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https://www.courtlistener.com/api/rest/v3/opinions/4625813/	Jack Rose, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mae Rose, Petitioner, v. Commissioner of Internal Revenue, Respondent. Jack Rose and Mae Rose, Petitioners, v. Commissioner of Internal Revenue, RespondentRose v. CommissionerDocket Nos. 43652, 43653, 43654United States Tax Court24 T.C. 755; 1955 U.S. Tax Ct. LEXIS 129; July 27, 1955, Filed 1955 U.S. Tax Ct. LEXIS 129">129 Decisions will be entered under Rule 50. 1. Deficiency notices were sent more than 3 years but within a 5-year period (as extended by waivers) after income tax returns for 1943 had been filed. Held, assessment of deficiencies barred. In determining whether there had been an omission of more than 25 per cent of gross income within the meaning of section 275 (c), 1939 Code, the individual returns filed by petitioners must be considered together with a partnership return that was filed with respect to a business owned by them as community property where the partnership return had been filed merely to facilitate the reporting of their community income.2. In 1944 each of petitioners created an "irrevocable" trust for the benefit of one of their two minor children and purported to give to each trust an undivided interest in certain specified assets, but not in all the assets, of two stores. Trust instruments, which were identical except that each had different donor and beneficiary, contained no provision as to amount of income each trust was to receive. Partnership returns were filed for each store for the years 1944 to 1948, inclusive, in which each trust was treated as a partner 1955 U.S. Tax Ct. LEXIS 129">130 entitled to a distributive share of 24 per cent of the net income of one store and 12 per cent of the net income of the other. No partnership agreement was ever executed. The trust indentures effected no real change in the management, control, or operation of stores. No part of the income of the stores was actually paid to trusts. Petitioners abandoned their position that the trusts were bona fide partners, but contend that the trusts were entitled to a "reasonable rate of return." Held, the Commissioner correctly determined that the income of each store, shown to be distributable to the trusts on the partnership returns for the years 1944 to 1948, inclusive, was includible in the taxable income of the petitioners for those years.3. Useful business life of building for depreciation purposes held to be 40 years.4. Allowable deductions for charitable contributions determined.5. Claim for allowance of depreciation on improvements to ranch property denied where the ranch was the personal home of petitioners and where there was no showing that the ranch was operated as a business. George A. Cavalletto, Esq., and Arthur A. Henzell, Esq., for the petitioners.R. E. Maiden, Jr., Esq., 1955 U.S. Tax Ct. LEXIS 129">131 for the respondent. Raum, Judge. RAUM24 T.C. 755">756 In these proceedings, which were consolidated for hearing, the respondent determined deficiencies in income tax and Victory tax, and additions to tax for negligence, as follows:YearJack RoseMae RoseJack andAdditions to taxMae Rose19431 $ 13,668.031 $ 17,465.56$ 683.40 (Jack Rose)873.28 (Mae Rose)194426,275.8225,992.83194529,524.3231,601.92194618,190.1017,421.89194710,115.8910,044.2619484,679.414,562.361949$ 35,601.46The principal issues involve: (1) The applicability of the 5-year period of limitations, section 275 (c) of the Internal Revenue Code of 1939, with respect to the year 1943; and (2) the propriety of including in the income of each petitioner for the years 1944-1948 one-half of that portion of the income of each of two stores reported in returns of trusts established for the two minor children of petitioners. In addition, there are presented issues relating to depreciation of a Ventura store building, charitable contributions, and depreciation on certain ranch properties. Other issues have been agreed to by the parties and will be given effect upon settlement under Rule 50.FINDINGS OF FACT.Some of the facts 1955 U.S. Tax Ct. LEXIS 129">132 have been stipulated and they are incorporated herein by reference as part of our findings.General Findings and Statute of Limitations Issue.Petitioners, husband and wife, are residents of Santa Barbara County, California. They filed separate income tax returns for the years 1942 to 1948, inclusive, and a joint income tax return for the year 24 T.C. 755">757 1949 with the collector of internal revenue for the sixth district of California.Petitioners were married on April 15, 1934. They have two sons, Ronald L. Rose, who was born on November 6, 1935, and Lawrence S. Rose, who was born on May 18, 1939.Jack Rose is engaged in the business of merchandising high style ladies' ready-to-wear clothing. He has operated his own store in Ventura, California, from 1925 to the present time. He started another ladies' ready-to-wear store in Santa Barbara, California, in 1933, and sold it in 1949. The first store will hereinafter be referred to as the Ventura store and the second as the Santa Barbara store. Both were operated under the name "Jack Rose Shop."Louis Rose, brother of Jack Rose, was made a partner in the Santa Barbara store operation as of January 1, 1936, and withdrew from the partnership as of 1955 U.S. Tax Ct. LEXIS 129">133 January 1, 1947. During the existence of the partnership, each partner owned an undivided one-half interest in the business.The individual income tax returns of Jack Rose and Mae Rose for the year 1943 were filed with the collector of internal revenue for the sixth California district on March 15, 1944.More than 3 years but less than 5 years after these returns were filed consents were executed by the petitioners, and accepted by the Commissioner, extending the period of limitation upon assessment of income tax for the year 1943 to and including June 25, 1952. On the latter date notices of deficiencies for the year 1943 (including the year 1942 by reason of the forgiveness features of the Current Tax Payment Act of 1943) were mailed to each of the petitioners.In petitions filed with this Court on August 25, 1952, each of the petitioners alleged that the respondent erred in not determining that the assessment and collection of taxes for the taxable year 1943 were barred by the provisions of section 275 of the Internal Revenue Code of 1939.On the income tax returns of the Ventura store and the Santa Barbara store for 1943, there was an overstatement of the cost of merchandise bought 1955 U.S. Tax Ct. LEXIS 129">134 for sale by reason of a failure to deduct from such cost certain earned discounts. The portion of these earned discounts not deducted which is allocable to Jack Rose is $ 13,020.22 and to Mae Rose is $ 13,020.22.The merchandise inventories on the books of account of both the Ventura store and the Santa Barbara store were at all times kept on a cost basis.On the returns of the operations of the Ventura and Santa Barbara stores for the years 1942 to 1949, inclusive, opening and closing inventories were marked down by approximately one-third of the cost of the 24 T.C. 755">758 merchandise, thus increasing the cost of goods sold during 1943 and some of the other years involved. This practice of marking down opening and closing inventories began in 1926 and was continued thereafter up to and including the year 1949 whether or not it resulted in a benefit tax-wise. It was adopted in order to reflect what Jack Rose estimated to be the depreciation in the value of merchandise on hand at the end of each year. The merchandise handled by the two stores was turned over six or eight times a year. Merchandise not sold at the end of 2 months was considered old merchandise and was sold at a reduced price in order 1955 U.S. Tax Ct. LEXIS 129">135 to dispose of it. Revenue agents who examined the returns and audited the books of the two stores for years prior to 1942 were aware of the practice of marking down opening and closing inventories and indicated that it was permissible because it was consistently followed.In determining the deficiencies for the years 1943 to 1949, inclusive, the respondent made adjustments to the net income reported by Jack Rose and Mae Rose in their individual returns for the years 1942 to 1948, inclusive, and in their joint return for the year 1949, to reflect the amounts shown on the books of the Ventura and Santa Barbara stores for opening and closing inventories. For the years 1942 to 1946, inclusive, these adjustments resulted in additions to reported net income and for the years 1947 to 1949, inclusive, in reductions of reported net income. The amounts by which the net income of each petitioner was increased or reduced were as follows:1942$ 5,308.27 19434,926.75 19441,113.26 19454,596.01 19462,684.30 1947(7,706.97)1948(7,477.24)The adjustment for 1949 resulted in a reduction in the net income reported in the joint return of petitioners of $ 27,826.75.Partnership returns were filed for the Santa 1955 U.S. Tax Ct. LEXIS 129">136 Barbara store for the calendar years 1936 to 1943, inclusive, 1 the distributive income being shown as allocable one-half to Louis Rose and one-half to Jack Rose. Since Jack Rose's interest represented community property, one-half of his share was transferred to his individual return and the other one-half to the individual return of Mae Rose. Partnership returns were filed for the Ventura store for the calendar years 1938 to 1943, inclusive. Each year, one-half of the net income appearing on the Ventura partnership returns was transferred to the individual return of Jack Rose and the other one-half was 24 T.C. 755">759 transferred to the individual return of Mae Rose. Although there was no partnership in fact with respect to the Ventura store, partnership returns were filed, at the suggestion of a revenue agent, in order to facilitate the reporting of the community income of petitioners derived from that store.All withdrawals of funds and distribution of profits from the Ventura store and the Santa Barbara store were charged 1955 U.S. Tax Ct. LEXIS 129">137 on the books and distributed to Jack Rose, with the exception of funds withdrawn and profits distributed from the Santa Barbara store to Louis Rose.After the marriage of Jack Rose and Mae Rose, all of their property, including their interests in the Ventura store and the Santa Barbara store, constituted their community property and they so regarded it. They did not enter into any agreement or do any acts intending to change the community character of their property.Jack Rose did not enter into any oral or written partnership agreement with Mae Rose at any time, and she never was a partner in the business of the Ventura store or the Santa Barbara store.In the individual income and Victory tax return of Jack Rose for 1943, he reported the following income:Dividends$ 25.00Interest on government obligations68.75Rents and royalties1,751.22Net profit from business or profession3,087.59Income from partnerships43,220.48Total income$ 48,153.04In the individual income and Victory tax return of Mae Rose for 1943, she reported the following income:Dividends$ 25.00Interest on government obligations68.75Income from partnerships43,220.48Total income$ 43,314.23The amount of $ 3,087.59 reported in 1955 U.S. Tax Ct. LEXIS 129">138 the return of Jack Rose represents the difference between income from the operation of a farm of $ 7,436.94 and deductions of $ 4,349.35, taken from Form 1040-F, a schedule of farm income and expenses for 1943, which was attached to his return.The amount of $ 43,220.48, reported in the returns of both Jack Rose and Mae Rose, consists of $ 22,139.29, representing one-half of their combined community share in the net income of the Santa Barbara store partnership for 1943; $ 22,954.84, representing one-half of the net income of the Ventura store for 1943 reported on the partnership return filed for that store; and $ 1,873.65, representing one-half of the net income of the Ventura Drug Company.24 T.C. 755">760 In the partnership return filed for the Santa Barbara store for the year 1943, the gross receipts were reported to be $ 563,236.61, cost of goods sold $ 347,696.82, and gross profit $ 215,539.79. The deductions claimed amounted to $ 126,907.64, and the net income $ 91,557.15.In the partnership return filed for the Ventura store for 1943, the gross receipts were reported to be $ 271,580.31, cost of goods sold $ 167,561.90, and gross profit $ 104,018.41. The deductions claimed amounted to $ 58,108.74, 1955 U.S. Tax Ct. LEXIS 129">139 and the net income $ 45,909.67.The assessment and collection of the deficiencies in the income and Victory tax of Jack Rose and Mae Rose for 1943, determined by the respondent, are barred by section 275 of the Internal Revenue Code of 1939.Trust Issue.On January 2, 1944, Jack Rose executed a declaration of trust naming his son, Ronald L. Rose, as beneficiary. On the same date, Mae Rose executed a declaration of trust naming her son, Lawrence S. Rose, as beneficiary. Jack Rose was named trustee of both trusts which were identical in all material respects. The trust instruments provided that Jack Rose, as trustee, "does hold in an irrevocable trust the personal property, hereinafter described and mentioned," for the benefit of the named beneficiary; that he could retain in the trust, for such time as he deemed desirable, any property received by him; and that he had the power with respect to the trust property, or any part thereof, and upon such terms and in such manner as he might deem advisable, to sell, convey, exchange, convert, improve, repair, and manage and control it. They also provided that he could hold securities, or other property in the trust in his name as trustee, or 1955 U.S. Tax Ct. LEXIS 129">140 in his own name, or in the name of his nominee; that all income from the trust estate collected or received by him should be added to the principal of the trust estate; that, in his sole discretion, he could pay to or for the beneficiary, for the beneficiary's use or benefit, any sum necessary to take care of any and all circumstances; that upon any division of the trust property, partial or final, his decision as to what constituted a proper division of the trust estate should be binding upon the beneficiary; and that the beneficiary could not alienate, encumber, or hypothecate his interest in the principal or income of the trust. The trust for the benefit of Ronald L. Rose was to terminate when he attained the age of 35 years and the trust for the benefit of Lawrence S. Rose was to terminate when he attained the age of 32 years.Each trust instrument provided that the property of the trust estate should consist of the following: 24 T.C. 755">761 Interest in Ventura store of Jack Rose Shop:Accounts receivable$ 4,817.23C. O. D.'s512.11Merchandise inventory16,933.14Fixtures426.18$ 22,688.66Interest in Santa Barbara store of Jack Rose Shop:Accounts receivable$ 7,304.69C. O. D.'s416.13Merchandise inventory10,741.24Fixtures4,690.7823,152.84$ 45,841.50Accounts payable7,493.90$ 38,347.60Jack 1955 U.S. Tax Ct. LEXIS 129">141 Rose filed a gift tax return for 1944 reporting a gift to the Ronald L. Rose Trust, and Mae Rose filed a gift tax return for 1944 reporting a gift to the Lawrence S. Rose Trust. The reported value of each gift was redetermined by the Commissioner to be $ 50,304.15, and gift taxes were paid on this amount by each of the petitioners.Capital accounts were set up on the books of the Ventura store and the Santa Barbara store, as of January 1, 1944, for the Ronald L. Rose Trust and the Lawrence S. Rose Trust. In the partnership returns filed for each store for the years 1944 to 1948, inclusive, each trust was treated as a partner entitled to distributive shares of 24 per cent of the net income of the Ventura store and 12 per cent of the net income of the Santa Barbara store. The distributive shares shown on these partnership returns were credited to the capital accounts set up on the books of the two stores for the trusts and were reported on fiduciary returns filed for each trust. Jack Rose drew checks for the payment of the income tax liabilities shown to be due on these returns and the payments were charged to the respective capital accounts. No bank accounts were ever set up or 1955 U.S. Tax Ct. LEXIS 129">142 maintained in any bank in the name of either of the trusts, and the profits credited on the books to the capital account of each trust were never withdrawn by or for the trusts, except for the aforementioned tax payments.There was no written agreement entered into with the Ronald L. Rose Trust or the Lawrence S. Rose Trust indicating that they were partners in the Jack Rose Shop, Ventura, or the Jack Rose Shop, Santa Barbara. There were no representations made to banks or other financial institutions or in trade channels that the Ronald L. Rose Trust and the Lawrence S. Rose Trust were partners in the Jack Rose Shop, Ventura, and the Jack Rose Shop, Santa Barbara. There was no notation that the Ronald L. Rose Trust or the Lawrence S. Rose Trust were partners in the Jack Rose Shop, Ventura, or the 24 T.C. 755">762 Jack Rose Shop, Santa Barbara, on social security returns, unemployment insurance or sales tax returns, or on insurance policies.The net income of the Ventura and Santa Barbara stores for 1949, and of the Ventura store for 1950 to 1952, inclusive, was reported on returns filed by petitioners, and no part of the net income of the stores for those years was reported by the trusts. 21955 U.S. Tax Ct. LEXIS 129">143 The respondent determined that the Ronald L. Rose Trust and the Lawrence S. Rose Trust were not partners in the businesses of the Ventura store and the Santa Barbara store, and that one-half of the income reported by each of the trusts for the years 1944 to 1948, inclusive, was includible in the taxable income of Jack Rose and the remaining one-half in the taxable income of Mae Rose for those years. The amounts included in the taxable income of each petitioner were as follows:1944$ 33,256.90194534,720.06194625,582.4419476,416.6119482,112.29Neither the Ronald L. Rose Trust nor the Lawrence S. Rose Trust was a partner in the Ventura store or in the Santa Barbara store during the years 1944 to 1948, inclusive.On November 27, 1953, Jack Rose filed two petitions with the Superior Court of the State of California in and for the County of Santa Barbara, one pertaining to the Lawrence S. Rose Trust and the other to the Ronald L. Rose Trust. In each petition he asked the court to issue an order accepting his resignation as trustee and appoint a bank as his successor, direct him to turn over the property of the trust to the bank, direct him to render a 1955 U.S. Tax Ct. LEXIS 129">144 final accounting of his trusteeship, instruct him as to the rate of return to be allowed to each trust as payment for the use of the undivided interest in and to its assets invested in the business of the two stores, issue an order discharging and releasing him as trustee after the approval of his final account, and appoint a guardian ad litem for Lawrence S. Rose and Ronald L. Rose.On December 1, 1953, Lawrence and Ronald each filed a petition with the court asking that David S. Licker, an attorney, be appointed guardian ad litem of each of them. On December 2, 1953, the court issued orders appointing David S. Licker guardian ad litem of Lawrence and Ronald and authorized him to appear and act in their behalf in the proceedings relating to the trusts.On December 14, 1953, a hearing was held in the Superior Court of the State of California in and for the County of Santa Barbara on 24 T.C. 755">763 the petitions filed by Jack Rose. David S. Licker represented Ronald and Lawrence Rose. Testimony was adduced at the hearing as to the proper return which should be allowed on an investment by each trust of $ 50,000 in a business similar to that of the Ventura and Santa Barbara stores.On February 19, 1955 U.S. Tax Ct. LEXIS 129">145 1954, the Superior Court of the State of California in and for the County of Santa Barbara signed the orders and instructions and specifically found: That the Ronald L. Rose Trust and the Lawrence S. Rose Trust were valid trusts under California law; that the trusts are still in existence and are irrevocable; that Ronald L. Rose and Lawrence S. Rose are the sole living beneficiaries of their respective trusts; that the assets placed in trust did not constitute an undivided interest in all, but only certain assets of the Ventura store and the Santa Barbara store; that the trusts were not partners in these stores; that the assets of the trusts have been continually invested in the Ventura store and the Santa Barbara store, since the creation of the trusts; that the value of the original assets of each trust was $ 50,304.15; and that such an investment being subject to substantial economic risk should earn a return of 15 per cent per year. The court then instructed and ordered Jack Rose, as trustee, to file an account of his administration of the two trusts using a 15 per cent yearly return on the original investment and on all yearly accumulations allowed to remain invested in these 1955 U.S. Tax Ct. LEXIS 129">146 businesses.On March 11, 1954, Jack Rose filed an account for each trust with the court. The accounts were identical except for the name of the trust. The material portions of each account read as follows:JACK ROSE, as Trustee of the above entitled Trust, in account with said Trust and pursuant to the order of this Court entered February 19, 1954 wherein the Court found that the value of the assets originally placed in said Trust to be Fifty Thousand Three Hundred Four and 15/100ths Dollars ($ 50,304.15), and that such investment should earn a return of fifteen percent (15%) per annum, charges himself as follows:DEBITSThe Trustee of the above entitled Trust charges himself with all of the assetscoming into his hands as Trustee under the Trust Agreement, dated January2, 1944 at the value fixed by the Court by Order of February 19, 1954:$ 50,304.15ADDITIONAL DEBITSDecember 31, 1944Interest at 15% on $ 50,304.15 for the7,545.62period January 2, 1944 to December 31,1944.March 15, 1945Interest at 15% on $ 57,849.77 for the1,807.81period January 1, 1945 to March 15, 1945.April 15, 1945Interest at 15% on $ 43,450.88 for the543.14period March 16, 1945 to April 15, 1945.December 31, 1945Interest at 15% on $ 43,118.61 for the$ 4,581.35period April 16, 1945 to December 31,1945.March 15, 1946Interest at 15% on $ 47,699.96 for the1,490.62period January 1, 1946 to March 15, 1946.April 15, 1946Interest at 15% on $ 31,988.94 for the399.86period March 16, 1946 to April 15, 1946.December 31, 1946Interest at 15% on $ 31,311.60 for the period3,326.86April 16, 1946 to December 31, 1946.March 15, 1947Interest at 15% on $ 34,638.46 for the period1,082.45January 1, 1947 to March 15, 1947.April 15, 1947Interest at 15% on $ 28,062.72 for the period350.78March 16, 1947 to April 15, 1947.December 31, 1947Interest at 15% on $ 28,002.46 for the period2,975.26April 16, 1947 to December 31, 1947.March 15, 1948Interest at 15% on $ 30,977.74 for the period968.05January 1, 1948 to March 15, 1948.April 15, 1948Interest at 15% on $ 30,967.88 for the period387.10March 16, 1948 to April 15, 1948.December 31, 1948Interest at 15% on $ 31,324.81 for the period3,328.26April 16, 1948 to December 31, 1948.1955 U.S. Tax Ct. LEXIS 129">147 CREDITS The Trustee is entitled to the following Credits:March 15, 19451944 Federal tax paid$ 16,206.70April 15, 19451944 California tax paid875.41March 15, 19461945 Federal tax paid17,201.64April 15, 19461945 California tax paid1,077.20March 15, 19471946 Federal tax paid7,658.19April 15, 19471946 California tax paid411.02March 15, 19481947 Federal tax paid977.91April 15, 19481947 California tax paid30.17March 15, 19491948 Federal tax paid212.0024 T.C. 755">764 On March 22, 1954, a hearing was held in the Superior Court of the State of California, in and for the County of Santa Barbara, on an accounting by Jack Rose, as trustee, for the Ronald L. Rose Trust and the Lawrence S. Rose Trust and a petition for release of Jack Rose as trustee and appointment of the County National Bank & Trust Company of Santa Barbara, California, as successor trustee. No person appeared at the hearing to contest the account or the settlement thereof.On March 22, 1954, the Superior Court of the State of California in and for the County of Santa Barbara signed orders settling and allowing the account of Jack Rose as trustee of the Ronald L. Rose Trust and the Lawrence S. Rose Trust and releasing him as trustee and appointing 1955 U.S. Tax Ct. LEXIS 129">148 County National Bank & Trust Company of Santa Barbara, California, as successor trustee; and further ordering the successor trustee to distribute the corpus of the Ronald L. Rose Trust 24 T.C. 755">765 and the Lawrence S. Rose Trust to Ronald L. Rose and Lawrence S. Rose, respectively, upon their reaching their 35th and 32d birthdays, respectively.Depreciation -- Ventura Store Building.In the latter part of 1948, Jack Rose completed a new store building in Ventura, California, for his ladies' ready-to-wear business. The cost of this building, exclusive of land, was $ 458,294.85. It was architecturally planned for the ladies' ready-to-wear business. It was constructed of reinforced concrete and steel. It had a basement and three floors, consisting of a main floor, mezzanine, and second mezzanine, and a long circular stairway which was used for fashion shows. The front of the building was almost all glass extending to a high ceiling, and the rear entrance was of glass.In the joint return of Jack Rose and Mae Rose for the year 1949, depreciation was claimed on the building on the basis of a 40-year useful life. The respondent determined that the useful life of the building was 50 years, and that 1955 U.S. Tax Ct. LEXIS 129">149 it should be depreciated at the rate of 2 per cent per year.The useful life of the Ventura store building was 40 years.Charitable Contributions Issue.The respondent disallowed for lack of substantiation amounts claimed by the petitioners as contributions in the years 1947, 1948, and 1949, as follows:Jack RoseMae RoseJack andMae Rose1947$ 1,200$ 67519485353501949$ 635The parties have stipulated that certain listed contributions to charitable organizations claimed by petitioners as business (advertising) expenses of the Ventura store and the Santa Barbara store are allowable as personal deductions of Jack Rose and Mae Rose for the years 1947, 1948, and 1949. They have also stipulated that in addition to these deductions, other deductions for contributions claimed on the petitioners' returns for those years, and disallowed by the respondent in determining the deficiencies, are to be allowed to the extent they are shown to have been made in addition to those stipulated to be allowable.The charitable contributions shown to have been made in addition to those stipulated as allowable are the following: 24 T.C. 755">766 AllocationOrganizationAmount1/2 to1/2 toJack RoseMae Rose1947Ventura County Jewish Council$ 75.00$ 37.50$ 37.50Police Boys Club146.1473.0773.07Firemen's Relief Assn45.0022.5022.50S. B. Firemen's Relief Assn25.0012.5012.50Totals$ 291.14$ 145.57$ 145.571948American Red Cross$ 150.00$ 75.00$ 75.00Community Chest27.3713.6813.69Community Chest60.2530.1330.12S. B. Firemen's Relief Assn25.0012.5012.50Totals$ 262.62$ 131.31$ 131.31Ranch 1955 U.S. Tax Ct. LEXIS 129">150 Depreciation.Jack Rose and Mae Rose owned as their community property during the years 1945 to 1949, inclusive, a 12-acre avocado ranch in Carpinteria, California. They purchased this ranch in 1944. Since 1945 they have been living on it and using it as their "personal home."In late 1945, the following improvements were made on the ranch:ImprovementCostPipe line$ 1,943.00Pump1,025.22Tank684.03These improvements were in full use during the year 1946 and thereafter.The water used on the ranch contains large amounts of sulphur which causes metal to corrode, thus requiring early replacement of pipe, pumps, and tanks.The probable useful life of the improvements made on the ranch in 1945 is 10 years.In January 1949, the following improvements were made on the ranch:ImprovementCostWell$ 7,783.00Pump3,172.96The probable useful life of these improvements is 10 years.OPINION.1. Deficiencies for 1943; Statute of Limitations.Petitioners urge that the assessment of the deficiencies determined for the year 1943 is barred by limitations because the statutory notices 24 T.C. 755">767 were mailed more than 3 years after the expiration of the 3-year period provided in section 275 (a) of the Internal Revenue Code of 1939. 