offered no evidence to prove that respondent's 108 determination was erroneous and does not deal with this issue in its brief. In the circumstances it must be assumed that it is conceding the correctness of respondent's determination. Moreover, to the extent that the stipulated facts relate to this issue, the respondent's determination appears to be correct.Decision will be entered under Rule 50. Footnotes1. N.J.L. 1953, ch. 17, p. 174, sec. 34 (N.J. Stat. Ann. sec. 17↩: 9A-216) provide, in part, as follows: "Moneys heretofore or hereafter deposited to the credit of an account opened prior to the effective date of the act in the name of an individual depositor as trustee for a named individual shall be subject to the law in effect on the date when such account was opened."2. Section 811 provides that the value of the gross estate of the decedent shall be determined by including the value at the time of all property --(c) Transfers in Contemplation of, or Taking Effect at, Death. -- (1) General rule. -- To the extent of any interest therein of which the decedent has at any time made a transfer * * * by trust or otherwise -- * * * (C) intended to take effect in possession or enjoyment at or after his death.↩3. (d) Revocable Transfers. -- (1) Transfers after June 22, 1936. -- To the extent of any interest therein of which the decedent has at any time made a transfer * * where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power * * * by the decedent * * * to alter, amend, revoke or terminate * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625050/	LOUIS E. STODDARD, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Stoddard v. CommissionerDocket No. 99387.United States Board of Tax Appeals47 B.T.A. 584; 1942 BTA LEXIS 673; August 20, 1942, Promulgated 673 1. Held, petitioner was not entitled to deduct as a business expense money paid to accountants in connection with a dispute over income taxes for prior years. 2. Pursuant to a plan of reorganization under section 77B of the Bankruptcy Act, the first mortgage bondholders of X Corporation were given first mortgage bonds and stock in a new corporation and the second mortgage noteholders were given second mortgage bonds of the new corporation. Additional stock in the new corporation was issued for cash. Petitioner sought to deduct either as a bad debt or a loss the amount paid for his undivided interest in the second mortgage note of the old corporation which he exchanged for new second mortgage bonds. In his return petitioner included in income gain on the exchange of certain first mortgage bonds and deducted a loss on the exchange of others. Held, the transfer of assets to the new corporation constituted a reorganization within the meaning of section 112(g)(1)(B) of the Revenue Act of 1936, as amended by the Revenue Act of 1939, and the exchange of petitioner's first mortgage bonds and his interest in the second mortgage note for new bonds and stock constituted a nontaxable674 exchange under section 112(b)(3) of the 1936 Act upon which no gain or loss might be recognized. 3. Held, further, petitioner is not entitled to take a bad debt deduction on the exchange. George E. H. Goodner, Esq., for the petitioner. Charles P. Reilly, Esq., and Davis Haskin, Esq., for the respondent. VAN FOSSAN 584 The respondent determined a deficiency of $16,970.14 in petitioner's income tax for the year 1936. The questions presented are: 1. Whether the petitioner is entitled to deduct as a business expense money paid to accountants in connection with a controversy over his 1932 and 1933 Federal income taxes. 2. Whether the petitioner is entitled to deduct as a bad debt or as a loss the amount paid by him for an undivided interest in a second mortgage note of the Taft Realty Co. second mortgage note of the Taft Realty Co. 585 FINDINGS OF FACT. Petitioner is an individual with his principal office at One East 57th Street, New York, New York. He keeps his books on a cash receipts and disbursements basis. He filed his income tax return for the year 1936 with the collector of internal revenue for the district675 of Connecticut. Petitioner, together with his two sisters, inherited an undivided interest in several large estates. The estates consisted of a large amount of real estate in Chicago and Pittsburgh and personal property in the form of notes, bonds, and mortgages. During 1936 petitioner, together with his two sisters and father, maintained an office for the purpose of managing the property. They also employed a staff of three persons who kept a record of the transactions, consisting of lending money, renting property, collecting rent, and generally managing the property. During the same year petitioner maintained an active interest in the affairs of the estate but did not regularly attend business. Prior to petitioner's becoming of age in December 1934, his father, Louis E. Stoddard, Sr., acted as guardian and looked after petitioner's business affairs. In a previous proceeding before this Board petitioner was found to have been in business in the years 1932 and 1933 through his father as guardian. In his return for the year 1936 petitioner deducted as a business expense $522.63 paid by him to accountants for services in handling a controversy over his 1932 and 1933 Federal676 income taxes. Respondent refused to allow the deduction. In 1925 petitioner obtained for $43,333.34 an undivided 13/45 interest in a $350,000 7 percent second mortgage note of the Taft Realty Co., payable in 1955. The mortgage covered all of the property of the Taft Realty Co., which consisted of the Taft Hotel, the Taft Apartments, and the Shubert Theatre and the furnishings and equipment contained therein. The hotel was built in 1912 and is situated on the corner of College and Chapel Streets in New Haven, Connecticut, a town of approximately 161,000 population. It has approximately 77 feet frontage on Chapel Street and 215 feet on College Street. It is the leading hotel in New Haven and is 12 stories high, constructed of brick, steel, and concrete and contains 348 rooms, a lobby on the first floor, a ballroom on the top floor, and the usual hotel appurtenances. In 1936 the hotel was in shabby condition and was poorly managed. The apartment building which adjoins the hotel on College Street was built in 1914. It is six stories high, of brick, stone, and steel construction, and contains 115 rooms. It is situated on a plot of land approximately 122 feet by 184 feet. The677 theatre is in the apartment 586 building. It seats 1,400 persons and is used for legitimate plays. It is not adapted to the showing of moving pictures. In addition to the second mortgage, the real and personal properties were subject to a first mortgage given to secure an issue of $1,400,000 of 6 percent first mortgage bonds. The principal and interest of the first mortgage bonds were guaranteed by Louis E. Stoddard, Sr. Petitioner and his sisters together held $112,000 face amount of the first mortgage bonds. Interest on the second mortgage note was paid through October 15, 1932. The first mortgage bonds have been in default since October 31, 1933. Late in 1935 the first mortgage bondholders started foreclosure proceedings in the Connecticut State courts. The liabilities of the Taft Realty Co. at that time were as follows: First mortgage 6 percent bonds due 1940$1,175,900.00Defaulted interest on first mortgage bonds158,746.50Second mortgage 7 percent note due 1955350,000.00Defaulted interest on second mortgage note22,881.33Third mortgage notes - J. C. LaVin Co80,000.00Notes payable, New Haven Bank, N.B.A.19,000.00City taxes payable and interest thereon7,067.74Accounts payable500.00678 The capital stock outstanding was of no par value and was carried on the books as of August 31, 1935, at $666,728.57. In 1936, upon ascertaining that there might be a deficiency claim against him on his guarantee, Stoddard, Sr., who owned all of the stock of the Taft Realty Co. except certain qualifying shares, induced it to file a voluntary petition for reorganization under section 77B of the National Bankruptcy Act in the, united States District Court for the District of Connecticut. Subsequent to the approval of the petition for reorganization the state foreclosure proceeding was dismissed. The plan of reorganization of the Taft Realty Co. which was confirmed by the court and subsequently carried out was substantially as follows: A new corporation called the Taft Realty Corporation was formed and took over all the assets of the Taft Realty Co. For each $100 of the old first mortgage bonds plus interest coupons maturing October 1, 1933, and subsequently, the holders were given $100 in first mortgage bonds of the new corporation with interest at 3 percent cumulative from November 1, 1938, plus a voting trust certificate, representing one share of stock in the new corporation. 679 The voting trust certificates given to the first mortgage bondholders represented 11,759 shares of stock or five-twelfths of all the stock. The holders of the undivided interests in the $350,000 second mortgage note were given 4 percent income second mortgage bonds in the principal amount of $150,000. Five thousand dollars additional second mortgage bonds were given to the New Haven Bank in exchange for its $19,000 note. 587 The new first mortgage bonds mature September 1, 1951, and the new second mortgage bonds mature September 1, 1956. Voting trust certificates, representing the remaining seven-twelfths, or 16,463 shares of the new corporation stock, were issued in exchange for $150,000 of new money which Stoddard, Sr., had undertaken to raise. The petitioner furnished $42,500 of the new money and received voting trust certificates representing 4,664 shares. His sisters furnished $67,500 and a friend of Stoddard, Sr., furnished the remaining $40,000. A part of the new money was used for improvement of the property. All 28,222 shares of the $5 par common stock of the new corporation were issued to voting trustees under a voting trust agreement, which is to continue680 in effect for 15 years from the date of issuance, or until all of the new first mortgage bonds have been paid or called for redemption and payment provided for, whichever is sooner. Pursuant to the plan of reorganization, petitioner surrendered his interest in the old second mortgage note and received new second mortgage bonds in the face amount of $43,333.34. Subsequently, on September 15, 1936, he charged off the old second mortgage note on his books and entered the new second mortgage bonds at no cost. In 1937 he received $405.52 in interest on the second mortgage bonds. In 1938 he received $1,515.82 in such interest, and in 1939, $95.34. At the time the reorganization proceedings were instituted the Taft Realty Co. was operating at a loss. The land and buildings were carried on its books at $2,158,505.13. The properties were assessed for real estate tax purposes at a value of $1,712,730. The furnishings and equipment were carried on the books of the old corporation at a value of $313,721.59. The land, buildings, furniture, and equipment were all entered on the books of the new corporation at an appraised value of $1,619,000. During the fiscal years ending August 31, 1937, 1938, 681 and 1939 the new company, after deducting depreciation, showed incomes of $9,877.51, $20,056.28, and $8,504.83, respectively. Interest on the mortgage bonds amounts to $35,277 annually. The interest on the first mortgage bonds was paid in full in the fiscal years ending August 31, 1937, 1938, and 1939, even though after depreciation charges there was not sufficient income for the payment of such interest. The interest was not paid in full for the fiscal year ending August 31, 1940. The price range of the old first mortgage bonds during the years prior to the 77B reorganization was as follows: YearHighLow19318571193253 1/250 1/219333513 1/2193420151935251819363424588 The last sale of the old bonds was on August 29, 1936, at 32. The first sale of the new first mortgage bonds was on September 4, 1936, at 31 1/2. In his 1936 Federal income tax return petitioner deducted as a bad debt the cost of his interest in the second mortgage note of the Taft Realty Co. He also reported a deductible capital loss of $5 and a taxable capital gain of $2,712.03 on the exchange of first mortgage bonds of the Taft Realty Co. 682 which he had acquired at various times. Respondent determined that the transaction whereby the obligations of the Taft Realty Co. were exchanged for those of the Taft Realty Corporation constituted a nontaxable exchange within the meaning of the Revenue Act of 1936. Accordingly, the deductions were disallowed and the gain excluded from income. OPINION. VAN FOSSAN: The first question presented is whether or not petitioner is entitled to deduct as an ordinary and necessary business expense the payments made to accountants for services rendered in connection with a controversy over petitioner's 1932 and 1933 Federal income taxes. Petitioner's argument that the decision of this Board in Louis E. Stoddard, Jr., Docket No. 92977, memorandum opinion entered December 14, 1939, is res judicata as to this issue must be rejected. A finding that petitioner was engaged in business during the year 1934 does not establish that he was engaged in business during the year 1936. Moreover, such a holding would not dispose of the issue. There remains the question of the nature of the expense. As to the nature of the expense the proof is insufficient to enable us to hold that the683 tax controversy which gave rise to the expenditure arose from business transactions. For aught that appears it may have arisen from petitioner's personal, as contrasted with his business, relationships. The second issue arises from respondent's determination that the transaction in which the first mortgage bonds and the second mortgage notes of the Taft Realty Co. were exchanged for first mortgage bonds, second mortgage bonds and stock of the Taft Realty Corporation was a nontaxable exchange upon which ne gain or loss may be recognized. The applicable statutory provisions are contained in sections 112:b):3) 1 and 112:g):1) of the Revenue Act of 1936, 589 as amended by section 213:g):1) of the Revenue Act of 1939; 2 and section 112:g):2) and :h), Revenue Act of 1936. 3684 Petitioner exchanged his interest in the first mortgage bonds of the old corporation for bonds and stock of the new corporation and he exchanged his interest in the old second mortgage note for new second mortgage bonds. These exchanges were within the scope of section 112:b):3). Hence, no gain or loss may be recognized if there was a reorganization to which both corporations were parties. One of the statutory definitions of a reorganization is the acquisition by one corporation of substantially all the properties of another solely in exchange for all or a part of its voting stock. In the case at bar Taft Realty Corporation acquired all the properties of Taft Realty Co. by virtue of an exchange of its voting stock and bonds for bonds of the old company. The fact that the new company's stock was issued to the old bondholders rather than to the old corporation is immaterial. Helvering v.New Haven & Shore Line R.R. Co., 121 Fed.:2d) 985. In ; affd., 128 Fed.:2d) 885, this Board held that the issuance of debentures of the new corporation in exchange for debentures of the old corporation constituted an assumption of indebtedness. 685 We are of the opinion that the issuance of the first and second mortgage bonds in the case at bar likewise constituted an assumption of indebtedness. The bonds were issued in recognition of the indebtedness of the old corporation. The indebtedness antedated the reorganization and did not arise out of it. Cf. . Since the bonds are eliminated from consideration, the property was acquired solely for voting stock, 590 within the meaning of the first part of section 112:g):1):b) of the 1936 Act, as amended. An essential factor which distinguishes a reorganization from a sale is the existence of a continuity of interest. ; . The Supreme Court has recently held that the continuity of interest requirement is satisfied where a proprietory interest in the new corporation is retained by the creditors of the insolvent old corporation. 686 . Cf. In the case at bar the continuity of interest requirement was satisfied by issuance of stock to the first mortgage bondholders. We are not convinced by petitioner's argument that a different result should be reached by reason of the fact that the shares of stock were issued to voting trustees. We deem this fact immaterial. See Helvering v.New Haven & Shore Line R.R. Co., supra.In keeping with the above, we hold that the second mortgage bonds were acquired in a nontaxable reorganization. The record shows that petitioner charged off his interest in the second mortgage note of the old corporation subsequent to the exchange. He claims a deduction either as a bad debt or as a loss. Since the exchange was nontaxable, no gain or loss may be recognized, nor may petitioner take a bad debt deduction on account of the same. ; 687 . It also follows that in determining the deficiency respondent correctly excluded from petitioner's income the gain reported on the exchange of a part of petitioner's first mortgage bonds and correctly disallowed the loss claimed on the exchange of the remainder of petitioner's first mortgage bonds. Reviewed by the Board. Decision will be entered for the respondent.KERN dissents on the second issue. Footnotes1. SEC. 112. RECOGNITION OF GAIN OR LOSS. * * * (b) EXCHANGES SOLELY IN KIND. - * * * (3) STOCK FOR STOCK ON REORGANIZATION. - No gain or loss shall be recognized if stock or sedurities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization. ↩2. (g) DEFINITION OF REORGANIZATION UNDER PRIOR ACTS. - (1) Section 112(g)(1) of the Revenue Acts of 1938, 1936, and 1934 are amended to "(1) The term 'reorganization' means (A) a statutory merger or consolidation, or (B) the acquisition by one corporation, in exchange solely for all or a part of its voting stock, of substantially all the properties of another corporaton, but in determining whether the exchange is solely for voting stock the assumption by the acquiring corporation of a liability of the other, or the fact that property acquired is subject to a liability, shall be disregarded; or the acquisition by one corporation in exchange solely for all or a part of its voting stock of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of another corporation, or (C) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the tranfer the transferor or its shareholders or both are in control of the corporation to which the assets are transferred, or (D) a recapitalization, or (E) a mere change in identity, form, or place of organization, however effected." (See , upholding the constitutionality of the retroactive application of section 213(g).)↩3. (g)(2) The term "a party to a reorganization" includes a corporation resulting from a reorganization and includes both corporations in the case of a reorganization resulting from the acquisition by one corporation of stock or properties of another. (h) DEFINITION OF CONTROL. - As used in this section the term "control" means the ownership of stock possessing at least 80 per centum of the total combined voting power of all classes of stock entitled to vote and at least 80 per centum of the total number of shares of all other classes of stock of the corporation. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625051/	MARTIN AND DIANE STERENBUCH, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSterenbuch v. CommissionerDocket No. 19506-88United States Tax CourtT.C. Memo 1991-505; 1991 Tax Ct. Memo LEXIS 554; 62 T.C.M. (CCH) 951; T.C.M. (RIA) 91505; October 3, 1991, Filed 554 Decision will be entered under Rule 155. Martin Sterenbuch, pro se. Thomas M. Cryan, for the respondent. WELLS, Judge. WELLSMEMORANDUM FINDINGS OF FACT AND OPINION Respondent determined deficiencies in petitioners' Federal income tax as follows: YearDeficiency1977$ 11,068.6819785,774.00Respondent asserts in his amendment to answer that petitioners are liable for increased interest on the deficiency under section 6621(c). 1The instant case involves petitioner's 2 investment in a limited partnership interest in MLTD Limited Partnership (the Partnership). The issues for our decision are: (1) Whether petitioners are entitled to deductions for depreciation with respect to the Partnership's investment in a movie film under the "income forecast method"; (2) whether petitioners 555 may raise an issue that a deduction is allowable due to the abandonment of the movie film in 1978; (3) whether petitioners are entitled to an investment tax credit with respect to petitioner's share of the Partnership's investment in the movie film; and (4) whether petitioners are liable for increased interest under section 6621(c). FINDINGS OF FACT Some of the facts have been stipulated for trial pursuant to Rule 91. The stipulations are incorporated in this Opinion by reference irrespective of any restatement below. Petitioners resided in Bethesda, Maryland, on the date their petition was filed. The Partnership was formed in 1976. The purpose of the Partnership was to carry on the production, acquisition, distribution, and exploitation of motion pictures. The general partners of the Partnership were Robert M. Lutz and Robert E. Trattner. On March 12, 1976, the Partnership's general partners signed a purchase contract with TNT 556 Productions, Inc. (TNT), under which TNT was to produce, deliver, and sell a movie film tentatively titled "Most Likely to Die" (the movie film) to the Partnership. The movie film was completed in October 1976, and the Partnership acquired it for a cash down payment of $ 240,000 and a nonrecourse interest-bearing note due December 31, 1986, of $ 960,000. On December 23, 1976, the Partnership signed an agreement with Dimension Pictures (Dimension), which provided that Dimension would pay the Partnership a percentage of Dimension's profits from the movie film and $ 180,000 cash over the subsequent 2 years. 3 The Partnership reported the entire $ 180,000 as income from rents from the movie film's exploitation on its 1976 Federal income tax return. On December 31, 1976, petitioner became 557 a limited partner in the Partnership when he invested $ 30,000 in cash and executed a promissory note for $ 120,000 in favor of the Partnership due November 15, 1986. Petitioner held an 11.8-percent interest in the Partnership. The movie film, subsequently titled "The Redeemer," was completed in 1976. However, early in 1977, Dimension requested that the movie film be refilmed and reedited. In the fall of 1977, the movie film was shown at a trade screening to exhibitors as a promotion. The movie film won critical acclaim in an international horror film competition overseas, which selected it as one of two nominees from the United States. The movie film was designated as one of the top five horror pictures of the world in 1978. The movie film, however, was held in Dimension's inventory during 1977 and was not released to the public until May 1978. In 1978, Dimension had financial problems. Consequently, later that year, the distribution of the movie film was curtailed. Even though the movie film did not play at very many places in the United States, it generated approximately $ 1 million at the box office. The Partnership, however, did not receive or accrue any income or receipts558 in 1977 or 1978 from the exploitation of the movie film. After Dimension ceased its distribution of the movie film, Steven Trattner, one of the film's producers, counseled Robert Trattner, one of the Partnership's general partners, against filing suit on the note or attempting to recover the movie film from Dimension. Subsequently, the Partnership neither filed suit on the note nor attempted to recover the movie film from Dimension. The Partnership filed Federal returns of income for its taxable years ended December 31, 1976, 1977, and 1978, respectively. For each of those years, it claimed a basis of $ 1,200,000 in the movie film and claimed depreciation deductions with respect to the movie film in such years of $ 356,700, $ 379,747 and $ 343,553, respectively. The depreciation deduction was calculated under the so-called "income forecast method." At the end of 1978, the Partnership listed the movie film on its Federal return of income showing a book value (net of depreciation) of $ 120,000. Further, the Partnership claimed that the movie film qualified for investment tax credit for 1976. On their 1976 Federal income tax return, petitioners claimed petitioner's distributive559 share of the Partnership's depreciation expense and his share of the Partnership's investment in the movie film, for which petitioners claimed $ 545 of investment tax credit. On their 1977 and 1978 Federal income tax returns, petitioners claimed losses, due in large part to petitioner's share of the Partnership's depreciation deductions, and claimed investment tax credit carryforwards resulting from petitioner's share of the Partnership's investment in the movie film. For taxable years 1977 and 1978, petitioners claimed losses with respect to the Partnership's investment in the movie film in the amounts of $ 21,389 and $ 40,825, respectively. Also, petitioners, for taxable years 1977 and 1978, carried forward from 1976 their unused investment tax credit from the Partnership's investment in the movie film in the amounts of $ 3,927 and $ 1,502, respectively. OPINION The first issue we will address is whether petitioners may claim depreciation deductions under section 167(a) with respect to the Partnership's investment in the movie film. Petitioners bear the burden of showing their entitlement to a deduction. Interstate Transit Lines v. Commissioner, 319 U.S. 590">319 U.S. 590, 593, 87 L. Ed. 1607">87 L. Ed. 1607, 63 S. Ct. 1279">63 S. Ct. 1279 (1943);560 New Colonial Ice Co. v. Helvering, 292 U.S. 435">292 U.S. 435, 440, 78 L. Ed. 1348">78 L. Ed. 1348, 54 S. Ct. 788">54 S. Ct. 788 (1934); Rule 142(a). Respondent argues that, under the income forecast method, no depreciation deduction is allowable because the Partnership received no income with respect to the film during the years in issue. Gordon v. Commissioner, 766 F.2d 293">766 F.2d 293, 298 (7th Cir. 1985), affg. a Memorandum Opinion of this Court; Fife v. Commissioner, 82 T.C. 1">82 T.C. 1, 9 (1984); Greene v. Commissioner, 81 T.C. 132">81 T.C. 132, 140 (1983); Wildman v. Commissioner, 78 T.C. 943">78 T.C. 943, 951 (1982); Siegel v. Commissioner, 78 T.C. 659">78 T.C. 659, 693 (1982). The parties stipulated that the Partnership neither received nor accrued any income with respect to the movie film during 1977 or 1978. Consequently, we hold that petitioners may not claim a depreciation deduction with respect to the movie film during the years in issue. Instead of attempting to sustain the depreciation deductions originally claimed on their returns, petitioners argue, for the first time on brief, that they should be allowed an abandonment loss deduction for 1978, claiming that the movie film was561 abandoned or retired from service in such year. Respondent objects to petitioners' raising such argument, as the question of whether an abandonment occurred was not placed in issue by the pleadings, and respondent had no notice of petitioners' intent to rely upon such argument prior to the filing of the post-trial briefs. We consistently have refused to consider an issue raised for the first time on brief where the opposing party would be surprised or prejudiced. Centel Communications Co. v. Commissioner, 92 T.C. 612">92 T.C. 612 (1989), affd. 920 F.2d 1335">920 F.2d 1335, 1340 (7th Cir. 1990); 508 Clinton Street Corp. v. Commissioner, 89 T.C. 352">89 T.C. 352, 353 n.2 (1987); Seligman v. Commissioner, 84 T.C. 191">84 T.C. 191, 199 (1985), affd. 796 F.2d 116">796 F.2d 116 (5th Cir. 1986). Because petitioners did not present their position on the abandonment issue to respondent or to the Court until they raised it in their briefs, we will not consider it. The next issue is whether petitioners are entitled to an investment tax credit for petitioner's share of the Partnership's investment in the movie film. A taxpayer is entitled to an investment credit 562 under section 38 with respect to an investment in a motion picture film only if the film is "new section 38 property" (determined without regard to useful life) which is a "qualified film" and only to the extent that the taxpayer has an "ownership interest" in the film. Sec. 48(k)(1)(A). A motion picture film is "new" section 38 property until it is placed in service in any medium of exhibition in any geographical area of the world; no investment tax credit is available to a taxpayer who acquires an ownership interest in the film after such time (except for certain costs subsequently incurred by the taxpayer). Sec. 1.48-8(a)(2), Income Tax Regs.There is no dispute that the movie film is "new section 38 property," a "qualified film," 4 and property in which petitioners have an "ownership interest." 5 Respondent, however, disputes when the movie film was placed in service. 563 Respondent contends that the movie film was placed in service in 1976, rather than in 1977 or 1978. Respondent argues that any investment tax credit allowable with respect to the movie film should be taken in 1976 and, if any credit remains unused, it first should be carried back 3 years preceding 1976, and then carried forward to the 7 years following 1976. Petitioners, on the other hand, contend that the movie film was placed in service in 1977 or, alternatively, 1978, and, accordingly, that they are entitled to an investment credit on petitioner's share of the Partnership's investment in the film for 1977 or, alternatively, 1978. With respect to the issue of when a qualified film is placed in service, section 1.48-8(a)(5), Income Tax Regs., provides: Placed in service. A qualified film is placed in service when it is first exhibited or otherwise utilized before the primary audience for which the qualified film was created. Thus, a qualified film is placed in service when it is first publicly exhibited for entertainment purposes and a qualified educational film is placed in service when it is first exhibited for instructional purposes. Each episode of a television film564 or tape series is placed in service when it is first exhibited. A qualified film is not placed in service merely because it is completed and therefore in a condition or state of readiness and availability for exhibition, or merely because it is exhibited to prospective exhibitors, sponsors, or purchasers, or is shown in a "sneak preview" before a select audience.We agree with petitioners that the movie film was not placed in service until 1978. As we have set forth above in our findings of fact, the movie film, as it originally was filmed, was completed in 1976. The movie film, however, was not exhibited to its primary audience in that year. At the request of the distributor, the movie film was refilmed and reedited in 1977. As a result of the refilming and reediting, the movie film was held in the distributor's inventory during 1977 until May 1978, when the movie film was first released to its primary audience -- the public. That the movie film was shown in 1977 at trade screenings to exhibitors as a promotion does not cause the movie film to have been placed in service during 1977. It is clear that the movie film's primary audience was the public, not such exhibitors, 565 and it was not until 1978 that the film was first exhibited to the public. See Law v. Commissioner, 86 T.C. 1065">86 T.C. 1065, 1110 (1986) (film placed in service when released to theatrical markets); Budget Films, Inc. v. Commissioner, 85 T.C. 114">85 T.C. 114, 116, 124 (1985) (film placed in service when publicly exhibited).6Respondent contends that petitioners' claim of an investment tax credit and depreciation on their 1976 return forecloses their right to argue that they are entitled to deductions with respect to petitioner's share of the Partnership's investment in the movie film in either 1977 or 1978. We do not agree. The fact that petitioners have committed an error in prior years is not a sufficient basis to find for respondent. North Carolina Granite Corp. v. Commissioner, 43 T.C. 149">43 T.C. 149, 168 (1964);566 Kenosha Auto Transport Corp. v. Commissioner, 28 T.C. 421">28 T.C. 421 (1957). Moreover, respondent's argument is akin to estoppel, which must be pleaded as an affirmative defense; not having properly pleaded the defense, respondent is deemed to have waived it. Arkansas Best Corp. v. Commissioner, 83 T.C. 640">83 T.C. 640, 660 n. 8 (1984), affd. in part and revd. in part on other issues 800 F.2d 215">800 F.2d 215 (8th Cir. 1986), affd. 485 U.S. 212">485 U.S. 212 (1988); Rule 39. For the same reasons, respondent's contention that the Partnership's reporting of the movie film on its 1976 return as qualifying for investment tax credit and depreciation are binding admissions by the Partnership that the movie film was placed in service in 1976 must fail. While the treatment of an item on a return is not dispositive of an issue, it is a factor to be considered with all other relevant evidence. Guardian Industries, Inc. v. Commissioner, 97 T.C. 308">97 T.C. 308, (1991) (slip op. at 26-27). In addition to the reporting positions of the 1976 returns of petitioners and the Partnership, respondent points to other indirect evidence of when the movie film was placed in service: The567 parties' stipulation that the carryforward credits claimed in 1977 and 1978 were the result of petitioner's investment in the Partnership; the acquisition of the movie film by the Partnership in 1976; the reporting of income from the movie film by the Partnership in 1976; and the Partnership's claim of depreciation deductions with respect to the movie film, beginning in 1976. In order to determine when a motion picture is placed in service, section 1.48-8(a)(5), Income Tax Regs., provides for an inquiry into when the motion picture is "first publicly exhibited for entertainment purposes." The evidence to which respondent points, however, is ambiguous and does not answer the pertinent inquiry posed by the regulations. Respondent would have us disregard the testimony of the movie film's producer, Steven Trattner, who explained that the movie film was not shown to general audiences, i.e., the public, until May 1978. Steven Trattner's testimony is supported by a stipulated affidavit of Sheldon Tromberg, another producer of the movie film, who stated that the movie film was released in 1978. We believe Steven Trattner's testimony. Accordingly, we conclude that the movie film was placed568 in service in 1978 for investment tax credit purposes, and hold that petitioners are entitled to an investment credit in 1978 with respect to petitioner's share of the Partnership's investment in the movie film. Lastly, we must decide whether petitioners are liable for increased interest under section 6621(c). Respondent amended his answer to assert increased interest under section 6621(c), for taxable years 1977 and 1978. The burden of proof with respect to such issue therefore is on respondent. Rule 142(a). In his amendment to his answer, respondent states that the Partnership used a purchase price of $ 1,200,000 to determine its depreciation and investment credit for the years in issue. In his amendment, respondent also alleges that petitioners overstated the value of the movie film by at least 150 percent of the correct valuation amount. In the stipulation of facts, however, respondent agreed with petitioners that the film had a value of $ 1,200,000, which is the very amount that respondent claims is at least 150 percent too great. Respondent's briefs are devoid of argument with respect to his claim for increased interest. In light of the foregoing, we hold that petitioners569 are not liable for increased interest under section 6621(c). To reflect the foregoing, Decision will be entered under Rule 155. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code as amended and in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. References to petitioner in the singular denote petitioner Martin Sterenbuch.↩3. The $ 180,000 cash was to be paid to the Partnership as follows: ↩$ 3,500 for 6 months beginning 1/1/77$ 21,000$ 16,500 for 6 months beginning 7/1/7799,000$ 5,000 for 12 months beginning 1/1/7860,000$ 180,0004. A qualified film is defined as "any motion picture film or video tape created primarily for use as public entertainment or for educational purposes. Such term does not include any film or tape the market for which is primarily topical or is otherwise essentially transitory in nature." Sec. 48(k)(1)(B)↩. 5. Sec. 48(k)(1)(C) provides that a taxpayer's ownership interest in a qualified film "shall be determined on the basis of his proportionate share of any loss which may be incurred with respect to the production costs of such film." The existence and extent of an ownership interest is determined at the time the film is placed in service. Sec. 1.48-8(a)(4)(ii), Income Tax Regs.; S. Rept. 94-938 (1976), 1976-3 C.B. (Vol. 3) 49, 230. A taxpayer may have an ownership interest in a motion picture film for purposes of the investment tax credit even if the taxpayer has neither legal title to nor a depreciable interest in the motion picture. Durkin v. Commissioner, 87 T.C. 1329">87 T.C. 1329, 1383 (1986), affd. 872 F.2d 1271">872 F.2d 1271↩ (7th Cir. 1989).6. Upham v. Commissioner, T.C. Memo 1989-253">T.C. Memo 1989-253, affd. 923 F.2d 1328">923 F.2d 1328↩ (8th Cir. 1991) (film placed in service when released nationally).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625052/	APPEAL OF PROVIDENCE & WORCESTER RAILROAD CO.Providence & Worcester R.R. Co. v. CommissionerDocket Nos. 6297, 7775.United States Board of Tax Appeals5 B.T.A. 1186; 1927 BTA LEXIS 3653; January 26, 1927, Promulgated 3653 Petitioner in 1892 leased its premises and property for a term of years, the leassee agreeing to pay all taxes imposed upon the lessor with reference to the rental. The lessee paid the income and profits taxes upon the net income returned by the petitioner for the taxable years. Held, the amount of the tax so paid constitutes additional income to the petitioner for the year in which such tax became due and was paid. J. S. Y. Ivins, Esq., and O. R. Folsom-Jones, Esq., for the petitioner. John W. Fisher, Esq., for the Commissioner. PHILLIPS 1187 The petitioner filed two appeals which have been consolidated - one from the determination of a deficiency of $8,177.95 in income and profits taxes for 1921, the other from the determination of deficiencies of $5,464.67 and $5,461.71 in income taxes for 1922 and 1923, respectively. FINDINGS OF FACT. The Providence & Worcester Railroad Co., the petitioner herein, was, during the years 1921, 1922, and 1923, a corporation existing under and by virtue of the laws of the States of Massachusetts and Rhode Island. The New York, New Haven, & Hartford Railroad Co. was, during the years 1921, 3654 1922, and 1923, a corporation existing under and by virtue of the laws of the States of Massachusetts, Rhode Island, and Connecticut. Under date of December 17, 1892, the petitioner leased its premises and property to the New York, New Haven & Hartford Railroad Co. for a term of 99 years from July 1, 1892, the lease containing, among other provisions, the following clause: The lessee further covenants to pay, during each year of said term, all taxes, rates, charges, and assessments, ordinary and extraordinary, which may be lawfully imposed or assessed in any way upon the lessor or lessee with reference to the premises and property hereby demised, the capital stock of the lessor, its indebtedness, franchises and revenues or said rental; said payments to be made to the authority or treasurer entitled by law to receive the same, whether Federal, State or municipal, so that said lessor shall be saved harmless, during the continuance of this lease from any tax, assessment or charge under laws or proceedings made or authorized by the United States or any State or municipality. By virtue of the provisions of such lease the New York, New Haven & Hartford Railroad Co. paid, in 1922, 3655 1923, and 1924, the Federal income and profits taxes for the years 1921, 1922, and 1923, respectively, upon the net income returned by or for the petitioner for those years. The Federal income and profits taxes so paid were at least $40,355.77 paid in 1922 on income of $349,716.86 returned for 1921, $43,717.36 paid in 1923 on income of $349,738.84 returned for 1922, and $43,693.72 paid in 1924 on income of $349,549.74 returned for 1923. The taxes so paid on the income for the respective years 1921, 1922, and 1923, were not due and payable until on or after March 15, 1922, 1923, and 1924, respectively. The deficiencies determined by the Commissioner are predicated upon treating as additional income to the taxpayer for the year 1921 an amount equal to the Federal income and profits taxes computed on income of $349,716.86 originally returned for the year 1921, and upon treating as additional income to the taxpayer for the year 1188 1922 an amount equal to the Federal income tax paid on income of $349,738.84 originally returned for the year 1922, and upon treating as additional income to the taxpayer for the year 1923 an amount equal to the Federal income tax paid on income3656 of $349,549.74 originally returned for the year 1923. The petitioner kept its books upon the accrual basis. OPINION. PHILLIPS: The sole question presented is whether the amount of the payment by the lessee railroad, pursuant to its contract, of income and profits taxes assessed against the lessor constitutes taxable income to the lessor. While conceding that such payment constitutes a benefit to the lessor, counsel for the petitioner contend that nothing was actually or constructively received by it which was subject to tax as income. From the admitted facts set out above we can not determine definitely whether the income and profits taxes of the petitioner were paid to it by the lessee, and by it to the Government, or paid by the lessee directly to the Government on behalf of the lessor. If the first alternative were the situation, petitioner could scarcely contend that nothing was actually received by it which was subject to tax as income. Does it make any difference if, as seems to be the more literal interpretation of the admitted allegations of the petition, the payment of the tax of the petitioner was made directly to the collector by the lessee? 3657 In , which arose under the Revenue Act of 1916, the Supreme Court, citing several decisions rendered by it under the Corporation Excise Tax Act of 1909, said: It is obvious that these decisions in principle rule the case at bar if the word "income" has the same meaning in the Income Tax Act of 1913 that it had in the Corporation Excise Tax Act of 1909, and that it has the same scope of meaning was in effect decided in , where it was assumed for the purposes of decision that there was no difference in its meaning as used in the Act of 1909 and in the Income Tax Act of 1913. There can be no doubt that the word must be given the same meaning and content in the Income Tax acts of 1916 and 1917 that it had in the Act of 1913. When to this we add that in Eisner v. Macomber, supra, a case arising under the same Income Tax Act of 1916 which is here involved, the definition of "income" which was applied was adopted from Stratton's Independence v. Howbert, supra, arising under the Corporation Excise3658 Tax Act of 1909, with the addition that it should include "profit gained through sale or conversion of capital assets," there would seem to be no room to doubt that the word must be given the same meaning in all of the Income Tax Acts of Congress that was given to it in the Corporation Excise Tax Act, and that what that meaning is has now become definitely settled by decisions of this court. 