1955 U.S. Tax Ct. LEXIS 129">151 3 While conceding that the notices were mailed within the 5-year period provided in section 275 (c), as extended by waivers, they urge that that section has no application because (a) there was no "omission" from gross income, and (b), in the alternative, if there was an "omission" from gross income, it did not amount to 25 per cent of the gross income stated in their returns. The burden of proving that the 5-year period provided in section 275 (c) is 1955 U.S. Tax Ct. LEXIS 129">152 applicable is on the respondent. The deficiencies which he determined for the year 1943 result principally from his addition to the net income disclosed in the return for that year filed by each petitioner of the amount of $ 17,946.97. In his answers to the petitions, the respondent alleges that Jack Rose in his 1943 return reported gross income of $ 48,153.04 and Mae Rose in her return for that year gross income of $ 43,314.23; that each of petitioners failed to include $ 17,946.97 in gross income; 41955 U.S. Tax Ct. LEXIS 129">153 and that each petitioner, therefore, omitted from gross income an amount properly includible therein which was in excess of 25 per centum of the gross income reported in their returns. The alleged omissions of $ 17,946.97 each, or a total of $ 35,893.94, were attributable to the failure to deduct from cost of merchandise, bought for sale by the Ventura and Santa Barbara stores, certain earned discounts amounting to $ 26,040.44, and to the practice of marking down opening and closing inventories of the two stores by one-third of cost which in 1943 resulted in an understatement of income in the amount of $ 9,853.50The petitioners do not contest the correctness of the Commissioner's action in including in their income the earned discounts which were not reported. They do urge, however, that the $ 9,853.50 markdown in inventories of the stores should not be included in their income for 1943, on the ground that this practice had been consistently followed. The books kept for each of the stores showed inventories only at cost. Yet, for purposes of income tax returns, the inventories were reduced 24 T.C. 755">768 by one-third to reflect a decline in market value. Petitioners do not undertake to defend this practice on the merits, and indeed concede it was improper for the years following 1943. We think it was equally improper for 1943 and cannot be sustained on the grounds of consistency.The petitioners' principal contention is that section 275 (c) is inapplicable because the failure to reflect cash discounts in the returns and the adjustment of inventories in the circumstances of this case merely resulted in an overstatement of the cost of goods sold, and 1955 U.S. Tax Ct. LEXIS 129">154 an overstatement of cost of goods sold is not an "omission" from gross income within the meaning of that section, citing Uptegrove Lumber Co. v. Commissioner, 204 F.2d 570 (C. A. 3). 5 Our decision in J. W. Gibbs, Sr., 21 T.C. 443, is to the contrary. However, we do not find it necessary to pass upon this point because, for reasons that we shall set forth, the $ 17,946.97 understatement of gross income of each petitioner in the circumstances of this case was not in any event in excess of 25 per centum of the gross income stated in their returns. The petitioners are residents of California, a community property State. During 1943, all of the property of petitioners, including their interests in the two stores, was community property. During 1943, the Santa Barbara store was operated by a partnership composed of Jack Rose and Louis Rose in which each owned a 50 per cent interest, and a partnership return was properly filed reporting gross and net income. Inasmuch as Jack and Mae Rose each had a community interest in his share of the net income from this store, each 1955 U.S. Tax Ct. LEXIS 129">155 reported in his or her individual return one-fourth of the net income shown in the partnership return. Respondent in his brief states that "a valid partnership return may be read with the individual return to arrive at the total gross income stated in the return. See I. T. 3981, 1949-2 C. B. 78" and that he does not rely upon L. Glenn Switzer, 20 T.C. 759, in which this Court expressed a different view, and which was remanded by the Court of Appeals for the Ninth Circuit on September 17, 1954, with directions (in accordance with stipulation of parties) to vacate our decisions and enter decisions for the petitioners. Cf. Harry Landau, 21 T.C. 414, 421, in which this Court said: "The general rule is that an individual partner is deemed to own a share interest in the gross income of the partnership."The Ventura store was not operated by a partnership. It was community property of the petitioners and the income therefrom was community income. Each of the petitioners, therefore, should have reported one-half of the gross income from the business. Leslie A. 24 T.C. 755">769 , 17 T.C. 64, 67. The respondent urges that they did not do so in their individual returns, and that their failure to 1955 U.S. Tax Ct. LEXIS 129">156 do so is an omission from gross income by each of them. But we think it is unrealistic to say that the petitioners did not report the gross income of the Ventura store (with the exception of the $ 17,946.97 which each of them omitted). They did so on Form 1065, a "partnership return." Although there was no partnership between them in the business of this store, Form 1065 returns were filed for the years 1938 to 1948, inclusive, at the suggestion of a revenue agent to facilitate the reporting of the community income of the store. The so-called partnership return filed for 1943 reported the gross income of the Ventura store in which petitioners each had an equal interest. It was not the return of another taxable entity. Cf. Corrigan v. Commissioner, 155 F.2d 164, 166 (C. A. 6); Elvina Ratto, 20 T.C. 785, 789. It showed income of the community, a nontaxable entity. In the circumstances we think that the so-called partnership return filed for the Ventura store was merely an adjunct to the individual returns of Jack and Mae Rose and must be considered together with such individual returns and treated as part of them. This case is thus distinguishable from the Switzer case where 1955 U.S. Tax Ct. LEXIS 129">157 the return in question was a proper partnership return, whereas here it was nothing unless it was an adjunct to the individual returns. But if the Commissioner is now and henceforth to concede, contrary to our decision in the Switzer case, that a valid partnership return may be read with the return of an individual partner to arrive at the total gross income stated in the partner's return, then, a fortiori, the Form 1065 return in this case which was filed merely to facilitate the reporting of community income of the petitioners, similar returns having been accepted for a number of years for that purpose by the Commissioner, would have to be read together with the individual returns of the partners to ascertain how much gross income was reported by each of them. Cf. Germantown Trust Co. v. Commissioner, 309 U.S. 304">309 U.S. 304; Atlas Oil & Refining Corporation, 22 T.C. 552, 557. We hold, therefore, that one-half of the gross income appearing on the Ventura store "partnership" return must be imputed to the individual return filed by each petitioner in determining the total gross income stated therein for the purposes of section 275 (c).The following computation submitted by petitioners which 1955 U.S. Tax Ct. LEXIS 129">158 we find to be correct, demonstrates that when the Ventura "partnership" return is considered together with the individual return of each petitioner for 1943 (even without giving any effect to the gross income reported in the Santa Barbara partnership return) the omission of $ 17,946.97 by each petitioner was not in excess of 25 per cent of the gross income stated in his or her return. 24 T.C. 755">770 Jack RoseGross income shown on individual return$ 48,153.04Less share of net income of Ventura store reported in individualreturn22,954.84Balance$ 25,198.20Plus 1/2 the gross income shown on Ventura store "partnership"return52,009.20Total gross income for sec. 275 (c) purposes$ 77,207.4025% of $ 77,207.40 is$ 19,301.85Alleged "omissions" per notice of deficiency --Earned discounts$ 13,020.22Inventory adjustments4,926.75$ 17,946.97Mae RoseGross income shown on individual return$ 43,314.23Less share of net income of Ventura store reported in individualreturn22,954.84Balance$ 20,359.39Plus 1/2 the gross income shown on Ventura store "partnership"return$ 52,009.20Total gross income for sec. 275 (c) purposes$ 72,368.5925% of $ 72,368.59 is$ 18,092.15Alleged "omissions" per notice of deficiency --Earned discounts$ 13,020.22Inventory adjustments4,926.75$ 17,946.97Accordingly, 1955 U.S. Tax Ct. LEXIS 129">159 we have made a finding, and hold, that the assessment and collection of deficiencies in income and Victory tax of Jack Rose and Mae Rose for 1943, determined by respondent, are barred by section 275 of the Internal Revenue Code of 1939. Since the deficiencies for 1943 are barred the addition to tax for negligence for that year must likewise be disapproved.2. Trust Issue.The Commissioner determined that the two trusts created for the benefit of each of petitioners' children, Ronald and Lawrence, were not partners in the business of the Jack Rose Shops at Ventura and Santa Barbara, and that the income from those enterprises ascribed to the trusts for the years 1944 to 1948, inclusive, must be charged to petitioners.On January 2, 1944, petitioners had two minor sons, Ronald and Lawrence. On that date Jack Rose executed an instrument purporting to establish a trust for the benefit of Ronald, and Mae executed a similar instrument for the benefit of Lawrence. Jack Rose was 24 T.C. 755">771 named trustee in both instruments. The trusts were described as irrevocable and were to terminate in approximately 27 years. All income was to be added to principal but the trustee in his sole discretion could pay 1955 U.S. Tax Ct. LEXIS 129">160 out any sum for the beneficiary's use "to take care of any and all circumstances"; and upon any division or distribution of the property the trustee was given absolute and binding discretion in determining what constitutes a proper division. The corpus of each trust was stated to consist of "Accounts Receivable," "C. O. D.'s," "Merchandise Inventory," and "Fixtures," in specified dollar amounts in each of the two Jack Rose Shops. No specific assets were transferred to the trusts; the foregoing represented merely undivided interests in each of the four categories of assets described. Nor were any interests in real estate or other assets of the businesses transferred to the trusts. Gift tax returns were filed with respect to each of these trusts and the reported value of each gift was redetermined to be $ 50,304.15. A capital account was set up for each trust on the books of each of the Jack Rose Shops. At the end of each year, 24 per cent of the net income of the Ventura store and 12 per cent of the net income of the Santa Barbara store were credited to the capital account of each trust. Income tax returns were filed on the theory that each of the trusts was a partner in each 1955 U.S. Tax Ct. LEXIS 129">161 of the two stores. However, there were no written partnership agreements in which either of the trusts appeared as a partner. No representations were made to financial institutions or in the business world that the trusts were partners, nor was any such partnership disclosed on insurance policies or social security, unemployment insurance, or sales tax returns. No income was in fact paid over to the trusts, nor were any amounts paid out for the benefit of the trusts other than for the purpose of paying taxes on income that was being ascribed to the trusts.It is altogether too plain that the alleged partnerships were a sham, and petitioners have abandoned their position that these were bona fide partnerships.Petitioners contend, however, that even if the trusts were not partners, each trust was entitled to a "reasonable rate of return" based upon the value of the corpus, and to the extent of such reasonable rate of return income of the enterprises otherwise chargeable to petitioners must be attributed instead to the trusts. Petitioners' theory is not entirely clear, and the statutory basis for such result is not articulated.Petitioners argue that the trusts were entitled to a 15 1955 U.S. Tax Ct. LEXIS 129">162 per cent rate of return, and they rely heavily upon certain proceedings initiated in the California courts after the present cases had been docketed in this Court. Those proceedings were plainly nonadversary in character, 24 T.C. 755">772 and it is highly dubious whether they should have any controlling effect in the present litigation. Cf. Estate of Ralph Rainger v. Commissioner, 183 F.2d 587 (C. A. 9), affirming 12 T.C. 483; Saulsbury v. United States, 199 F.2d 578, 580 (C. A. 5); Lois J. Newman, 19 T.C. 708, affirmed, 222 F.2d 131 (C. A. 9); Estate of Arthur Sweet, 24 T.C. 488.As already noted, petitioners have not pointed to specific statutory provisions upon which they rely. In speaking of a "reasonable rate of return," they may perhaps be referring to interest payable to creditors. If so, they must be relying upon section 23 (b) of the Internal Revenue Code of 1939 which allows a deduction for interest. However, petitioners in fact paid no interest to the trusts during the years in question, 61955 U.S. Tax Ct. LEXIS 129">163 and since there is no contention that they are on any basis other than the cash basis, they certainly cannot obtain the benefit of interest deductions for the years before us.Wofford v. Commissioner, 207 F.2d 749 (C. A. 5), upon which petitioners rely, is distinguishable. There the trust was treated as having a one-third interest in the entire business in question, and, whatever may be thought of the correctness of that decision, the situation there presented was different from the one before us. There the trust was regarded as entitled to a fraction of the profits of the enteprise; here, petitioners argue that a specified rate of return (15 per cent) must be allowed to the trusts regardless of the earnings of the two Jack Rose Shops.Petitioners' position here is plainly an afterthought. There was an attempt to treat the trusts as partners during the years 1944-1948. However, the partnership theory was spurious, and petitioners abandoned it. Thereafter, for the years 1949, 1950, and 1951, no income was allocated to the trusts and no income tax returns were filed for them.Regardless of whether the subsequent nonadversary proceedings in the California courts may be taken as an authoritative disposition of the question whether 1955 U.S. Tax Ct. LEXIS 129">164 valid trusts were created, they certainly cannot control the Federal tax consequences which flow from such ruling. If petitioners' reasonable-rate-of-return theory is one turning upon the interest deduction, it is not available here for reasons already set forth above. On the other hand, if it is one which depends upon statutory provisions (not identified) akin to the partnership provisions, then petitioners must also fail for the same reason that the partnership theory would be ineffective to relieve petitioners of tax upon the income. "The crucial question," as the Supreme Court said in Commissioner v. Sunnen, 333 U.S. 591">333 U.S. 591, 333 U.S. 591">598, "remains whether the assignor 24 T.C. 755">773 retains sufficient power and control over the assigned property or over receipt of the income to make it reasonable to treat him as the recipient of the income for tax purposes."The management and control of the business of both the stores was in Jack Rose prior to the purported gifts, and remained in him thereafter. Under the terms of the trust instruments he was given broad powers of control and management of the trust assets. He could hold them, as trustee, in his own name, or in the name of his nominee. He could sell, 1955 U.S. Tax Ct. LEXIS 129">165 convey, or exchange them, or manage or control them, on such terms and in such manner as he deemed desirable. His decision as to a proper division of the trust property, partial or final, was binding on the beneficiary. In his discretion he could pay to or for the beneficiary any sum necessary to take care of "any and all circumstances." These powers enabled him to use the assets of the trust in the business of the two stores as they would have been used if the trusts had not been created. The trust indentures, therefore, effected no real change in the operation of the stores. Neither did they change the relationship and control which the petitioners had over their family property. The business, assets, and income of both stores continued to be controlled and dominated by Jack Rose. He could and did keep the assets and any proceeds of their sale or other disposition in the businesses. No bank account was opened for the trusts and no part of the income of the two stores was ever actually distributed to them. As we view the evidence, we have here another instance where a husband and wife assigned interests in their respective shares of community property to their children while 1955 U.S. Tax Ct. LEXIS 129">166 retaining effective control over both property and income. Jack Rose controlled both his and his wife's interest in that property and income prior to the assignments, and continued to do so thereafter. We find it difficult to perceive how the economic position of either was materially changed by the creation of the trusts.Petitioners have not shown that the Commissioner's determination in respect of the trust issue was in error. Cf. Losh v. Commissioner, 145 F.2d 456 (C. A. 10); Christopher v. Campbell, 223 F.2d 124 (C. A. 5); Eisenberg v. Commissioner, 161 F.2d 506 (C. A. 3).3. Depreciation of Ventura Store Building.This issue involves depreciation claimed by petitioners in their joint return for 1949 on the new Ventura store building which was completed in the latter part of 1948. The petitioners contend that the useful life of this building is 40 years and that depreciation should be allowed on this basis. The respondent determined that its useful life was 50 years and that a reasonable allowance for depreciation was 2 24 T.C. 755">774 per cent for 1949. The burden was on the petitioners to prove that the respondent's determination was erroneous.The building was constructed of reinforced 1955 U.S. Tax Ct. LEXIS 129">167 concrete and steel, and had a basement and three floors. It had a glass front extending to a high ceiling, and was architecturally planned for the ladies' ready-to-wear business. Evidence was introduced by petitioners to the effect that the front of the building should be changed within 10 to 25 years in order to attract business and that frequent changes should also be made in the interior of the building. Jack Rose and another witness engaged in the ladies' ready-to-wear business testified that the building had a useful life of from 30 to 35 years. We have carefully considered this and other evidence submitted by petitioners and are satisfied that the useful life of the building is 40 years.4. Charitable Contributions.This issue relates to the amount of deductions for charitable contributions for the years 1947, 1948, and 1949 to which the petitioners are entitled in addition to those stipulated by the parties to be allowable as deductions for those years. We have made a finding that contributions made by petitioners in addition to those stipulated to be allowable totaled $ 291.14 in 1947 and $ 262.62 in 1948, one-half of which is allocable to and deductible by each petitioner. 1955 U.S. Tax Ct. LEXIS 129">168 The deduction of other amounts, claimed as contributions in petitioners' returns for the years 1947, 1948, and 1949 and not included in the stipulation as allowable, is denied for lack of substantiation.5. Ranch Depreciation.Petitioners, by amendments to their petitions, make claim for allowance of depreciation on various improvements made on their 12-acre ranch in Carpinteria, California, for the taxable years 1946 through 1949. Mae Rose testified that this ranch was their personal home. In returns filed for the taxable years the petitioners did not report the receipt of any income from the operation of the ranch. There is no evidence that the ranch was operated as a business, and we do not agree with petitioners' statement on brief that the very size of the ranch, 12 acres, indicates that it was operated as a business rather than as a hobby. In the circumstances, the petitioners' claim for allowance of depreciation must be denied. Cf. Bradley v. Commissioner, 184 F.2d 860, 863 (C. A. 7).Decisions will be entered under Rule 50. Footnotes1. Income and Victory tax.↩1. Partnership returns were also filed for the Santa Barbara and Ventura stores for the years 1944 to 1948, inclusive, and will be considered in connection with the Trust Issue.↩2. The Santa Barbara store was sold in 1949.3. SEC. 275. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION.Except as provided in section 276 --(a) General Rule. -- The amount of income taxes imposed by this chapter shall be assessed within three years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period. * * *(c) Omission From Gross Income. -- If the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 per centum of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 5 years after the return was filed.↩4. On brief respondent contends for the first time that Mae Rose omitted an additional amount representing her community interest in farm income of $ 7,436.94 reported in the return of Jack Rose. This contention comes too late.5. Cf. Slaff v. Commissioner, 220 F.2d 65 (C. A. 9), and Deakman-Wells Co. v. Commissioner, 213 F.2d 894↩ (C. A. 3).6. The payment of income taxes of the trusts on the theory that they were partners can hardly qualify as payments of interest on an indebtedness.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625816/	ARTHUR Y. JOHNSON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentJohnson v. CommissionerDocket No. 5954-83.United States Tax CourtT.C. Memo 1985-534; 1985 Tax Ct. Memo LEXIS 94; 50 T.C.M. 1310; T.C.M. (RIA) 85534; October 21, 1985. Arthur Y. Johnson, pro se. Michael R. McMahon, for the respondent. WILBURMEMORANDUM FINDINGS OF FACT AND OPINION WILBUR, Judge: Respondent determined the1985 Tax Ct. Memo LEXIS 94">95 following deficiencies and additions to tax: Additions to TaxYearDeficiencySec. 6653(a) 1Sec. 6651(a)Sec. 66541979$5,512$276$944$13919805,3572681,067255198112,8506432,338651The issues for decision are whether petitioner had taxable income in the amounts determined by respondent and whether he is liable for additions to tax under section 6653(a), 6651(a), and 6654. FINDINGS OF FACT Some of the facts have been stipulated and are so found. Other facts are deemed admitted pursuant to Rule 90(c). The deemed admissions and stipulated facts are incorporated by this reference. Petitioner resided in Benton City, Washington, when he filed the petition in this case. During the 1979 taxable year, petitioner received wages of $10,560 from Atkinson Wright Schuchart, $123.88 from Fischbach/Lord Electric Company and $14,072.60 from Power City Electric, Inc. In that year petitioner also1985 Tax Ct. Memo LEXIS 94">96 received $28 of interest from the Internal Revenue Service and $89 of interest from I.B.E.W. No. 112 in that year. (The record provides no elaboration on the name I.B.E.W.). In 1980, petitioner received wages of $13,402.41 from Lord Electric Co., Inc., and of $9,478.25 from Power City Electric, Inc. Petitioner also received unemployment compensation of $1,538 from the State of Washington and interest of $51 from I.B.E.W. No 112 in that year. In 1981 petitioner received wages of $40,732.93 from Power City Electric, Inc. During each of the years in issue, petitioner filed Forms W-4 (Employee's Withholding Allowance Certificate) with his employers, on which he claimed that his wages were exempt from withholding. Petitioner also filed Federal income tax forms with respondent for each year in issue. On those forms, petitioner responded to each inquiry by typing either "OBJECT--SELF INCRIMINATION" or "NONE." The forms reported no information from which tax liability could be determined. OPINION We must first determine whether petitioner received taxable income in the amounts determined by respondent. Respondent properly served a request for admissions on petitioner. Petitioner1985 Tax Ct. Memo LEXIS 94">97 did not respond to this request. Rule 90(c) provides that each matter is deemed admitted unless the party to whom the request is directed responds appropriately within 30 days, or within such period as the Court may allow. The rule is self-executing. Freedson v. Commissioner,65 T.C. 333">65 T.C. 333, 65 T.C. 333">335-336 (1975), affd. 565 F.2d 954">565 F.2d 954 (5th Cir. 1978). Petitioner stated that he did not respond to the request because "I did not get my mail picked up." Because respondent properly served the document upon petitioner, petitioner's failure to collect his mail is irrelevant. Accordingly, the statements contained in the Request for Admissions are deemed admitted. The deemed admissions establish that petitioner received income during the years and in the amounts determined by respondent. As petitioner concedes, only the additions to tax remain in dispute. Respondent's determinations are presumed to be correct, and petitioner bears the burden of proving otherwise. Rule 142(a); Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933). During the years in issue, 2 section 6653(a) provided that: If any part of any underpayment * * of any tax imposed by subtitle1985 Tax Ct. Memo LEXIS 94">98 A * * 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. Petitionerin the instant case maintains that he objected to providing any information on his Federal income tax return because he "could be waiving [his] most fundamental constitutional1985 Tax Ct. Memo LEXIS 94">99 rights." He insists that he should be granted immunity from criminal prosecution before being required to provide the information requested on the Form 1040. In addition, petitioner presented the Court with three "Memoranda of Law" which contained various other constitutional arguments, including arguments relating to the privileges and immunities clause of Article IV, section 2, and the Seventh Amendment right to trial by jury. The privilege against self-incrimination may be asserted with respect to an Internal Revenue Service form only if petitioner shows a "relationship between the information required on the * * form and a real and appreciable danger of criminal prosecution at the time he was required to complete that form." Rowlee v. Commissioner,80 T.C. 1111">80 T.C. 1111, 80 T.C. 1111">1122-1123 (1983); see Hoffman v. United States,341 U.S. 479">341 U.S. 479 (1951). Petitioner has made no effort to show such a relationship, either during oral testimony before the Court or in his prepared written statements. His other arguments have been rejected by this Court on occasions too numerous to count, and merit no further discussion. McCoy v. Commissioner,76 T.C. 1027">76 T.C. 1027 (1981),1985 Tax Ct. Memo LEXIS 94">100 affd. 696 F.2d 1234">696 F.2d 1234 (9th Cir. 1983). Petitioner admitted that he was aware that his position was contrary to established case law by stating to this Court that "it has been continuously ruled in Tax Court that the Fifth Amendment is frivolous." While we certainly have never ruled that the Fifth Amendment is frivolous, we have held repeatedly that valid Fifth Amendment assertions must be supported by facts indicating that a criminal case is pending or contemplated or that an answer to the question posed would expose petitioners to a real danger of criminal prosecution. E.g., 76 T.C. 1027">McCoy v. Commissioner,supra;Howell v. Commissioner,T.C. Memo. 1981-631. Petitioner has clearly failed to meet his burden of proving that his failure to file valid Federal income tax returns was not due to negligence or intentional disregard of the rules. Rule 142(a); Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933). His failure to provide any information on the Form 1040, and his claim of exempt status on his Form W-4, warrant imposition of the addition to tax under section 6653(a). The addition to tax under section 6651(a) is imposed for the failure1985 Tax Ct. Memo LEXIS 94">101 to file a required return. Section 6651(a)(1). A document constitutes a valid return if it contains sufficient data from which respondent can compute and assess a tax liability and evinces an honest and genuine endeavor to satisfy the requirements for a return. E.g., McCaskill v. Commissioner,77 T.C. 689">77 T.C. 689, 77 T.C. 689">696-697 (1981). In the instant case, petitioner provided no information with which respondent might have determined his tax liability. As such, the form he filed does not constitute a return. See United States v. Johnson,577 F.2d 1304">577 F.2d 1304, 577 F.2d 1304">1310-1311 (5th Cir. 1978); United States v. Porth,426 F.2d 519">426 F.2d 519, 426 F.2d 519">523 (10th Cir. 1970). The addition to tax under section 6654 is imposed "[i]n the case of any underpayment of estimated tax by an individual" with exceptions not here applicable. Section 6654(a). Petitioner has presented no evidence to show that he paid estimated tax, and therefore has not met his burden of proof with respect to this issue. Rule 142(a); 290 U.S. 111">Welch v. Helvering,supra.We note that this Court, in its discretion and upon its own motion, may award damages upon to $5,000 against taxpayers who1985 Tax Ct. Memo LEXIS 94">*102 institute or maintain proceedings in this Court primarily for delay, or who advance positions that are frivolous or groundless. Section 6673; Sydnes v. Commissioner,74 T.C. 864">74 T.C. 864 (1980), affd. 647 F.2d 813">647 F.2d 813 (8th Cir. 1981). When we consider petitioner's admission relating to Fifth Amendment cases in this Court in conjunction with the frivolous arguments advanced, we are convinced that damages in the amount of $5,000 are appropriate. Decision will be entered for the respondent.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue, unless otherwise indicated. Any reference to "Rules" is to the Tax Court Rules of Practice and Procedure.↩2. Sec. 6653(a) was amended by Pub. L. 96-223, sec. 101(f)(8), 94 Stat. 253, effective after Feb. 29, 1980. The amendments do not, however, affect our decision in this case. In addition, sec. 6653(a) was amended by the Economic Recovery Tax Act of 1981 to provided for an additional addition to tax with respect to the portion of the underpayment attributable to negligence or intentional disregard of rules and regulations. See sec. 6653(a)(2), as amended by the Economic Recovery Tax Act of 1981, Pub. L. 97-34, sec. 722(b)(1), 95 Stat. 172, 342. This amendment is applicable to taxes the last date prescribed for payment of which is after December 31, 1981. Respondent has not chosen to assert this additional amount as to petitioner's 1981 taxable year, and we therefore do not consider its applicability.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625817/	ESTATE OF RICHARD HEMMONS HALSEY, LILIAN JOHNSON HALSEY, EXECUTRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Halsey v. CommissionerDocket No. 96404.United States Board of Tax Appeals42 B.T.A. 607; 1940 BTA LEXIS 978; August 21, 1940, Promulgated 1940 BTA LEXIS 978">978 ESTATE TAX - GROSS ESTATE. - Property the subject of an inter vivos gift to a needy sister may not be included in the gross estate under 302(a) or (c) of the Revenue Act of 1926, as amended. Jonathan Grout, Esq., for the petitioner. Davis Haskin, Esq., for the respondent. MURDOCK 42 B.T.A. 607">607 The Commissioner determined a deficiency of $1,192.49 in estate tax. The only issue for decision is whether the value of 240 shares of Halsey Realty Co. stock and the value of 115 shares of R. B. Halsey & Co. stock was property included in the gross estate of the decedent. FINDINGS OF FACT. Richard Hemmons Halsey, a resident of Bridgeport, Connecticut, died on November 27, 1934, at the age of 54 years. The estate tax return was filed with the collector of internal revenue for the district of Connecticut. The decedent was survived by his wife, to whom he left all of his property. They had no children. He was survived also by his younger brother, Julian, and by his sister, Mabel H. Prendergast. The latter was a widow with two children, one in high school, the other in college. Mabel had an income of less than $1,000 a year from a small store which1940 BTA LEXIS 978">979 she conducted and her brothers gave her necessary financial aid from time to time. R. B. Halsey & Co. was a corporation engaged in the manufacture and sale of shirts and ties. Its capital stock consisted of 500 shares each of $100 par value. The deceased father of the decedent left him 240 of those shares and left Julian 259. The other share was left to Mabel by her deceased mother. The decedent and Julian completely controlled and managed the business. The decedent was president, Mabel was vice president, Julian was secretary and treasurer, and all three were directors. Mabel attended the annual meetings but otherwise took no part in the business. The Halsey Realty Co. was a corporation. Its outstanding stock consisted of 1,000 shares each having a par value of $100. The father of the decedent left him 490 of those shares and left 509 to Julian. The remaining share was owned by Mabel. The officers and directors were the same as those of the other corporation and its affairs were conducted in the same way as were those of the other. Neither corporation has ever paid a dividend. The fair market value of the 42 B.T.A. 607">608 stock of R. B. Halsey & Co. in 1933 and 1934 was1940 BTA LEXIS 978">980 $98.18 per share and that of the Halsey Realty Co. was $107.20 per share. The only property which Mabel received from the estates of her parents was the two shares of stock above mentioned and the release of a mortgage upon her home. The decedent as president and Julian as secretary of the two companies executed two stock certificates made out to Mabel. One was for 115 shares of R. B. Halsey & Co. stock, and the other was for 240 shares of Halsey Realty Co. stock, all of which belonged to the decedent. The decedent placed the certificates in an envelope, went to Mabel's store, handed the envelope to her, and said: "Mabel, this is something I want you to have, but keep your mouth shut about it and it may be of use to you sometime", or words to that effect. Mabel received the envelope and placed it with her insurance policies and other important papers. The events described above all took place on August 16, 1933. Mabel did not examine the contents of the envelope or otherwise learn, until after the death of the decedent, that the shares were in her name. The two brothers and their sister did not discuss the subject further during the life of the decedent. The decedent, 1940 BTA LEXIS 978">981 on or about August 16, 1933, consulted a lawyer in regard to drawing a will. No will was drawn at that time. The transfer of the shares to Mabel was not mentioned to the lawyer. Later, on June 21, 1934, the lawyer drew a will for the decedent leaving all of his property to his wife. The decedent first mentioned the subject of his will to his wife after the death of her brother in January 1934. He enclosed his will and a letter of instruction and farewell to his wife, in a sealed envelope, and delivered the envelope to his wife on June 21, 1934, with instructions not to open it. He had previously read to her his draft of the will. His wife did not know of the transfer of the shares to Mabel. She and Mabel were friends. The decedent was active and in good health until a few weeks before his death. The state of his health on and about August 16, 1933, was excellent. He never mentioned his possible death or indicated, except as above described, that he was in any way contemplating his death. His statements and actions indicate that he expected to live and continue to be active in his business. He was injured in a fall in July 1934 and canceled his proposed business trip1940 BTA LEXIS 978">982 to Europe as a result. Thereafter, he again conducted his business as formerly. The record does not show the cause of his death. The Commissioner, in determining the deficiency, has included in the gross estate of the decedent $37,018.70 representing the value of the 240 shares of Halsey Realty Co. shares and of the 115 shares of R. H. Halsey & Co. shares standing in the name of Mabel H. Prendergast. He explained that "It is the position of the Bureau that the decedent was the actual owner of this stock and its value forms a part 42 B.T.A. 607">609 of his gross estate under the provisions of section 302(a) of the Revenue Act of 1926, as amended." He determined that the value of the entire gross estate was $100,578.47. Mabel, after the death of the decedent, obtained a loan of $900 from Julian, voluntarily endorsed the two certificates above mentioned, and placed them with a broker for the protection of Julian. The executrix of the decedent's estate, upon advice of counsel, instituted a suit against Mabel and Julian to set aside the transfers of August 16, 1933. The proceeding was settled by compromise before trial. The defendants paid to the executrix $7,250 and she released1940 BTA LEXIS 978">983 them from all claims of the estate in respect to the shares. The transfer of the shares by the decedent on August 16, 1933, was a gift in praesenti. It was not made in contemplation of death and it was not intended to take effect in possession or enjoyment at or after death. OPINION. MURDOCK: The theory upon which the Commissioner determined the deficiency was that the alleged transfer was an incomplete gift, inasmuch as Mabel did not know what was in the envelope and did not accept a gift of the certificates. However, it appears that she did accept the envelope and its contents with full intent to keep it as her own. She had thereafter continuous possession of the shares and was free to do with them as she pleased. The decedent clearly intended to make a gift; he was competent; the sister was competent, and accepted; and there was a transfer of title with complete relinquishment by the donor of dominion and control of the property. Cf. . The gift was complete on August 16, 1933. Cf. 1940 BTA LEXIS 978">984 . The respondent, by amended answer, has attempted to support his determination upon a wholly different theory - that of contemplation of death. The evidence shows that the transfer was made within two years of the date of death. The respondent cites section 302(c) of the Revenue Act of 1926, as amended, providing that such a transfer is presumed to have been made in contemplation of death unless the contrary be proven. The only affirmative argument advanced by the respondent is that the decedent consulted a lawyer about a will, learned that he could give a part of his property to his sister and the rest would go to his wife in the absence of a will, and then delivered the shares to his sister in contemplation of death. The evidence does not support this argument. The decedent did not mention such matters to the attorney. Almost a year later, on his fourteenth wedding anniversary, he executed his will and gave it, together with a beautiful letter, to his wife. The facts do not show that the transfer was made in contemplation of death. But the respondent contends that the 42 B.T.A. 607">610 statute requires the petitioner1940 BTA LEXIS 978">985 to prove that the transfer was not in contemplation of death. The decedent was only 54. He was extremely active in his business and enjoyed excellent health. He had no expectation of death within the reasonably near future. The respondent concedes these facts and relies, as above stated, upon the visit to the lawyer to show a testamentary motive. The stock was not paying dividends but it was worth about $37,000. The gift tended to equalize the distribution of the estate of their father among Julian, Mabel, and the petitioner, and to give substantial financial assistance to a widowed sister who was much in need of it. While the evidence pertaining to the transfer is not as clear and convincing as might be desirable, nevertheless, the reasonable conclusion to be drawn from the entire record is that the transfer was not made in contemplation of death. The respondent, also by way of amended answer, raises the point that the transfer was one intended to take effect in possession or enjoyment at or after the death of the donor. The decedent made an absolute transfer of the certificates, permanently parted with possession, and never again exercised any dominion or control over1940 BTA LEXIS 978">*986 or benefited from the shares. The sister received possession and thereafter retained it. She was free to use them as she saw fit. Her possession and enjoyment was immediate and was so intended. The respondent contends finally that, in any event, the amount of the settlement should be included in the gross estate. No such issue was raised by the pleadings and it may not be raised in the respondent's brief. The facts in regard to the suit and settlement are inadequate for a decision of such an issue. If there is anything, other than the fact of settlement, to show that the estate had a lawful and valuable claim at the date of death in respect to the shares, the respondent should have pleaded the facts and introduced evidence to establish them. Decision will be entered for the petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625822/	Winter & Company, Inc. (Indiana), Petitioner, v. Commissioner of Internal Revenue, RespondentWinter & Co. v. CommissionerDocket No. 15204United States Tax Court13 T.C. 108; 1949 U.S. Tax Ct. LEXIS 123; July 19, 1949, Promulgated 1949 U.S. Tax Ct. LEXIS 123">123 Decision will be entered for respondent. Petitioner claims error in the determination of deficiencies in income and excess profits taxes for its fiscal year 1942 and claims, under authority of section 710 (c) (3) (A) of the code, the right to carry back to that year an unused excess profits credit for each of its fiscal years 1943 and 1944. It also claims a net operating loss for 1944 which it claims the right to carry back to 1942. The result of such carry-backs, if allowed, would be overpayments of income and excess profits taxes for 1942. Petitioner's excess profits credit was computed on its average base period net income. Petitioner's business was the assembling of pianos from parts supplied by its parent. It operated on the basis of a fiscal year ending January 31. On or prior to April 30, 1942, petitioner ceased all operations, and dismantled and shipped its plant equipment, inventories, and all other tangible assets to its parent. Its intangible assets consisted of credits on the parent's books and represented accounts receivable which the latter had at all times held and collected. On the parent's books also was credited the value of the above described tangible1949 U.S. Tax Ct. LEXIS 123">124 assets. Petitioner had no earnings and no business expense subsequent to April 30, 1942. Held:(1) The period from February 1 to April 30, 1942, inclusive, was a tax year of less than twelve months within the meaning of section 711 (a) (3) (A) and, accordingly, the excess profits net income of such "short year" should be annualized for the application thereto of the excess profits credit for the fiscal year ended January 31, 1943.(2) Within the meaning of section 710 (c) (3) (A) the period May 1, 1942, to January 31, 1943, inclusive, and the fiscal year 1944 are not includible in petitioner's cycle of tax years for the carry-back of unused excess profits credit.(3) Since petitioner carried on no business or other operation and had no earnings or business expense in the fiscal year 1944, it sustained no operating loss in that year and, hence, there is no such loss to carry back. David Sher, Esq., and B. E. Brandes, Esq., for the petitioner.John J. Madden, Esq., for the respondent. Hill, Judge. Leech, J., dissents. HILL 13 T.C. 108">109 Respondent determined a deficiency in petitioner's income tax for the fiscal year ended January 31, 1942, in the amount of $ 209.13 and a deficiency in its excess profits tax for the same year in the amount of $ 449.75. Petitioner filed a claim for refund of excess profits tax for that year in the net amount of $ 10,481.73. The claim for refund was based upon the claimed right of carry-back of unused excess profits credit from the fiscal years ended January 31, 1943 and 1944, respectively, and of a net operating loss1949 U.S. Tax Ct. LEXIS 123">126 carry-back for the fiscal year 1944.The questions presented are: (1) Did petitioner have an unused excess profits credit for its fiscal year 1943? (2) Did petitioner have an unused excess profits credit for its fiscal year 1944, and, if so, is it entitled to carry such credit back to its fiscal year 1942? (3) Did petitioner have a net operating loss for its fiscal year 1944, and, if so, is it entitled to carry such loss back to its fiscal year 1942?Some of the facts are stipulated and are so found.FINDINGS OF FACT.Petitioner is a corporation, organized under the laws of the State of Indiana on August 4, 1937. It was formed by its then sole stockholder, Sears, Roebuck & Co. (sometimes hereinafter referred to as Sears). It was created by Sears at the suggestion of William G. Heller, president of petitioner corporation and also of Winter & Co. of New York (hereinafter sometimes referred to as the New York company or parent), whose stock was also wholly owned by 13 T.C. 108">110 Sears. It is on the accrual and fiscal year basis. Its fiscal year ends on January 31.Petitioner's tax return for the year involved was filed with the collector of internal revenue for the first collection1949 U.S. Tax Ct. LEXIS 123">127 district of Illinois, at Chicago.The New York company has been engaged in the business of manufacturing Winter pianos and piano parts for sale in the United States, as well as for export, for more than forty years.Petitioner's business was the assembling and finishing of pianos from cases, backs, and certain other parts shipped to it by the New York company. Petitioner was organized and its physical plant located at La Porte, Indiana, for the purpose of enlarging production of Winter pianos, saving freight charges, and facilitating quicker delivery of pianos to midwest and western customers of the New York company. The building and premises of the La Porte plant were occupied under a five-year lease which expired in August 1942 and has never been renewed. The pianos assembled and finished by petitioner were sold and distributed by the New York company to its customers.The inventories used by petitioner in its piano assembling operations were furnished and charged to petitioner by the New York company. The sales accounts of pianos assembled by petitioner were collected by the New York company and credited to petitioner. The New York company advanced to petitioner from such 1949 U.S. Tax Ct. LEXIS 123">128 collections the moneys required by the latter in the operation of its business.The books of account of petitioner were kept in the office of the New York company in New York by the same accountants that kept the books of the New York company.Retwin Corporation was organized under the laws of the State of New York on January 30, 1942, with an authorized and issued capital stock of 2,000 shares of $ 100 par value preferred, and 1,000 shares of common without par value. William G. Heller was also president of this company.On January 31, 1942, Sears, the New York company, and Retwin Corporation entered into an agreement whereby Sears sold the stock of petitioner to the New York company and sold the stock of the latter to Retwin Corporation. Pursuant to the agreement and effective prior to the indicated sales of stock, dividends were declared and credited to Sears by petitioner and the New York company of all their surplus and earnings, so that on January 31, 1942, these companies had no surplus or earnings.The stock of petitioner was sold by Sears to the New York company for $ 10,000 cash. Also, the New York company assumed under the agreement above mentioned the indebtedness of1949 U.S. Tax Ct. LEXIS 123">129 petitioner to Sears. As a result of the indicated transaction the New York company from 13 T.C. 108">111 and after January 31, 1942, owned all of the capital stock of petitioner and from and after that date Sears owed nothing to and had no claim against petitioner.The War Production Board on February 19, 1942, issued Limitation Order L-37, which restricted the manufacture of pianos to 50 per cent of the 1940 production. After February 19, 1942, and prior to May 1, 1942, petitioner assembled and finished as many pianos as it had complete parts for, and prior to May 1, 1942, it shipped and delivered to the New York company its remaining inventory, together with all its plant equipment. The value of the inventory returned was credited to petitioner. The plant equipment was fully depreciated and no credit was given petitioner therefor. From and after the last named date petitioner has had no plant, no plant equipment, and no inventory. Since that date petitioner has had no employees; it has not manufactured any pianos or engaged in any other operation or business; and it has incurred no expense.At the time petitioner disposed of its inventory and plant equipment and ceased operations1949 U.S. Tax Ct. LEXIS 123">130 on or before May 1, 1942, it was intended that petitioner should resume operations at an undetermined future time after the governmental restrictions against the manufacture of pianos had been removed and if and when the requisite supply of materials should become available, and also if and when it should be deemed that competitive and economic conditions warranted resumption. Petitioner's corporate charter has been kept alive and no resolution has been adopted or proposed for its dissolution.On May 29, 1942, the War Production Board issued Limitation Order L-37-A, which prohibited the further manufacture of pianos. This order was revoked May 10, 1945.Petitioner abandoned the use of the building and premises used in its Indiana plant prior to May 1, 1942, and abandoned their possession when its lease thereof expired in August 1942.For each of the years 1943 and 1944 petitioner filed an annual report with the Secretary of State of Indiana and paid its corporation franchise tax of $ 1. All the state and local personal property and real property taxes due from petitioner have been paid to date. Since April 30, 1942, petitioner has owned no tangible property. Petitioner also filed1949 U.S. Tax Ct. LEXIS 123">131 for the years 1943, 1944, and 1945 returns of capital stock tax. Such returns showed a "Declared Value of Entire Capital Stock" of $ 999 and no capital stock tax due.In 1945, shortly after the prohibition placed upon production of pianos was removed, petitioner made inquiry of the Reconstruction Finance Corporation as to whether there were any available plants in Indiana suitable for woodworking. That corporation sent petitioner a catalog giving pictures and details of plants throughout the country, 13 T.C. 108">112 but none of the plants listed was suitable for petitioner's purposes. No further action has been taken by petitioner in respect of a plant or site for the resumption of operations.The New York company produced 11,302 pianos in 1946 and 10,291 in 1947. In 1941 it manufactured 15,500 pianos, while in its fiscal year 1941 petitioner produced 3,500 pianos.Petitioner's balance sheets for the years 1942 to 1943, inclusive, show the following:1/31/421/31/43ASSETSCash$ 10,348.58$ 709.18Notes and accounts receivable (a)72,683.5115,783.62Inventories64,861.88Equipment (2,919.33) less reserve for depreciation(2,506.87) (b)412.46Deferred charges1,059.02Total149,365.4516,492.80LIABILITIES AND CAPITALAccounts payable (c)138,888.37Accrued liabilities477.081,800.00Capital stock10,000.0010,000.00Earned surplusNone4,692.80Total149,365.4516,492.80INCOME AND PROFITS OR (LOSS)Total income149,068.7113,646.03Total deduction78,035.236,527.87Net income (loss)71.033.487,118.161949 U.S. Tax Ct. LEXIS 123">132 1/31/441/31/45ASSETSCash$ 463.08Notes and accounts receivable (a)24,202.49$ 24,246.50InventoriesEquipment (2,919.33) less reserve for depreciation(2,506.87) (b)Deferred chargesTotal24,665.5724,246.50LIABILITIES AND CAPITALAccounts payable (c)Accrued liabilitiesCapital stock10,000.0010,000.00Earned surplus14,665.5714,246.50Total24,665.5724,246.50INCOME AND PROFITS OR (LOSS)Total income(Int.) 1.41NoneTotal deduction381.49(74.00)Net income (loss)(380.08)(74.00)(a) Notes and accounts receivable1/31/431/31/441/31/45Winter (New York)$ 15,195.16$ 13,827.73$ 13,871.74McGill Mfg. Co. (landlord, La Porte,Indiana)565.00Other23.46Net claim for refund of income andexcess profits taxes10,374.7610,374.76Total15,783.6224,202.4924,246.50(b) Depreciation -- Assets of $ 2,919.33 were fully depreciated during the fiscal year ended 1/31/43. Most of this equipment was junked.(c) 1/31/42 accounts payable$ 138,888.37(1) Trade (paid off during July 1942)5,723.73(2) Winter (N. Y.) (loan payable)138,164.64Total138,888.371949 U.S. Tax Ct. LEXIS 123">133 The intercompany transactions between petitioner and the New York company were reflected in their respective books of account by offsetting credits and debits. Petitioner's balance sheet for the fiscal year ended January 31, 1942, as shown above, included an item of accounts payable in the amount of $ 138,888.37. The accounts making up this item were payable to the New York company and consisted almost wholly of the account payable to Sears for dividends declared by petitioner as of January 31, 1942. This account was assigned by Sears to the New York company on that date. These 13 T.C. 108">113 accounts payable, after certain adjustments, were paid by the transfer on March 31, 1942, to the New York company by petitioner of accounts receivable in the amount of $ 136,590.24.Petitioner's balance sheet for its fiscal year ended January 31, 1943, shows notes and accounts receivable in the amount of $ 15,783.62. Of that amount, $ 15,195.16 was due from the New York company and represented the balance of moneys credited by that company from collections of petitioner's receivables after paying therefrom various items for and on behalf of petitioner. Also, in the balance sheet the liability1949 U.S. Tax Ct. LEXIS 123">134 item of $ 1,800 represents an accrual for Federal income taxes.Petitioner's balance sheets for its fiscal years 1944 and 1945 show notes and accounts receivable of $ 24,202.49 and $ 24,246.50, respectively. Of each of these amounts $ 10,481.73 represents the amount claimed by petitioner as a refund of income and excess profits taxes for its fiscal year 1942, the year here involved. Petitioner credited the amount of the claimed refund to earned surplus. Its earned surplus as shown in its balance sheets for the fiscal years 1944 and 1945 was $ 14,665.57 and $ 14,246.50, respectively. Petitioner had no earnings and no surplus earned subsequent to April 30, 1942. Petitioner had net income of $ 7,118.16 which it earned after January 31, 1942, and prior to May 1, 1942.For petitioner's fiscal year ended January 31, 1942, it paid Federal excess profits tax of $ 14,865.20 and income tax of $ 17,162.17. For its fiscal year ended January 31, 1944, petitioner claims a net operating loss in the amount of $ 724.96.There were included in the computation of the claimed net operating loss the following items which were deducted in petitioner's income and declared value excess profits tax 1949 U.S. Tax Ct. LEXIS 123">135 return for its fiscal year ended January 31, 1944:Interest$ 0.19Personal property tax330.30Legal expenses51.00Total381.49Petitioner's excess profits credit, based on its average base period net income, was $ 26,370.48.For its fiscal year ended January 31, 1943, petitioner claims an unused excess profits credit in the amount of $ 19,252.32. For its fiscal year ended January 31, 1944, it claims an unused excess profits credit of $ 26,370.48. Petitioner carried back the above mentioned excess profits credits to its fiscal year ended January 31, 1942, and also carried back the above mentioned claimed net operating loss to the same year. On the basis of that action, it filed on April 14, 1945, a claim for refund 13 T.C. 108">114 of income and excess profits tax for its fiscal year 1942 in the total amount of $ 10,481.73.In a statement attached to the notice of deficiency respondent stated as follows with respect to the claim for refund:It is held that you are not entitled under the provisions of Sections 710 and 23 of the Internal Revenue Code to carry back alleged unused excess profits credits or alleged net operating losses for any period subsequent to May 1, 1949 U.S. Tax Ct. LEXIS 123">136 1942 at which date you ceased operations.Respondent, in determining the deficiencies, treated the period February 1 to May 1, 1942, as a taxable year of less than twelve months and annualized petitioner's excess profits net income therefor. Such annualization eliminated any unused excess profits credit for the fiscal year 1943.Respondent made an adjustment with respect to petitioner's allowable capital stock deduction for the year ended January 31, 1942, and determined a deficiency in petitioner's income tax in the amount of $ 209.13 and a deficiency in its excess profits tax in the amount of $ 449.75. The stated adjustment is not in issue. The claim of overpayments of income and excess profits taxes based on the claimed right of carry-back of unused excess profits credits for petitioner's fiscal years 1943 and 1944 and of a net operating loss in 1944 are in issue.OPINION.The questions for determination as stated at the beginning of this report will be taken up in the order stated. The first question is, Did petitioner have an unused excess profits credit for its fiscal year ended January 31, 1943?If it had such credit it is entitled under section 710 (c) (3) (A) of the Internal1949 U.S. Tax Ct. LEXIS 123">137 Revenue Code1 to carry it back to its tax year 1942. Petitioner contends that it had such credit in the amount of $ 19,252.32.1949 U.S. Tax Ct. LEXIS 123">138 Respondent contends that, because petitioner had disposed of its assets and ceased all operations before May 1, 1942, and earned no income after that date, its tax year is not its fiscal year ended January 31, 1943, but is the short period from February 1 to April 30, 1942, inclusive. 