1189 To the same effect, see . There is no substantial difference between gross income as defined in the Revenue Acts of 1916 and of 1921, and we conclude that we may look to the decisions of the courts under such prior acts for assistance in determining what is income under the Revenue Act of 1921. In , the plaintiff had leased its railroad equipment and franchises to the Delaware & Hudson Canal Co., in consideration of which the lessee agreed to pay, among other things, interest upon the bonded indebtedness of the lessor and dividends of 4 per cent per annum to the stockholders3659 of the lessor. In that case the Circuit Court of Appeals for the Second Circuit held that the interest and dividends so paid constituted income to the lessor under the Corporation Excise Tax Law of 1909. In a similar case, the Circuit Court of Appeals for the Fifth Circuit reached the same conclusion. . In the determination of the income of this lessor, we fail to see any distinction in principle between payments by the lessee of interest to bondholders of the lessor, payment of dividends to stockholders of the lessor, and payments of taxes of the lessor. In each of the cases cited, as in the present case, the payment was made as a part of the compensation for the use of property, and in each case the payment, although it did not pass through the hands of the lessor, was made for its benefit and account. It may be true, as contended by the petitioner's counsel, that not every benefit derived from the use of disposition of property is taxable as income. In circumstances such as we have here, however, the payment of an indebtedness, pursuant to a contract for3660 the use of property, impresses us as being as truly a part of the income from the property as would be a payment of an equal amount made directly to the petitioner. We are not unmindful of the statement, cited by counsel for the petitioner, made by the Supreme Court in , in discussing permanent improvements made by the lessee to the property of a lessor, that - The term "rentals," since there is nothing to indicate the contrary, must be taken in its usual and ordinary sense, that is, as implying a fixed sum, or property amounting to a fixed sum, to be paid at stated times for the use of property * * and in that sense it does not include payments, uncertain both as to amount and time, made for the cost of improvements or even for taxes. The court, however, further said: Nor do such expenditures come within the phrase "or other payments," which was evidently meant to bring in payments ejusdem generis with 1190 "rentals," such as taxes, insurance, interest on mortgages, and the like, constituting liabilities of the lessor on account of the leased premises which the lessee3661 has covenanted to pay. Nor is this similar to the situation presented in , where it was held that a contribution to the capital of a corporation in the nature of a subsidy is not income. Here the payment is recurrent and arises from the use of the property. Although we have already stated our conclusions, certain contentions made by counsel for the petitioner deserve consideration here. It is said that the decision in , in which is was held that the 2 percent tax paid by a corporate obligor on interest upon so-called taxfree covenant bonds was not additional income to the obligee, is controlling. The law there considered imposed a tax upon the corporate obligor equal to 2 per cent of the interest and provided that the obligee should be entitled to credit for such amount. The effect was to tax the obligor and to reduce the tax of the obligee. The tax paid by the obligor was a tax imposed upon it and not one imposed upon the obligee, even though the same law reduced the amount of tax due from the obligee. In the case before us, however, 3662 the tax which was paid was levied by law upon the petitioner and not upon the lessee. The payment by the lessee was in the nature of compensation for the use of the property, was imposed by contract, and was not a part of a tax liability imposed upon it by law. It is pointed out by counsel for the petitioner that if the tax paid by the lessor is additional income to petitioner, the lessee is obligated to pay the tax on such additional amount, which payment in turn is additional income subject to tax. It is said that, if the contention of the Commissioner be carried to its logical conclusion, the tax must be computed upon each payment of tax until the last computation is a minor fraction of a cent; that such computation requires the use of an algebraic formula and that "algebraic formulae are not lightly to be imputed to legislators." . In the instant appeal we are not called upon to determine whether the lease requires the interpretation which counsel would assign to it or whether the law requires such an interpretation, for the Commissioner proposes to include as additional income only the3663 amount of the tax assessed and paid upon amounts which are admittedly income, and this computation requires the use of no algebraic formula. It would seem, however, that the necessity for the use of such a formula, if it exists, is not to be attributed to the legislators but to the contract made by the parties. It would scarcely be argued that parties may escape tax because their contracts require the use of such a formula to determine true income. So far 1191 as we have been able to ascertain, the quoted expression has been used in cases where the contention was made that the taxing statute was inherently such as to necessitate the use of such a formula in the application of its provisions. No decision has been called to our attention, nor do we know of any, which goes so far as to hold that the use of such formula may not become necessary in computing income or tax liability by reason of dealings by the taxpayer. The Commissioner has treated as income for each of the taxable years the amount of the tax which became due and was paid in the succeeding year. Under the decisions of the Board in the 3664 ; ; and , this appears to have been in error. In the last cited case it was held that a tax which became due and was paid by the lessee in 1919 upon 1918 income was not income for 1918, since the tax did not accrue until 1919 and the income could not have accrued prior to 1919. This decision of the Board was followed in the United States District Court, District of Massachusetts, when suit was brought by the United States to recover the amount of tax disallowed by the Board in its decision. . Pursuant to those decisions the deficiency should be recomputed by including as income for 1921 the amount of the tax which became due and payable in that year upon 1920 income; by including as income for 1922 the amount of the tax which became due and payable in that year upon income of 1921, and by including as income for 1923 the amount of the tax which became due and payable in that year upon 1922 income. Decision will be entered on 15*3665 days' notice, under Rule 50.	01-04-2023	11-21-2020
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PDF link will display a scanned image with file date stamp and judicial signatures. Beginning in 2010, Case Number link will display a scanned image with file date stamp and judicial signatures. ADA link will display an accessible file compatible with online reader devices. Click here to view Opinions and Orders from 1998 to 2009. Date Ct. Case Number Case Name Appealed From Reporter Citation May 29, 2020 S.Ct SCPW-XX-XXXXXXX [ADA] In re Slavick (Order Denying Petition for Writ of Mandamus). Petition for Writ of Mandamus, filed 05/18/2020. Original Proceeding May 29, 2020 ICA CAAP-XX-XXXXXXX [ADA] Gailliard v. Rawsthorne (s.d.o., affirmed). Circuit Court, 3rd Circuit May 29, 2020 ICA CAAP-XX-XXXXXXX [ADA] Smith v. State (mem. op., vacated and remanded). Circuit Court, 2nd Circuit May 29, 2020 ICA CAAP-XX-XXXXXXX [ADA] State v. Smith (s.d.o., affirmed). District Court, 1st Circuit, Waianae Division May 29, 2020 ICA CAAP-XX-XXXXXXX [ADA] State v. Avalos (s.d.o., affirmed). District Court, 1st Circuit, ‘Ewa Division May 29, 2020 ICA CAAP-XX-XXXXXXX [ADA] State v. Beaty (s.d.o., affirmed). Circuit Court, 1st Circuit May 29, 2020 ICA CAAP-XX-XXXXXXX [ADA] Gomes, et. al. v. Olu Pua Gardens LLC (s.d.o., affirmed). Circuit Court, 5th Circuit May 29, 2020 ICA CAAP-XX-XXXXXXX [ADA] State v. Ireland (s.d.o., affirmed). District Court, 3rd Circuit, South Kohala Dividion May 29, 2020 ICA CAAP-XX-XXXXXXX [ADA] State v. McFee (s.d.o., affirmed). Circuit Court, 2nd Circuit May 28, 2020 ICA CAAP-XX-XXXXXXX [ADA] Honolulu Student Housing One, LLC. v. Gonzalez (Order Dismissing Appeal). District Court, 1st Circuit, Honolulu Division May 28, 2020 ICA CAAP-XX-XXXXXXX [ADA] Quiring v. The Association of Apartment Owners of Papakea (Order Granting May 18, 2020 Motion to Dismiss Appellate Court Case Number CAAP-XX-XXXXXXX for Lack of Appellate Jurisdiction). Circuit Court, 2nd Circuit May 28, 2020 ICA CAAP-XX-XXXXXXX [ADA] Schmidt v. Princekong Inc. et.al. (Order Dismissing Appeal). District Court, 1st Circuit, Honolulu Division May 27, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] State v. Enos (Amended Opinion). ICA s.d.o., filed 04/30/2019 [ada], 144 Haw. 375. Application for Writ of Certiorari, filed 08/26/2019. S.Ct. Order Accepting Application for Writ of Certiorari, filed 10/10/2019 [ada]. S.Ct. Opinion, filed 05/27/2020. Circuit Court, 1st Circuit May 27, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] State v. Key (Order Rejecting Application for Writ of Certiorari). ICA s.d.o., filed 01/29/2020 [ada], 146 Haw. 118. Application for Writ of Certiorari, filed 03/30/2020. District Court, 1st Circuit, Wahiawa Division May 27, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] State v. Enos. ICA s.d.o., filed 04/30/2019 [ada], 144 Haw. 375. Application for Writ of Certiorari, filed 08/26/2019. S.Ct. Order Accepting Application for Writ of Certiorari, filed 10/10/2019 [ada]. S.Ct. Amended Opinion, filed 05/27/2020 [ada]. Circuit Court, 1st Circuit May 26, 2020 ICA CAAP-XX-XXXXXXX [ADA] State v. Scriven (Order Approving Stipulation for Voluntary Dismissal of the Appeal). Circuit Court, 5th Circuit May 26, 2020 ICA CAAP-XX-XXXXXXX [ADA] Bergmann v. Hawai‘i Residency Programs, Inc. (Order Approving Stipulation to Dismiss Appeal With Prejudice). Circuit Court, 1st Circuit May 26, 2020 ICA CAAP-XX-XXXXXXX [ADA] Cornelio v. State (s.d.o., affirmed). Circuit Court, 2nd Circuit May 26, 2020 ICA CAAP-XX-XXXXXXX [ADA] State v. Thronas-Kaho‘onei (s.d.o., affirmed). Circuit Court, 5th Circuit May 26, 2020 ICA CAAP-XX-XXXXXXX [ADA] State v. Liao (s.d.o., affirmed). District Court, 1st Circuit May 22, 2020 S.Ct SCPW-XX-XXXXXXX [ADA] Xu v. Ochiai (Order Denying Petition for Writ of Mandamus). Petition for Writ of Mandamus, filed 05/06/2020. Original Proceeding May 22, 2020 ICA CAAP-XX-XXXXXXX [ADA] DB v. BB (Order Dismissing Appeal for Lack of Appellate Jurisdiction and Dismissing as Moot All Pending Motions in CAAP-XX-XXXXXXX). Family Court, 1st Circuit May 21, 2020 ICA CAAP-XX-XXXXXXX [ADA] Wilmington Trust v. Association of Apartment Owners of Waikoloa Hills Condominium (Order Granting Motion to Dismiss Appeal). Circuit Court, 3rd Circuit May 21, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] Prudential Locations, LLC v. Gagnon (Order Dismissing Application for Writ of Certiorari). Consolidated with CAAP-XX-XXXXXXX. ICA mem. op., filed 04/15/2020 [ada]. Application for Writ of Certiorari, filed 05/15/2020. Circuit Court, 1st Circuit May 21, 2020 ICA CAAP-XX-XXXXXXX [ADA] JZ v. JZ (mem. op., affirmed, vacated and remanded). Family Court, 1st Circuit May 20, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] State v. Baker (Order of Correction). ICA s.d.o., filed 04/18/2019 [ada], 144 Haw. 334. Application for Writ of Certiorari, filed 07/24/2019. S.Ct. Order Accepting Application for Writ of Certiorari, filed 08/30/2019 [ada]. S.Ct. Opinion, filed 03/13/2020 [ada]. District Court, 1st Circuit, Honolulu Division May 20, 2020 ICA CAAP-XX-XXXXXXX [ADA] Schmidt v. Schmidt (Order Dismissing Appeal). Family Court, 1st Circuit May 20, 2020 ICA CAAP-XX-XXXXXXX [ADA] State v. Trubachev (Order Dismissing Appeal). Circuit Court, 3rd Circuit May 20, 2020 ICA CAAP-XX-XXXXXXX [ADA] State v. Grandinetti (Order Dismissing Appeal for Lack of Appellate Jurisdiction and Dismissing All Pending Motions as Moot). Circuit Court, 3rd Circuit May 20, 2020 ICA CAAP-XX-XXXXXXX [ADA] State v. Grandinetti (Order Dismissing Appeal for Lack of Appellate Jurisdiction and Dismissing All Pending Motions as Moot). Circuit Court, 3rd Circuit May 20, 2020 ICA CAAP-XX-XXXXXXX [ADA] Grace v. Yett Property Management, LLC (Order Dismissing Appeal). Labor and Industrial Relations Appeals Board May 20, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] Porter v. The Queen’s Medical Center (Order Accepting Application for Writ of Certiorari). ICA Opinion, filed 02/21/2020 [ada]. Motion for Reconsideration, filed 02/27/2020. ICA Order Denying Motion for Reconsideration, filed 03/04/2020. Amended Order Denying Motion for Reconsideration, filed 03/10/2020 [ada]. Application for Writ of Certiorari, filed 03/11/2020. S.Ct. Order Dismissing Application for Writ of Certiorari, filed 03/19/2020 [ada]. Application for Writ of Certiorari, filed 04/13/2020. Labor and Industrial Relations Appeals Board May 20, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] LO v. NO (Order Accepting Application for Writ of Certiorari). ICA mem. op., filed 02/06/2020 [ada]. Application for Writ of Certiorari, filed 04/03/2020. Family Court, 1st Circuit May 19, 2020 S.Ct SCPW-XX-XXXXXXX [ADA] Office of the Public Defender v. Connors (Fifth Interim Order). S.Ct. Interim Order re: Initial Summary Report and Initial Recommendations of the Special Master, filed 04/09/2020 [ada]. Consolidated with SCPW-XX-XXXXXXX. S.Ct. Interim Order, filed 04/15/2020 [ada]. S.Ct. Third Interim Order, filed 04/24/2020 [ada]. Concurrence re: Interim Order [ada]. S.Ct. Fourth Interim Order, filed 05/04/2020 [ada]. Original Proceeding May 19, 2020 ICA CAAP-XX-XXXXXXX [ADA] KG v. AG (Order Dismissing Appeal for Lack of Appellate Jurisdiction). Family Court, 2nd Circuit May 19, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] State v. Martin (Order). ICA s.d.o., filed 03/29/2019. ICA Amended s.d.o., filed 03/29/2019 [ada], 144 Haw. 153. Application for Writ of Certiorari, filed 08/07/2019. S.Ct. Order Accepting Application for Writ of Certiorari, filed 09/18/2019 [ada]. S.Ct. Opinion, filed 04/22/2020 [ada]. S.Ct. Order of Correction, filed 04/23/2020 [ada]. Motion for Reconsideration, filed 05/14/2020. Circuit Court, 3rd Circuit May 19, 2020 ICA CAAP-XX-XXXXXXX [ADA] RSM Inc. v. Middleton (Order Dismissing Appeal). District Court, 3rd Circuit, North and South Hilo Division May 19, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] In re Taniguchi Trust (Order Rejecting Application for Writ of Certiorari). ICA s.d.o., filed 02/24/2020 [ada]. Application for Writ of Certiorari, filed 04/07/2020. Circuit Court, 1st Circuit May 19, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] State v. Uchima. Opinion by Recktenwald, C. J. Concurring in Part and Dissenting in Part, And Concurring in the Judgment [ada]. Opinion by Nakayama, J., Dissenting From the Judgment [ada]. ICA s.d.o., filed 02/15/2018 [ada], 141 Haw. 396. Application for Writ of Certiorari, filed 05/24/2018. S.Ct. Order Accepting Application for Writ of Certiorari, filed 07/05/2018 [ada]. Dissent by Nakayama, J., with whom Recktenwald, C.J., joins. District Court, 1st Circuit, Honolulu Division May 15, 2020 S.Ct SCPW-XX-XXXXXXX [ADA] In re Lauro (Order Denying Petition for Writ of Mandamus). Petition for Writ of Mandamus, filed 04/30/2020. Original Proceeding May 15, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] HawaiiUSA Federal Credit Union v. Monalim (Order Denying Motion for Partial Reconsideration). ICA s.d.o., filed 05/17/2018 [ada] 142 Haw. 216. Application for Writ of Certiorari filed 09/17/2018. S.Ct. Order Accepting Application for Writ of Certiorari, filed 11/14/2018 [ada]. S.Ct. Opinion, filed 04/30/2020 [ada]. Concurring and Dissenting Opinion by Nakayama, J. in which Recktenwald, C.J., Joins [ada]. Motion for Partial Reconsideration, filed 05/11/2020. Circuit Court, 1st Circuit May 15, 2020 S.Ct SCPW-XX-XXXXXXX [ADA] In re Harshman (Order Denying Petition for Writ of Mandamus). Petition for Writ of Mandamus, filed 04/07/2020. Original Proceeding May 15, 2020 S.Ct SCPW-XX-XXXXXXX [ADA] Young v. Chang (Order Denying Petition for Writ of Prohibition). Petition for Writ of Prohibition, filed 03/23/2020. Original Proceeding May 15, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] State v. Gallagher. Dissenting Opinion by Recktenwald, C.J. [ada]. Dissenting Opinion by Nakayama, J. [ada]. ICA s.d.o., filed 12/20/2017 [ada], 141 Haw. 247. Application for Writ of Certiorari, filed 03/01/2018. S.Ct. Order Accepting Application for Writ of Certiorari, filed 04/13/2018 [ada]. Circuit Court, 2nd Circuit May 15, 2020 S.Ct SCOT-XX-XXXXXXX [ADA] Lāna‘ians for Sensible Growth v. Land Use Commission. Dissenting Opinion as to Parts III (E) and IV By Wilson, J.[ada] Opinion Concurring in the Judgment and Dissenting by Recktenwald, C.J., in Which Nakayama, J., Joins.[ada]. Land Use Commission May 15, 2020 S.Ct SCPW-XX-XXXXXXX [ADA] Yamano v. Ochiai (Order Denying “Application for Writ of Prohibition/Mandamus”). “Application for Writ of Prohibition/Mandamus”, filed 05/06/2020. Original Proceeding May 15, 2020 ICA CAAP-XX-XXXXXXX [ADA] State v. Shaw (mem. op., vacated and remanded). Circuit Court, 1st Circuit May 14, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] Ted’s Wiring Service, Ltd. v. Department of Transportation (Order Rejecting Application for Writ of Certiorari). ICA mem.op., filed 12/26/2019 [ada], 146 Haw. 31. Application for Writ of Certiorari, filed 04/03/2020. Circuit Court, 1st Circuit May 14, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] State v. Tavares (Order Dismissing Certiorari Proceeding). ICA mem. op., filed 11/29/2019 [ada], 145 Haw. 299. Application for Writ of Certiorari, filed 01/23/2020. S.Ct. Order Accepting Application for Writ of Certiorari, filed 05/05/2020 [ada]. Circuit Court, 1st Circuit May 13, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] Pennymac Corp. v. Godinez (Order Accepting Application for Writ of Certiorari). ICA s.d.o., filed 12/06/2019 [ada], 145 Haw. 442. Application for Writ of Certiorari, filed 03/11/2020. 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https://www.courtlistener.com/api/rest/v3/opinions/4562862/	Filed 9/3/20 P. v. Buford CA4/2 NOT TO BE PUBLISHED IN OFFICIAL REPORTS California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA FOURTH APPELLATE DISTRICT DIVISION TWO THE PEOPLE, Plaintiff and Respondent, E074118 v. (Super.Ct.No. FSB17004057) TIMOTHY BUFORD, OPINION Defendant and Appellant. APPEAL from the Superior Court of San Bernardino County. J. David Mazurek, Judge. Affirmed. Timothy Buford, in pro. per.; Benjamin Kington, under appointment by the Court of Appeal, for Defendant and Appellant. No appearance for Plaintiff and Respondent. Defendant and appellant Timothy Buford appeals the trial court’s order denying his postjudgment petition to strike the restitution fines. Defendant’s counsel has filed a brief under People v. Wende (1979) 25 Cal.3d 436, raising no arguable issues. Defendant personally filed a supplemental brief raising several issues related to the underlying trial, 1 none of which address the postjudgment order that is the subject of this appeal. Having found no arguable issues upon our review of the record, we affirm the trial court’s postjudgment order. FACTUAL AND PROCEDURAL HISTORY The facts of the underlying conviction and some aspects of the relevant procedural history of this case are not contained in the limited record that was prepared for this appeal. Accordingly, on our own motion, we take judicial notice of the record prepared in defendant’s appeal from the judgment of conviction, case No. E072474. (Evid. Code, §§ 455, 459.) That appeal is currently pending before this court. Facts In October 2017, defendant angrily entered the home of an acquaintance armed with a weapon and took a guitar, an amplifier head, and a sound effects pedal under threat of force. Procedural History A jury convicted defendant of first degree burglary in violation of Penal Code1 section 459. The jury deadlocked on additional charges to which the court declared a mistrial. In a bifurcated proceeding, the trial court found defendant had one prior serious felony conviction (§ 667, subd. (a)), one prior “strike” conviction (§§ 667, subds. (b)-(i), 1170.12), and had served five prior prison terms (§ 667.5, subd. (b)). 1 All further statutory references are to the Penal Code unless otherwise indicated. 