13 T.C. 108">115 Respondent further contends that, because, as he claims, the tax year was a period less than twelve months, the excess profits net income for the short period should be annualized and the excess profits credit of $ 26,370.48 applied to the annualized income. Petitioner opposes annualization. If petitioner's contention should be sustained it will have a carry-back to its tax year ended January 31, 1942, of $ 19,252.32. If respondent's contention should be sustained, there will be no unused excess profits credit for petitioner's fiscal year 1943 and hence no such credit to carry back to its fiscal year 1942.The statutory provision relied on by respondent in support of his contention for annualization is section 711 (a) (3) (A) of the code. 21949 U.S. Tax Ct. LEXIS 123">139 The solution of the first question depends on whether the period beginning February 1, 1942, and ending April 30, 1942, was petitioner's tax year instead of the fiscal year beginning February 1, 1942, and ending January 31, 1943.It is our conception that the obvious purpose of the provisions for the carry-over and carry-back of unused excess profits credit from a current tax year is to establish a maximum cycle of five years over which to level off the income for excess profits tax purposes as between the more profitable and the less profitable operations of the respective years composing the cycle. The effectuation of the provisions for tax relief purposes and the prevention of its abuse for tax avoidance beyond the relief intended require of necessity that the period of tax years over which the carry-over or carry-back can be made shall embrace only a period of business operations or of operations to effect a conversion or liquidation thereof.If and when, within such authorized maximum cycle, a corporation destroys its potentiality for the production of income by disposing of its capital, inventories, and assets, and ceases operations, goes out of business, and, consequently, 1949 U.S. Tax Ct. LEXIS 123">140 ceases to produce income, its cycle for the carry-over and carry-back of unused excess profits credit thereupon terminates. In respect of the excess profits credit, the period following cessation of operations under such circumstances is not a tax period and it therefore ceases to be a constituent part of the cycle within which a carry-over and carry-back of an unused excess profits credit is provided.13 T.C. 108">116 This case presents a unique factual situation. Petitioner was a corporate entity, but in practical effect was operated as a department of its parent, the New York company. Petitioner assembled pianos from constituent parts supplied and shipped to it by its parent. Petitioner's inventories so supplied were charged to it on the parent's books. The pianos assembled by petitioner were sold as its parent's pianos to the latter's customers. The sales accounts were held and collected by the parent and credited on its books to petitioner. From the proceeds of the collections the parent advanced to petitioner such amounts as were required by the latter to carry on its operations and charged petitioner therewith. The parent retained in its custody the balance thereof. Petitioner's1949 U.S. Tax Ct. LEXIS 123">141 books of account were kept by the parent at the offices of the latter in New York. The same persons kept and audited the books of the parent and of petitioner. Except for cash advanced by the parent to petitioner to carry on the latter's operations, no moneys were transmitted from the parent to petitioner or vice versa. The intercompany accounts were settled by bookkeeping entries of offsetting credits and debits.When it was determined, on or about February 19, 1942, that petitioner should cease operations, such pianos as petitioner had complete parts for in inventory were assembled, sold, and distributed to the parent company's customers and its remaining inventories and plant equipment were shipped to the parent in New York and credited on the latter's books to petitioner. There remained in petitioner's possession no other tangible property. Petitioner's intangible property consisted of credit entries on the parent's books.The foregoing statement as to intangible property does not include petitioner's claim for refund. Whether such claim has substance as property is the ultimate issue for determination.It is obvious that a distribution of petitioner's intangible property1949 U.S. Tax Ct. LEXIS 123">142 to its parent was available at any time to the parent, and at the latter's behest, by mere book entries, and that without formal distribution the parent used the funds represented by the book credits above mentioned.It is apparent that the course of petitioner's action and function as a corporate entity was and is entirely dictated and controlled by its parent to subserve the latter's convenience and economic interests and that petitioner, notwithstanding its recognition as a corporate entity, can not independently formulate or execute for itself any functional program.Petitioner was not dissolved and its charter has been kept alive, but since April 30, 1942, it has been a mere empty corporate shell, not for any present or current purpose, but for a contingent future purpose of petitioner's parent. Since April 30, 1942, petitioner has not been a 13 T.C. 108">117 functioning corporation. As of that date petitioner was stripped of its plant, equipment, and financial structure. It was reduced to a state of complete inertia and its charter was folded up and laid away. Whether or not petitioner will ever be recapitalized, refinanced, reinventoried, reequipped and again put in operation 1949 U.S. Tax Ct. LEXIS 123">143 depends entirely upon the decision of its parent. That decision has not been made. Many years have now elapsed since petitioner was laid to rest and no action has been taken to reanimate it.Since April 30, 1942, petitioner has had no operations, no earnings, no income, and no expense except its franchise tax. In short, no period from and after April 30, 1942, has been a tax year or part of a tax year of petitioner within the meaning of the applicable statutory provisions respecting the carry-over or carry-back of unused excess profits credit.As above indicated, the purpose of the statutory provision for the carry-over and carry-back of an unused excess profits credit is to level the burden of excess-profits taxes over a period of not exceeding five consecutive tax years of a going concern. If a corporation to which the provision for such credit is applicable should discontinue its operating functions after the lapse of a month, a year, or two years, within such applicable period, we think it inconceivable that Congress intended that the excess profits credit was to apply not only to the operating years, but also to each of the remaining nonoperating years of the maximum authorized1949 U.S. Tax Ct. LEXIS 123">144 cycle. For if there is no production there can be no excess profits income, potential or actual, and, hence, no occasion for the authorization of an excess profits credit. It follows that if, under the situation stated, no excess profits credit is allowable, there could be no excess profits credit to carry back.In the above expression of our views we are not unmindful of the following court decisions: United States v. Kingman, 170 Fed. (2d) 408; Union Bus Terminal, Inc., 12 T.C. 197; Allegheny Broadcasting Corporation, 12 T.C. 522; Mesaba-Cliffs Mining Co. v. Commissioner, 174 Fed. (2d) 857; Wier Long Leaf Lumber Co. v. Commissioner, 173 Fed. (2d) 549.An examination of the listed cases discloses that the decision in each deals with a regularly operating corporation whose unused excess profits credit was sought to be carried over, as in the Mesaba case, or a corporation whose functioning as such had continued pending liquidation in the year from which it was sought to carry back unused excess profits credit. 1949 U.S. Tax Ct. LEXIS 123">145 The Mesaba case is obviously not a precedent for the decision here.The Kingman case is distinguishable on its facts from the instant case. In that case, as here, there was involved the question of a short taxable year and the annualization of excess profits income against 13 T.C. 108">118 which to apply the excess profits credit. On April 3 of its calendar tax year 1943 the Kingman corporation, pursuant to a plan of liquidation, distributed to its sole stockholder all of its physical operating assets. Thereafter it engaged in no activities or operations other than as hereinafter stated. The corporation retained its claims against the Government for refund of income and excess profits taxes, including its proposed claim under section 722 and its right to post-war refund of excess profits taxes. The latter item consisted of nonnegotiable bonds evidencing its right to the postwar refund of excess profits taxes. Application was filed with the collector of internal revenue on September 10, 1943, for refund of excess profits tax for the year 1942 under the provisions of section 722. That claim was pending during the remainder of the calendar year 1943. The corporation's 1942 1949 U.S. Tax Ct. LEXIS 123">146 excess profits tax return, after adjustments, showed that it was entitled to a postwar refund credit of $ 2,586.08. Its return for the year 1943, after adjustments, showed that it was entitled to a postwar refund credit of $ 1,305.95. The original returns prior to adjustment showed a postwar refund credit of $ 2,267.90 for 1942 and $ 598.42 for the year 1943. Under the law as it then stood the taxpayer would be entitled to receive the correct amount of its postwar refund credit only after termination of the war. On or about April 30, 1945, the Kingman corporation received income by way of interest on overassessments of tax for 1942 and on or about January 29, 1946, it received income in the amount of $ 98.94 as interest on overassessment of income tax for the year 1943. It also received from the United States in years subsequent to 1943 the postwar refunds hereinabove referred to. The Kingman corporation retained its corporate existence throughout the years mentioned for the purpose of prosecuting the claims above enumerated.A deficiency in excess profits tax was determined against the corporation on the theory and contention that the period January 1 to and including April 1949 U.S. Tax Ct. LEXIS 123">147 3, 1943, was a taxable year of less than 12 months, on the basis of which the Commissioner annualized the corporation's income for the purpose of applying thereto the excess profits credits for the calendar year 1943.In the instant case petitioner received no income after April 30, 1942, and had no claim for refund under section 722 and had no bonds evidencing its right to a postwar refund of excess profits taxes. In the instant case the corporate existence was not retained for any of the purposes for which the corporate existence was retained in the Kingman case or for any current purpose.In the instant case the claim for refund filed April 14, 1945, is based on petitioner's claim of right to carry back unused excess profits credits and a net operating loss from a period in which it had no operation or income.13 T.C. 108">119 On the facts in the Kingman case as above summarized, both the Federal District Court and the U. S. Court of Appeals for the Fifth Circuit held that the action of the Commissioner in determining a short taxable year and in annualizing the income thereof was error. By reason of the distinction in the facts between the Kingman case and the instant case, 1949 U.S. Tax Ct. LEXIS 123">148 the decision in the former is not a precedent for a decision in the latter.The Wier case involved the question of whether the taxpayer there was entitled to carry back to the year 1942 an unused excess profits credit for each of the years 1943 and 1944. The Wier corporation began liquidation in 1942 and continued in liquidation throughout 1943 and 1944. It retained its corporate existence beyond the period of those years.The Court of Appeals for the Fifth Circuit held that at the end of 1943 the process of liquidation had reached a stage where there was no occasion to delay formal dissolution of the corporation and also held that at the end of 1943 the corporation was de facto dissolved. Accordingly that court held that the Wier corporation was entitled to carry back to 1942 an unused excess profits credit for 1943, but that it was not entitled to carry back such credit for the year 1944.The Court of Appeals, in its decision in the Wier case, said:We find ourselves in equal disagreement with the petitioner's broad position, that the facts and circumstances of, and the stage reached in, liquidation are without significance, and that the only relevant inquiry in a1949 U.S. Tax Ct. LEXIS 123">149 case of this kind is whether the corporation is a corporation still if only in name and form.We find ourselves, however, in general agreement with the view of the Commissioner that the fact of liquidation and the particular circumstances and stages of it are relevant to the inquiry here, and that they may, indeed must, be inquired into.We agree with him, too, that if it appears that the corporation is a corporation in name and semblance only, without corporate substance and serving no real corporate purpose, it must, though not formally dissolved, be treated as dissolved de facto.The above quoted excerpt from the Wier case is authority for our holding on the facts in the instant case that, notwithstanding the petitioner here retained its legal existence, it was, for the purpose of excess profits taxes, de facto dissolved as of April 30, 1942, and that the period February 1 to April 30, 1942, inclusive, was a short taxable year. The quoted excerpt is also authority for our holding that there can be no carry-back to 1942 of the unused excess profits credit for the year 1944.Because of the dissimilarity between the facts in the instant case and those of the Union Bus1949 U.S. Tax Ct. LEXIS 123">150 and Allegheny cases, neither of those cases rules the decision here.The essence of the factual picture here is that the operation and functions of petitioner reduced it to a mere department of its parent, which on April 30, 1942, stored petitioner's charter to await its use 13 T.C. 108">120 if and when the parent should so decide to set up another activity, departmental or otherwise, under corporate form.Petitioner's corporate charter was not intended to be and was not surrendered or canceled. But, notwithstanding its charter has been kept alive, all substance was drawn out of the corporate body as of or prior to April 30, 1942. Since that time, in a practical sense, petitioner has been as effectually dead as if it had been mummified.Also, as a basis of its claimed right to carry back unused excess profits credits and a net operating loss to its fiscal year 1942, petitioner contends that it was compelled to cease operations because of War Production Board Limitation Orders L-37 and L-37-A, hereinabove described. By reason of such orders petitioner was unable to continue its operation of assembling pianos. It did not elect to convert to a permissible line of production. The gist1949 U.S. Tax Ct. LEXIS 123">151 of this contention is that, because petitioner did not voluntarily quit business, but was compelled to do so by the Government, it should be permitted, for excess profits tax purposes, to carry back and apply to its tax year 1942 an unused excess profits credit for each of the two succeeding fiscal years, 1943 and 1944. We see no merit in this contention.Petitioner claims a net operating loss for its fiscal year 1944 and the right, under section 122 (b) (1) of the Code, 3 to carry back such loss to its tax year 1942.1949 U.S. Tax Ct. LEXIS 123">152 No evidence was offered to establish that the deductions which petitioner claims resulted in a net operating loss in its fiscal year 1944 represented expense connected with its business operations. Moreover, it affirmatively appears from the evidence, and is so found, that petitioner owned no tangible personal property subsequent to April 30, 1942. Therefore, it does not appear from the evidence that the deducted item of $ 330.30 for personal property taxes in 1944 represented taxes owed by petitioner.We hold, therefore, that within the meaning of section 710 (c) (3) (A) the period from May 1, 1942, to January 31, 1943, inclusive, and the period February 1, 1943, to January 31, 1944, inclusive, are not includible in petitioner's cycle of tax years for the carry-back of unused excess profits credit.We hold, further, that within the meaning of section 711 (a) (3) (A) the period February 1 to April 30, 1942, inclusive, is, for the 13 T.C. 108">121 purpose of this proceeding, a taxable year of less than twelve months, or a "short taxable year" and, accordingly, the excess profits net income for that taxable year should be annualized. Riteway Products, Inc., 12 T.C. 475;1949 U.S. Tax Ct. LEXIS 123">153 Kamin Chevrolet Co., 3 T.C. 1076.We also hold that, in addition to the reason that there was a lack of evidence to establish the loss claimed as a net operating loss, since petitioner was not engaged in a business or other operation after April 30, 1942, it could not have had an operating loss for a tax year subsequent to that date. Accordingly, there can be no carry-back of a net operating loss from petitioner's fiscal tax year 1944 to its fiscal tax year 1942.Decision will be entered for respondent. Footnotes1. SEC. 710. IMPOSITION OF TAX. * * (c) Unused Excess Profits Credit Adjustment. -- * * (3) Amount of unused excess profits credit carry-back and carry-over. --(A) Unused Excess Profits Credit Carry-back. -- If for any taxable year beginning after December 31, 1941, the taxpayer has an unused excess profits credit, such unused excess profits credit shall be an unused excess profits credit carry-back for each of the two preceding taxable years, except that the carry-back in the case of the first preceding taxable year shall be the excess, if any, of the amount of such unused excess profits credit over the adjusted excess profits net income for the second preceding taxable year computed for such taxable year (i) by determining the unused excess profits credit adjustment without regard to such unused excess profits credit, and (ii) without the deduction of the specific exemption provided in subsection (b) (1).↩2. SEC. 711. EXCESS PROFITS NET INCOME.(a) Taxable Years Beginning After December 31, 1939. -- * * (3) Taxable years less than twelve months. --(A) General Rule. -- If the taxable year is a period of less than twelve months the excess profits net income for such taxable year (referred to in this paragraph as the "short taxable year") shall be placed on an annual basis by multiplying the amount thereof by the number of days in the twelve months ending with the close of the short taxable year and dividing by the number of days in the short taxable year. The tax shall be such part of the tax computed on such annual basis as the number of days in the short taxable year is of the number of days in the twelve months ending with the close of the short taxable year.↩3. SEC. 122. NET OPERATING LOSS DEDUCTION. * * *(b) Amount of Carry-Back and Carry-Over. --(1) Net Operating Loss Carry-Back. -- If for any taxable year beginning after December 31, 1941, the taxpayer has a net operating loss, such net operating loss shall be a net operating loss carry-back for each of the two preceding taxable years, except that the carry-back in the case of the first preceding taxable year shall be the excess, if any, of the amount of such net operating loss over the net income for the second preceding taxable year computed (A) with the exceptions, additions, and limitations provided in subsection (d) (1), (2), (4), and (6), and (B) by determining the net operating loss deduction for such second preceding taxable year without regard to such net operating loss.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625823/	DiANDREA, INCORPORATED, ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Di Andrea, Inc. v. CommissionerDocket Nos. 13349-78, 13350-78, 13351-78, 13352-78.United States Tax CourtT.C. Memo 1983-768; 1983 Tax Ct. Memo LEXIS 22; 47 T.C.M. 731; T.C.M. (RIA) 83768; December 21, 1983. Robert O. Rogers, for the petitioners. Ivan A. Gomez, for the respondent. RAUMMEMORANDUM FINDINGS OF FACT AND OPINION RAUM, Judge: The Commissioner determined the following deficiencies1983 Tax Ct. Memo LEXIS 22">23 and overassessment in these consolidated cases: DocketPetitionerNumberYearDeficiencyOverassessmentDiAndrea, Inc.13349-781975$111,742.00Arthur DiAndrea and13350-781975206,759.00Yolanda DiAndrea1976133.081977$4,679Yolanda DiAndrea,13351-781975111,742.00TransfereeArthur DiAndrea,13352-781975111,742.00TransfereeIn an amendment to his Answer, the Commissioner requested an increase of $42,940 in the 1975 deficiency in docket No. 13350-78. 2This case involves the interplay of sections 337 and 333, I.R.C. 1954. The corporate petitioner transferred its property to its stockholders (the individual petitioners) who in turn transferred it to a purchaser. The stockholders had made an election to liquidate the corporation under section 333 with the understanding they, rather than the corporation, would be treated as having made the sale. The principal matters for adjudication are (1) whether, on this record, the corporation must be considered as the seller; and (2) 1983 Tax Ct. Memo LEXIS 22">24 whether the nonrecognition provisions of section 337(a), which would be rendered inapplicable by section 337(c)(1)(B) if there were a section 333 liquidation, are nevertheless applicable because the section 333 election to liquidate was made under a mistake of fact and was therefore not binding upon the stockholders. FINDINGS OF FACT Petitioners Arthur DiAndrea ("petitioner" or "Arthur") and Yolanda DiAndrea ("Yolanda"), husband and wife, were residents of Delray Beach, Florida, when they filed their petitions herein. They filed their Federal income tax returns for the taxable years 1975, 1976, and 1977 with the Internal Revenue Service Center, Chamblee, Georgia. At all relevant times, the individual petitioners were officers and directors of and owned all of the outstanding stock of petitioner DiAndrea, Incorporated. 3 The individual petitioners and DiAndrea, Incorporated, will sometimes hereinafter be referred to in the aggregate simply as "petitioners". 1983 Tax Ct. Memo LEXIS 22">25 DiAndrea, Incorporated ("DiAndrea" or the "corporation"), a cash basis taxpayer, was a New Jersey corporation engaged, as lessor, in the business of leasing the Palm Beach Motel and its contents ("Motel"). The Motel was located in Wildwood Crest, New Jersey. During the period in issue, DiAndrea's mailing address was 823 Palmer Road, Delray Beach, Florida, the home address of the individual petitioners. It filed its United States Corporate income tax return for its final taxable year, which ended December 15, 1975, 4 with the Internal Revenue Service Center, Chamblee, Georgia. On August 1, 1966, the individual petitioners acquired title to the Motel. 5 On April 4, 1967, they transferred title to the motel property to the corporation, which engaged in the business of operating the Motel until 1972. On January 13, 1972, the corporation agreed to lease the Motel to A & J Woolley Corporation ("Woolley"), the lease to become effective on April 15, 1972, and to terminate on January 12, 1975. 1983 Tax Ct. Memo LEXIS 22">26 Also on January 13, 1972, the corporation executed an option agreement which gave Woolley the right to purchase the Motel for $695,000. Woolley paid $100,000 for the option, which was exercisable at any time on or before January 12, 1975. The option agreement provided that the $100,000 paid for the option would be applied against the $695,000 selling price, that the balance would be payable over 17 years "in equal annual installments of $35,000 * * * [plus] interest at a rate of eight (8) per cent per annum" and that Woolley would "execute and deliver a purchase money bond and mortgage, Financing Statements, Security Agreement, individual and personal Guaranty, in the amount of the unpaid balance of the sale price of Five Hundred Ninety-Six ($596,000.00) Dollars". 6 The option agreement further provided that in the event that the option was not exercised, Woolley would "forfeit the sum of $75,000.00 of the $100,000 [option cost], to [the corporation], and this agreement shall be null and void upon [the corporation's] payment of $25,000 back to [Woolley]". 1983 Tax Ct. Memo LEXIS 22">27 Petitioner Arthur DiAndrea fully expected Woolley to exercise its option to purchase the Motel. Sometime prior to the expiration of the option on January 12, 1975, he discussed the tax consequences of the expected sale with his accountant Paul Trois. Trois advised Arthur that to avoid "get[ting] clobbered with taxes", he and Yolanda should dissolve DiAndrea pursuant to a section 333 election and then, in their individual capacity rather than as agents for the corporation, sell the Motel to Woolley. 7On February 19, 1974, petitioner requested Woolley to postpone the closing of the sale of the Motel from January 1975 to "September or October of 1975". 1983 Tax Ct. Memo LEXIS 22">28 8 Sometime in January 1975 the corporation and Woolley executed an "Extension Agreement" which postponed the date for settlement to October 5, 1975. The Agreement further provided that "[Woolley] * * * shall have been deemed to have exercised its option so that the option agreement is now an agreement for purchase", and that "[Woolley] * * * shall continue in possession, and shall pay in reduction of principal for said land and premises the sum of $35,000.00, and shall pay interest at the rate of 8 percent per annum on $595,000.00, which will be $47,600.00 for the portion of the year 1975 to October 3, 1975". The remaining balance of $560,000 was to be paid over 16 years at a rate of $35,000 per year plus interest at eight percent. The Agreement was signed for Woolley and the corporation by Albert Woolley and petitioner Arthur DiAndrea, respectively. In addition, Albert Woolley, his wife and the individual petitioners agreed separately that they would "cause our respective corporations to perform their agreements as agreed". The corporation's 1975 income tax return includes $82,600 as payments from Woolley in compliance with the Extension Agreement. 91983 Tax Ct. Memo LEXIS 22">29 On September 2, 1975, DiAndrea held a "Joint Special Meeting of Stockholders and Directors" at which it was resolved to liquidate the corporation pursuant to section 333 and, "as soon as practical" after liquidation, to dissolve the corporation pursuant to state law. On September 10, 1983, the corporation executed a deed and bill of sale transferring to the individual petitioners title to the motel property and its contents. On September 15, 1975, DiAndrea filed a Form 966, Corporate Dissolution or Liquidation, and Arthur and Yolanda filed a Form 946, Election of Shareholders under Section 333 Liquidation. The Internal Revenue Service received the forms on September 19, 1975. On October 9, 1975, the individual petitioners executed a deed and bill of sale purporting to transfer title to the Motel (i.e., the motel property and its contents) to Woolley. On November 7, 1975, Woolley executed a note to the individual petitioners secured by a mortgage on the motel property. The note was in the amount of $560,000, as required by the Extension Agreement, and was payable over 16 years at the rate of $35,000 a year in 48 thrice-yearly principal installments of $11,666.66 on the 15th1983 Tax Ct. Memo LEXIS 22">30 of July, August, and September of each year. 10 Interest, computed at a rate of eight percent per annum on the unpaid balance, was to be added to the principal payments. On September 24, 1975, Arthur paid a $40,000 personal debt to Main National Bank using a check drawn on the corporation's checking account. The corporation's cash disbursements journal and shareholder loan journal treat the withdrawal as a loan. On November 21, 1975, Arthur deposited $40,000 in the corporation's checking account. 11 The cash receipts journal records this deposit as a repayment of the earlier loan. Also, the parties have stipulated that as a distribution in liquidation, DiAndrea cancelled a $12,739 loan obligation of Arthur to DiAndrea and that the cancellation should be treated as a distribution of money. 1983 Tax Ct. Memo LEXIS 22">31 At all relevant times, Arthur and Yolanda had sole signature authority over DiAndrea's checking account. During November 1975, Arthur drew two checks payable to Yolanda in the total amount of $18,029.50 and during December he drew a check payable to Yolanda in the amount of $14,800 and a check payable to the First Bank and Trust of Boynton Beach (a depository for the Internal Revenue Service) in the amount of $8,000. The payments to Yolanda were originally accounted for as salary and the payment to the Boynton Bank represented taxes withheld with respect to this salary. However, in the deficiency notice in docket No. 13349-78, the Commissoner reclassified these payments as distributions with respect to stock and petitioners have agreed with this characterization. The checking account was closed on January 7, 1976, at which time its balance of $71.31 was distributed to Arthur and Yolanda. The corporation's 1975 tax return shows that it was liquidated on December 15, 1975. As of the time of its liquidation it owed $500 in travel expenses and $5,416 12 in New Jersey income taxes. The individual petitioners paid a portion of the foregoing amounts in 1975 and the remainder in1983 Tax Ct. Memo LEXIS 22">32 1976. In their respective tax returns for the years in issue, petitioners reported their income relying on the assumptions that DiAndrea distributed all of its assets, including the Motel, pursuant to a valid section 333 liquidation and that Arthur and Yolanda sold the Motel in their individual capacity. In the deficiency notices herein, the Commissioner treated the sale of the Motel as made by the corporation and determined deficiencies accordingly. Petitioners now contend that the sale of the Motel should not be imputed to DiAndrea or, in the alternative, that their section 333 election is either invalid or revocable, with the result that section 337 would become applicable and the gain on sale realized by the corporation would be nonrecognizable. Also in issue is the Commissioner's determination that the travel and state tax expenses incurred by the corporation but paid by the individual petitioners in 1976 are not deductible by the corporation on its final tax return. 131983 Tax Ct. Memo LEXIS 22">33 The individual petitioners do not contest their transferree liability in respect of any deficiency that may ultimately be approved against the corporation. OPINION The initial matter in dispute is whether the sale of the Motel is to be imputed to the corporation, rather than to its stockholders ( the individual petitioners) and whether, in the circumstances, the corporation is to be relieved of tax in respect of the gain on sale by reason of section 337, I.R.C. 1954. The answer to the latter question depends upon whether there was a binding election under section 333. We begin with consideration of who must be treated as having made the sale. We find upon the record before us, following the guidelines of Commissioner v. Court Holding Co.,324 U.S. 331">324 U.S. 331 (1945), that the corporation was the seller. Not only were the negotiations for the sale conducted on behalf of the corporation, but the option to purchase was sold by the corporation to the ultimate purchase with provision that the $100,000 option price was to be applied against the total agreed upon purchase price ($695,000) for the Motel. Thereafter, even upon expiration of the option, an "Extension Agreement" 1983 Tax Ct. Memo LEXIS 22">34 was executed on behalf of the corporation, explicitly stating that the purchaser was deemed to have exercised the option "so that the option agreement is now an agreement for purchase". Moreover, installments were thereafter in fact paid to the corporation in discharge of the purchaser's stated obligation to pay principal and interest, prior to the transfer of the Motel to the stockholders for retransfer to the purchaser in order to create the illusion that the sale was being made by the stockholders rather than by the corporation. In our judgment, petitioners' position here is weaker than that of the taxpayer in Court Holding Co., and we find as a fact that the sale was made by the corporate petitioner (DiAndrea, Inc.), and not by its stockholders, the individual petitioners. Although we have thus concluded that the sale must be attributed to DiAndrea, Inc., it does not necessarily follow that it is chargeable with the gain on sale. Section 337 was enacted to render such gain nonrecognizable if its conditions are satisfied. 14 One of the limiting conditions is stated in section 337(c)(1)(B) as follows: (c) Limitations.-- (1) * * * This section shall not apply to any1983 Tax Ct. Memo LEXIS 22">35 sale or exchange-- * * (B) following the adoption of a plan of complete liquidation, if section 333 applies with respect to such liquidation. We must therefore now consider whether the stockholders' attempt to liquidate the corporation under section 333 must be given effect. An election to be governed by the provisions of section 333 is generally not subject to revocation. See sections 1.33-2(b)(1) and 1.333-5(g), Income Tax Regs. Nevertheless, we hold, for reasons set forth below, that petitioners were not bound by their election to liquidate under section 333, since the election was made on the basis of a mistake of fact,1983 Tax Ct. Memo LEXIS 22">36 and that consequently, by reason of controlling law of the Fifth Circuit, 15 they are not bound by their election to liquidate the corporation under section 333. In Meyer's Estate v. Commissioner,200 F.2d 592 (5th Cir. 1952), revg. 15 T.C. 850">15 T.C. 850 (1950), the stockholders elected to be taxed under a predecessor provision of section 333 (section 112(b)(7) of the Internal Revenue Code1983 Tax Ct. Memo LEXIS 22">37 then in effect). The election was made in reliance upon a specified amount of earned surplus appearing on the corporate books. It turned out, however, as a consequence of the Commissioner's subsequent determination in respect of the effect of a prior corporate reorganization and merger, that the corporation's earned surplus was greatly in excess of what the stockholders believed it to be at the time they made their election. As a result, if the election were binding, the stockholders would be subject to a disproportionately high tax, and they sought to avoid the consequences of the election. The Fifth Circuit noted that section 112(b)(7), the predecessor of section 333, was intended to be "remedial in nature" (p. 597), that the election was made on the basis of a "mistake of fact as to the large earned surplus figure", and that such mistake of fact "would in effect convert a remedial statute enacted to aid taxpayers into a punitive statute inflicting a disproportionately harsh tax liability upon them" (p. 597). Under our opinion in Golsen (n. 15, supra), we are bound to follow Meyer's Estate, which holds that a mistake of fact may vitiate the binding effect of an1983 Tax Ct. Memo LEXIS 22">38 election under the particular statutory provisions involved. 16We must then finally consider whether the stockholders' assumption that they would be treated as the sellers was a mistake of fact. We are satisfied that they were informed by their tax advisor that they would be the sellers and that they made their section 333 election on that assumption. Was this a "mistake of fact" or a "mistake of law"? The answer, we think, is to be found in United States v. Cumberland Pub. Serv. Co.,338 U.S. 451">338 U.S. 451 (1950). Cumberland was a case raising the same issue as that involved in Court Holding Co., namely, whether, in the absence of any statutory provisions like section 337, the corporation, as opposed to the stockholders, was to be treated as the seller and therefore accountable for the gain realized. There was a considerable amount of similarity in the facts. In both, the corporation began1983 Tax Ct. Memo LEXIS 22">39 the negotiations for the sale, and in both, prior to the ultimate transfer to the buyer, the corporation was liquidated, its assets were distributed to the stockholders, who finally transferred the property to the buyer. In Court Holding Co. this Court found that the stockholders were merely carrying out the corporation's agreement to sell, and held that the real seller was the corporation which had to account for the gain realized on sale. 2 T.C. 531">2 T.C. 531 (1943). The Court of Appeals reversed 143 F.2d 823 (5th Cir. 1944), but the Supreme Court in turn reversed the Court of Appeals, and reinstated the result reached by this Court. 324 U.S. 331">324 U.S. 331 (1945). In Cumberland, the Court of Claims held otherwise on the facts before it. 83 F. Supp. 843">83 F. Supp. 843 (1949). The Government argued in the Supreme Court that the decision of the Court of Claims in Cumberland was inconsistent with the Supreme Court's decision in Court Holding. There were differences in the underlying subsidiary facts in the cases, particularly as to the extent to which the negotiations on behalf of the corporation had progressed and to what extent a binding arrangement1983 Tax Ct. Memo LEXIS 22">40 had been entered into by the corporation and the purchaser prior to liquidation and the transfer of the property by the stockholders to the buyer. However, the Supreme Court refused to become involved in attempting to sort out the differences and ascribe what weight, if any, should be accorded to the differences. Instead, it noted that under the statute as written either the corporation or the stockholder-distributees could be treated as the seller depending upon the facts, and it held that it was up to the trial court, "upon consideration of an entire transaction, to determine the factual category in which a particular transaction belongs". (Emphasis supplied.) (P. 456.) It concluded that "[h]ere as in the Court Holding Co. case we accept the ultimate findings of fact of the trial tribunal". (Emphasis supplied.) Cumberland thus treated the matter as one of fact, and, as a consequence, petitioners' mistake as to who would be regarded as the seller was one that should be classified as a mistake of fact, thus bringing Meyer's Estate into play. In one respect this case is even stronger for the taxpayers than Meyer's Estate. The earnings and profits account1983 Tax Ct. Memo LEXIS 22">41 (referred to as "earned surplus" in Meyer's Estate) was of critical importance in both cases. In the instant case, if the sale is to be imputed to the corporation and if section 333 were held to be applicable, section 337 would be inapplicable and the corporation's earnings and profits would be greatly increased by reason of the recognizable gain on sale of its property. Similarly, it was the unanticipatedly large increase in the earnings and profits account of the corporation that resulted in the increase in tax in Meyer's Estate, unless the election under the predecessor of section 333 were held not to be binding. The Court of Appeals in Meyer's Estate held that the election was not binding, since in its view the level of the "earned surplus" account was a question of fact and the election was made upon the mistaken belief relating to that factual situation.But the reason that the "earned surplus" account was sharply increased was that there had been a failure to give proper treatment to a prior reorganization and a prior merger in which the corporation was involved -- a matter of law, and not of fact. Here, on the other hand, the underlying factor affecting the earnings1983 Tax Ct. Memo LEXIS 22">42 and profits account was the question of who was the seller -- a question that the Supreme Court in Cumberland has treated as a factual matter. Thus, even though the level of the earnings and profits account was a factual matter, according to the Fifth Circuit in Meyer's Estate, the underlying cause of the increase in that case was one of law, i.e., the legal consequences of a reorganization and merger. In contrast, the underlying cause of the sharp increase in the corporation's earnings and profits in the instant case is itself required to be considered as a factual matter according to the Supreme Court in Cumberland.171983 Tax Ct. Memo LEXIS 22">43 In short, to the extent relevant in the present case, the question of the identity of the seller as between DiAndrea, Inc., and the stockholder-distributees is a factual question. And since the individual stockholders elected to come within section 333 on the assumption that they rather than their corporation were making the sale, their election was founded on a "mistake of fact", not a mistake of law. Thus, in accordance with our practice expressed in the Golsen case, we find that section 333 is inapplicable by reason of the controlling effect of Meyer's Estate in this Court. 18 We hold that the deficiencies must be recomputed in such manner as to relieve the corporation of any tax on the gain on sale of the Motel by reason of section 337, 19 and that the tax liabilities of the individual petitioners must be recomputed without the unintended crushing effect of section 333 upon them. 1983 Tax Ct. Memo LEXIS 22">*44 As a result of the conclusions reached above and in view of various concessions made by the petitioners, there remains for disposition only the minor question whether the corporation is entitled to a deduction in 1975 for that portion of travel expenses and the New Jersey taxes paid by the individual petitioners in 1976. Although it might be possible to find that they were acting on behalf of the corporation when they made the payments in question, such payments were not made in 1975, and regardless of any other possible analysis that might also preclude the deduction, it is not available to the corporation, a cash basis taxpayer, in 1975. Decisions will be entered under Rule 155.Footnotes1. Cases of the following petitioners are consolidated herewith: Arthur DiAndrea and Yolanda DiAndrea, docket No. 13350-78; Yolanda DiAndrea, Transferee, docket No. 13351-78; and Arthur DiAndrea, Transferee, docket No. 13352-78.↩2. The requested change also resulted in an overassessment for 1976 and an increase in the overassessment for 1977.↩3. The record shows that a Judith Meccariello was the nominal owner of one share of DiAndrea's stock during 1975 but that she transferred such share to Yolanda on August 28, 1975. After such transfer, Arthur and Yolanda each owned 50 shares.↩4. In other years, DiAndrea's taxable year ended on December 31.↩5. Although it is stipulated that Arthur and Yolanda acquired title to the "Motel" on August 1, 1967, Arthur's testimony and the unchallenged third paragraph of petitioners' Request for Findings of Fact indicate that they acquired only "certain real property" in 1966, and that a motel was constructed on that property.↩6. There is confusion in the record as to whether the correct amount of the balance was $596,000 or $595,000, but it would seem from most of the materials in evidence that the correct amount was $595,000, and the parties have so treated it.↩7. It was apparently hoped that the individual petitioners could avoid the immediate tax in respect of the distribution of Woolley's installment note, which the law prior to the Installment Sales Revision Act of 1980, 94 Stat. 2247, required, see S. Rept. No. 96-1000, 96th Cong., 2d Sess. 20-21 (1980), 1980-2 C.B. 504-505, and that they could enjoy the benefits of a section 333, I.R.C. 1954↩, election as DiAndrea's earnings and profits would be sufficiently low if not charged with profit from the Motel's sale.8. The undated minutes of a DiAndrea shareholder meeting show that a shareholders' vote authorized DiAndrea's officers to accept a proposal from Woolley "to extend the option to purchase the building for a period of one (1) year". There is no indication as to the actual date of this meeting or the date of Woolley's proposal. ↩9. The $82,600 was paid during the months of July, August, and September, 1975. In accordance with the Extension Agreement, $47,600 consisted of interest and $35,000 represented the first year's installment of principal of the purchase price.↩10. Woolley had already paid $35,000 (as required by the Extension Agreement) by the time it executed the note on November 7, 1975, and it was for that reason that the principal amount of the note was $560,000 rather than $595,000 (the net original purchase price after credit for the $100,000 option payment).↩11. DiAndrea's records show the entry on November 21, 1975, a Friday, but DiAndrea's bank statement dates the deposit November 24, 1975, a Monday.↩12. It is stipulated that DiAndrea owed $5,516 in state taxes. However, the deficiency notice in docket No. 13350-78 shows that the amount was $5,416.↩13. The Government now concedes that payments in the aggregate amount of $948 in respect of these items were made in 1975 and that such amount is deductible by the corporation in 1975. However, it continues to contest the deductibility of the payments of the remaining amounts that were made in 1976.↩14. the general rule set forth in sec. 337(a), as in effect for the taxable year 1975, is as follows: (a) General Rule.--If-- (1) a corporation adopts a plan of complete liquidation on or after June 22, 1954, and (2) within the 12-month period beginning on the date of the adoption of such plan, all of the assets of the corporation are distributed in complete liquidation, less assets retained to meet claims, then no gain or loss shall be recognized to such corporation from the sale or exchange by it of property within such 12-month period.↩15. Although the case is appealable to the Eleventh Circuit, which has recently been carved out of the Fifth Circuit, the Eleventh Circuit has stated that it will follow the precedents of the Fifth Circuit that were in existence prior to the creation of the Eleventh Circuit. Bonner v. City of Prichard,661 F.2d 1206, 1207 (11th Cir. 1981). Accordingly, to the extent that our rule in Golsen v. Commissioner,54 T.C. 742">54 T.C. 742, 54 T.C. 742">756-757 (1970), affd. 445 F.2d 985 (10th Cir.), cert. denied 404 U.S. 940">404 U.S. 940 (1971), would be applicable to cases appealable to the Fifth Circuit it is equally applicable to cases appealable to the Eleventh Circuit. See Simon v. Commissioner,43 T.C.M. 269↩, 271, 51 P-H Memo T.C. par. 82,008 (1982).16. The fact that Meyer's Estate was concerned with the predecessor provision in section 112(b)(7) of the Code then in effect and that the present controversy involves section 333 of the 1954 Code is of no consequence in the application of the Golsen↩ rule.17. We do not mean to suggest that we regard Meyer's Estate as correctly decided insofar as it treats as a mistake of fact one that is induced by an underlying mistake of law, or that such a rule would necessarily be followed in other circuits. The point is that this is what the Fifth Circuit decided and that pursuant to Golsen we think we must follow it in a case appealable within that circuit (or the Eleventh Circuit), particularly in the present case which follows afortiori from Meyer's Estate, since we have here a mistake of ultimate fact based on a mistake of underlying fact in accordance with Cumberland.↩18. We recognize that on similar facts, Cohen v. Commissioner,63 T.C. 527">63 T.C. 527 (1975), affirmed without opinion 532 F.2d 745 (3d Cir. 1976), points in the other direction. However, there is no indication that the parties in that case ever presented to the Court for consideration the impact of the Supreme Court's opinion in Cumberland in respect of the characterization of the crucial issue relating to the section 333 election as one of fact rather than as one of law, nor did that case involve the Golsen↩ rule. 19. The record indicates that the gain on sale pursuant to section 1231 was $283,276. Also involved is a $74,000 recapture pursuant to section 1245, which would follow the same course as the gain on sale.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625824/	CHRISTOPHER M. TRZECIAK and JANICE A. TRZECIAK, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentTrzeciak v. CommissionerDocket No. 24127-83.United States Tax CourtT.C. Memo 1984-370; 1984 Tax Ct. Memo LEXIS 303; 48 T.C.M. 543; T.C.M. (RIA) 84370; July 19, 1984. Michael J. Kavanaugh, for the petitioners. Jacqueline M. Hotz, for the respondent. DINANMEMORANDUM FINDINGS OF FACT AND OPINION DINAN, Special Trial Judge: This case was assigned to Special Trial Judge Daniel J. Dinan pursuant to the provisions of section 7456(c) and (d), 1 and General Order No. 8, 81 T.C. XXIII1984 Tax Ct. Memo LEXIS 303">304 (1983). Respondent determined a deficiency of $1,244 in petitioners' 1980 Federal income tax. After concessions by the parties, the sole issue for decision is whether Mr. Trzeciak is entitled to a deduction of $2,939.62 for expenses incurred in traveling between his home and work by private automobile. Some of the facts have been stipulated and are so found. The stipulations of fact and the attached exhibits are incorporated herein by this reference. Petitioners resided in Melvindale, Michigan, when they filed the petition in this case. Christopher Trzeciak (petitioner) is an electrician and a member of a union local in Detroit, Michigan. He worked in the Detroit metropolitan area when work was available. However, in February 1980, because of a shortage of work in the immediate area, petitioner was sent by his union to work for the Bechtel Power Corporation on the Monroe Nuclear Power Plant (Monroe Plant) in Monroe, Michigan. Petitioner worked at the Monroe Plant from February 19, 1980 until December 23, 1980, when he voluntarily quit1984 Tax Ct. Memo LEXIS 303">305 the job to take new employment closer to his residence. Petitioner traveled daily to and from his personal residence in Melvindale, a Detroit suburb, to Monroe, about 39 miles away. On his 1980 return, he deducted $2,939.62 for transportation expenses while working at the Monroe Plant. Respondent disallowed the entire deduction. Petitioner contends that his employment in Monroe was temporary and, thus, that he is entitled to deduct the expenses of daily round-trip transportation between his residence and the Monroe Plant. In McCallister v. Commissioner,70 T.C. 505">70 T.C. 505 (1978), we said, at page 508: Although we have held that automobile expenses in commuting between the taxpayer's residence and even a temporary jobsite outside a taxpayer's normal area of employment are not deductible (see Turner v. Commissioner,56 T.C. 27">56 T.C. 27 (1971) (reviewed by the Court), vacated and remanded on respondent's motion by an unpublished order (2d Cir., Mar. 21, 1972)), respondent again has chosen not to so frame the issue. See also Norwood v. Commissioner,66 T.C. 467">66 T.C. 467 (1976). Counsel for respondent in his opening statement at trial conceded that if1984 Tax Ct. Memo LEXIS 303">306 we determine petitioner's employment at Cheshire, Ohio, was temporary rather than indefinite, petitioner's transportation expenses are deductible as ordinary and necessary business expenses under section 162(a). Under the circumstances, we need inquire as to what provision in the law petitioner relies on for the deduction. Compare Kroll v. Commissioner,49 T.C. 557">49 T.C. 557 (1968) (temporary-indefinite rule used to test whether taxpayer "away from home" under section 162(a)(2)). [Fn. ref. omitted.] In this case, as in McCallister, respondent again has not chosen to challenge petitioner's deduction of commuting expenses under section 262 but frames the issue as one of "temporary" versus "indefinite" employment while "away from home" under section 162(a)(2). Temporary employment has been defined as that type of employment that can be expected to last only for a short period of time. Mitchell v. Commissioner,74 T.C. 578">74 T.C. 578 (1980); Peurifoy v. Commissioner,358 U.S. 59">358 U.S. 59 (1958). Employment is "indefinite," rather than "temporary" unless its termination is anticipated within a short period of time. Boykin v. Commissioner,T.C. Memo. 1984-297.1984 Tax Ct. Memo LEXIS 303">307 Whether employment is temporary or indefinite is a question of fact to be determined from all the circumstances. Kroll v. Commissioner,49 T.C. 557">49 T.C. 557 (1968). Beginning in 1973, petitioner worked as an electrician out of Union Local 58, International Brotherhood of Electrical Workers (IBEW), located in Detroit, Michigan. In 1980, there was no work for petitioner out of Local 58 because of poor economic conditions in the Detroit area. On February 29, 1980, petitioner obtained employment out of Union Local 8, IBEW, located in Toledo, Ohio. He began working for the Bachtel Power Corporation at the Monroe powerhouse, Monroe, Michigan. At that time, Bechtel did not indicate how long petitioner would be employed at the Monroe powerhouse. At then end of 1980, petitioner was informed by Union Local 58 in Detroit that they had work for him in Detroit. On December 23, 1980, after having worked eight months for Bechtel, petitioner voluntarily left his employment at the Monroe powerhouse to take employment in Detroit. There is no evidence in this record that petitioner could not have continued to work indefinitely for Bechtel at the Monroe powerhouse after December 23, 1980. 1984 Tax Ct. Memo LEXIS 303">*308 Petitioner's termination of his employment at the Monroe powerhouse for his own personal reasons does not cause such employment to be temporary. Camren v. Commissioner,T.C. Memo. 1981-485. We find that petitioner has failed to prove that his employment at the Monroe powerhouse was temporary. New Colonial Ice Co. v. Helvering,292 U.S. 435">292 U.S. 435, 292 U.S. 435">440 (1934). Rule 142(a), Tax Court Rules of Practice and Procedure. Accordingly, his automobile expenses for traveling between his home and the Monroe powerhouse are nondeductible. 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 1980, unless otherwise indicated.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625825/	JULIA A. FORHAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Forhan v. CommissionerDocket No. 85367.United States Board of Tax Appeals45 B.T.A. 799; 1941 BTA LEXIS 1064; November 25, 1941, Promulgated 1941 BTA LEXIS 1064">1064 CLAIM FOR REFUND. - A protest against additional taxes proposed in a letter from the Commissioner prior to the notice of deficiency was not a claim for refund within the meaning of section 322 of the Revenue Act of 1932, even though the Commissioner, in computing the proposed deficiency, had eliminated the items reported by the petitioner and had substituted a wholly new item and the protest was against the taxation of that new item as income of the petitioner. Edgar B. Bronson, Esq., for the petitioner. James C. Maddox, Esq., for the respondent. MURDOCK 45 B.T.A. 799">799 OPINION. MURDOCK: The Commissioner determined a deficiency of $43,974.41 in the petitioner's income tax for the calendar year 1932. He has now stipulated that she owed no tax for that year, but has made an overpayment of $441.74, the amount shown on her return filed with the collector of internal revenue for the third district of New York. 45 B.T.A. 799">800 The only question presented for decision by the Board is whether the Board can make a finding that the overpaid tax was paid within two years before the filing of a claim for refund. The evidentiary facts have been stipulated. The1941 BTA LEXIS 1064">1065 Commissioner is not permitted to make a refund of overpaid tax after two years from the time the tax was paid, except under certain circumstances. The taxpayer has filed a timely petition with the Board after receiving a notice of deficiency. A refund can not be made under such circumstances unless the Board determines as a part of its decision that the tax was paid within two years before the filing of a claim for refund or the filing of the petition, whichever ever was earlier. Sec. 322, Revenue Act of 1932. The overpaid tax in the amount of $441.74 was paid quarterly in 1933, the last payment having been made on December 16. The petition was filed more than two years after the last payment. The petitioner argues that a protest which she filed on December 1, 1934, together with a memorandum in support of that protest filed by her attorney on January 5, 1935, were sufficient to constitute a claim for refund. Those papers were filed within two years after the payment of the tax, so that the only question is whether they constitute a claim for refund within the meaning of section 322. The petitioner and her husband separated under an agreement dated April 5, 1932. He revived1941 BTA LEXIS 1064">1066 an old trust of December 15, 1922, by placing new property in that trust. He was trustee and his wife was beneficiary. He guaranteed that she would receive at least $15,000 a year from the trust. He also provided her with a place to live by causing his wholly owned corporation, Forhan Realty Corporation, to give her a lease for life on a house at a nominal rental, and he further agreed that if she was prevented from occupying the house, he would pay her $500 a month so that she could secure other quarters. The above matters were all incorporated in the agreement of April 5, 1932. The total gross income which the petitioner reported on her return for 1932 and upon which the tax shown on that return was computed and paid was $17,666.29, received from the trust above mentioned. The Commissioner sent the petitioner a letter dated November 17, 1934, stating that a review of her return for 1932 disclosed a deficiency of $11,364.93. He explained in the letter that he had eliminated the items of gross income which she had reported and had taxed them to her husband, but had included in her income $60,000 representing the value of her life interest in the lease, which she had received1941 BTA LEXIS 1064">1067 under the agreement of April 5, 1932. The petitioner was told in the letter that she could file a protest in writing against the income tax liability proposed, provided she did so within 45 B.T.A. 799">801 fifteen days, and she was also advised what information the protest should contain. The petitioner filed a protest on December 1, 1934. She had signed the document and sworn to it. It was submitted pursuant to the letter of November 17, 1934. The grounds for the protest were: (1) That the lease "was in the nature, and in lieu of alimony and support"; (2) in any event, the entire value of the lease was not income in 1932, but no more than the value of the use of the premises for that year would be income for that year; and (3) the value in 1932 of the yearly use of the premises and the lump sum value of the lease for the life of the petitioner were only nominal or, at least, very much less than the value assigned in the letter of November 17, 1934. She stated in the protest that it was her intention and the intention of her husband that she should receive for her maintenance and support in lieu of alimony the income from the trust "and the lease, which is the subject of this protest. 1941 BTA LEXIS 1064">1068 " No reference whatsoever to the taxes already paid was made in the protest. The petitioner asked for a hearing on the protest. A hearing on the protest was held on January 5, 1935, at which the duly appointed attorney for the petitioner appeared and submitted to the conferee an eight-page memorandum in support of the protest. He also filed with the conferee, at the latter's request, copies of the trust and agreements. He argued in the memorandum that "Neither alimony, nor a provision or allowance for the support and maintenance of the wife, pursuant to a separation agreement, is taxable income to her." He cited authorities in support of that proposition and concluded that the lease "which is the subject of this protest" was a part of the plan to provide for her support and "like other allowances or provisions for support, based on the separation agreement, it is not taxable to her." He also argued that the Commissioner had overvalued the lease and, in any event, a yearly value rather than a lump sum value would be the most that could be included in income for 1932. The conclusion of the memorandum was that the protest should be sustained, the value of the lease should be excluded1941 BTA LEXIS 1064">1069 from the taxpayer's income, and, even if something should be included, it should be no more than the real annual value of the use of the house for the tax year. No mention of the taxes shown on the return and theretofore paid was made in that memorandum. The attorney appeared before another conferee on April 9, 1935, and argued that the value of the lease, the income from the trust, and money received by the petitioner upon the execution of the separation agreement were not taxable income to her for 1932. Thereafter, the Commissioner advised the petitioner in letters that 45 B.T.A. 799">802 the matter of her income tax liability for 1932 was being considered. However, he never allowed the protest and mailed the petitioner the notice of deficiency on March 16, 1936. The deficiency of $43,974.41 was determined by adding to the net income of $17,056.78 reported by the petitioner on her return, $60,000 representing the value of her life interest in the lease, and $50,000 described as received in part settlement of a law suit. Counsel for the respondent explained, when this case was called for hearing, that the Government had taxed the income in question both to the petitioner and to1941 BTA LEXIS 1064">1070 her husband to assure collection of the tax, no matter which one owed it. He said the Government did not seek to collect the tax from both parties, and, since it had won the case against the husband by default, an appropriate adjustment would be made in the case of the petitioner. The stipulation followed and the Commissioner now concedes that the petitioner owed no tax for 1932 and has made an overpayment in the amount of $441.74 shown on her return. The petitioner reasons as follows: The Commissioner's letter of November 17, 1934, in effect, acknowledged that the tax paid on the return was an overpayment unless the new item of $60,000, representing the lease, was properly taxable; the protest and memorandum filed by the petitioner claiming and showing that the new item of $60,000 was not taxable to her conveyed notice of the overpayment and that refund was due to the petitioner; consequently, those documents constituted a sufficient refund claim. Courts have been rather liberal in deciding just what constitutes a proper claim for refund. For discussion of this subject see Law of Federal Income Taxation, Paul and Mertens, sec. 51.16, et seq. The taxpayer, however, must have1941 BTA LEXIS 1064">1071 filed some kind of a document within the statutory period. He must have indicated thereon, with reasonable clarity, the fact that he was demanding a return of overpaid taxes and the ground upon which he was making his demand. Furthermore, the ground which he advanced must be one which actually supports the overpayment. In other words, the Commissioner must be put upon notice. Perfect claims filed after the period of limitations had run have been recognized as amending informal or imperfect claims filed before the statute had run. A protest against an additional assessment ordinarily may not be recognized as a claim for refund. The present protest and memorandum were not intended as a claim for refund and were not treated as a claim for refund. They were intended and treated merely as a protest against the assertion of any additional tax. Even if they could be regarded as an imperfect claim for refund, susceptible of amendment, nevertheless, no 45 B.T.A. 799">803 amendment was ever filed and the issuance of the notice of deficiency was a complete rejection of any pending claim. Thereafter, it was too late to amend. Furthermore, the petition to the Board may not be regarded as an1941 BTA LEXIS 1064">1072 amendment of an imperfect claim theretofore filed. The parties have not cited any case which contains facts at all comparable to those in the present case. The petitioner never protested against the taxes shown on her return and never filed any claim for the return of those taxes. She never advised the Commissioner in writing that she had overpaid her taxes for 1932 or that she demanded the return of any taxes paid for that year. One may reason, of course, that, since she protested against the inclusion of the $60,000 proposed in the letter of November 17, 1934, and the Commissioner had eliminated the income which she had reported on her return, she was, in effect claiming that she owed no taxes for 1932 and, therefore, she must have been claiming that she had overpaid the taxes shown on her return. But the notice to the Commissioner would have to be more direct than that to constitute a proper claim for refund. She made only collateral reference in her protest to the income from the trust which she had reported and on which she had paid the tax. The protest was in the alternative and not only contains no reference to taxes paid, but also fails to state any demand for refund1941 BTA LEXIS 1064">*1073 of taxes already paid. We are unable to determine, as a part of our decision, that the tax was paid within two years before the filing of a claim for refund.