2 On April 5, 2019, the court sentenced defendant to 22 years in state prison. The court also imposed several fines and fees, which defendant’s counsel objected to under People v. Dueñas (2019) 30 Cal.App.5th 1157, arguing that defendant did not have the ability to pay them. The court reviewed the probation officer’s report and noted that defendant was disabled and had no assets, although he was receiving a monthly social security income of $860. The court struck two fees it had imposed that were in excess of $700—the fee for appointed counsel and the fee for the investigation and preparation of the probation officer’s report. It also reduced the restitution and parole revocation fines under sections 1202.4 and 1202.45 from $1,000 to the statutory minimum of $300. In doing so, the court made an implied finding that defendant had the ability to pay these fines by noting he would be receiving social security disability income and would have the opportunity for employment while incarcerated. On April 10, 2019, defendant timely filed a notice of appeal from the judgment of conviction. That appeal is currently pending before this court in case No. E072474. Defendant is represented by counsel in that case and has raised two contentions on appeal, neither of which relate to the court’s imposition of the fines and fees. On August 20, 2019, while his appeal was pending, defendant filed a petition in propria persona asking the trial court to strike the $300 restitution fines imposed under sections 1202.4 and 1202.45. In support of his petition, defendant asserted he was “low income and receives social security benefits,” and argued the victim did not suffer any losses. Defendant attached a statement of assets to the petition that showed he was unemployed, did not have a bank account, did not own any real property or personal 3 property of value, and did not have any other assets or debts. Defendant also attached pages of the reporter’s transcript from trial that showed the police had returned the stolen items to the victim. The trial court denied defendant’s petition by a minute order issued on September 13, 2019. Defendant timely filed a notice of appeal. DISCUSSION Defendant’s appellate counsel has filed a brief under the authority of People v. Wende, supra, 25 Cal.3d 436 and Anders v. California (1967) 386 U.S. 738, setting forth the factual and procedural history of the case and identifying a single potentially arguable issue: whether the trial court abused its discretion in failing to strike the $300 restitution fines. Counsel has also requested this court undertake a review of the entire record. We offered defendant an opportunity to file a personal supplemental brief, which he has done. Defendant raises three issues in the supplemental brief related to the underlying trial: (1) the prosecution violated defendant’s due process rights under Brady v. Maryland (1963) 373 U.S. 83, by refusing to turn over exculpatory pretrial discovery; (2) defendant was inappropriately tried on charges of robbery and burglary because the two offenses were cumulative—they were based on the same act and intent, and involved a single victim; and (3) defendant was denied the right to an impartial jury because the prosecution improperly excused an African American prospective juror. We decline to reach the merits of defendant’s issues because none of the issues he raised relate to the present appeal, which is from the postjudgment order denying his petition to strike the restitution fines. “Our jurisdiction on appeal is limited in scope to 4 the notice of appeal and the judgment or order appealed from.” (Polster, Inc. v. Swing (1985) 164 Cal.App.3d 427, 436.) Defendant has separately appealed the judgment of conviction and is represented by counsel in that appeal; any issue defendant seeks to raise related to the trial must be raised in that appeal. Pursuant to the mandate of People v. Kelly (2006) 40 Cal.4th 106, we have conducted an independent review of the record and find no arguable issues. DISPOSITION The trial court’s postjudgment order is affirmed. NOT TO BE PUBLISHED IN OFFICIAL REPORTS RAMIREZ P. J. We concur: CODRINGTON J. RAPHAEL J. 5	01-04-2023	09-03-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625104/	EDWARD DEAN CHRISTENSEN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentChristensen v. CommissionerDocket No. 6718-79.United States Tax CourtT.C. Memo 1982-672; 1982 Tax Ct. Memo LEXIS 71; 45 T.C.M. (CCH) 160; T.C.M. (RIA) 82672; November 22, 1982. Edward Dean Christensen, pro se. 72 Randy G. Durfee, for the respondent. KORNERMEMORANDUM FINDINGS OF FACT AND OPINION KORNER, Judge: Respondent determined deficiencies against petitioner in individual income tax, plus additions to tax, for the calendar years 1972 through 1977 as follows: TAXABLE YEARENDEDDEFICIENCY INADDITIONS TO TAX UNDER SECTIONS 1DECEMBER 31INCOME TAX6651(a)6653(a)6653(b)1972$13,486.69$6,743.35197322,024.6311,012.31197416,629.208,314.60197522,178.985,544.751,108.95197614,603.413,650.85730.171977427.00106.7521.35All such amounts are in dispute, together with a claimed overpayment by petitioner for the year 1972 of income tax in the amount of $11,783.30. FINDINGS OF FACT Some of the facts herein have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference. During73 the years 1972 through 1977, petitioner was a single individual, and resided for some undisclosed part of the period in the State of Utah, and resided in the State of Washington for another undisclosed part of the period. At the time of filing his petition herein, petitioner was a resident of Salt Lake City, Utah. Petitioner timely filed U.S. individual income tax returns for the years 1968, 1969, 1970 and 1971. Petitioner did not file income tax returns for the years 1972 through 1977. On or about October 26, 1979, petitioner mailed to respondent's Service Center at Ogden, Utah, Forms 1040, executed by him, and purporting to be his individual income tax returns for the years 1972 through 1977. Aside from his name, address and social security number, none of said forms contained any information from which petitioner's taxable income and tax liability could be determined. During the taxable years 1972, 1973, 1974, 1975, and in the year 1976 up to the month of July, when he retired, petitioner was employed as a commercial airline pilot for United Airlines. In July, 1976, petitioner retired from this employment and thereafter, in 1976 and 1977, received retirement pension payments74 from United Airlines. The salary paid to petitioner by United Airlines during his period of employment and prior to his retirement was as follows: YEARGROSS SALARY1972$44,403.86197345,214.52197447,643.66197555,471.63197632,478.33For and during each of the years 1973, 1974, 1975 and 1976, petitioner filed an exemption certificate on Form W4-E with his employer, United Airlines, in which petitioner certified under penalties of perjury that he had incurred no Federal income tax liability for the immediately preceding year, and that he anticipated no such liability for the current year. As the result of these actions by petitioner, United Airlines withheld only $1,356.02 from petitioner's salary on account of Federal income tax for 1973, and withheld nothing on account of Federal income tax from petitioner's salary for the years 1974, 1975 and 1976. In the year 1955, petitioner purchased a parcel of real estate near Elgin, Illinois, at an undisclosed price. On October 31, 1972, petitioner sold 3.057 acres of this tract, for cash, and received $65,000 in sales proceeds. In the year 1973, a further portion of this tract, consisting of 13.84275 acres, was sold by petitioner for an undisclosed price. In 1976, petitioner sold a further portion of the above tract for an undisclosed price. On January 18, 1978, after a trial by jury in the United States District Court for the Western District of Washington, petitioner was found guilty of willful failure to file U.S. individual income tax returns for the calendar years 1972, 1973 and 1974, under the provisions of section 7203. In his statutory notices of deficiency for the years involved herein, respondent determined that petitioner had unreported gross income in each of the years from various specific sources, including, inter alia, petitioner's salary and pension from United Airlines, dividends, capital gains, and income or loss from partnership distributions. Respondent accordingly determined deficiencies and further determined additions to tax under section 6651(a) and 6653(a) for the years 1975, 1976 and 1977, and under section 6653(b) for the years 1972, 1973 and 1974, as set forth in the first table given above herein. Petitioner's failure to file income tax returns for the years 1972, 1973 and 1974 was willful and was done fraudulently with the intent of evading76 tax. Petitioner's execution and filing of false withholding exemption certificates for the years 1973 and 1974 was likewise done fraudulently with intent to evade tax. Part of the underpayment of tax required to be shown on petitioner's income tax returns for each of the years 1972 through 1974 was due to fraud. OPINION At no time -- either in his petition to this Court, at trial or on brief -- has petitioner alleged any factual error with respect to respondent's determinations as to petitioner's income, deductions, exemptions or tax. Instead, petitioner, in his petition herein as well as in two pretrial memoranda which were filed with the Court, has raised a host of legal objections to respondent's actions herein, all of which are insubstantial and meritless, and all of which have previously been rejected by this and other courts, to the point where such issues may now fairly be characterized as frivolous. 2 Of this plethora of worthless legal issues, only three survived the trial process and were perpetuated into petitioner's briefs, and the rest are therefore deemed to be abandoned. The three issues which survived, and our disposition of them, are as follows: 77 (a) The principal "constitutional" issue upon which petitioner relies is the proposition that only gold and silver is lawful money of the United States; that it is unconstitutional and illegal for the United States Government, the Federal Reserve System or any branch thereof to issue and circulate anything other than gold or silver dollars as lawful money, i.e., legal tender; that it is therefore improper for respondent to determine petitioner's income, deficiencies of tax and additions to tax in anything other than gold or silver, or even to require that tax returns be filed on any basis other than gold or silver, with the result that all of respondent's determinations herein are unconstitutional, illegal and even criminal, and must therefore be set at naught by this Court. Such arguments are merely refinements and variations on a theme which has been litigated many times previously before this and other courts, with results uniformly opposed to petitioner's position, and we therefore summarily reject them. United States v. Rickman,638 F.2d 182">638 F.2d 182 (10th Cir. 1980); Ware v. United States,608 F.2d 400">608 F.2d 400 (10th Cir. 1979); United States v. Anderson,584 F.2d 369">584 F.2d 369 (10th Cir. 1978).78 (b) Petitioner further argues that in any event the wages or salaries of natural citizens (as opposed to the income of corporations) are not subject to the income tax. The law is so clearly to the contrary that this can no longer be considered a serious issue. Eisner v. Macomber,252 U.S. 189">252 U.S. 189 (1920); Commissioner v. Glenshaw Glass Co.,348 U.S. 426">348 U.S. 426 (1955); United States v. Slater,545 F. Supp. 179">545 F. Supp. 179 (D. Del. 1982); Graf v. Commissioner,T.C. Memo 1982-317">T.C. Memo. 1982-317. (c) In spite of the denial of his two prior motions, and in spite of the Court's explanation thereof to petitioner at trial, petitioner persists in demanding a jury trial before this Court. Such a procedure is neither provided for by our enabling statutes, see section 7453, nor is it constitutionally mandated. Olshausen v. Commissioner,273 F.2d 23">273 F.2d 23 (9th Cir. 1959), cert. denied 363 U.S. 820">363 U.S. 820 (1960); Blackburn v. Commissioner,681 F.2d 461">681 F.2d 461 (6th Cir. 1982). As to all the deficiencies and additions to tax determined by respondent in this case, other than the additions to tax under section 6653(b), the burden of proof79 in this case is upon petitioner to show error in the respondent's determinations, Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a). Since petitioner neither pleaded nor proved any factual error in respondent's determinations, and his legal positions being without merit, as we have noted, we hold that he has failed to carry his necessary burden of proof on these issues, and respondent's determinations of deficiency in tax for all the years before us, together with additions to tax under section 6651(a) and 6653(a) for the years 1975, 1976 and 1977, are therefore sustained. With respect to the asserted additions to tax under section 6653(b) 3 for the years 1972, 1973 and 1974, the situation is different. Here, the respondent has the burden of proof, and he must carry that burden by clear and convincing evidence. Section 7454(a), Rule 142(b). Respondent's determinations in this regard are not evidence, nor are unadmitted allegations in pleadings. Rule 143(b); Kashat v. Commissioner,229 F.2d 282">229 F.2d 282 (6th Cir. 1956); Drieborg v. Commissioner,225 F.2d 216">225 F.2d 216 (6th Cir. 1955). 80 Fraud, as used in section 6653(b), means actual intentional wrongdoing. Mitchell v. Commissioner,118 F.2d 308">118 F.2d 308 (5th Cir. 1941). The intent required is a voluntary, intentional violation of a known legal duty; in this case, to evade a tax believed to be owing. Stoltzfus v. United States,398 F.2d 1002">398 F.2d 1002, 1004 (3rd Cir. 1968), cert. denied 393 U.S. 1020">393 U.S. 1020 (1969); Estate of Temple v. Commissioner,67 T.C. 143">67 T.C. 143, 159 (1976), appeal dismissed (5th Cir. 1977). Where direct evidence of fraudulent intent is not available, its existence may be determined from the conduct of the petitioner and the surrounding circumstances. Stone v. Commissioner,56 T.C. 213">56 T.C. 213, 223-224 (1971); Otsuki v. Commissioner,53 T.C. 96">53 T.C. 96 (1969). The Supreme Court has stated that an "affirmative willful attempt may be inferred from * * any conduct, the likely effect of which would be to mislead or conceal." Spies v. United States,317 U.S. 492">317 U.S. 492, 499 (1943). Viewing the record herein in light of the above legal standards, we conclude that respondent has carried his necessary burden of proof to establish petitioner's81 fraud within the meaning of section 6653(b) for the years 1972, 1973 and 1974. Respondent has proved, and we have found, the amount of salary received by petitioner from United Airlines in 1972, 1973 and 1974, in amounts clearly sufficient to require petitioner to file returns for those years. Section 6012. For the year 1972, in addition to proving the amount of petitioner's salary, respondent also proved that petitioner received $65,000 from the sale of a capital asset, which by itself would have called for the filing of a tax return, even if no gain and resulted from the sale. Petitioner was an educated man holding a responsible position as an airline pilot for United Airlines, and it cannot be and is not argued that he was unaware of his return-filing requirements, as is shown by the fact that he timely filed his individual income tax returns for the years 1968 through 1971. That petitioner's failure to file returns for 1972, 1973 and 1974 was willful is proved by his conviction for failing to file returns for those same years under the provisions of section 7203, and establishes that his failure to file involved the "voluntary, intentional violation of a known legal duty,82 " involving the element of bad faith or evil intent. See United States v. Bishop,412 U.S. 346">412 U.S. 346, 360 (1973). 4 Petitioner's consistent and blatant failure to file returns, based on nothing more than the "tax protester" grounds which, we are satisfied, petitioner knew were frivolous, supports a finding of fraud, cf. Fuhrmann v. Commissioner,T.C. Memo 1982-255">T.C. Memo. 1982-255, as does the consistent failure to report substantial amounts of income. See Estate of Mazzoni v. Commissioner,451 F.2d 197">451 F.2d 197 (3d Cir. 1971); Schwarzkopf v. Commissioner,246 F.2d 731">246 F.2d 731 (3d Cir. 1957). Respondent has also proved that petitioner filed withholding certificates with his employer for 1973 and 1974, falsely certifying that he had incurred no tax liability for the immediately preceding*83 year and that he anticipated no tax liability for the current year. It is clear that these were affirmative fraudulent acts. Compare Nielson v. Commissioner,T.C. Memo. 1980-453; Fuhrmann v. Commissioner,supra.We conclude that respondent has carried his burden of proof and has established that petitioner fraudulently intended to evade taxes that he knew were due and owing for the years 1972, 1973 and 1974, and that additions to tax for those years under sections 6653(b) are therefore properly imposed. Cf. Gaar v. Commissioner,T.C. Memo 1981-696">T.C. Memo. 1981-696; Fuhrmann v. Commissioner,supra.Decision will be entered for the respondent.Footnotes1. All section references are to sections of the Internal Revenue Code of 1954, as in effect in the years in issue, and all references to Rules are to the Rules of Practice and Procedure of the Tax Court, unless otherwise stated.↩2. As raised by the petition herein, such frivolous legal issues included the following: (a) nothing other than gold or silver is lawful money, therefore determining petitioner's income and resulting tax deficiencies in anything other than gold and silver constitutes taking property without compensation within the meaning of the Fifth Amendment to the Constitution; (b) forcing petitioner to pay such deficiencies constitutes involuntary servitude within the meaning of the Thirteenth Amendment to the Constitution↩; (c) this Court is not a court, is unconstitutionally constituted and lacks jurisdiction over the subject matter of this controversy; (d) the income tax laws do not apply to natural persons such as petitioner nor to his wages; (e) the questions promulgated on respondent's Form 1040 are unconstitutional; (f) petitioner has been unconstitutionally deprived of his right to a jury trial before this Court. The petition also claims an overpayment in the amount of $11,783.30, but alleges no factual or legal basis in support thereof.3. The relevant portion of section 6653(b) reads as follows: (b) Fraud. - If any part of any underpayment (as defined in subsection (c) of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 50 percent of the underpayment.↩4. The Forms 1040 filed by petitioner with respondent in 1979, with respect to the years before us, containing no information from which his tax liability could be ascertained, are clearly not returns of income within the meaning of the law. United States v. Porth,426 F.2d 519">426 F.2d 519 (10th Cir. 1970); United States v. Rickman,supra.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625108/	The Krueger Co., Inc., and Merri Mac Corp. (formerly known as M.K.B. Corp.) as successor (by statutory merger) to Krueger Bros., Inc., Petitioners v. Commissioner of Internal Revenue, RespondentKrueger Co. v. CommissionerDocket No. 15891-80United States Tax Court79 T.C. 65; 1982 U.S. Tax Ct. LEXIS 66; 79 T.C. No. 3; July 14, 1982, Filed 66 Decision will be entered under Rule 155. Petitioner made interest-free loans to corporations controlled by common interests. The Commissioner allocated interest on the loans under sec. 482, I.R.C. 1954, which resulted in the imposition of personal holding company tax under sec. 541, I.R.C. 1954, upon the lender. Held, interest allocated under sec. 482 constitutes interest for purposes of the personal holding company tax provisions and the lender corporation is liable for personal holding company tax. John J. O'Toole and Bruce E. Goldman, for the petitioners.William F. Halley, for the respondent. Goffe, Judge. GOFFE65 OPINIONThe Commissioner determined deficiencies in the Federal income tax of Krueger Bros., Inc., 1 for the following years and in the following amounts:Taxable yearDeficiency1974$ 5,75619754,131The adjustments giving rise to these deficiencies have been conceded by petitioners.69 66 The Commissioner determined deficiencies in the Federal income tax and personal holding company tax of the petitioner, Krueger Co., Inc., for the following years and in the following amounts:TYE June 30 --Deficiency1975$ 34,678197623,932197722,658After concessions by the parties, the only question remaining for decision is whether interest income allocated to the petitioner, Krueger Co., Inc., under the provisions of section 4822 constitutes personal holding company income, as defined in section 543. Since this question concerns only the petitioner, Krueger Co., Inc., all references to "petitioner" will hereinafter refer to it alone.This case was submitted fully stipulated pursuant to Rule 122(a). We find as facts the facts and exhibits stipulated, which we incorporate herein by this reference.Petitioner is a corporation70 formed under the laws of New Jersey. At some time prior to July 1, 1974, petitioner made interest-free loans to the petitioner, Merri Mac Corp., and to Krueger Bros., Inc., which was a wholly owned subsidiary of Merri Mac Corp. at the time the loans were made, but which merged with Merri Mac Corp. on January 2, 1976. Petitioner and Merri Mac Corp. were both owned by the same two individuals, Emanuel and Mary Krueger, at all times relevant to this case.The outstanding balance at June 30, 1974, of the loan to Merri Mac Corp. was $ 98,135.99. It remained at that amount until December 31, 1977, when the loan was repaid in full.The outstanding balance at June 30, 1974, of the loan to Krueger Bros., Inc., was $ 290,177.32. On March 31, 1976, a payment of $ 26,000 reduced that balance to $ 264,177.32. It remained at that amount until December 31, 1977, when the loan was repaid in full.In the notice of deficiency issued to petitioner, the Commissioner allocated interest income to petitioner under section 482 for each of its taxable years in question to reflect an 67 interest rate of 5 percent on the loans described above. Petitioner concedes that this allocation is correct. 71 The notice of deficiency also set forth the Commissioner's determination that the allocation of additional interest income to petitioner for the taxable year ended June 30, 1975, made petitioner a personal holding company for that year, 3 subjecting it to the special tax imposed under section 541. For the taxable years ended June 30, 1976, and June 30, 1977, petitioner concedes that it was a personal holding company irrespective of the additional interest income allocated to it by the Commissioner. That additional income, however, was treated by the Commissioner as increasing the amount of petitioner's "undistributed personal holding company income" for those years and, consequently, the amount of the personal holding company tax for which petitioner was liable.For the year ended June 30, 1977, petitioner concedes that it is liable for 72 personal holding company tax in the amount determined by the Commissioner. 4 Petitioner also concedes that, if the interest income allocated to it by the Commissioner under section 482 is held to constitute personal holding company income, then it is liable for personal holding company tax in the amounts determined by the Commissioner for the years ended June 30, 1975, and June 30, 1976. It is petitioner's position, however, that the allocated interest does not constitute personal holding company income.73 Section 482 grants the Secretary power to "distribute, apportion, or allocate" income between or among organizations controlled by common interests in order to "prevent evasion of taxes or clearly to reflect the income of any of such organizations." The effect of a proper application of section 482 is to place a controlled taxpayer on a parity with an uncontrolled taxpayer by determining, according to the standard 68 of an uncontrolled taxpayer, the true taxable income of a controlled taxpayer. Edwards v. Commissioner, 67 T.C. 224">67 T.C. 224, 231 (1976); Huber Homes v. Commissioner, 55 T.C. 598">55 T.C. 598, 605 (1971); sec. 1.482-1(b)(1), Income Tax Regs. The question specifically involved in the present case of interest-free loans between commonly controlled entities is dealt with in section 1.482-2(a)(1), Income Tax Regs., which provides:Where one member of a group of controlled entities makes a loan * * * to * * * another member of such group, and charges no interest, * * * the * * * [Commissioner] may make appropriate allocations to reflect an arm's length interest rate for the use of such loan or advance.The validity of this74 regulation was upheld in our decision in Latham Park Manor, Inc. v. Commissioner, 69 T.C. 199">69 T.C. 199 (1977), affd. in an unpublished opinion 618 F.2d 100">618 F.2d 100 (4th Cir. 1980). Section 1.482-1(d), Income Tax Regs., also provides generally that "the character * * of amounts allocated * * * shall be determined with reference to the substance of the particular transactions or arrangements which result in the avoidance of taxes or the failure to clearly reflect income."Section 541 subjects personal holding companies to a tax equal to 70 percent of the "undistributed personal holding company income." A personal holding company is a corporation which satisfies both a stock ownership requirement and an adjusted ordinary gross income requirement. Sec. 542(a). The stipulations establish that petitioner satisfies the stock ownership requirement. The adjusted ordinary gross income requirement is satisfied if at least 60 percent of the adjusted ordinary gross income of the corporation is personal holding company income. Sec. 542(a)(1). One class of personal holding company income is the portion of adjusted ordinary gross income which consists75 of interest. Sec. 543(a)(1). This Court has stated that "section 543(a)(1) which defines 'personal holding company income' as 'the portion of the adjusted ordinary gross income which consists of * * interest' also includes interest as defined in section 61, except for certain adjustments." 