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625826/	AUGUSTUS P. LORING AND ADA DWYER RUSSELL, EXECUTORS, ESTATE OF AMY LOWELL, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Loring v. CommissionerDocket No. 39872.United States Board of Tax Appeals20 B.T.A. 440; 1930 BTA LEXIS 2122; July 31, 1930, Promulgated 1930 BTA LEXIS 2122">2122 In the computation of the taxable estate of a decedent the full amount of charitable bequests is deductible without reducing such amount by a state inheritance tax which may be payable therefrom. Francis R. Hines, Esq., for the petitioners. Eugene G. Smith, Esq., for the respondent. SEAWELL20 B.T.A. 440">440 The Commissioner determined a deficiency in estate tax for 1925 of $1,743.27, against which, on account of the payment of a state inheritance tax, there is allowable a credit of 25 per centum thereof, leaving only $1,307.45 of said deficiency proposed for assessment. The deficiency in controversy is due in part to the Commissioner's reducing the value of charitable bequests under the residuary clause of the decedent's will by $26,020.26, the amount of the Massachusetts inheritance tax paid. The case is submitted on the pleadings. FINDINGS OF FACT. Amy Lowell died testate on May 12, 1925, being then a resident of Brookline, Norfolk County, Mass.The petitioners were on June 24, 1925, duly appointed executors of her estate and are now acting in such capacity. The decedent by the terms of her will gave, bequeathed and devised the residue1930 BTA LEXIS 2122">2123 of her estate to certain charitable or educational corporations. Certain legacies and bequests made by the will were subject to Massachusetts inheritance tax and in due course the said Massachusetts inheritance tax was paid by the executors of the estate. In the audit and review of the return filed for the estate the respondent determined that the value of the charitable bequests passing under the residuary clause of the will should be reduced by the amount of the Massachusetts inheritance tax, thus increasing the amount of the net estate and resulting in part in the alleged deficiency. 20 B.T.A. 440">441 OPINION. SEAWELL: The value of certain property in the estate that formed a part of the basis of the determination of the deficiency in tax is not controverted by the petitioners. The sole question for our decision is, Did the respondent err in reducing the value of the charitable bequests by $26,020.26, paid as the Massachusetts inheritance tax? The petitioners rely on and cite prior decisions of this Board and of the Federal courts to sustain their contention that the action of the Commissioner complained of was erroneous. Counsel for the respondent at the hearing very1930 BTA LEXIS 2122">*2124 frankly and properly stated that the question in issue has in numerous cases been passed on by this Board. We are of the opinion that counsel for petitioners is correct in his contention that the Commissioner committed error as indicated in the assignment of error. On the authority of the following cases we so hold. ; ; ; ; ; and . Judgment will be entered under Rule 50.STERNHAGEN dissents.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625827/	WAYNE E. WELLS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentWells v. CommissionerDocket No. 15811-87United States Tax CourtT.C. Memo 1990-58; 1990 Tax Ct. Memo LEXIS 58; 58 T.C.M. 1345; T.C.M. (RIA) 90058; February 8, 1990Wayne E. Wells, pro se. Bruce K. McNeely, for the respondent. JACOBSMEMORANDUM FINDINGS OF FACT AND OPINION JACOBS, Judge: Respondent determined deficiencies in petitioner's income tax and additions to tax as follows: Additions to TaxYearDeficiency 1Sec. 6651(a)(1) 2Sec. 6653(a)(1) Sec. 6654Sec. 66611983$ 4,805$ 1,201$ 240$ 296--19844,85837324322--19855,0231,256251288$ 1,2561990 Tax Ct. Memo LEXIS 58">60 At trial, respondent moved for an award of damages pursuant to section 6673. Petitioner did not file income tax returns for any of the years at issue; he was a tax protestor. As a result, respondent reconstructed petitioner's income by using the amount of wages and interest reported to have been paid to petitioner. In computing the amount of tax, respondent allowed petitioner one exemption but no itemized deductions. After concessions, the issues for decision are: (1) whether petitioner is entitled to a deduction for interest on a mortgage and an automobile loan pursuant to section 163(a); (2) whether petitioner is entitled to a deduction for real estate taxes pursuant to section 164(a); (3) whether petitioner is entitled to more than one exemption; (4) whether petitioner is liable for the addition to tax for failure to timely file a return pursuant to section 6651(a)(1); (5) whether petitioner is liable for the addition to tax for negligence pursuant to sections 6653(a)(1) and (2); (6) whether petitioner is liable for the addition to tax for failing to make estimated tax payments pursuant to section 6654(a); and (7) whether damages should be awarded to the United States pursuant1990 Tax Ct. Memo LEXIS 58">61 to section 6673. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and accompanying exhibits are incorporated herein by this reference. Petitioner resided in Bristow, Oklahoma, when the petition in this case was filed. He is married and has three children, all of whom were under the age of 19 at the end of 1985. Petitioner, a college graduate, was employed as an insurance agent (selling casualty insurance) during the years at issue. Wages received from such employment, and Federal income taxes withheld therefrom, were as follows: YearWagesTaxes Withheld1983$ 25,064$ 0198426,4793,369198526,4863,533Petitioner also received interest income in 1983 and 1984. The parties stipulated that petitioner's adjusted gross income for each year at issue was: Petitioner's AdjustedYearGross Income1983$ 25,105198426,999198526,486In January 1983, petitioner and his wife transferred the title to their house to the trustee of an irrevocable trust (which they had established in 1982); the beneficiaries of said trust were1990 Tax Ct. Memo LEXIS 58">62 petitioner's children. Petitioner and/or his wife continued to make mortgage payments on the house; either or both of them also paid property taxes on the house. The parties stipulated that with respect to the years at issue, the amount of mortgage interest and property taxes paid by petitioner and/or his wife were: YearMortgage InterestProperty Taxes1983$ 4,666$ 8219843,9498219854,358468Petitioner did not know how much of the mortgage interest and property tax payments he made and how much his wife made. (During the years at issue, petitioner's wife worked as a physical therapist; she also failed to file tax returns for the years at issue.) Petitioner claims that he is entitled to an exemption with respect to at least one of his children, but he presented no evidence with respect to his claim. The parties stipulated that petitioner purchased an automobile in June 1983 and in connection therewith petitioner executed an installment note which required payments of interest totalling $ 427 during 1983. No evidence was introduced substantiating that such interest payments were actually made. Prior to trial, petitioner1990 Tax Ct. Memo LEXIS 58">63 claimed that he was not a taxpayer and he filed a frivilous motion to dismiss respondent's claim for tax deficiencies. At trial, petitioner conceded that he is a taxpayer, but he claimed entitlement to the aforementioned deductions which were not addressed in the notice of deficiency. Petitioner claims he has documentation to substantiate his deductions, but he was unable to locate such at the time of trial. OPINION The first issue for decision is whether petitioner is entitled to a deduction for interest expense. Respondent's notice of deficiency did not allow petitioner such a deduction. Deductions are a matter of legislative grace. . Respondent's determinations are presumptively correct, and petitioner bears the burden of proving otherwise by a preponderance of the evidence. ; Rule 142(a). With respect to petitioner's entitlement to a deduction for the mortgage interest, petitioner failed to prove that he, rather than Mrs. Wells, made the payments. With respect to the automobile loan, petitioner failed to prove that interest with1990 Tax Ct. Memo LEXIS 58">64 respect to the loan in fact was paid. He produced no records to substantiate the claimed expenses; rather, the only support for petitioner's claimed entitlement to these deductions was his own testimony, which was vague and unconvincing. Accordingly, petitioner's claimed entitlement to a deduction for mortgage and automobile loan interest is denied. The next issue is whether petitioner is entitled a deduction with respect to real estate taxes. Again, petitioner failed to prove that he, rather than Mrs. Wells, paid such taxes. Accordingly, petitioner's claim for such a deduction is denied. The next issue is whether petitioner is entitled to more than one exemption. Here, too, petitioner failed to prove his entitlement to an exemption for any of his children. Respondent determined that petitioner is liable for an addition to tax pursuant to section 6651(a)(1). Section 6651(a)(1) imposes an addition to tax for failure to file a timely return, unless such failure is due to reasonable cause and is not due to willful neglect. Petitioner bears the burden of proving that the section 6651(a)(1) addition to tax does not apply. ;1990 Tax Ct. Memo LEXIS 58">65 ; Rule 142(a). Petitioner failed to do so; thus, he is liable for the section 6651(a)(1) addition to tax as determined by respondent. Furthermore, respondent determined that petitioner is liable for additions to tax for negligence or intentional disregard of rules and regulations pursuant to sections 6653(a)(1) and (2). Petitioner bears the burden of proving that his underpayment of tax was not due to negligence. ; . Under section 6653(a), negligence is the lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances. . Petitioner again failed to meet his burden of proof; therefore, we sustain respondent's determination of the additions to tax under sections 6653(a)(1) and (2). Respondent determined additions to tax under section 6654 for underpayment of estimated tax. Petitioner bears the burden of proving that he is not liable for the section 6654 addition to tax. ;1990 Tax Ct. Memo LEXIS 58">66 . In general, section 6654 provides for an addition to tax if the taxpayer fails to pay, through periodic prepayments, an amount equal to 80 percent of the amount of tax shown on the return, or if no return is filed, 80 percent of the tax for such year. Section 6654(d)(1)(B)(i). Petitioner did not make estimated tax payments nor did he cause sufficient amounts to be withheld from his wages during 1983 and 1984 so as to avoid the section 6654 additions to tax. 3 He failed to present any evidence to rebut the presumption of correctness that attaches to respondent's determination; thus, he is liable for the section 6654 addition to tax. . The final issue is whether damages should be awarded to the United States pursuant to section 6673. Section 6673 provides, in relevant part: Whenever it appears to the Tax Court that proceedings before it have been instituted or maintained by the taxpayer primarily for delay, that the taxpayer's position in such proceeding is frivolous1990 Tax Ct. Memo LEXIS 58">67 or groundless, or that the taxpayer unreasonably failed to pursue available administrative remedies, damages in an amount not in excess of $ 5,000 shall be awarded to the United States by the Tax Court in its decision. With respect to proceedings pending or commenced after December 31, 1989, the amount of damages which can be awarded to the United States for filing a proceeding in this Court where the taxpayer's position is frivolous or groundless has been increased from $ 5,000 to $ 25,000. Revenue Reconciliation Act of 1989, Pub. L. 101-229, sec. 7731(a), 103 Stat. 2106. Respondent's request for an award of damages was based upon petitioner's failure to cooperate in pre-trial conferences and discovery and his failure to produce any documentation in support of his claimed deductions. Considering the aforesaid as well as petitioner's pre-trial position that he is not a taxpayer and his filing of a frivolous motion, respondent's request for an award of damages is granted and we hereby award damages to the United States in the amount of $ 2,500. To reflect the foregoing and concessions by the parties, Decision will be entered under Rule 155. Footnotes1. The deficiencies (as set forth in the notice of deficiency) were computed on rates applicable to single individuals; at trial, respondent was permitted to amend the pleadings to conform to the proof that the deficiencies should be computed on rates applicable to married individuals filing separately. ↩2. 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. All dollar amounts are rounded. ↩. Plus 50 percent of the interest due on the underpayment attributable to negligence pursuant to section 6653(a)(2).↩3. Respondent conceded the addition to tax under section 6654 with respect to 1985.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625828/	Robert F. and Sharon M. Deming v. Commissioner.Deming v. CommissionerDocket No. 2806-69 SC.United States Tax CourtT.C. Memo 1972-163; 1972 Tax Ct. Memo LEXIS 94; 31 T.C.M. 812; T.C.M. (RIA) 72163; August 1, 1972Robert F. Deming, pro se, 2007 W. Cone #2, Greensboro, N. C. Robert N. Ginsburg, for the respondent. INGOLIAMemorandum Findings of Fact and Opinion INGOLIA, Commissioner: Respondent determined a deficiency in petitioners' Federal income tax for 1965 and 1966 in the amounts of $173 and $193, respectively. The only issue 1 before the Court in each year is whether the petitioners are entitled to deduct the expense of traveling between the nearest habitable community and the situs of the petitioner-husband's work, under section 162. 21972 Tax Ct. Memo LEXIS 94">95 Findings of Fact The petitioners, Robert F. Deming and Sharon M. Deming, husband and wife, were residents of Greensboro, North Carolina, at the time their petition was filed. They filed their Federal income tax returns for the years 1965 and 1966 with the District Director of Internal Revenue at Austin, Texas. Robert F. Deming, hereinafter referred to as the petitioner, began working for the Western Electric Company in 1955. In 1960, he was assigned to the White Sands Missile Range in New Mexico, to teach the Nike Zeus system. He remained at White Sands until 1967, teaching engineering in the Sentinel and Saferguard systems. In 1965 and 1966, White Sands was a rectangular block of New Mexico, approximately 100 miles from north to south and varying from 10 to 40 miles east and west. Since it was used as a missile range, none of the approximately 5,000 civilian personnel lived there. Western Electric maintained an administrative office and three job sites at White Sands. The distance from El Paso to the closest job site in White Sands was 48 miles, and to the furthest job site was 70 miles. The nearest habitable place to White Sands was Las Cruces, New Mexico, which was 30 miles1972 Tax Ct. Memo LEXIS 94">96 from the closest job site and 45 miles from the furthest job site. The petitioner traveled daily to and from El Paso and the job site. He was never required to stay overnight. Western Electric paid the petitioner, as well as its other employees, overtime for the travel time of going to and from work in excess of 45 minutes each way per day. The excess was originally estimated as one hour and later reduced to 45 minutes per day. The amounts paid to the petitioner were reported on his employee's W-2 form as taxable income. In going to and from White Sands, the petitioner drove himself or was a member of a car pool. He was paid the mileage allowance regardless of whether or not he drove. The petitioner was not required to carry any tools with him by his employer. In 1965 and 1966, the petitioner and his wife operated a 16 unit apartment house in El Paso. Each unit rented for $135 per month. The petitioner and his family lived in the same building and he normally performed any maintenance work that was required. On his income tax returns for 1965 and 1966, the petitioner deducted $774 as a business travel expense. He arrived at this figure by taking the mileage between White Sands1972 Tax Ct. Memo LEXIS 94">97 and the nearest habitable community of Las Cruces (44 miles), multiplying it by the number of trips (176, or 88 round trips), and then applying a mileage rate of 10 cents per mile. Opinion Section 162(a) provides generally that, "There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in 813 carrying on any trade or business." On the other hand, section 262 provides that " * * no deduction shall be allowed for personal, living, or family expenses." When provided with facts such as are presented in this case, the Court must ultimately decide whether the travel expenses represent expenditures related to the taxpayer's business or occupation and are therefore deductible, or whether they represent personal commuting expenses which are not deductible. William L. Heuer, Jr., 32 T.C. 947">32 T.C. 947, 32 T.C. 947">951 (1959), affd. per curiam 283 F.2d 865 (C.A. 5, 1960), and cases cited therein. The question, while not novel, is nevertheless vexing because of the obvious "overlapping" that occurs and because it is often difficult to apply the general rule of law without raising troublesome equitable considerations. 1972 Tax Ct. Memo LEXIS 94">98 In the instant case, there is no question but that the petitioner lived in El Paso, worked at White Sands, and expended monies in traveling between the two locations. Without more, one would have to conclude that the expenditures represent commuting expenses. However, the petitioner asserts that he should be allowed to deduct the claimed travel expense because White Sands was not habitable and was a "remote area". In Raymond A. Sanders, 52 T.C. 964">52 T.C. 964 (1969), affd. 439 F.2d 296 (C.A. 9, 1971), this Court disallowed the claimed travel expenses of employees at Vandenberg Air Force Base even though there were no living accommodations and there was no available public transportation. In doing so, it cited United States v. Tauferner, 407 F.2d 243 (C.A. 10, 1969). In Tauferner, supra, the facts were very similar to those now before us. Even though the taxpayer proved he was unable to live near the chemical plant where he worked, the Court denied the travel expense deduction stating: The taxpayer urges that we should follow the Ninth Circuit in Wright v. Hartsell, 305 F.2d 221. There the taxpayer worked in a remote AEC site1972 Tax Ct. Memo LEXIS 94">99 covering a large land area and far from any community, the geography being very similar to that in the case at bar. The court there held that the travel expenses to the site were deductible, and the cited decision cannot be effectually distinguished on any factual basis, but the Ninth Circuit in the subsequent case of Smith v. Warren, 388 F.2d 671, has in our opinion weakened the authority of the Hartsell case. And further: The more persuasive authority would, in the case before us, place the expenses of the taxpayer in getting to the work site and returning to the place of residence in the personal expense category. There is no convincing way to distinguish these expenses from those of the suburban commuter. As the Supreme Court said in United States v. Correll, 389 U.S. 299">389 U.S. 299, 88 S. Ct. 445">88 S. Ct. 445, 19 L. Ed. 2d 537">19 L. Ed. 2d 537, any rule in this area must make some rather arbitrary distinctions. The nature of the work engaged in, the distance traveled, the mode of transportation, the degree of "necessity" appear to be unsatisfactory guides with any degree of consistency and certainty. The basic and unmodified fact of whether the taxpayer is going to the place where he begins1972 Tax Ct. Memo LEXIS 94">100 work or is returning from the place where he ceases work should be determinative. Such travels are expenses within section 262 as "personal, living or family expenses" whether in an urban, suburban, or rural setting. They are not ordinary business expenses under section 162(a). * * The petitioner argues that 52 T.C. 964">Sanders, supra, and Tauferner, supra, are distinguishable from his case because, "Petitioner's expense was incurred on the job." He supports this premise by showing that he was actually paid a "mileage allowance" by his employer so that he was being compensated "while driving himself to and from the work site". We cannot agree. We believe the petitioner's employer recognized the hardship imposed on its employees respecting housing and transportation and, like many similarly situated employers, it chose to alleviate the hardship by defraying some of the additional costs resulting from the hardship. Certainly, one of the logical "measuring sticks" for the allowance made was the time spent in going to and from work. A payment based on that criteria did not mean that the employer was actually compensating the employee for the physical act of driving to1972 Tax Ct. Memo LEXIS 94">101 work. The petitioner taught engineering and it was for that service that he was paid. In short, the employer's method of payment cannot convert the act of commuting into the carrying on of a trade or business for tax purposes. Here, in traveling between his work and his residence, the petitioner was commuting. While equitable considerations do raise disturbing questions, the Court's statement in 52 T.C. 964">Sanders, supra, is particularly appropriate: 814 * * Petitioners' argument may be appealing from an equitable and logical standpoint but it cannot prevail when considered in the light of the statutes, regulations, and caselaw. There is no convincing way to distinguish the expenses here from those of suburban commuters. Petitioners' hardships are no different than those confronting the many taxpayers who cannot find suitable housing close to their urban place of employment and must daily commute to work. We see no reason why petitioners in the case at bar should receive more favored tax treatment than their urban counterparts who also cannot live near their worksites. * * * The remaining argument advanced by the petitioner in support of his position is that he had a second1972 Tax Ct. Memo LEXIS 94">102 business in El Paso (the apartment house) and that he should be able to deduct the transportation expense between his principal post and the second business. While we believe the petitioner's testimony on this point, it is obvious to us that his purpose in traveling between White Sands and El Paso was not to take care of the apartments but to leave and return home each day. In Julio S. Mazzotta, 57 T.C. 427">57 T.C. 427 (1971), on similar facts we stated: * * The primary motivation for petitioner's trips from his major place of employment to his residence was personal. The primary purpose for these trips was to be home (in the popular sense of the term). We do not believe petitioner's statement that he would not have returned to his residence each evening had he not conducted business there. Accordingly, the trips from the major post of employment were not incurred in the course of petitioner's trade or business. Reviewed and adopted as the report of the Small Tax Case Division. Decision will be entered under Rule 50. Footnotes1. There are two other technical adjustments involved which are based on the resolution of this issue. ↩2. All section references are to the Internal Revenue Code of 1954, unless otherwise indicated.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625829/	Victor and Evelyn Blanco, Petitioners v. Commissioner of Internal Revenue, RespondentBlanco v. CommissionerDocket No. 4042-68United States Tax Court56 T.C. 512; 1971 U.S. Tax Ct. LEXIS 122; June 15, 1971, Filed 1971 U.S. Tax Ct. LEXIS 122">122 Decision will be entered for the respondent. The petitioner sought to show the total support of his son by reference to information secured by a revenue agent who interviewed the boy's mother, the petitioner's former wife, with respect to her contributions to the child's support. Such agent did not testify; and it is not clear whether the list of her contributions was complete. Held, under the circumstances, a revenue agent's report is not admissible in evidence for the purpose of showing the accuracy of its contents, and in any event, the petitioners have failed to show the total support of the child. Towner Leeper, for the petitioners.W. Read Smith and Robert L. Liken, for the respondent. Simpson, Judge. SIMPSON56 T.C. 512">512 The respondent has determined a deficiency of $ 1,654.85 in the income tax of the petitioners for 1965. The first issue for decision is whether the petitioners are entitled to a dependency deduction for that year for Jon V. Blanco, the son of the petitioner Dr. Victor Blanco and his former wife. If our decision with respect to that issue is affirmative, we must then decide whether they may deduct as medical expenses the amounts that Dr. Blanco paid to keep Jon in a private school during part of 1965, and the legal fees and other expenses that Dr. Blanco paid with respect to litigation concerning his support obligation and Jon's mental competency.56 T.C. 512">513 FINDINGS OF FACTSome of the facts were stipulated, and those facts are so found.The petitioners, Dr. Victor Blanco and Evelyn Blanco, were husband and wife during 1965, and they maintained their residence in El Paso, Tex., when the petition was filed in this case. They filed their joint Federal income tax return for 1965 with the district director1971 U.S. Tax Ct. LEXIS 122">124 of internal revenue, Austin, Tex. Dr. Blanco will be referred to as the petitioner.The petitioner was previously married to Ruth LacKamp Blanco, now Ruth LacKamp Preston (Mrs. Preston). They were divorced under a decree entered on December 22, 1955. Custody of their son, Jon V. Blanco, who was born on April 27, 1947, was granted to Mrs. Preston. As a result of the decree, the petitioner was required to support Jon until he reached the age of 18.In 1965, Jon lived with his mother in El Paso, Tex., and Warrensburg, Mo., from January 1 to June 5, and for the rest of the year, he was a student at the Green Bank School in Glenmoore, Pa. The Green Bank School is a school for children who are mentally deficient; Jon had been declared mentally incompetent.In April and June of 1965, there were two legal proceedings with respect to Jon's mental competency and the petitioner's obligation to support Jon past the age of 18. Mrs. Preston initiated the litigation to obtain a modification of the divorce decree with respect to such obligation of support. Her motion was based on Tex. Rev. Civ. Stat. art. 4639a-1 (1961), which deals with support payments for a mentally or physically unsound1971 U.S. Tax Ct. LEXIS 122">125 child who is unable to provide for himself, and which applies whether or not the child is a minor. On August 12, 1965, a judgment was entered in the District Court of Travis County, Tex., stating that it was modifying the divorce decree in order to provide custodial care for Jon, and it required the petitioner to pay $ 360 per month, payable to the Green Bank School, for Jon's support. Such requirement was "pro-rated as of June 10, 1965."In 1965, the petitioner paid certain sums of money to the Green Bank School on account of Jon. The petitioner made payments to both his and Mrs. Preston's attorneys for services rendered in connection with the litigation relating to his support obligation and Jon's competency; he also incurred and paid other expenses in connection with such litigation. In addition, he expended other sums of money in 1965 on Jon's behalf and for his support. No one other than the petitioner and Mrs. Preston contributed to Jon's support in 1965.The audit of the petitioners' 1965 income tax return was conducted by Revenue Agent Raymond E. Wormley. In dealing with the issue of the petitioner's entitlement to the dependency deduction for Jon, 56 T.C. 512">514 Mr. Wormley1971 U.S. Tax Ct. LEXIS 122">126 contacted by telephone Internal Revenue tax technician John R. Madden, in Kansas City, who had audited the return of Mrs. Preston. Mr. Madden reported that Mrs. Preston had checks to substantiate payments with respect to Jon in 1965 in the total amount of $ 5,186.31, including expenditures which she made in connection with the litigation. Mr. Madden told Mr. Wormley the amount which she claimed with respect to each item. Such information included no amount whatsoever for food for Jon. Mr. Wormley made a list of those items which he considered allowable as support and those which he considered unallowable. The latter category included all of the expenditures related to the litigation, which totaled $ 2,295.90. However, according to Mr. Wormley's figures, the allowable items totaled $ 2,890.41.After interviewing the petitioner and his accountant several times, Mr. Wormley prepared similar lists, using the same criteria for allowability, with respect to the items of support claimed by the petitioner. The items which Mr. Wormley considered allowable and with respect to which the petitioner provided substantiation totaled $ 2,658.13; he considered as unallowable $ 1,578.46 of litigation-related1971 U.S. Tax Ct. LEXIS 122">127 expenses claimed by the petitioner. Based upon the analysis of the claims of the petitioner and Mrs. Preston, Agent Wormley concluded that the petitioner had failed to show that he provided more than one-half of the total support for Jon during 1965. The respondent disallowed the dependency deduction claimed by the petitioner for Jon in that year; he also disallowed the deduction for medical care including the amount paid to the Green Bank School and the legal expenses paid by the petitioner in connection with the litigation in 1965.At trial, the petitioner testified with respect to additional amounts which he claimed to have spent for Jon's support. Some of such amounts were represented by canceled checks, and others were not.OPINIONThe first issue for decision is whether or not the petitioners have shown themselves to be entitled to the dependency deduction for Jon for 1965. To make such a showing under the law applicable to 1965, they must prove that they furnished over one-half of Jon's total support during that year. Sec. 152(a), I.R.C. 1954; 1sec. 1.152-1(a), Income Tax Regs.; Rose D. Seraydar, 50 T.C. 756">50 T.C. 756, 50 T.C. 756">760 (1968); Aaron F. Vance, 36 T.C. 547">36 T.C. 547, 36 T.C. 547">549 (1961);1971 U.S. Tax Ct. LEXIS 122">128 Rule 32, Tax Court Rules of Practice. One prerequisite to making such a showing is the demonstration, by competent evidence, of the total amount of the child's support furnished by all sources for that year. If the amount of total support is 56 T.C. 512">515 not shown, and cannot be reasonably inferred from the competent evidence available to us, then it is not possible to conclude that the petitioners furnished more than one-half. James E. Stafford, 46 T.C. 515">46 T.C. 515, 46 T.C. 515">518 (1966); James H. Fitzner, 31 T.C. 1252">31 T.C. 1252, 31 T.C. 1252">1255 (1959).The petitioner has furnished substantial evidence with respect to his own contributions to Jon's support, but the requisite showing of total support has not been made. The petitioner has established that he and Mrs. Preston were the sole contributors to Jon's support in 1965; to show Mrs. Preston's contributions, the petitioner relies solely upon1971 U.S. Tax Ct. LEXIS 122">129 a list of figures used by Mr. Wormley, who secured them from Mr. Madden. Such figures represented expenditures which Mrs. Preston apparently substantiated by check to Mr. Madden's satisfaction, and which he and Mr. Wormley believed to constitute allowable expenditures in determining Jon's support. Mr. Wormley compared the total of such expenditures to the total that he believed the petitioners had established as their contribution to Jon's support, and because the latter figure fell short of Mrs. Preston's allowable contributions as related by Mr. Madden, Mr. Wormley recommended the disallowance of the deduction claimed by the petitioners.A revenue agent's report, even though it forms the basis for the respondent's notice of deficiency, is not competent evidence to prove the truth of the facts contained therein, in the absence of a specific agreement to that effect. 31 T.C. 1252">James H. Fitzner, supra at 1255; J. Paul Blundon, 32 B.T.A. 285">32 B.T.A. 285, 32 B.T.A. 285">288-289 (1935). This case is a very appropriate situation for the application of such evidentiary principle. Mr. Madden, who obtained the figures on which the petitioner seeks to rely, did1971 U.S. Tax Ct. LEXIS 122">130 not testify; we do not know whether he believed that such checks represented the whole of Mrs. Preston's contributions to Jon's support. Only Mr. Wormley and the petitioner testified, and neither of them testified as to any firsthand knowledge with respect to support furnished by Mrs. Preston. Mr. Wormley did not know whether there were other items of support that Mrs. Preston could have shown. Mr. Madden's figures represent checks which Mrs. Preston allegedly used to pay for certain items of support for Jon; we do not know whether she made any expenditures for support in cash, whether she made any such expenditures by check for which she could not produce the canceled check, or whether she made any contributions to support which would not be evidenced by a corresponding outlay of money, such as is often the case when lodging is provided. We know that Jon lived with Mrs. Preston for over 5 months in 1965; seldom is it the case, when a parent is supporting a dependent child who lives with him or her, that all of the parent's contributions to the child's support are evidenced by checks. Specifically, we know that the list of Mrs. Preston's contributions 56 T.C. 512">516 that Mr. Wormley1971 U.S. Tax Ct. LEXIS 122">131 was working with made no provision for food; surely, over a period of more than 5 months, substantial expenditures for food must have been made for a boy 17 or 18 years old.To support his argument that we should consider the amounts of Mrs. Preston's checks as tentatively "allowed" by Mr. Madden, the petitioner cites Southern Ford Tractor Corporation, 29 T.C. 833">29 T.C. 833 (1958). In that case, this Court said that the presumption of correctness of the respondent's determination applies also to all findings which are necessarily included in such determination. However, with respect to the case at hand, the only finding necessarily included in the respondent's determination was simply that the petitioners did not contribute more than one-half of Jon's support in 1965. Such a finding might include a maximum figure representing the petitioner's contribution, and a minimum figure representing Mrs. Preston's contribution; but there was no need for the respondent to have ascertained a maximum figure for Mrs. Preston's contribution. Once the respondent concludes that the petitioner's total, with all of his claims considered, falls short of contributions made by Mrs. 1971 U.S. Tax Ct. LEXIS 122">132 Preston, the respondent would have no reason to try to determine whether the list of contributions by Mrs. Preston is complete. Indeed, Mr. Wormley testified to this effect.We hold that the list of checks evidencing Mrs. Preston's expenditures for Jon's support, as prepared by Mr. Madden and as used by Mr. Wormley, is not competent evidence in this proceeding to prove the amount of support furnished by her. In addition, the respondent's determination of deficiency against the petitioners does not include, as a necessary element thereof, the finding that Mrs. Preston contributed no more to Jon's support in 1965 than what is evidenced by Mr. Madden's list of checks. Furthermore, even if we could consider such list of checks as proof of its accuracy, we could not conclude from that list that Mrs. Preston would be unable to show any additional contributions. Indeed, the petitioner claims that his contributions to Jon's support include many items which he cannot substantiate by means of canceled checks; but in his attempt to prove total support, he assumes that Mrs. Preston made no such contributions other than those evidenced by canceled checks. Therefore, under any view of the 1971 U.S. Tax Ct. LEXIS 122">133 record presented here, we conclude that the petitioners have failed to show the amount of Jon's total support in 1965.Having so concluded, it is not necessary to decide whether the petitioner has proved that he paid certain amounts claimed by him as support for Jon in 1965 or whether those amounts are properly allocable to support furnished in that year; he has failed to show that he is entitled to a dependency deduction for Jon for 1965. And, as Jon was 56 T.C. 512">*517 not his dependent during that year within the meaning of section 152, he cannot deduct any amounts paid for Jon's medical care. Sec. 213(a); sec. 1.213-1(a)(3)(i), Income Tax Regs. Therefore, it is unnecessary for us to determine such amounts, or to decide whether the amounts paid in connection with the litigation qualify as deductible expenses for medical care.Decision will be entered for the respondent. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, unless otherwise indicated.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625831/	Estate of Ida A. Crawley, Deceased, George C. Brosius, as Executor v. Commissioner.Estate of Ida A. Crawley v. CommissionerDocket No. 19289.United States Tax Court1950 Tax Ct. Memo LEXIS 232; 9 T.C.M. 286; T.C.M. (RIA) 50081; March 30, 19501950 Tax Ct. Memo LEXIS 232">232 Harry G. Taylor, Esq., Miami, Fla., for the petitioner. F. L. Van Haaften, Esq., for the respondent. JOHNSON Memorandum Findings of Fact and Opinion JOHNSON, Judge: The Commissioner determined a gift tax deficiency of $21,544.88 for the calendar year 1941, and a delinquency penalty of $5,386.22 for failure to file gift tax return. Petitioner asserts no gift taxes are due, since the alleged transfers upon which the Commissioner bases same did not constitute gifts, because: (a) of the mental incapacity of the transferor to execute same; (b) that the transferor "did not divest herself of all of her economic interest in and dominion and control over the subject matter of said alleged gifts, all of the parties knowing and fully understanding that the purported transfers were without force or effect." In the alternative petitioner says that the values of the alleged gifts, as determined by the Commissioner, are excessive. Findings of Fact Ida A. Crawley (hereinafter called decedent), a resident of Miami, Florida, (formerly of Evanston, Illinois) died testate March 30, 1943, when 55 days past eighty years of age. Her husband, Murray D. Crawley, died in 1921 and1950 Tax Ct. Memo LEXIS 232">233 she never remarried. Her only heirs, being also children of her deceased husband, were four daughters, who also were named as the sole and equal beneficiaries in her will. They were Helen Crawley, unmarried, (nicknamed Nell), Mrs. Mary C. Brosius, Mrs. Dorothy Kipp (formerly McCarthy) and Mrs. Margaret Perricelli (formerly Reed). George C. Brosius, son-in-law of decedent, is the executor of her estate. Decedent's husband was a successful business man and left his entire estate to her, which consisted largely of dividend-paying stocks in Canadian and American corporations which he and his associates had established and which stocks are here involved. Decedent was not a business woman, knew nothing about business and took no interest therein, and upon her husband's death she left the management and control of her business largely in the hands of her brother until his death in 1935, and also to F. C. McCracken, who had been her husband's partner in Canada in Murray-McCracken Co., Ltd. Mr. McCracken died about 1940. Thereafter her nephew, Neil Williams, and her cousin, Hargrave Long, both attorneys of Chicago, at times assumed to act as legal and business advisor to her and her daughters. 1950 Tax Ct. Memo LEXIS 232">234 In 1940 decedent, then in her seventyeighth year, was weak physically and mentally. In addition to senility she had a serious diabetic condition of long standing, requiring the taking of insulin, hardening of the arteries or arteriosclerosis, also angina pectoris. From 1938 to August 1942 she was under he care of Dr. Arthur R. Colwell, a practicing physician of Evanston, Illinois, where she then resided. In May 1940 Dr. Colwell was compelled to place her in a hospital because of her "extreme nervousness, insomnia, irritability, forgetfulness and mild confusion." Again in February 1941, Dr. Colwell had her hospitalized for the same reason. During these periods of hospitalization her symptoms somewhat improved, but her physical and mental condition remained bad, her ailments being permanent, there was a progressive deterioration of her mental faculties and "She was not of sound mind and understanding at any time" subsequent to 1939. On March 26, 1941, decedent made her will, leaving her property equally to her four daughters. On July 18, 1941, she fell and broke her hip and was immediately hospitalized and was put in a cast, the hip was pinned surgically and she remained in the1950 Tax Ct. Memo LEXIS 232">235 hospital until September 13, 1941. During this period Dr. Colwell, her physician, saw her daily and he was assisted in her treatment by a surgeon. As a result of this fall, both her physical and mental impairment were greatly augmented and thereafter her mentality was such that she was incapable of understanding either the details or the nature and effect of any business transaction, and in the language of her family physician, "she was mentally incompetent to transact business at all times during the last half of the year 1941." Due to her mental impairment she did not understand the extent and value of her property. Instances illustrative of this: (1) she gave a magazine solicitor calling upon her over $100 worth of subscriptions, and among them were three or four magazines to which she was already a subscriber; (2) she would pay bills two or three times; (3) buy extravagantly things unnecessary and not needed; (4) constantly lost her bank book; (5) would sell bonds and borrow money when not needed; (6) she was obsessed with the idea that she had inexhaustible funds. Other incidents: often she did not know relatives and friends of long standing; she developed suspicion and thought1950 Tax Ct. Memo LEXIS 232">236 her nurse was trying to rob her; while living in Evanston she thought she was at her daughter's in a different state. Her family, not wanting to have her adjudged mentally incompetent and a guardian appointed, in lieu of this, after conference with Niel Williams and preparation of legal documents by him, caused her, on August 18, 1941, to execute a general power of attorney to her son-in-law, George C. Brosius. The power of attorney and the outline of procedure were two separate instruments, counterparts of each other, and were contemporaneously executed. The former, in addition to the general powers usually contained therein, enumerated many comprehensive and specific powers. The effect of the two instruments was to place immediately in Brosius' custody all of decedent's property and to give him the exclusive management and absolute control of same. He could buy, sell, mortgage or hypothecate the property, make loans or borrow money or exchange such property upon such terms and conditions as he "in his sole judgment" might determine, employ and discharge attorneys, prepare or cause to be prepared and delivered all returns of taxation required by the Government of the United States1950 Tax Ct. Memo LEXIS 232">237 or the Dominion of Canada, also to accept or procure his election as a director of any or all foreign or domestic corporations in which decedent may own stock. The last paragraph provided that if any power or authority granted should be held illegal in any jurisdiction "such illegality shall not void or vitiate the exercise of such power in jurisdictions where they are legal," etc. The outline of procedure, among other provisions, directed that Brosius should at once take over all of decedent's property, bank accounts, safety deposit box, contents, etc., and prepare a complete inventory of all property and furnish a copy of same to decedent and a copy to each of her four daughters; that he should render bi-monthly statements to decedent and her four daughters of all receipts and expenditures, prepare a tentative budget for the living expenses of decedent and her daughter who lived with her, to be within the expected income with some reserve for decreased income and increased taxes. All store accounts were to be cancelled and future family expenses of decedent should be upon a cash basis. This document contained a recital that its contents might have been included in the power of1950 Tax Ct. Memo LEXIS 232">238 attorney, but were omitted because the power of attorney would have to be exhibited to outsiders. Brosius accepted under the power of attorney, took possession of decedent's property and administered same under the authority therein conferred upon him, until decedent's death. After executing the power of attorney, decedent did not at any time thereafter engage in or consider business of any kind. As early as October 1940, Neil Williams and the family became concerned about the conservation of decedent's property and also about taxes that would accrue upon her death. There was then no treaty between the United States and Canada, allowing reciprocal credit for estate taxes paid, hence such taxes would be due in both countries. Under Canadian law all assets owned at the time of death would be enlarged by the total of all gifts within five prior years. Considering decedent's age and health, Williams determined that an immediate disposition of all her Canadian stock was desirable, but an outright sale was not feasible since, under Canadian war regulations, Canada would not permit the transfer in block of the proceeds of a sale to this country, but only in installments over a period1950 Tax Ct. Memo LEXIS 232">239 of years. To avoid the payment of death dues in Canada and also to minimize estate taxes in the United States, Williams decided that decedent should place the title of both her American and Canadian stocks in the names of her four daughters. Various methods of doing this were considered by Williams and Hargrave Long for nearly a year before its execution. During this period Williams wrote a number of lengthy letters about the subject, the merits and objections to different plans. Only one of these, dated February 14, 1941, containing 6 typewritten pages, was addressed to decedent, and near its close was this sentence: "I know this is a complicated matter and one which deserves your careful consideration." All of his letters thereafter upon this subject were addressed either to Brosius or to the daughters, mainly to Brosius with carbon copies to each daughter, but no carbon to decedent. The plan finally adopted, evolved by Williams, was described in a letter from him to Brosius dated September 17, 1941, (carbon copy to each daughter, but not to decedent) from which we quote: "Further research I have been conducting in the last few days * * * has * * * led me to change the theory1950 Tax Ct. Memo LEXIS 232">240 on which we should proceed. * * to treat the transaction whereby Aunt Ida divests herself of her entire estate giving a quarter of it to each of her four daughters on the basis of a purchase and sale rather than on the theory of a gift. * * * [Italics supplied]" The letter then sets out the plan in detail. In substance, and as adopted, decedent transferred to each of her four daughters one-fourth of all stocks owned by her, and for which each daughter agreed to pay her $100 per month so long as decedent lived. The daughters, immediately upon receipt of the stock, delivered custody and control of same to Brosius, decedent's attorney in fact, and all dividends therefrom were expended for decedent's use and benefit, and if the income therefrom proved insufficient for her support, then the stock, or a part of it, could be sold and the proceeds used for that purpose. The daughters' sale or disposition of the stock was restricted and it was to be held as one block by Brosius for decedent. The hundred dollar monthly payments provision was a mere formal recital of consideration; none of same was ever paid, and the daughters were not expected to pay it. All parties understood the sole1950 Tax Ct. Memo LEXIS 232">241 purpose of the transaction was to minimize estate taxes upon decedent's death, and after the papers were executed putting into effect "the theory of purchase and sale," Brosius and also the daughters still regarded the stock allegedly transferred to them as belonging to their mother. While the paper title was vested in the daughters, the actual ownership, management and control of the stock, according to the understanding and agreement of the parties, remained in decedent, to be handled by Brosius as her attorney in fact. It was orally stipulated that written instruments were executed by the parties whose names were signed thereto, as follows: (1) On October 20, 1941, four separate agreements of purchase and sale, each signed by decedent and one of her four daughters, wherein decedent agreed to sell and the daughter therein named agreed to buy a certain designated number of shares of (a) common stock of Murray-McCracken Co., Ltd., of Canada; (b) cumulative preference stock of Murray-McCracken Co., Ltd., of Canada; (c) capital stock of Murray-Galesburg Building Corporation, an Illinois corporation, and (d) stock of Crawley-McCracken Hotel Company, an Illinois corporation, for which1950 Tax Ct. Memo LEXIS 232">242 the buyer promised to pay as purchase price $100 per month so long as the seller lived. Signing as witnesses were Neil Williams and Margaret E. Pitmon. (2) On October 20, 1941, a single instrument signed by decedent's four daughters, viz: Helen Crawley and Margaret C. Reed, both of New York City, Mary C. Brosius of Miami Beach, Florida, and Dorothy C. McCarthy of Evanston, Illinois. The preamble recited that each of the parties is the owner of blocks of stock, substantially equal in number of shares and in value, in Murray-McCracken Co., Ltd., Murray-Galesburg Building Corporation and Crawley-McCracken Hotel Company, and recited that the parties desire to "deal with said stocks in the future in concert with one another and in the same manner and as though said several blocks were one larger block." Contained among the specific agreements were: no party to sell, pledge, exchange or alienate any shares of the stock without the written consent of a majority of said four parties. All of the stock to be at once deposited with Brosius and retained by him, and he was irrevocably constituted and appointed proxy for all of the parties, with full power and authority to vote any or all of said1950 Tax Ct. Memo LEXIS 232">243 stock "as he in his sole discretion shall determine." Agreement to be binding and in full force and effect for 15 years from date thereof, unless cancelled or modified by unanimous consent of the parties. Neil Williams and Margaret E. Pitmon, witnesses to instrument 1 above, did not testify and there is no evidence as to the circumstances under which decedent signed same. Aside from the stipulation that she signed it, there is no evidence that she read it or was aware of its contents. The only evidence indicating possible knowledge on her part is: (1) a letter dated September 11, from Hargrave Long to Brosius, advising that on that day he had a telephone talk with Williams, in which Williams told him that he had visited decedent that day at the hospital and explained the plan for "gift of the stocks," which she understood and concurred in. However, subsequent to this date the plan was changed from a gift to the "purchase and sale theory." The plan as executed was never shown to have been read or explained to decedent; (2) Helen Crawley, on cross examination, testified that she thought Brosius and Williams "must have explained the plan to her mother before it was executed," but neither1950 Tax Ct. Memo LEXIS 232">244 of them testified that they did so, and Helen being in New York, it is apparent that her statement was an assumption rather than a fact. If the transaction had been explained to decedent, her mental condition at that time was such that she would not have understood the consequences and effects thereof. Subsequent to the transfers, dividends on the stocks were paid to the daughters which they immediately gave to Brosius for decedent's use. In their income tax returns for 1941 and 1942 each daughter reported the dividends received by her on the stocks, but they were reimbursed by Brosius therefor out of decedent's funds. On June 30, 1943, Brosius filed petition for probate of decedent's will, dated March 26, 1941, and on July 14, 1943, an order of probate was entered and letters testamentary were issued to Brosius as executor. On June 15, 1944, Brosius, as executor, filed an income tax return for decedent for the taxable year 1941. This return reported no gains from the sale or exchange of any capital assets, reporting only income from dividends, interest and annuities. On June 21, 1944, Brosius, as executor of decedent's estate, filed an estate tax return with the collector1950 Tax Ct. Memo LEXIS 232">245 of internal revenue for the district of Florida, in which all of the stocks here involved were reported therein as having been sold by decedent on October 20, 1941, to her four daughters, each of whom "paid $100 per month to the decedent in conformity with the contracts of purchase and sale. These payments amounted to the sum of $6,800.00." Subsequently, petitioner, in 1948-1949, did pay estate taxes to the United States Government in an amount of approximately $40,000. This tax included estate taxes upon the value of the stocks here in controversy. On October 16, 1945, Brosius, as executor, filed with the Estate Tax Division of the office of the Commissioner of Internal Revenue a certificate showing that the estate had paid Dominion succession dues (Canada), including interest and penalties, amounting to $27,201.01. On January 24, 1944, in the probate court claims were filed against the estate by Helen Crawley for $143.48, by Dorothy Kipp for $551.06, by Mary Brosius for $476.06, and by Neil Williams and George Brosius, as trustees, for $241.06 "for excess payments on account of the purchase of stock" under an agreement with reference to the purchase of stock. No gift tax1950 Tax Ct. Memo LEXIS 232">246 return was filed by decedent, but if required so to do, such failure was not due to willful neglect. Decedent and Brosius, her attorney in fact, relying upon advice of attorneys, did not believe the transactions to be taxable gifts. In 1941, due to regulations and war restrictions of the Canadian Government, the market value of Canadian stocks and securities in the United States was 20 to 30 per cent lower than their value in Canada. As of the date of transfers the fair market value in the United States of the corporate stocks here involved was as follows: 3,357 shares Murray-McCracken Co.,Ltd., Com.$138,855.6014,543 shares Murray-McCracken Co.,Ltd., Pfd.65,443.5062 shares Murray-Galesburg Bldg.Corp.6,200.00409 shares Crawley-McCrackenHotel Co.10,225.00Total$220,724.10The above valuation is subject to reduction to "present value after life of Ida A. Crawley, born Feb. 5, 1863, Factor.81159," 1 which computation is not here included. Respondent's notice of deficiency determined taxable gifts from decedent to her four daughters to the extent of $237,147.06, with the following1950 Tax Ct. Memo LEXIS 232">247 explanation: "Donor in October 1941 under the form of a purchase and sale agreement transferred to her four daughters in equal portions the above securities, the daughters to pay her $100 a month each, during her life time. The facts indicate that the effect of the transaction when coupled with an agreement entered into by the daughters was a transfer with income retained to the donor. The present value of the gift is included." The value of the stocks at the time of transfers as determined by the Commissioner was as follows: 3,357 shares Murray-McCracken Co.,Ltd., Com.