5Lake Gerar Development Co. v. Commissioner, 71 T.C. 887">71 T.C. 887, 894 (1979); see also Investors Insurance Agency, Inc. v. Commissioner, 72 T.C. 1027">72 T.C. 1027, 1031 (1979), affd. 677 F.2d 1328">677 F.2d 1328 (9th Cir. 1982). "Adjusted ordinary gross income" is simply gross income with 69 certain modifications not relevant to the present case. Sec. 543(b)(1) and (2).If, as respondent asserts, the additional interest income he has allocated to petitioner under section 482 is also to be considered interest for purposes of the personal holding company provisions, then a rigorous application of the76 statute leads inevitably to the conclusion that it is personal holding company income. The additional income is clearly gross income. It is also adjusted ordinary gross income, since it is not subject to any of the modifications undergone by gross income in reaching that point. Finally, as a portion of adjusted ordinary gross income consisting of interest, it would be personal holding company income by the plain words of the statute.Respondent has indicated in a revenue ruling on a related matter the view he espouses here that interest income allocated to a corporate taxpayer is indeed also to be considered interest income for purposes of the personal holding company provisions. 6 Additionally, in section 1.482-1(d)(3), examples (2) and (3), Income Tax Regs., respondent describes a situation in which personal holding company status is created by an allocation of rental income under section 482. Neither he nor petitioner, however, has cited any case directly on point, nor have we found one through our own research.77 Respondent's argument is based on the purpose he perceives as underlying section 482, that of establishing "tax parity" between controlled and uncontrolled taxpayers. This can be accomplished, respondent argues, only by giving full effect to his allocation under section 482, including its effect on the personal holding tax liability of the controlled taxpayer.Petitioner, however, argues that, although the allocation of interest income to it by respondent is valid for purposes of the corporate income tax imposed by section 11, the additional income should not be considered interest income for purposes of the personal holding company tax. Petitioner contends that, in enacting the personal holding company provisions, Congress70 intended to tax "real not fictional income." Petitioner explains that --The essence of our inquiry is actual income versus imputed income. The allocation under section 482 imputes interest, but it does not result in actual or real income. It is a fictional attribution of income which although valid for income tax purposes, petitioner contends, does not necessarily constitute personal holding company income.If section 482 is correctly applied, 78 however, as petitioner concedes it has been in the present case, then the income as adjusted is a better reflection of economic reality than was the income prior to adjustment. Section 482 is applicable when, as in the present case, the income reported by one of a group of commonly controlled entities is artificially low. The adjustment under section 482 serves to move the income as reported by the controlled entity toward reality, not away from it. Petitioner's failure to charge its related corporations interest on loans totaling several hundred thousand dollars which were outstanding for over 3 years suggests that the right to use that amount of money for that length of time is without value. This is more "fictional" than any allocation made by respondent. An unrelated corporation making the same loans would certainly have charged interest at the market rate, perhaps thereby incurring liability for the personal holding company tax. If section 482's purpose of canceling the advantages that related entities may obtain by artificially shifting income among themselves is to be realized, then the same result must be reached in the case of petitioner.Petitioner argues further79 that the personal holding company provisions were designed to tax "incorporated pocketbooks," 7 and that petitioner cannot be so characterized. As this Court stated in Lake Gerar Development Co. v. Commissioner, supra at 895, however,even assuming arguendo that petitioners fall outside the asserted congressional intent, the personal holding company provisions provide for a mechanical test in which the absence of an "incorporated pocketbook" motivation is irrelevant. Bell Realty Trust v. Commissioner, supra [65 T.C. 766 (1976), affd. 71 without published opinion 546 F.2d 413">546 F.2d 413 (1st Cir. 1976)]. See also Ways and Means Committee, H. Rept. 704, 73d Cong., 2d Sess. 12 (1933): "The effect of this system * * is to provide for a tax which will be automatically levied upon the holding company without any necessity for proving a purpose of avoiding surtaxes."80 Finally, petitioner argues that the purpose of the personal holding company provisions is to compel the personal holding company to pay dividends 881 and that, when interest income is not actually paid, but instead, is merely allocated under section 482, there is nothing for the creditor corporation to distribute. The same, however, might be said of unpaid interest included in income by an accrual basis corporation, yet it is clear that such interest may constitute personal holding company income. Joseph Lupowitz Sons, Inc. v. Commissioner, T.C. Memo. 1972-238, revd. in part on other grounds, affd. in part, and remanded in part 497 F.2d 862">497 F.2d 862 (3d Cir. 1974). 9 Furthermore, although no interest payments were actually made on the loans in question, the record does not establish, and petitioner does not argue, that it had no other property which could have been distributed as a dividend. And even if, in fact, it did not have such property, the consent dividend procedures of section 565 were apparently available to it and its shareholders.We conclude that the interest allocated to petitioner under section 482 must also be considered interest for purposes of the personal holding company provisions. This result is in accord with the purpose of section 482, as interpreted by this Court in Edwards v. Commissioner, supra, and Huber Homes v. Commissioner, supra, of placing controlled taxpayers on a parity with uncontrolled taxpayers. It also comports with our holding in Lake Gerar Development Co. v. Commissioner, supra,82 that the term "interest" as used in section 543(a) includes interest as 72 defined in section 61, except for certain adjustments not relevant to the present case, and with our decision in Latham Park Manor, Inc. v. Commissioner, supra, in which we upheld the power asserted by the Commissioner in his regulations under section 482 to "make appropriate allocations to reflect an arm's length interest rate" on loans between controlled entities. It follows that the allocated interest constitutes personal holding company income. Petitioner concedes that, if this is the case, then it is liable for personal holding company tax for the years in question in the amounts computed by respondent. 1083 Respondent concedes that Krueger Bros., Inc., is entitled to additional deductions for interest expense which correlate with the additional interest income allocated to petitioner. Accordingly, a computation under Rule 155 will be necessary.Decision will be entered under Rule 155. Footnotes1. The petitioner, Merri Mac Corp., is before the Court due to its liability as successor by statutory merger to Krueger Bros., Inc., for that corporation's deficiencies.↩2. Statutory references are to the Internal Revenue Code of 1954 as amended, and references to Rules are to the Tax Court Rules of Practice and Procedure.↩3. Respondent concedes that, but for the allocation of interest income under sec. 482↩, petitioner would not have been a personal holding company for the year ended June 30, 1975.4. On brief, petitioner asserts that the personal holding company tax for the year ended June 30, 1977, is still at issue. The stipulations, however, are very clear on this point: "Petitioner, The Krueger Co., Inc., concedes the correctness of the respondent's imposition of the personal holding company tax and the amount of such tax as set forth in respondent's notice of deficiency for the F.Y.E. June 30, 1977." Petitioner has not moved to amend the stipulations. Accordingly, we consider petitioner to have conceded the question of its personal holding company tax liability for the year ended June 30, 1977.↩5. The adjustments referred to are not relevant to the present case.↩6. In Rev. Rul. 78-133, 1 C.B. 171">1978-1 C.B. 171, dealing with the deduction for deficiency dividends of sec. 547, the creation of personal holding company status through an allocation of interest income under sec. 482↩ is postulated in the statement of the facts.7. This term refers to corporations formed by individuals subject to high marginal tax rates in order to hold their investments, for the purpose of having the return on those investments taxed at the corporate rate rather than the higher individual rate. See B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders par. 8.20, at 8-39 (4th Ed. 1979).↩8. The payment of dividends reduces the amount of "undistributed personal holding company income," the base on which the personal holding company tax is computed. Sec. 545(a).↩9. Although accrued but unpaid interest was not involved in Lake Gerar Development Co. v. Commissioner, 71 T.C. 887">71 T.C. 887 (1979), the conclusion that such interest may constitute personal holding company income is also supported by our holding in that case that the term "interest" as used in sec. 543(a)(1) includes interest as defined in sec. 61, with certain adjustments. Under sec. 61↩, of course, accrued interest may be included in income as well as interest actually paid, depending on the accounting method of the taxpayer.10. The concession with regard to the taxable year ended June 30, 1975, is stated as follows:"If the Court should find that respondent's interest allocation under I.R.C. sec. 482, in the F.Y.E. June 30, 1975, constitutes personal holding company income under I.R.C. sec. 543(a) and that such an allocation can create personal holding company tax liability under I.R.C. sec. 541 et seq., where none would otherwise exist (without such imputed interest), then petitioner, The Krueger Co., Inc., concedes the correctness of the respondent's computation of the amount of the personal holding company tax for the F.Y.E. June 30, 1975."This statement appears to place two conditions on petitioner's concession. The concession is to be valid if the Court finds that the allocated interest constitutes personal holding company income "and that such an allocation can create personal holding company tax liability * * where none would otherwise exist." We believe, however, that this is actually only one condition; once the determination is made whether the allocated interest constitutes personal holding company income, the matter of the corporation's status as a personal holding company and its liability for the tax can be resolved by a purely mechanical application of the statute.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625109/	JOSEPH PAPER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. DAVID PAPER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Paper v. CommissionerDocket Nos. 59040, 64744.United States Board of Tax Appeals29 B.T.A. 523; 1933 BTA LEXIS 927; December 12, 1933, Promulgated 927 Pursuant to an election given to stockholders in a resolution declaring corporate dividends, the petitioners elected to receive, and were paid, in corporation's preferred stock for their shares in the corporate earnings distributed. Held, in the circumstances shown, that the petitioners are taxable upon the stock they received as an ordinary corporate dividend. Francis D. Butler, Esq., and Thomas J. Shannon, C.P.A., for the petitioners. James K. Polk., Jr., Esq., for the respondent. LANSDON 524 OPINION. LANSDON: These petitioners have appealed from the respondent's determinations of their income taxes for the year 1929. Each also asks affirmative relief in the way of refunds for alleged overpayments of taxes in the year reviewed. The items in dispute are, in Docket No. 59040, taxes, $677.52, and refund claims, $161.60; in Docket No. 64749, taxes, $168,75, and refund claim, $32.75. The sole issue is whether or not the respondent committed error in holding the petitioners taxable for dividends paid in the stock of a family corporation known as Paper, Calmenson & Co., hereinafter referred to in these proceedings as "the corporation. 928 " The petitioners are and were in the tax year stockholders and managing officers of the corporation, which had 5,000 shares of common and 2,550 shares of preferred stock outstanding. Of these shares, 3,522 of the common and 1,108 of the preferred stock were owned by petitioners' mother, who depended upon dividends thereon for her sole support. Because of the needs of this stockholder, the petitioners, who controlled the corporation's board of directors, adopted a plan of declaring yearly dividends and paying their mother's portion of them in cash, but accepting the corporation's preferred stock in payment of their interest in them. At the end of the year 1928 the corporation had on hand a balance of earned surplus subject to distribution among its stockholders, and on February 18, 1929, pursuant to custom and an understanding that they would accept the corporation's preferred stock in lieu of cash, its board of directors met and passed the following resolution: Resolved, that a dividend of 6 percent on the outstanding common stock of the corporation be, and the same hereby is, declared out of the surplus earnings of the corporation, said dividend to be payable to the holders of929 such stock of record at the close of business on the 31st day of December, 1928. That a dividend of 7 percent on the outstanding preferred stock of the corporation be, and the same is, hereby declared out of the surplus earnings of the corporation, said dividend to be payable to the holders of such stock of record at the close of business on the 31st day of December, 1928. Be it further resolved, that said dividend on the common and preferred stock of the corporation, be paid at the option of the individual stockholders, either in cash or in preferred stock of the corporation. The authorized dividends, following this corporate action, accruing to petitioners' mother were paid to her in cash, and those due the petitioners were paid in preferred stock of the corporation in the respective amounts of 108 and 31 shares and in cash in the respective amounts of $31 and $14. In their respective income tax returns for 1928 each petitioner reported the stock received as dividends upon his common stock as 525 income, but excluded the shares received as dividends on his preferred stock. The respondent held that all of the stock received by the petitioners as aforesaid constituted930 income taxable to them as corporate dividends and added the omitted shares to their gross income in computing their surtax. The petitioners now contend that none of the stock received from that dividend should be taxed, and ask us to overrule the respondent's determination and also to hold that they are entitled to a refund of taxes paid on the stock erroneously reported in their returns. The petitioners base their claims upon the decision in , which involved facts similar in some respects to those here considered. We have carefully considered that case and find it on all fours with the facts in the case at bar, with one important exception - in the Jackson case practically all of the dividends were liquidated with the stock of the declarant corporation and only a scattering few of "employee" stockholders were paid in cash. The court, in the review, seems to have considered the cash payments too trivial to affect the substance of the transaction, and in considering that phase of the situation it said: Jackson and the Crellins, after the stock was issued to them, held no greater proportion of the assets of the931 corporation than they did before as to the January dividend, because Whitacre and Smith also turned back their dividend checks for stock, so that all stockholders, after the January dividend, held the same proportion as before. After the August dividend was declared, however, some few of the employees elected to take cash instead of shares of stock. As is shown in the Board's findings, that stock was not of the same class as that owned by Jackson and the Crellins but was "Employees Stock." * * The issues raised in these cases have all been considered and decided adversely to the respondent's contentions by this court in the case of , and , certiorari denied . The case of , is also cited; but the facts there are also different from those involved here in that the declarant corporation there paid all stock and no cash in discharging its dividend obligation. Mellon and his associates took, in addition to the shares due them, the shares of the small stockholders932 who desired cash, and paid them the cash. These facts, the court there held, left the taxpayers' relationship to the corporation's assets exactly as they were before, and brought them within the rule laid down in the much cited case of . Going back to the case at bar, these petitioners were minority stockholders and owned between them less than one half of the corporation's stock at the time the dividends here involved were 526 declared and paid. Their mother, who received her dividends in cash, owned more than 70 percent of all of the corporation's common stock and in excess of 40 percent of its preferred stock. These facts, we think, are sufficient to distinguish the present case from those which the petitioners cite as authority for their contentions here urged. The attribute of stock dividends, proper, which renders them tax free, lies in the fact that they take nothing out of the assets of the corporation and do not increase the relative holdings of its stockholders. Their only effect is to divide up the corporation's capital into smaller title units and to increase the stockholders' title tokens by which their933 interests are evidenced. ; ; . We do not think it will be seriously contended in this case that the corporation's surplus was not affected by the cash withdrawal made by its major stockholder; or that the petitioners' interests in the corporation were not proportionately increased in the process followed. Before the distribution of the dividends the petitioners owned 1,308 shares of the corporation's common and 1,271 shares of its preferred stock. As a result of the distribution they increased these holdings by 139 shares of preferred stock. These certificates increased the petitioners' capital assets proportionately as their mother's interest in the corporation decreased. Their gains, therefore, in the distribution of the corporation's earnings were real and constituted income taxable to the petitioners as corporation dividends. ; 934 . Reviewed by the Board. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625110/	J. O. W. GRAVELY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Gravely v. CommissionerDocket No. 49103.United States Board of Tax Appeals29 B.T.A. 29; 1933 BTA LEXIS 1012; September 14, 1933, Promulgated 1012 George E. H. Goodner, Esq., and Frederick C. Rohwerder, C.P.A. for the petitioner. Harold Allen, Esq., and L. H. Rushbrook, Esq., for the respondent. SEAWELL29 OPINION. SEAWELL: This proceeding involves an alleged deficiency in income tax for the year 1927 in the amount of $19,445.95. The only error assigned by the petitioner is that the Commissioner erroneously included in taxable net income for the year 1927 salary in the amount of $87,500, representing income of prior years. In 1918 the China American Tobacco & Trading Co. was incorporated for the purpose of dealing in tobacco, which it sold mostly in China or the Orient. In 1925 the corporate name was changed to "China American Tobacco Company." J. O. W. Gravely, a resident of Rocky Mount, North Carolina, was the president of the corporation from the date of its organization and owned about 55 percent of its stock. William T. Fuller was bookkeeper and office man of the corporation since some time in 1919, but was not an officer or director of the corporation. The bylaws of the corporation authorized the directors to fix the salaries of the officers, and in 1919 the directors1013 fixed the salary of 30 J. O. W. Gravely at $55,000 per year, to continue until the board of directors changed it. The board of directors consisted of J. O. W. Gravely, his three sons and three Chinese gentlemen. The business was practically managed and controlled by J. O. W. Gravely and his sons, one of whom was vice president and another secretary-treasurer. The $55,000 salary was regularly credited to J. O. W. Gravely on the books of the corporation until June 30, 1923, on which date J. O. W. Gravely instructed Fuller to credit him thereafter on the books of the corporation at the rate of only $30,000 per year, which was done until June 30, 1927, on which date L. L. Gravely, the secretary-treasurer of the corporation since its organization, directed Fuller to credit to his father, J. O. W. Gravely, on the corporation's books $87,500 as back salary, which was accordingly done. Thereafter petitioner's salary was credited at the rate of $55,000 per year. The amount of $142,500 was entered on the books of the corporation to petitioner's credit in 1927 and was made up of $55,000 ordered by petitioner's son to be credited to petitioner as salary for that year and $87,5001014 as extra or back salary on 1923, 1924, 1925 and 1926. The reduction and the restitution on the books of the corporation of the salary of petitioner were without any formal action or resolution by the board of directors. Important business of the corporation was, however, frequently discussed and decided informally by the petitioner and his sons and then reported and acted on without formal resolution of the directors, leaving comparatively little to be done at formal directors' meetings, held only every two months. The corporation's returns were filed on the accrual basis. The petitioner's returns were filed on the cash receipts and disbursements basis. Both the corporation's returns and the petitioner's returns from 1919 to 1927 were prepared by Fuller, the corporation's bookkeeper. On June 30, 1927, petitioner owed the corporation about $125,000, part of which was on open account and part was evidenced by notes, one note for $82,100 having been given in 1926. On the corporation's returns for 1923 to 1927, inclusive, the following deductions were set up on account of salary paid to petitioner: 1923$42,500192430,000192530,000192630,000Extra for 192312,500Extra for 192425,0001927Extra for 192525,000Extra for 192625,000Salary for 192755,0001015 31 These deductions were allowed, with the exception of $87,500 in 1927, representing that portion of the total deduction of $142,500 that was set up as extra salaries for prior years. On petitioner's individual returns for the years 1923, 1924, 1925, and 1926 the same amounts given above for said years were reported received as salaries. For the year 1927, petitioner reported as salary $30,000. The China American Tobacco Co. was able to pay petitioner the yearly salary of $55,000 claimed by petitioner though not entered on the books. The petitioner had a running account on the books of the corporation to which were credited his salary and any moneys advanced by him to the corporation on its behalf and to which were debited any drawing which he made from the corporation and any payment made by the corporation for him. The corporation did not pay salaries by checks or in cash, but credited each officer's account each month with a pro rata amount of his salary. When the time came for the petitioner to file his 1927 return he was in China and an extension of time for filing it was granted by the collector, within which time the petitioner returned home and discussed1016 with Fuller, the bookkeeper, the matter of filing his (petitioner's) 1927 return. Fuller explained to him that the China American Tobacco Co. had deducted the back salary in 1927 and gave him a memorandum showing the effect on his taxes of including the whole amount in 1927 income and of spreading it over prior years. The petitioner discussed with Fuller and also with one of his sons the matter of filing amended returns for years prior to 1927 and then went to Raleigh, North Carolina, to see the collector, and while there submitted a memorandum to a deputy collector from which the deputy prepared his 1927 return and the same was then, on October 10, 1928, sworn to by the petitioner and filed. The petitioner did not file amended returns for the years from 1923 on, and within a week after his return home from Raleigh he left for China and returned to this country after about a year. The record shows that the petitioner was not given credit on the books of the China American Tobacco Co. for the full amount of his salary - $55,000 yearly - for the years 1923 to 1926, inclusive, until 1927, when he was given credit for his full salary for that year and also for back salary in the1017 amount of $87,500 for the years 1923 to 1926, inclusive. The fact that the petitioner owed the corporation enough to have taken up his back salary does not show payment. It was only when he got the credit against such indebtedness by application thereto of his deferred salary that he received payment to that extent, and that was not until 1927. In the circumstances of this case, the insistence that the petitioner in a sense received constructive payment of his entire salary in the 32 years 1923 to 1926, inclusive, is not in our opinion sound. The record shows he had the power to receive an actual payment of his entire salary in each of the years for which back salary is now claimed and sought to be allocated. Not having reported in preceding years the income now in question and not having filed amended returns covering the years preceding 1927, he can not now repudiate his own acts or resort to the use of the fiction of constructive payment or receipt to the detriment of the public revenues. The principle and reasoning in *1018 is applicable here. See also ; affd., , and authorities therein cited. We are of the opinion, therefore, that the respondent's determination herein is correct and the same is approved. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625113/	TURKEY CREEK, INC., and TURKEY CREEK, INC., AS SUCCESSOR BY MERGER TO N.W., INC., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentTurkey Creek, Inc. v. CommissionerDocket Nos. 4217-86; 4218-86.1United States Tax CourtT.C. Memo 1987-429; 1987 Tax Ct. Memo LEXIS 426; 54 T.C.M. (CCH) 326; T.C.M. (RIA) 87429; August 26, 1987. Walter M. Tovkach and Thomas G. Christmann, for the petitioners. Jane T. Dickinson, for the respondent. SHIELDSMEMORANDUM FINDINGS OF FACT AND OPINION SHIELDS, Judge: Respondent determined deficiencies in petitioners' Federal income taxes as follows: DocketYear EndedPetitionerNumberJune 30DeficiencyTurkey Creek, Inc.4217-861980$ 46,879Turkey Creek, Inc. as4218-861978$ 86,220Successor by Merger to1980$ 285N.W., INC.427 The issues for decision in docket No. 4217-86 are (1) whether the issuance of promissory notes by Turkey Creek Inc., to a shareholder-employee was for services rendered in previous years, and if so, whether the promissory notes constitute "payment" for purposes of section 404; 2 and (2) whether Turkey Creek had unreported income in the amount of $ 23,852 as determined by respondent. The issue in docket No. 4218-86 is whether the issuance of a promissory note by N.W., Inc., to an employee for services rendered in previous years is fully deductible in the year of issuance. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation and associated exhibits are incorporated herein by reference. Petitioner in docket No. 4217-86 is TurkeyCreek, Inc. ("Turkey Creek"). Petitioner in docket No. 4218-86 is Turkey Creek as successor by merger to N.W., Inc. ("N.W."). At the time the petitions were filed428 herein, Turkey Creek had its principal place of business in Alachua, Florida. Both Turkey Creek and N.W. were Florida corporations and accrual basis taxpayers at all relevant times. Turkey Creek, a real estate construction and development company, was organized in 1974. Ralph W. Cellon, Jr. ("Cellon") was one of its original stockholders. Norwood W. Hope ("Hope"), while not an original stockholder, has been its president since incorporation. As of 1977 the outstanding stock in Turkey Creek was owned 50 percent by Cellon and his wife and 50 percent by Hope and members of his family. The Cellons and the Hope family also owned the stock of and had both debtor and creditor relationships with several other corporations which over the years had been operated in close conjunction with Turkey Creek. Cellon was employed by Turkey Creek in a management capacity from 1974 to 1980. His primary duties during such period involved public relations and attempting to obtain appropriate zoning for Turkey Creek's real estate projects. He did not receive a regular salary for such duties. By January 1980, Turkey Creek was in poor financial condition. Its financial statements reflected a negative429 net worth and it was in arrears on about $ 4,500,000 in loans. In spite of its conditions, Cellon could not or would not contribute additional capital to Turkey Creek or incur any additional personal indebtedness to keep it in operation. On the other hand, Hope and his family wanted to continue with Turkey Creek but were unwilling to make any further investment without a similar commitment by Cellon. To overcome the resulting stalemate, and at Hope's suggestion, it was agreed that the Cellons would transfer their interest in Turkey Creek to the Hopes. However, the contemplated transfer was complicated by the stock and debts outstanding between the parties and their other related corporations. In an attempt to resolve all of these problems the Cellons and the Hopes together with Turkey Creek and five other corporations entered into an agreement which contained the following pertinent preambles and other provisions: WHEREAS, the Cellons enumerated above and the Hops enumerated above have combined in various business ventures and have done business with one another and together for a number of years, and WHEREAS, as a result of these ventures several corporations are owned by430 both the Cellons and the Hopes, and WHEREAS, it is the desire of the Cellons and the Hopes that these jointly-owned corporations be wholly owned by the Hopes and that the Cellons are compensated for their interests therein, and WHEREAS, it is also the desire of the Cellons and the Hopes that each continue other business relationships with the other in a manner most beneficial to each, and WHEREAS, as a result of past dealings, the Cellons now owe one of the Hopes' companies, N.W., Inc., $ 147,815.42 as of January 31, 1980, and WHEREAS, this agreement will completely satisfy this indebtedness and future dealings between the parties subsequent to January 31, 1980, will be dealt with separately on a normal account basis, and WHEREAS, a corporation now jointly-owned by the Cellons and the Hopes, TURKEY CREEK, INC., now owes the Cellons $ 180,433.29 as of the date of this agreement, and WHEREAS, this agreement will completely satisfy this indebtedness, and future dealings between these parties subsequent to this agreement will be dealt with separately on a normal account basis, and * * * WHEREAS, N.W., INC., presently possesses a security interest in a portion of the Cellons' 431 stock in TURKEY CREEK, INC., for the purpose of protecting the Hopes or their corporations for property they put up as collateral in the event of a default by the Cellons or their corporations on that certain $ 100,000.00 note from the Cellons to University City Bank (now Great American Bank) under date of November 15, 1978, and WHEREAS, this agreement will completely satisfy that security interest, and WHEREAS, in exchange for this satisfaction of this security interest, the Cellons will herein agree to personally indemnify the Hopes and any of their corporations for any injury as a result of the Cellons' actions or inactions with regard to the aforesaid note, and WHEREAS, N.W., Inc., under mortgage dated January 25, 1980, has secured a $ 45,000.00 note of Ralph W. Cellons, Jr. with C & L Bank of Bristol, Florida and N.W., INC., TURKEY CREEK, Inc., Norwood W. Hope, N. Forest Hope and A. Bice Hope were required by said bank to endorse said note, and WHEREAS, this agreement will not satisfy the aforesaid note, but will make provisions for the Cellons' indemnity to said corporations and individuals for any injury as a result of Cellons' actions or inactions with regard to the432 aforesaid note and will further provide for N.W., Inc. or the Hopes' ability to redeem this mortgage and offset any costs of redemption against payments due the Cellons under other provisions of this agreement, and WHEREAS, the Cellons have personally endorsed as guarantors certain obligations of TURKEY CREEK, INC., and WHEREAS, since this agreement cannot satisfy or change the obligations of the Cellons to third parties, the Hopes will herein agree to personally indemnify the Cellons and any of their corporations with regard to any of the TURKEY CREEK, INC. notes which the Cellons have endorsed, and WHEREAS, TURKEY CREEK, INC. currently owes Ralph W. Cellon, Sr. the sum of $ 30,000.00, which is a portion of a past due payment plus accrued interest since January 4, 1980, and WHEREAS, TURKEY CREEK, INC., will pay this amount (plus any additional accrued interest) to Ralph W. Cellon, Sr., on or before April 30, 1980. NOW, THEREFORE, the parties hereto and each of them and their heirs, assigns, designees and successors hereby agree and covenant one to the other that the following will occur simultaneously with the execution of this agreement. A. TURKEYCREEK, INC. will give433 Ralph W. Cellon, Jr. a draft in the amount of $ 1,250.00, and Ralph W. Cellon, Jr. will endorse his 1000 shares of TURKEY CREEK, INC., stock over to TURKEY CREEK, INC. Ralph W. Cellon, Jr. hereby warrants and guarantees that there are no liens or other claims on said stock excepting that lien to be extinguished as provided in paragraph K. below. * * D. TURKEYCREEK, INC. will give Ralph W. Cellon, Jr., a draft in the amount of $ 147,815.42, and Ralph W. Cellon, Jr. will give a draft in the amount of $ 147,815.42 to N.W., Inc. E. TURKEYCREEK, INC. will give Ralph W. Cellon, Jr. a noninterest bearing promissory note in the principal amount of $ 32,617.87 which is due and payable on or before February 28, 1986. * * * G. TURKEYCREEK, INC. will give Ralph W. Cellon, Jr. a promissory note in the principal amount of $ 200,000.00 for a term of five years and to accrue interest at 12% per annum beginning March 27, 1980. Equal principal and interest payments under such note shall be made monthly beginning on April 27, 1980. Norwood W. Hope, Jayne F. Hope, N. Forest Hope, Patricia W. Hope, A. Bice Hope and Donna P. Hope will endorse and personally guarantee said note. H. 434 TURKEYCREEK, INC. will give Ralph W. Cellon, Jr. a promissory note in the principal amount of $ 100,000.00 for a term of five years to accrue interest at 12% per annum beginning on April 27, 1985. Equal principal and interest payments under such note shall be made monthly beginning on May 27, 1985. I. Ralph W. Cellon, Jr. will execute a satisfaction on his original note receivable from TURKEY CREEK, INC. in the amount of $ 100,000.00. J. N.W., INC. will execute a satisfaction of its original note receivable from Ralph W. Cellon, Jr. in the sum of $ 136,000.00. * * P. By the execution hereof, Norwood W. Hope and Jayne F. Hope hereby agree to personally indemnify any injury or harm Ralph W. Cellon, Jr. or Jean M. Cellon may suffer as a result of any default on any TURKEYCREEK, INC. notes which Ralph W. Cellon, Jr. has endorsed. * * * R. The terms and provisions of this agreement are binding on the heirs, successors, assigns, devisees and legatees of the parties hereto. S. This agreement constitutes the entire agreement between all parties hereto, and said parties are not liable or bound in any manner by expressed or implied warranties, guarantees, promises, statements, 435 representations, or information not specifically set forth herein. The agreement was duly executed on February 21, 1980 by all parties including the related corporations and Hope's son A. Bice Hope, who not only executed it personally but, as general counsel, reviewed and approved it for Turkey Creek. On the same date the $ 200,000 note and the $ 100,000 note referred to in paragraphs G and H of the agreement were executed by Turkey Creek and delivered to Cellon. Each note was payable in sixty equal monthly installments together with interest at the rate of 12 percent per annum on the unpaid balance. On March 17, 1980, a special meeting of the new Board of Directors of Turkey Creek was held. The Board consisted of Hope and his two sons, A. Bice Hope and N. Forest Hope, all of whom were recorded as present. The minutes of the meeting state the following: During the work session a discussion was held relative to the corporation's former stockholder, Ralph W. Cellon, Jr. Each of the Directors expressed a desire to continue a working relationship with Mr. Cellon and to that end instructed the Chairman to request Mr. Cellon's help in corporate matters at a weekly salary beginning436 at $ 150.000. The Directors discussed that the $ 300,000.00 in long term notes which were given to Mr. Cellon were for past management and consulting services rendered and that the new weekly salary would compensate him for his future efforts. It was agreed among those present that Mr. Cellon's continuing association with the corporation at this compensation level would be beneficial to all concerned. [Emphasis supplied.] In an attempt to bolster Turkey Creek's financial position, the Hopes thereafter decided to merge Turkey Creek with N.W., another family owned and operated construction company. However, prior to merging they also decided to redeem all of N.W.'s outstanding stock which was owned by nonfamily members. One of these individuals was Wilbur M. Harling, Jr. ("Harling"), who owned 2.6 percent of N.W.'s stock. Harling had been employed in full-time managerial positions by the Hope family since early 1940. He had always received a salary, as well as, annual bonuses in insubstantial amounts. The Hope family felt that Harling should be retired prior to the proposed merger because he was 65 years old and in bad health. Accordingly, on June 2, 1980, two agreements437 were entered into between Harling and N.W. The first was entitled "STOCK SALE AGREEMENT" and provided for the cash purchase by N.W. of Harling's stock in N.W. for $ 6,000. The second agreement was entitled "COMPENSATION AGREEMENT" and in pertinent part it reads as follows: WHEREAS, WILBUR M. HARLING, JR. has been part of the management of Jim Hope Electrical for many, many years, and WHEREAS, WILBUR M. HARLING, JR.'s contributions to the Welfare of Jim Hope Electrical and its associated employees have been many, and WHEREAS, WILBUR M. HARLING, JR. has not always been compensated for amounts he was entitled for his past services as a result of cash flow problems from time to time in the company, and WHEREAS, WILBUR M. HARLING, JR. is about to partially retire from Jim Hope Electrical, and WHEREAS, N.W., INC., the corporate entity which owns Jim Hope Electrical, now desires to give WILBUR M. HARLING, JR. sufficient compensation to make up for the lack of same in previous years for his past efforts. NOW THEREFORE, for and in consideration of the mutual covenants herein contained, the receipt of which is acknowledged, the parties hereto agree for themselves and their assigns,438 successors and heirs forever as follows: 1. N.W., INC. does hereby agree to pay WILBUR M. HARLING, JR. the total sum of Three Hundred Thousand Dollars ($ 300,000.00) as compensation for past services rendered. This indebtedness shall be represented by a Note from N.W., INC. to WILBUR M. HARLING, JR. in the total sum of Three Hundred Thousand Dollars ($ 300,000.00) payable monthly over a ten year period with no interest. This Note shall not be negotiable, but in the event WILBUR M. HARLING, JR. dies prior to the expiration of ten years from the date of the Note, the payments due thereunder shall be paid unto WILBUR M. HARLING, JR.'s estate.The $ 300,000 promissory described in the compensation agreement was given to Harling on the same date by N.W. N.W. was merged into Turkey Creek on June 30, 1980, but despite the merger, Turkey Creek was forced to file a petition under of Chapter 11 of the Bankruptcy Act in September 1982. Turkey Creek, with the approval of the Bankruptcy Court, continued to make the payments on the notes payable to Cellon, and in 1985, Turkey Creek obtained the approval of the Bankruptcy Court to sell certain land to Harling upon such terms that the monthly439 payments due by Harling to Turkey Creek were exactly equal to the monthly payments due by Turkey Creek to Harling. Thereafter, to the date of trial no money had passed between Harling and Turkey and Creek. On its corporate income tax return for the fiscal year ended on June 30, 1980, Turkey Creek claimed a deduction for management fees in the amount of the $ 300,000 in promissory notes given to Cellon. On its corporate return for the taxable year ending on the same date, N.W. claimed a deduction for $ 300,000 represented by the note given to Harling. With its deduction N.W. claimed an operating loss carryback of $ 276,585 from the taxable year ending on June 30, 1980 to the taxable year ending on June 30, 1978. In his statutory notices, respondent disallowed both deductions in fiscal 1980 as well as N.W.'s operating loss carryback to fiscal 1978. On its return for the fiscal year ending June 30, 1980, Turkey Creek also reported its unappropriated retained earning account as follows: Balance at beginning of year($ 438,569)Net income per books196,426 Merged N.W., Inc. on 6/30/80264,489 Federal Income Tax Refund N.W., Inc.112,000 Federal Income TaxRefund Turkey Creek, Inc.61,708 Prior Period Adjustment85,509 Balance at end of year281,563 440 During audit neither respondent nor Turkey Creek could account for $ 23,852 of the amount included in the "Prior Period Adjustment" to the retained earnings account. Therefore, in his statutory notice respondent determined that the $ 23,852 adjustment represented unreported taxable income. OPINIONCellon's NotesPetitioner Turkey Creek contends that the promissory notes issued to Cellon constitute payment for past management services and as such as fully deductible in the taxable year ending June 30, 1980. To the contrary, respondent contends that the notes were issued in payment for the purchase of capital assets, and, therefore, cannot be considered as compensation for services rendered by Cellon. In support of his position respondent cites Brush-Moore Newspapers, Inc. v. Commissioner,95 F.2d 900">95 F.2d 900 (6th Cir. 1938), cert denied 305 U.S. 615">305 U.S. 615 (1938); and Nicholas Co. v. Commissioner,38 T.C. 348">38 T.C. 348 (1962). For the reasons set out below we agree with respondent. First, Turkey Creek would have us disregard the entire written agreement of February 21, 1980, which as a whole tends to indicate it was intended by the parties441 to bring the jointly owned corporations within the sole ownership of the Hope family. For instance, it specifically states that it was "the desire of the Cellons and the Hopes that these jointly-owned corporations be wholly owned by the Hopes and that the Cellons [be] compensated for their interests therein . . ." The agreement further provides that it "constitutes the entire agreement between all parties hereto, and said parties are not liable or bound in any manner by expressed or implied warranties, guarantees, promises, statements, representations, or information note specifically set forth herein." Furthermore no mention is made in the agreement of any compensation being due to Cellon for past services rendered to Turkey Creek or that the notes were being issued in payment for such services. Second, the only evidence offered in support of petitioner's contention, and to refute the statements made in the agreement is the testimony of Norwood W. Hope and A. Bice Hope who, at trial stated in general terms that the notes were issued in payment for Cellon's past services. Their self-serving and obviously biased testimony is unpersuasive, however, because it is not corroborated442 by any evidence in the record with the possible exception of the minutes of the special meeting of Turkey Creek's board of directors. Here again, no weight can be attributed to the minutes because the meeting occurred over a month after the agreement was executed, the board consisted of three Hopes, and the minutes are clearly a belated attempt by them to avoid the tax consequences of their agreement. Finally, petitioner offered no explanation for failing to call Cellon as a witness even though admitting knowledge as to his whereabouts. The unexplained failure to produce such a knowledgeable witness within their power is sufficient basis for an inference that if produced his testimony would have been unfavorable to petitioner. Wichita Terminal Elevator Co. v. Commissioner,6 T.C. 1158">6 T.C. 1158 (1946), aff'd. 162 F.2d 513">162 F.2d 513 (10th Cir. 1947). In view of the foregoing, it is concluded that the promissory notes were issued to Cellon in payment for his interests in Turkey Creek and the related corporations and not as compensation for past services. Respondent's determination443 on this issue is sustained.Harling's NotePetitioner Turkey Creek as successor to N.W. contends that the $ 300,000 represented by the note payable to Harling is deductible by N.W. in 1980, the year the note was issued, as compensation for personal services actually rendered by Harling to N.W. in previous years. Respondent does not dispute petitioner's claim that the note was issued for past services rendered by Harling but contends that the note constitutes a form of deferred compensation which does not qualify for deduction under section 404. Under either view of the transaction, to be deductible the amount represented by the note must constitute reasonable compensation for the services rendered. Under petitioner's view such a finding is required by section 162(a). 3 Under respondent's view a similar finding is required by section 404(a) and (b). 4444 Therefore, even if we assume that the issuance of the note by N.W. in 1980 qualifies in all other respects for deduction in that year, we still have to determine under either view of the transaction, whether the amount involved is reasonable. Where as here a deduction is claimed in a current year for a payment purportedly made for services rendered in previous years, the reasonableness of the payment in the current year is determined by reference to the difference between the value of the past services and the amounts, in any, previously paid for such services. The value of the past services is determined by reference to their nature, amount, and quality. See Lucas v. Ox Fibre Brush Co.,281 U.S. 115">281 U.S. 115 (1930); R. J. Nicoll Co. v. Commissioner,59 T.C. 37">59 T.C. 37 (1972). The burden of proof with respect to the various elements to be considered in determining the reasonableness of a deduction claimed for a current payment for past services is upon the claimant of such deduction. American Foundry v. Commissioner,59 T.C. 231">59 T.C. 231, 239 (1972), affd. 445 on this issue 536 F.2d 289">536 F.2d 289 (9th Cir. 1976); Perlmutter v. Commissioner,373 F.2d 45">373 F.2d 45, 48 (10th Cir. 1967). In the case before us petitioner has produced no evidence as to Harling's salary in past years or of the extent, nature, quality, or value of his services except some vague references to the fact that he had been a devoted employee of the Hope family and of Jim Hope Electrical for many years. The exact nature and duration of the relationship between N.W. and Jim Hope Electrical does not appear from the record. However, the compensation agreement of June 2, 1980 recites that as of that date N.W. owned Jim Hope Electrical. In view of the condition of the record, it is apparent that Turkey Creek as successor to N.W. has failed to establish that the amount of the note issued to Harling in 1980 represents the reasonable value of uncompensated services rendered by Harling to N.W. in prior years. As a result the deduction claimed by N.W. on its return for the year ended June 30, 1980 with respect to such note or the uncompensated services it allegedly represented is not allowable and N.W.'s operating loss for such year and its operating loss carryback446 to 1978 is reduced accordingly.Turkey Creek's Unreported IncomeAs set out in our findings respondent determined that the adjustment of $ 85,509 made by Turkey Creek at the end of its 1980 fiscal year to its retained earnings account included unreported taxable income to the extent of $ 23,852. Turkey Creek admits that the adjustment was made, that it is unable to account for the adjustment, and that the inability is due to Turkey Creek's failure to correctly identify and report all items of taxable income. At trial petitioner was able to either an income tax refund or some adjustment related to the N.W. merger. Turkey Creek, however, also admits that sums were allocated to each of these items on its allocations should be adjusted. Therefore, under these unusual circumstances petitioner has failed to overcome the presumption that respondent's determination is correct. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a). To reflect the foregoing, Decision will be entered under Rule 155.Footnotes1. These cases have been consolidated for purposes of trial, briefing and opinion. ↩2. Unless otherwise indicated all section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue. All rule references are to the Tax Court Rules of Practice and Procedure unless otherwise provided. ↩3. The pertinent part of section 162(a) reads as follows: 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 * * * ↩4. The pertinent parts of section 404 as in effect in 1980 are as follows: SEC. 404. DEDUCTION FOR CONTRIBUTIONS OF AN EMPLOYER TO AN EMPLOYEES' TRUST OR ANNUITY PLAN AND COMPENSATION UNDER A DEFERRED-PAYMENT PLAN. (a) General Rule. -- If contributions are paid by an employer to or under a stock bonus, pension, profit-sharing or annuity plan, or if compensation is paid or accrued on account of any employee under a plan deferring the receipt of such compensation, such contributions or compensation shall not be deductible under section 162 (relating to trade or business expenses) or section 212 (relating to expenses for the production of income); but if they satisfy the conditions of either of such sections, they shall be deductible under this section * * * * * * (b) Method of Contribution, Etc., Having the Effect of a Plan. -- If there is no plan but a method of employer contributions or compensation has the effect of a stock bonus, pension, profit-sharing, or annuity plan, or other plan deferring the receipt of compensation, subsection (a) shall apply as if they were such a plan. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625114/	ALBERT T. SCHARPS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Scharps v. CommissionerDocket No. 21457.United States Board of Tax Appeals20 B.T.A. 246; 1930 BTA LEXIS 2165; July 18, 1930, Promulgated 2165 1. NET LOSS. - A loss sustained by petitioner resulting from loans to a corporation is not a deductible net loss within the meaning of section 204(a) of the Revenue Act of 1921, or of section 206(f) of the Revenue Act of 1924. 2. Id. - Losses resulting from dealings in stocks as an investment are not deductible as net losses under said sections. Albert T. Scharps, Esq., pro se. P. A. Bayer, Esq., for the respondent. BLACK 246 The respondent determined a deficiency of $638.65 in income tax against petitioner for the year 1924. Petitioner seeks redetermination 247 and alleges that respondent erred in refusing to allow a deduction of $26,615.48 on account of a net loss sustained by him for the year 1923. It is claimed that the net loss resulted from loans and advancements made to the Flagg Ink Co. in the sum of $23,089.67 and charged off as a bad debt in 1923, and the loss of $12,000 through failure of Zimmerman & Forshay, a brokerage concern. FINDINGS OF FACT. The petitioner is an individual and has his office at 154 Nassau Street, New York City, N.Y. He is an attorney and has been engaged in the practice of law in2166 New York since 1901, but in conjunction therewith he has at various times made investments and been connected with business enterprises. In 1920 and 1921 one Albert B. Flagg, the originator and owner of a formula for a record ink, interested petitioner in its manufacture. A corporation was organized to manufacture the ink. This corporation, the Flagg Ink Co., was incorporated under the laws of the State of New York in 1921. The record does not show the authorized capital stock, but whatever it was, only $200 capital stock was paid in. Flagg was president of the company and petitioner Albert T. Scharps was treasurer. The money which Scharps furnished to the Flagg Ink Co. was used for the pay roll, factory rent, office rent, telephone, stationery, postage, etc. Sometimes Scharps would pay the bills himself. Sometimes he would advance money to the company to pay them. The loans or advancements of money which he made to the company varied in amounts from $100 to $1,000, and extended over a period from June 7, 1921, to December 1, 1923, on which date petitioner charged off $23,089.67 as a bad debt. The amounts which petitioner advanced in the form of loans to the Flagg Ink Co. 2167 to pay its bills were credited to him on a ledger account kept by the Flagg Ink Co., and from time to time he was debited with certain amounts paid him on this account. From June 78 1921, to December 1, 1923, when he charged off $23,089.67 as a bad debt, petitioner was credited on this account with 397 different items. The first debit for money paid Scharps on this account is dated December 22, 1922, and from that time to December 1, 1923, 24 debits are shown, which consisted of checks and exchange that the Flagg Ink Co. had received in payment of accounts from customers and turned over to Scharps to apply as part payment of the loans and advances which he had made. From the time that it started operations, petitioner Scharps spent a part of every day at the office of the Flagg Ink Co., except those days in which he was actually engaged in the trial of causes in the courts. He directed the policies of the company and its selling campaign and managed its finances. 248 Petitioner had no contract with the Flagg Ink Co. for the employment of his services, neither did he have any agreement, either in the by-laws or resolutions or otherwise, which required him to perform2168 services. Testifying on this point, he said: "I did this work, gave my personal time and attention and advanced these monies, in the expectation that the business would be brought to such a successful point, that I could make a stock investment." He further testified: "Finally in the year 1923, when I saw it was in a hopeless condition and over $28,000 had been lost on the advances which I made, I decided to close it up, surrendered up the Factory Lease, surrendered up the Lease at 154 Nassau Street (office of the company) and I took back the furniture and filing devices which I owned and placed them elsewhere." Thus the Flagg Ink Co. ceased operations in 1923, practically without assets. For about two years prior to 1923 petitioner had been buying from his surplus funds for investment purposes certain high grade securities through the brokerage firm of Zimmerman & Forshay. These securities were bought in small lots for actual delivery and were paid for by petitioner in monthly payments. The brokerage firm went into bankruptcy in 1923 and at the time owed petitioner $12,000. This was allowed as a deductible loss for 1923, but respondent ruled that it could not be carried over2169 or included in net loss for 1924. Petitioner's income-tax returns for 1921, 1922, 1923, and 1924 were introduced in evidence and in each of these in answer to the question as to what was his "Occupation, Profession, or Kind of Business," he answered "Attorney at Law." No other occupation, profession or kind of business was listed on any of these returns. OPINION. BLACK: In the instant case petitioner's 1923 loss in connection with Flagg Ink Co. was not due to the fact that stock which he held in the corporation became worthless during the taxable year. The evidence shows that he held no stock in the corporation. His loss was occasioned by having to charge off as a bad debt certain sums which he had loaned and advanced to the corporation, covering a period from June 7, 1921, to December 1, 1923. Under the applicable revenue act it was perfectly proper for petitioner to use this bad debt charge-off as a deduction from his 1923 income. This he was permitted to do, but he may not carry forward the remaining net loss as a statutory net loss to use as a deduction in computing net income for the succeeding year, unless it was incurred in some trade or business in which petitioner2170 was regularly engaged. The facts do not establish that the loss was so incurred. 249 This case is similar in its facts, we think, to , where the taxpayer made an investment in a corporation and rendered it in addition his personal and financial assistance, and the Board held that his loss therein was not a net loss. After quoting section 204(a) of the Revenue Act of 1921, the Board said: In the opinion of the Board the facts stipulated do not bring the petitioner within the provisions of this section. They fail to show that he was regularly engaged in carrying on a trade or business of his own. He rendered personal and financial assistance to the corporation in which he had made an investment, but the business was that of the corporation. All that he did was to make an investment in and an occasional loan to a corporation which was regularly engaged in carrying on a millinery business. In the opinion of the Board, the evidence does not warrant the conclusion that petitioner's loss in 1921 was from the operation of a trade or business regularly carried on by him within the meaning of section 204, and the Commissioner correctly2171 denied the deduction of $4,797.57 from 1922 income. In the recent case of , the taxpayer was the president and largest stockholder of a corporation and sustained a loss of $68,000 by endorsing its notes. He claimed the benefit of the net loss provision of the Act of 1921, but it was denied by the Board on the ground that the business was that of the corporation and that taxpayer had not shown that he was in the business of endorsing notes. See also , and . Relative to that part of the alleged statutory net loss relating to a loss of $12,000 sustained by petitioner in the failure of the brokerage firm of Zimmerman & Forshay, the evidence fails to establish that this loss resulted from any business carried on by petitioner. In the case of , where the taxpayer made occasional investments in securities, sustained a loss and claimed a net loss, the Board denied it and said: We are unable to agree with the petitioner that he is entitled to the deduction claimed, for the reason that his dealing2172 in stocks on his own account, which gave rise to the loss in question, did not, in our opinion, constitute a trade or business regularly carried on by him. On the contrary, they appear to be isolated and occasional transactions outside the scope of his regular trade or business. As he testified, he had for many years traded in the market "off and on." We have held that the term "trade or business regularly carried on" used in section 204 of the Revenue Act of 1921 means a vocation and not occasional or isolated transactions. , and . Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625115/	JAMES E. DAVIDSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. EDITH L. DAVIDSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Davidson v. CommissionerDocket Nos. 61741, 72904, 72905.United States Board of Tax Appeals34 B.T.A. 555; 1936 BTA LEXIS 683; May 8, 1936, Promulgated 683 As applied to sales through a brokerage account of shares of stock purchased at different times and at different prices the first in, first out rule is not applicable: (a) Where the seller ordered the broker to sell certain specified shares which had been issued to him and put up as collateral for a loan and in completion of the sale the seller delivered to the broker certificates for the identical shares. The certificates delivered to the broker identified the shares sold. (b) Where the seller ordered the broker to sell certain specified shares which had not been issued to the seller but were held by the broker in a "street" name. The order to the broker to sell certain specified shares identified the shares sold. Helvering v. Rankin,295 U.S. 123">295 U.S. 123. (c) Where the seller ordered the broker to sell certain specified shares which had been issued to him and deposited with a bank as collateral on a loan, but in completion of the sale the bank by mistake delivered to the broker certificates for other shares. The certificates delivered to the broker identified the shares sold. (d) Where the seller ordered the broker to sell certain specified shares which684 had been issued to him and deposited with a bank as collateral on a loan, but in completion of the sale the seller, being unable to get possession of the shares specified, delivered certificates for other shares. The certificates delivered to the broker identified the shares sold. Edward J. Svoboda, Esq., and J. A. C. Kennedy, Esq., for the petitioners. E. C. Algire, Esq., for the respondent. SMITH 556 These proceedings are for the redetermination of deficiencies in petitioners' income taxes as follows: PetitionerDocket No.YearDeficiencyJames E. Davidson617411928$2,609.47Do7290419299,352.50Edith L. Davidson72905192910,156.14It is alleged that in his computation of each of the deficiencies the respondent erred in applying the rule of first in, first out in computing the profit on the sale of certain shares of stock. The proceedings were consolidated for hearing. FINDINGS OF FACT. The petitioners, James E. Davidson and Edith L. Davidson, are husband and wife. James E. Davidson is president of the Nebraska Power Co. He began active trading in stocks in about 1925. He then owned685 a number of shares of National Power & Light Co. stock which he put up with the brokerage firm of Logan & Bryan, hereinafter sometimes referred to as the broker, with instructions that the shares were to be preserved "intact" and kept as his "estate" unless he specifically ordered them to be sold. He further instructed his broker that his active trading was to be done in other shares which he would purchase on margin or with funds borrowed from the banks. The transactions in question in these proceedings were all conducted through the brokerage firm of Logan & Bryan in the name of petitioner James E. Davidson. Both of the petitioners had other stock transactions during the years involved which are not in controversy. 557 National Power & Light Co. transactions of James E. Davidson in 1928.On January 1, 1928, the petitioner, James E. Davidson, had in his brokerage account 900 shares of National Power & Light Co. stock designated as "collateral" stock which he had put up with the broker in 1925, and 900 other shares of the same stock designated as "trading" stock which he had purchased in 1926. The cost of the collateral stock was $4.42 per share and of the trading686 stock $23 3/8 per share. In addition to those shares the petitioner had 2,200 shares of the same stock on deposit as collateral with the Omaha National Bank and 1,400 shares in a safety-deposit vault. In January 1928 the petitioner arranged with the Omaha National Bank for a loan of approximately $25,000 with which to purchase 1,000 additional shares of National Power & Light Co. stock, with the understanding that the shares purchased would be deposited with the bank as collateral for the loan. On the petitioner's instructions the broker purchased for his account 1,000 shares on January 27, 1928, at a cost of $25,337.50. The certificates for 900 of those shares, numbered 27,417 to 27,425, inclusive, were delivered to the petitioner on February 8, 1928, and a certificate for the remaining 100 shares, numbered 27,556, was delivered to him on February 16, 1928. On those dates the petitioner deposited the certificates with the bank in accordance with his agreement. On March 9, 1928, the petitioner ordered the broker to sell the 1,000 shares purchased on January 27, 1928, stating that he would get the certificates from the bank and deliver them as soon as the sale was made. On687 that date, March 9, 1928, the broker sold 1,000 shares for petitioner's account and in completion of the sale the petitioner, on March 9, 1928, got the identical certificates, numbered 27,417 to 27,425, inclusive, and 27,556, from the bank and delivered them to the broker. The petitioner then received a check from the broker in the amount of $26,310, representing the proceeds of the sale, which he deposited with the bank and paid off the loan. In substantially the same manner the petitioner, on March 14, 1928, purchased 1,000 shares of the same stock with a loan from the First National Bank of Omaha and on March 20, 1928, he purchased 1,000 additional shares with a loan from the Omaha National Bank, the cost of each lot being $25,650. On April 13, 1928, the broker, on the petitioner's order, sold 2,000 shares for his account and on April 16, 1928, the petitioner got the identical certificates which he had put up as collateral at the banks when the shares were purchased and delivered them to the broker, receiving a check for the proceeds of the sale. One of the lots was sold for $29,310 and the other for $29,060. On September 24, 1928, the petitioner instructed the broker to688 sell the remaining 1,000 shares of National Power & Light Co. stock, which he mistakenly thought was the balance in his trading account. 558 In fact, there were only 900 shares in the trading account, being the same 900 shares that the petitioner had purchased in 1926. The broker, however, sold 1,000 shares for the petitioner's account, as he had been instructed to do, and notified the petitioner that his trading account was 100 shares short. The petitioner then instructed the broker to take 100 of the shares held in his collateral account and apply to the sale. The proceeds from the sale of the 1,000 shares were $39,835. The cost of the 900 shares of trading stock was $21,150 and the cost of the 100 shares of collateral stock was $441.89. On September 25, 1928, the petitioner purchased 2,000 shares of National Power & Light Co. stock for $84,375, and on October 2, 1928, 200 additional shares for $8,280, all of which he left in his trading account. On December 31, 1928, the petitioner had on hand 800 shares in his collateral account and 2,200 shares in his trading account. He also had the 2,200 shares still on deposit as collateral at the Omaha National Bank and689 the 1,400 shares in his safety-deposit vault. National Power & Light Co. transactions of James E. Davidson in 1929.On January 3, 1929, the petitioner instructed the broker to sell 500 of the National Power & Light Co. shares in his trading account purchased September 25, 1928. On the same day the broker sold 500 shares for the petitioner's account for $23,405 and, on petitioner's further instructions, purchased for his account 500 shares at a cost of $22,825. On January 22, 1929, the petitioner instructed the broker to sell the 200 shares purchased on October 2, 1928. The broker sold 200 shares for petitioner's account on that day, the proceeds being $9,162. The profits on 100 of these shares belonged to another individual and were sent to him. On January 28, 1929, the petitioner instructed the broker to sell 500 of the shares in his trading account purchased September 25, 1928, and also the 500 shares purchased January 3, 1929. On the same day the broker sold 1,000 shares for the petitioner's account for $53,785. Also, at about that time the petitioner took the remaining 1,000 shares in the trading account, purchased September 25, 1928, and deposited them as690 collateral on a loan at the Omaha National Bank. After these transactions there were no National Power & Light Co. shares left in the trading account. On February 11, 1929, the petitioner purchased through his trading account 600 shares for $31,905 and on February 15, 1929, he sold 600 shares for $32,871, leaving the trading account again exhausted. On February 15, 1929, the petitioner withdrew the remaining 800 shares from the collateral account and put them in his safety-deposit 559 vault with other securities. There were then no shares left in either the trading or the collateral accounts. All of the sales in 1929 up to this point were made through the trading account and the shares sold had never been issued to the petitioner but were held by the broker for his account in "street" names. The next transaction in National Power & Light Co. stock occurred on March 27, 1929, when the petitioner purchased through the broker 1,000 shares with a part of the proceeds of a loan from the Omaha National Bank. Certificates for these shares numbered 80,250 to 80,258, inclusive, and 80,264 were delivered to the petitioner and put up as collateral with the bank as had been691 done in the previous transactions. On June 19, 1929, the petitioner instructed the broker to sell 500 of the 1,000 shares purchased on March 27, 1929, certificates for which were on deposit at the Omaha National Bank. When the sale was made the petitioner called at the bank to get the certificates for delivery to the broker, but the bank refused to release them to the petitioner, stating that they would make delivery themselves. The petitioner then instructed the bank to deliver 500 shares from the certificates numbered 80,250 to 80,258, inclusive, and 80,264. In making delivery of the certificates, however, a bank clerk, by mistake, delivered certificates from another lot which had been held as collateral by the bank since 1925. The mistake was not known by the petitioner at that time. On July 1, 1929, the petitioner instructed the broker to sell the remaining 500 shares purchased on March 27, 1929. When this sale was made he instructed the bank to deliver to the broker certificates for 500 shares from the remainder of the certificates numbered 80,250 to 80,258, inclusive, and 80,264. Again, however, the bank made the same mistake and delivered to the broker certificates692 for 500 shares from the same lot which it had held as collateral since 1925. The selling price of the first 500-share lot sold by the broker on June 19, 1929, was $28,142.50 and of the second 500-share lot sold July 1, 1929, was $31,392.50. The cost of the 1,000 shares purchased by the petitioner on March 27, 1929, represented by certificates 80,250 to 80,258, inclusive, and 80,264, was $49,900. The cost of the 1,000 shares delivered to the broker by mistake was $4.42 per share or $4,420 for the 1,000 shares. General Electric Co. stock transactions of James E. Davidson in 1929.On February 19, 1929, the petitioner, through his broker, purchased 100 shares of General Electric common for $22,750. A certificate for these shares, numbered 86,242, was received by the petitioner on March 4, 1929, and deposited as collateral with the Omaha 560 National Bank, along with other collateral shares, to secure a loan of $147,000 which had been used to purchase these and other stocks. On March 26, 1929, the petitioner instructed his broker to sell the 100 shares purchased February 19, 1929. The broker sold the shares on that date and in completion of the sale the petitioner693 called at the bank and got the identical certificate numbered 86,242 which he had put up as collateral when the shares were purchased and delivered to the broker. The selling price of the 100 shares was $22,791. This was the petitioner's only transaction in General Electric Co. stock in 1929. American Gas & Electric Co. stock transaction of Edith L. Davidson in 1929.On January 1, 1929, the petitioner, Edith L. Davidson, was the owner of 1,100 shares of American Gas & Electric Co. stock which she had purchased May 11, 1928, for $185,900. In purchasing these shares she had obtained a loan at the Omaha National Bank of $100,000, for which 700 of the shares were put up as collateral, and another loan from the First National Bank of $90,000, for which 400 shares were deposited as collateral. For each of these loans she executed a demand note in her own name. Certificates for the 1,100 shares purchased were delivered to her and deposited with the banks on July 6, 1928. On January 2, 1929, a 52 percent stock dividend was issued on the American Gas & Electric Co. stock and the petitioner received on the 1,100 shares bought May 11, 1928, 572 shares, which she placed in her694 safety-deposit vault. On January 10, 1929, the petitioner instructed the broker to begin selling the 1,672 shares which she then owned in 100 or 200-share lots so as not to break the market. Thereafter, the broker made sales as follows: January 10, 19291,000 sharesJanuary 16, 1929500 sharesJanuary 21, 1929170 sharesThe two remaining shares were not sold. The total proceeds of the sales were $246,340.70. As the sales were made the certificates were taken from the banks and delivered to the broker. From the Omaha National Bank the petitioner got the identical certificates for the 700 shares that were on deposit there, but at the First National Bank she was unable to get release of the certificates for the 400 shares there on deposit. The bank stated that it wanted to make its own delivery. In order to complete the transaction, however, the petitioner took from her safety-deposit vault certificates for 400 other shares received January 2, 1929, as stock dividend on stock of American Gas & Electric Co. of a previous purchase, together with 570 shares received on the same date as stock dividend on the 1,100 shares of said stock bought May 11, 1928, and695 delivered these certificates to the 561 broker. When she received a check from the proceeds of these sales she paid off the loan at the First National Bank and got the certificates held by it, which she put in the safety-deposit vault in the place of the ones delivered to the broker. The 400 shares which were taken from the safety-deposit vault for delivery to the broker were issued as a stock dividend on shares acquired by the petitioner previous to the purchase of the 1,100 shares on May 11, 1928, and had a cost to the petitioner of $27.50 a share. The cost of the 1,672 shares acquired by the purchase of the 1,100 shares on May 11, 1928, and the stock dividend thereon of 572 shares on January 2, 1929, was about $109 each. OPINION. SMITH: The petitioners contend that the respondent has erroneously applied the first in, first out rule in computing their gains upon the above described sales of stock and that in each of the transactions involved the shares of stock sold were identified by their instructions to the broker to sell certain specified shares. By amendments to his answers duly filed in each of the proceedings the respondent admits error in applying the696 first in, first out rule to the 400 shares of the American Gas & Electric Co. stock sold by Edith L. Davidson in 1929 and avers that such shares were identified by the certificates which the petitioner delivered to the broker in completion of the sale as those acquired by stock dividend, with a stipulated cost of $27.50 per share. The respondent further avers that if the rule of first in, first out is held not applicable to the gains on the sale of certain of the shares of stock sold in 1928 and 1929 such gains are not taxable as capital net gains, as they were treated in the computation of the deficiencies herein, but are taxable as ordinary gains at the normal rate. The respondent further avers in the amendment to his answer filed in Docket No. 72905 that, due to error in the computation of the deficiency therein asserted against Edith L. Davidson, capital net gains were understated in the amount of $22,660.79. For reasons hereinafter discussed we have found that the first in, first out rule is not applicable to any of the transactions involved in these proceedings, since in each transaction the shares sold were sufficiently identified. This ruling, however, does not dispose697 of the proceedings. We must still determine what shares were sold in each transaction and the amount of the profit or loss thereon. The several transactions will be discussed in the order indicated in the above findings of fact. National Power & Light Co. transactions of James E. Davidson in 1928.As to the sale of the several lots of National Power & Light Co. shares in 1928, we think that there was an identification by the petitioner 562 of all the shares sold and that the first in, first out rule is therefore inapplicable. The Commissioner's regulations, article 58 of Regulations 74, provide that this rule is to be applied only when the identity of the lots sold can not be determined. See . In each of these sales the shares which the petitioner instructed the broker to sell had been bought and paid for by the petitioner and, with the exception of the 100 shares sold on September 24, 1928, the certificates for the shares had been issued to him. In each instance the petitioner instructed his broker to sell certain shares which he clearly identified by certificate numbers, and afterwards he delivered the698 shares so identified to the broker where they were not already in the broker's possession. The respondent makes the argument that the evidence does not show that the broker actually sold the shares which the petitioner instructed him to sell or delivered to him for sale and that in fact the shares sold by the broker were all kept in "street" names and were not susceptible of identification. That is immaterial, we think. It is not identification by the broker, but the owner and seller of the shares, that is required. In , the Court said: * * It is true that certificates provide the ordinary means of identification. But it is not true that they are the only possible means. Compare ; ; ; ; . Particularly is this so when, as here, the thing to be established is the allocation of lots sold to lots purchased at different dates and different prices. The699 required identification is satisfied, if the margin trader has, through his broker, designated the securities to be sold as those purchased on a particular date and at a particular price. It is only when such a designation was not made at the time of the sale, or is not shown, that the "First-in, first-out" rule is to be applied. The petitioner's instructions to the broker to sell certain specified shares and the subsequent delivery to the broker of certificates for the shares specified sufficiently identifies the shares sold. National Power & Light Co. transactions of James E. Davidson in 1929.As to the petitioner's 1929 transactions in the National Power & Light Co. stock a different situation is found. The first four sales in that year, 500 shares sold January 3,200 shares sold January 22, 1,000 shares sold January 28, and 600 shares sold February 16, were all made through the petitioner's trading account with the broker, which was "long" at the time of the sales for the number of shares sold. No certificates for the shares sold had ever been issued to the petitioner. The shares were carried by the broker in "street" names and were not earmarked. In each instance700 the petitioner instructed 563 the broker to sell certain shares purchased on a specified date. Under the decision of the Supreme Court in , that was a sufficient identification of the shares sold. Apparently, the transactions in , were conducted in substantially the same manner as the transactions here, since in both instances the shares sold had not been issued in the name of the customer or earmarked by the broker, but were held in "street" names. In each of the two remaining sales in 1929, 500 shares sold June 19 and 500 sold July 1, the petitioner instructed the broker to sell certain shares represented by certificates which had been issued to him and were then being held by the bank as collateral on a loan. The petitioner expected to get these identical certificates from the bank and deliver them to the broker in completion of the sales, just as he had done in the 1928 sales, but through a mistake on the part of the bank other certificates, representing shares acquired at an earlier date, were delivered to the broker. In those circumstances, we think that the shares delivered701 to the broker were the shares actually sold by the petitioner. In , the rule pronounced in , was held to apply to transactions other than those conducted by a "margin trader." The facts there were that the broker, who had in his possession a number of shares of stock which the taxpayer had purchased at different times and for different prices, was instructed to sell a certain number of shares from a specified lot, but instead sold and delivered to the purchaser shares from a different lot. The court held that the taxpayer's instructions to the broker to sell certain of the shares identified those shares as the ones sold, notwithstanding that the broker delivered other shares to the customer. In concluding its opinion, the court stated the three following rules: * * * (1) that where there is no designation by the taxpayer at the time of making the sale, the certificate should be treated as the proper means for identification; (2) that a designation by instructions to the broker of the shares to be sold is controlling though the certificate delivered does not correspond with702 the instructions; (3) that the "First-in, first-out" rule applies only where there is neither identification by a certificate, nor by designation of the taxpayer. In , the Board followed , with the qualification, however, that clause (2) of the above quotation from the court's opinion in that case should be construed to mean that a designation by instructions to the broker is controlling though the certificate delivered by the broker does not correspond with the instructions. Where the shares are already in the broker's possession there is nothing more for the seller to do after he instructs the broker to sell certain of those shares. 564 Ordinarily, too, it is of no consequence to the broker or to the customer which shares are delivered by the broker. But as long as the petitioner has possession of the shares he is free to exercise his own choice and deliver whatever shares he may choose to in conclusion of the sale. In the instant case, for instance, the petitioner after instructing the broker to sell certain shares was free to change his mind about what703 shares he would dispose of and to deliver certificates for other shares. See also , affirming ; ; ; affd., . There is no suggestion in the Court's opinion in , that the seller's instructions to the broker to sell certain shares would have prevailed as a means of identification over the fact of the delivery to the broker of certificates for other shares, nor was this question presented by the facts in In this case the delivery of the certificates by the petitioner or by the bank as his agent, we think, definitely identified the shares sold. The brokers sold the shares of stock represented by the certificates of indebtedness delivered - not those represented by some other certificates. General Electric Co. stock transactions of James E. Davidson in 1929.The petitioner had only one completed transaction in General Electric Co. stock in 1929, involving the purchase of 100704 shares on February 19 and the sale of those shares on March 26. The material facts with respect to the transaction are identical with those relating to the purchase and sale of the several lots of National Power & Light Co. stock in 1928. The petitioner received delivery of certificates for the shares purchased, deposited them with the bank as collateral on a loan, instructed the broker to sell those specific shares, and when the sale was made delivered the identical certificates to the broker in completion of the sale. The purchase price of the 100 shares was $22,705, the sale price $22,791, and the profit $86. American Gas & Electric Co. stock transactions of Edith L. Davidson in 1929.The questions raised with respect to the transactions of Edith L. Davidson in American Gas & Electric Co. stock in 1929 have also been answered in our foregoing discussion of the sales of National Power & Light Co. shares by the petitioner, James E. Davidson, in 1929. There, other shares than those which the broker had been instructed to sell were delivered to him through a mistake on the part of the bank acting as agent for the petitioner. Here, other shares than those which the broker705 had been instructed to sell were delivered to him by the seller intentionally because she was unable to get possession of the shares which she had instructed the broker to 565 sell. As to the identification of the shares sold there is no basis for a distinction in these transactions and, for the reasons already stated, we hold that the shares sold were the shares actually delivered to the broker and not in part other shares which the seller instructed the broker to sell but did not deliver. We can not sustain the petitioner's contention "that the delivery of a certificate other than the share representing that particular lot [which the broker was instructed to sell] because of inability to obtain the identical certificate from the bank did not alter the transaction and that it still remained the sale of that specific lot." With respect to the net capital gain question raised by the respondent in the amendments to his answers, it can be readily ascertained from the above stated facts whether the different lots of shares of stock sold by the petitioners in 1928 and 1929 had been held by them for a period of two years or more and therefore constituted capital assets within706 the meaning of section 101 of the Revenue Act of 1928. Where the shares sold had been held for less than two years the gains derived from such sales were not capital net gains, but were ordinary income taxable as such. Pursuant to the amended answers filed by the respondent the necessary adjustments in petitioners' tax liabilities will be reflected in the Rule 50 computations. The further averment contained in respondent's amendment to his answer filed in Docket No. 72905 that Edith L. Davidson's net capital gains have been understated by the amount of $22,660.79 due to an error in the computation of the deficiency is supported by the evidence. The error appears on the face of respondent's Exhibit C. Adjustment in respect of this error likewise will be made in the Rule 50 computation. Reviewed by the Board. Judgment will be entered under Rule 50.MURDOCK MURDOCK, concurring: The author of the prevailing opinion attempts to distinguish the present case from the Miller and McCarter cases on the ground that in the latter cases the delivery of the wrong certificate was made by the taxpayer's broker, while in the present case the wrong delivery was707 made either by the taxpayer himself to the broker or by a bank to the broker. I do not agree that the difference in the facts is a sound basis for distinguishing the cases. A broker, just like a bank, is merely the agent of the seller, and where it appears, as it did in the Miller and McCarter cases, that the certificate actually delivered was identifiable as that pertaining to a different lot of stock from the one which the taxpayer designated for sale, there is just as good reason for holding the seller to the basis applicable to the shares represented by the certificate actually 566 delivered as there is in the present case. I agree with the result reached in the present case because I think that identification by certificates is a better method of identification than identification by designation to the broker. See William W. Miller,31 B.T.A. 192">31 B.T.A. 192, and my dissent in Estate of Uzal H. McCarter,34 B.T.A. 535">34 B.T.A. 535. MCMAHON and TURNER agree with the above. ARUNDELLARUNDELL, dissenting: In the case of Estate of Uzal H. McCarter,34 B.T.A. 535">34 B.T.A. 535, we definitely held that we would follow the rule laid down708 by the Second Circuit in Miller v. Commissioner, 80 Fed.(2d) 219, to the effect that a designation to the broker of the shares to be sold is controlling although the certificate delivered does not correspond with the instructions given. I think we depart from that ruling in the instant case when we hold that the mistaken delivery by the banker of certain certificates shall prevail as an identification of what was intended to be sold over the very definite instructions of the owner to the contrary. The two rulings can not be reconciled. We should adhere to the rule announced in Miller, supra.VAN FOSSAN, MELLOTT, and ARNOLD agree with this dissent.	01-04-2023	11-21-2020

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