$198,365.1314,543 shares Murray-McCracken Co.,Ltd., Pfd.66,097.9462 shares Murray-Galesburg Bldg.Corp.12,400.00409 shares Crawley-McCrackenHotel Co.15,337.50$292,200.57Reduced to present value after lifeof Ida A. Crawley born Feb. 5,1863, Factor.81159Present value$237,147.06Opinion The issue here is whether the decedent, Mrs. Ida A. Crawley, during her lifetime, made gifts to her four daughters by transfers to them of certain corporate stocks which required the filing of a Federal gift tax return and the payment of a gift tax thereon. The basis of the transactions1950 Tax Ct. Memo LEXIS 232">248 in question are the four so-called purchase and sales agreements between decedent and her daughters, dated October 20, 1941, wherein she purports to sell to each of them certain securities therein listed, for which each daughter agrees to pay her as the purchase price $100 each month so long as decedent lives. Petitioner does not controvert respondent's determination that the purported transactions were not sales, but insists that respondent erred in determining them to be gifts, and contends they were not gifts, because (1) at the time of their execution decedent was of unsound mind and not mentally competent to execute same; and (2) that regardless of the question of mental competency the transactions did not constitute gifts (a) there being no intention to make a gift, and (b) decedent "did not divest herself of all economic interest in and dominion and control over the stocks," the subject matter of the alleged gifts. It is elementary that a donor must have mental capacity to make a gift, otherwise the transaction is void. Mere mental weakness, however, is not sufficient to invalidate a gift - the mental infirmity must be such that the donor does not have sufficient mental1950 Tax Ct. Memo LEXIS 232">249 capacity to comprehend the transaction in question nor sufficient intellect to understand the nature and effect thereof. The test in determining mental capacity as accepted and generally applied by the courts is as follows: " * * The general rule is that, if the donor has sufficient mental capacity to comprehend the transaction, if he understands the extent and value of his property, what persons are the objects of his bounty, and the manner in which he is distributing his property among them, his gift will be valid. * * * 38 C.J.S. 789 § 13 and authorities there cited." Measured by this test, we have concluded from the evidence and the record as a whole that the decedent did not have the required mental capacity at the time to execute the transfers in question. In October, 1941, when the instruments were executed, unquestionably the decedent was of unsound mind. Her mind had been impaired for several years, but after her fall in July, 1941, her mental condition had grown much worse, and according to undisputed medical evidence she was mentally incompetent at all times during the last half of the year 1941, and we have found her wholly unable to transact business of any kind, 1950 Tax Ct. Memo LEXIS 232">250 and that she did not "understand the extent and value of her property." Her family, realizing this, instead of having her legally declared incompetent and a guardian appointed, in August, 1941, had caused her to execute a general power of attorney to her son-in-law, and deliver to him possession, control and management of all her property, including the stocks in question, which he continued to hold and exclusively manage and control throughout the remainder of her life. It does not appear reasonable that one mentally incapacitated to manage her daily or ordinary business affairs or whose mind was so impaired that she did not understand the extent and value of her property and hence could not be entrusted with it would have the mental capacity to comprehend the transactions here in question and to understand the manner in which she was distributing her property or the nature and effect thereof. The method employed in effecting a change of title to the stocks was not a simple one. It was neither an outright gift nor an outright sale. If it had been either, its meaning and effect would have been easier of comprehension to all, and more especially to one having an infirm and debilitated1950 Tax Ct. Memo LEXIS 232">251 mind. The plan of transfer employed was involved and complicated. It was the culmination of various schemes considered by decedent's two lawyer nephews for nearly a year, they having first considered a gift and then a sale, and finally evolving a plan which combined elements of both. Indicative of its involved and complicated nature is the fact that opposing counsel here differ widely as to the nature and effect of the transfers. Corroborative of decedent's lack of comprehension or ability to comprehend the transaction is the fact that she was ignored in the consideration and determination of the plan. Of the fifty letters in evidence, largely correspondence between the lawyers and members of decedent's family, concerning the proposed transfers, only one upon this subject was addressed to decedent. It was from Williams, written eight months prior to the transfers, and contained this sentence: "I know this is a complicated matter and one which deserves your careful consideration." It is obvious that the complicated nature of the transaction, coupled with the decedent's mental infirmity, was the reason that all subsequent correspondence was had between the lawyers and members of decedent's1950 Tax Ct. Memo LEXIS 232">252 family rather than with her. It does not appear that the plan as finally executed was ever explained to decedent, but even if it had been, considering her state of mind, we do not think she would have had sufficient mentality to have comprehended it. Respondent asks why, since decedent made a will seven months prior to the transfers, and also executed a power of attorney some six weeks prior thereto, both of which were accepted as valid, the transfers in question were not also valid. Failure to contest these documents is neither proof of their validity nor that of the transfers. We seriously question whether either of these documents would have been sustained if legally attacked on the ground of mental incompetency. The will, however, was executed prior to decedent's fall, when her mind was not so greatly impaired, and its terms were not complicated, it being an outright bequest of all of decedent's property equally to her four daughters. The attorneys who prepared the papers in connection with the power of attorney evidently anticipated that its validity might be attacked, and stipulated that if it should be held illegal in one jurisdiction, it would not vitiate the exercise of1950 Tax Ct. Memo LEXIS 232">253 powers under it in another. However, regardless of whether the will or the power of attorney, if attacked, would have been sustained, as to the transfers in question we have no doubt that if contested in a court of competent jurisdiction, under the evidence here produced, the court, solely on the ground of mental incompetency, would have held them invalid. Respondent cites and . The essential facts in both of those cases are materially different from those in the instant case. Challiner v. Smith was a contested will case involving both mental incapacity and undue influence. The appellate court reversed a jury verdict for contestant on both issues because of insufficient evidence on undue influence and an improper charge and unsatisfactory evidence on mental incapacity. There, those who witnessed the execution of the will and others testified unequivocally that testatrix in their opinion was then possessed of a sound mind and memory and recited instances in connection with its signing, including statements by her, and other business transactions, such as giving of checks, settlement1950 Tax Ct. Memo LEXIS 232">254 of farm rents, discussion of income tax, etc., which corroborated the conclusion that she was mentally competent to transact business. Among such witnesses were her family physician, her lawyer, her preacher and others. The testimony of those to the contrary was analyzed by the court and found to be unsatisfactory. In , the court refused to set aside a transfer of corporate stocks on the ground of mental incompetency, since it appeared that during the time in question and subsequent to the execution of a general power of attorney, transferrer carried on and consummated many other transactions, such as employing a contractor to make repairs on her home, purchased household necessities, "sold securities, attended meetings of the board of directors of the drill company and on at least one occasion made a motion for some routine matter before the board", etc. Said the court, "evidence of business transactions have been consummated during the time in question is most convincing as to mental ability." In the instant case, save for the transfers in1950 Tax Ct. Memo LEXIS 232">255 question, the evidence shows that subsequent to the execution of the power of attorney by decedent, she neither consummated, carried on nor discussed business of any kind. Decision will be entered for petitioner. Footnotes1. As was done by Commissioner in his deflciency letter.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625835/	A. M. NICHOLS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Nichols v. CommissionerDocket No. 12623.United States Board of Tax Appeals15 B.T.A. 1155; 1929 BTA LEXIS 2716; March 29, 1929, Promulgated 1929 BTA LEXIS 2716">2716 As compensation for his services in effecting a sale of certain coal properties the petitioner received from the purchaser certain interest-bearing notes and bonds payable seven years from the date of receipt, the bonds being secured by a deed to the property purchased and the notes being unsecured. The Commissioner included the face value of the notes and bonds in the petitioner's income for the year in which they were received. Held, that the notes had no market value at the time received and that, therefore, the Commissioner's determination in respect to the notes was erroneous, but that the evidence offered was insufficient to show error in the Commissioner's determination in respect to the bonds. W. W. Booth, Esq., and W. A. Seifert, Esq., for the petitioner. L. A. Luce, Esq., for the respondent. MURDOCK 15 B.T.A. 1155">1156 This is a proceeding for the redetermination of a deficiency in income tax for the year 1920 in the amount of $4,221.87. It is alleged that the Commissioner erred in including in the petitioner's gross income the amount of $25,000, the face value of certain promissory notes and bonds received as commissions by the petitioner1929 BTA LEXIS 2716">2717 during the taxable year. FINDINGS OF FACT. The petitioner is an attorney-at-law residing at Waynesburg, Greene County, Pa. About October 1, 1920, he arranged a sale to the General Investment Co. of approximately 6,347 acres of undeveloped coal land situated in Marshall County, W. Va. In payment of the purchase price and the commissions on the sale of the property the General Investment Co. gave $29,140 of its notes, $525,000 of its bonds, and $71,804 in cash. The bonds were dated August 15, 1920, bore interest at 6 per cent, and matured over a period of 7 years, $70,000 maturing each year for 6 years and the balance or $105,000 maturing the seventh year. They were secured by a deed to the property purchased. Of the acreage sold, 46.5 acres were owned by the petitioner. In exchange therefor he received from the General Investment Co. $4,625 in cash, which amount he returned as income for 1920. He also received from the company as commissions on the sale, three of the primissory notes of a total face value of $14,000, all dated August 15, 1920, and payable August 15, 1927, bearing interest at 6 per cent, and $11,000 face value of the company's bonds maturing August 15, 1927. 1929 BTA LEXIS 2716">2718 He was paid the full amount of interest on both the notes and bonds in the years 1921, 1922, and 1923, but has received no interest since the latter year. The General Investment Co. was a West Virginia corporation formed in 1915 by J. C. McKinley and Nelson T. Hubbard of Wheeling, W. Va., as a holding company to take title to coal properties, none of which it operated. During the taxable year it owned about 10,000 acres of such property. The balance sheet of the company as of December 31, 1920, was as follows: AssetsCash$655.25Bills receivable130,000.00Accounts receivable29,761.85Supplies32.04Stock in other corporations277,935.00Bonds800.00Real estate1,053,110.63Oil investigation600.00Treasury stock62,000.001,554,894.77LiabilitiesBills payable$464,181.19Accounts payable458,753.61Bonds525,000.00Capital stock84,000.00Accrued interest11,812.50Surplus11,147.471,554,894.7715 B.T.A. 1155">1157 The bills receivable in the above balance sheet represented two notes of $65,000 each, made by McKinley and Hubbard. Of the stock in other corporations, about $270,000 represented stock from which the company never1929 BTA LEXIS 2716">2719 received any income. The greater part of the item designated bills payable represented notes given for the purchase of coal lands. The accounts payable represented money owed to various allied corporations and to McKinley and Hubbard. After July 1, 1920, and through the balance of the year the company owned no income-producing assets. The amount of $71,804 used as part payment in the purchase of the Marshall County properties was borrowed on open account from the Richland Coal Co. All of this company's common stock was owned by the Richland Coal Mining Co. and all of the latter company's common stock was owned by McKinley and Hubbard. Before the sale was made, the petitioner agreed to accept the notes and bonds as payment for his commissions. He took these of necessity since he was unable to obtain anything else. A short time after receiving the notes he offered them in payment of a debt, but the creditors refused to accept them at any value due to the fact that after making numerous inquiries they were unable to receive any cash offers therefor. At some undisclosed time or times the petitioner offered the notes as collateral to the First National Bank and to the Marshall1929 BTA LEXIS 2716">2720 County Bank, both of Moundsville, W. Va., both of which banks refused to accept them. When some of the General Investment Co.'s notes were presented for discount at the Marshall County Bank of Moundsville, W. Va., in 1920, the bank refused to discount them or to accept the bonds as collateral security with the notes. The company did not pay any of the bonds at their maturity dates. About the end of the year 1920 the petitioner placed three bonds with a bank as collateral security on a loan. The notes had no market value at the time they were received by the petitioner. The market value of the bonds at the time they were received by the petitioner was $11,000. OPINION. MURDOCK: The petitioner has alleged that the Commissioner erred in adding to his income for the taxable year 1920 the amounts of $11,000 and $14,000 representing the face value of the notes and bonds received as compensation during that year by the petitioner under the circumstances set forth in the findings of fact. It is the petitioner's contention that none of this amount represented income to him during the year, for the reason that the notes and bonds so received in 1920, and payable in 1927, had no1929 BTA LEXIS 2716">2721 market value at the time received. 15 B.T.A. 1155">1158 Section 213 of the Act of 1918 provides as follows: SEC. 213. That for the purposes of this title (except as otherwise provided in section 233) the term "gross income" - (a) Includes gains, profits, and income derived from salaries, wages, or compensation for personal service * * of whatever kind and in whatever form paid * * . Regulations 45, promulgated by the Commissioner with the approval of the Secretary, relating to the 1918 Act, contains the following: ART. 33. Compensation paid other than in cash. - Where services are paid for with something other than money, the fair market value of the thing taken in payment is the amount to be included as income. * * ART. 34. Compensation paid in notes. - Promissory notes received in payment for services, and not merely as security for such payment, constitute income to the amount of their fair market value. * * * In the case of , the Board considered and approved a somewhat similar regulation promulgated under the Revenue Act of 1916 (art. 4, par. 22 of Regulations 33) and held that stock paid as compensation1929 BTA LEXIS 2716">2722 for personal services was taxable as income to the extent of its fair market value. See also , holding that bonds received as compensation for personal services are income in the year received to the extent of their fair market value. Presumably, then, the Commissioner in conformance with his regulations has determined that the fair market value of the notes and bonds received by the petitioner equaled their face value. This determination must be sustained unless the petitioner can show that in 1920 their market value was less than the amount determined, or that at that time they had no market value whatsoever, which latter condition is the one the petitioner contends was a fact. To meet the burden of proof he has offered the opinion testimony of two witnesses - one, a banker who was familiar with the values of coal properties and securities issued by coal companies of the vicinity during the year 1920; and the other, the former secretary-treasurer of the General Investment Co., who had held this position during the taxable year. In answer to a hypothetical question as to whether the notes and bonds had a market value in 1920, the1929 BTA LEXIS 2716">2723 banker testified that in his opinion neither would be readily marketable. When examined further concerning this opinion he stated that he did not know where a market could have been found for the bonds and that he or his bank would not have paid anything for them in 1920. The former officer of the company testified that in his opinion neither the notes nor the bonds had any market value in 1920. It may be observed that where the issue before the Board concerns the existence of market value, a question of fact, expert opinion 15 B.T.A. 1155">1159 testimony as to such value may be only one of several methods of proof and is merely evidence to be followed or not, to the extent that it may be considered reliable. See ; ; ; ; ; . Also, its efficacy as proof may depend to a great degree upon the qualifications of the witnesses and their familiarity with the market for the property concerning which1929 BTA LEXIS 2716">2724 they are testifying. The fact that one of the witnesses was during the taxable year an officer of the company which issued the notes and bonds, does not show that he was familiar with the market values of its securities. In this particular case both the notes and the bonds were issued in payment for the property and it does not appear that the witness was ever concerned with the sale of the securities or with any attempt to sell them. The petitioner was attempting to prove that the fair market value of the securities was nihil.He did not necessarily accomplish this by merely having the witnesses state that in their opinions the securities had no market value. It is our duty to decide whether or not these securities had any fair market value at the controlling date, and we must be given sufficient facts on which to base our decision in order that it may not be a mere echo of the unsupported opinions of others. Fair market value means the amount which would be mutually agreed upon in a sale between a willing seller not forced to sell and a willing purchaser not forced to buy. See 1929 BTA LEXIS 2716">2725 ; ; . In this particular case it does not appear that the witnesses understood this to be the meaning of the term fair market value, so that our decision should not depend solely upon their opinions. Cf. . The General Investment Co. was only a holding company of undeveloped coal lands, having no income at any time from operations. It did not receive income from any source from July 1, 1920, throughout the balance of the year. Its bills and accounts payable were in excess of its receivables and its only real assets consisted of undeveloped coal lands, the value of which was not given. The comparatively small amount of cash given in purchase of the acreage which was bought in 1920 was borrowed from another corporation. The remainder of the payment consisted of the General Investment Co.'s notes and bonds. The notes were unsecured. Two of the petitioner's creditors refused to accept them at any value in payment of their debt. These facts are sufficient to convince us1929 BTA LEXIS 2716">2726 that at the time received by the petitioner the notes had no market value and represented no taxable income to him at such time. We therefore conclude 15 B.T.A. 1155">*1160 that the Commissioner was in error in including the amount of $14,000, representing the face value of the notes, in the petitioner's income for the year 1920. However, as to the bonds, the petitioner's evidence is not sufficient to show that they had no market value at the time received. Although they were not payable for seven years, they were secured by a deed to the property purchased. It is true that the value of this property does not appear on the record, but, even if it were worth little more than the amount of cash paid in its purchase, it is quite probable that this security would give some value to the bonds for which a purchaser would be willing to pay. The determination of the Commissioner in respect to the bonds is sustained. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625836/	E. L. Collamer, Sr. v. Commissioner.Collamer v. CommissionerDocket No. 17481.United States Tax Court1950 Tax Ct. Memo LEXIS 212; 9 T.C.M. 367; T.C.M. (RIA) 50107; April 21, 19501950 Tax Ct. Memo LEXIS 212">212 Held, the petitioner and his wife did not really and truly in good faith and acting with a business purpose intend to join together as partners in the conduct of a moving picture theatre. William L. Parker, Esq., 718 National Bank of Commerce Bldg., Norfolk 10, Va., for the petitioner. George J. LeBlanc, Esq., for the respondent. VAN FOSSAN Memorandum Findings of Facts and Opinion The Commissioner determined deficiencies in income tax of $12,183.78 and $7,628.62 for the years 1943 and 1944, respectively. The deficiencies result from the d ermination of the Commissioner that all of the net earnings derived from the operation of the Park Theatre, Norfolk, Virginia, were taxable to petitioner. Findings of Fact The petitioner and his wife, Ada P. Collamer, reside in Norfolk, Virginia. The returns of petitioner for the years 1943 and 1944 were filed with the collector of internal revenue for the district of Virginia. From 1922 to on or about October 4, 1933, the petitioner was engaged in the electric welding business at Portsmouth, Virginia. On October 4, 1933, he entered into a written contract for the purchase of the "Park Theatre property or lot No. 21950 Tax Ct. Memo LEXIS 212">213 and 3 in Block No. 11 on the plat of Fairmount Park" and "all of the theatre equipment, excepting the Western Electric Sound equipment", all in Norfolk, Virginia, for $13,000, of which amount $1,500 was paid in cash. Petitioner assumed payment of a mortgage on the property and a second was executed for the balance of $2,800. Under the agreement, deeds to the property and possession thereof were to be delivered on October 9, 1933. On October 4, 1933, neither petitioner nor his wife had any money or other property. Title to a residential property located in Portsmouth, Virginia, and occupied by petitioner and his family as a residence, was in petitioner's name. However, this property was actually purchased and owned by petitioner's aunt. At that time petitioner was liable for delinquent taxes on such property. The delinquent taxes were later paid by petitioner with profits derived from the operation of the Park Theatre. Title to the theatre property was taken in the name of petitioner. The cash payment of $1,500 was obtained by petitioner as a loan from his aunt, which loan was not evidenced at that time by a note or any other writing. Petitioner borrowed an additional amount of1950 Tax Ct. Memo LEXIS 212">214 $2,500 from his aunt, and on June 20, 1934, he and his wife executed a note payable to the order of his aunt in the amount of $4,000 secured by a deed of trust. The additional $2,500 was turned over by petitioner to the former owner of the Park Theatre property to apply on the purchase price thereof. The petitioner made periodic payments on the mortgages on the Park Theatre property out of profits realized from the operation of the theatre. On December 23, 1936, the petitioner and his wife executed and delivered to the Merchants and Mechanics Savings Bank of the City of Norfolk, Virginia, a note for $14,000, secured by a first mortgage on the theatre property and payable at the rate of $200 per month, the first payment to be made on February 1, 1937. The proceeds of this loan were used for the payment of all the then existing loans and mortgages against the Park Theatre property and for certain improvements and alterations to the theatre building. All payments on this loan were made out of the profits realized from the operation of the theatre. The note was paid in full on July 1, 1942. On May 30, 1937, the petitioner and his wife executed a note for $4,200 payable to the order1950 Tax Ct. Memo LEXIS 212">215 of Merchants and Mechanics Savings Bank of the City of Norfolk. The proceeds of the note were used to purchase an air-conditioning unit for the Park Theatre. This loan was paid from the proceeds of a note dated June 28, 1937, in the amount of $5,600 payable to the same bank executed by petitioner and his wife. The additional amount of $1,400 was used for the payment of the cost of installing the above referred to air-conditioning unit. In May, 1934, petitioner and his family moved to 1607 Lafayette Boulevard, Norfolk, Virginia, which property was located about ten blocks from the Park Theatre. This property was purchased and title thereto was taken in the name of petitioner. The property was paid for from the profits derived from the operation of the Park Theatre. The Park Theatre, which had 336 seats, is situated on the outskirts of Norfolk. It was open to the public from 3:00 P.M. to 11:00 P.M. each day. The programs were changed each Monday, Wednesday, and Friday. The pictures exhibited were not "first run pictures" and were purchased and exhibited when made available by the film companies. The admission prices in 1933 were 10 and 15 cents. When the petitioner began operation1950 Tax Ct. Memo LEXIS 212">216 of the theatre, and for some time thereafter, the pictures were booked for petitioner by a brother-in-law of the former owner of the Park Theatre, for which services he received compensation from petitioner. Until forced by ill health to quit in 1942, the petitioner devoted his entire time to the management and operation of the theatre. He sometimes arrived at the theatre as early as 9 o'clock in the morning and remained there until shortly after the closing of the theatre. He was assisted in the operation of the theatre by his wife, and his son and daughter, aged 15 years and 18 years in 1933, respectively. In addition, the petitioner employed two ushers, a projection-machine operator and a cleaner or janitor. When petitioner bought the theatre property, his wife told him that she "would go in and help him to try to make a go of it." She usually arrived at the theatre shortly before 3 o'clock in the afternoon and served as cashier in the box-office, which opened at 3:00 P.M. and closed at 9:15 P.M. The daughter served as relief cashier from time to time during the day and also served as cashier for two or three weeks at a time in the absence of her mother. After the box-office1950 Tax Ct. Memo LEXIS 212">217 closed, petitioner's wife when acting as cashier took the receipts to the theatre office and checked them. She usually remained in the theatre until the petitioner was ready to leave after the closing of the theatre and they returned home together. At times when petitioner was in the upstairs theatre office, his wife sat in the theatre looking at the pictures. If any disturbance occurred she went up to the office to tell petitioner about it. Petitioner's wife called his attention to the need of cleaning and changing drapes and carpeting and to the dullness of the screen. She assisted petitioner in the selection of new drapes and carpeting. At times, her choice of pattern prevailed. If she thought the janitor had not properly cleaned the theatre, she told petitioner so he could talk to the janitor about it. She never bought or booked any pictures. At times, when in the office, she listened to the picture salesmen talking to her husband and son, but as a rule she left the office when such business matters were discussed. She signed the various notes hereinbefore referred to because she was requested to do so. Petitioner's wife received no compensation for her services. So much money1950 Tax Ct. Memo LEXIS 212">218 as was needed for living expenses was taken from the daily receipts by petitioner or his wife. The balance of the daily receipts was deposited in a bank. The daughter at times kept the books for the business. She also took the receipts of the theatre to the bank. In the early years of the operation of the theatre she received as compensation about $10 a week. The son at first served as usher. In 1933, and for some time subsequent thereto, he attended school and had to go home early to do his lessons. When he was old enough and had learned how to operate the projection-machine, he relieved the employed operator for an hour so that the regular operator could go out for his evening meal. The books of account of the business carried no capital account or drawing account in the name of petitioner's wife. On Thanksgiving Day in 1942, petitioner became ill at the theatre and thereafter was seriously ill. The operation of the business was turned over to the son, who thereafter served as manager and was paid a salary of about $70 or $75 a week. Neither petitioner nor his wife thereafter ever actively participated in the operation of the Park Theatre. Petitioner's wife devoted all her1950 Tax Ct. Memo LEXIS 212">219 time to her ill husband. The daughter served as cashier until she married in 1945. Thereafter various persons, not related to petitioner, were employed as cashiers. After the son assumed operation of the business, the net receipts were deposited in a joint account in the name of petitioner and his wife. Some real property, other than the residence and theatre properties, was acquired at some undisclosed time, title to which was taken in the name of petitioner's wife. In January, 1943, the petitioner was sufficiently recovered so that he could travel to California. Petitioner and his wife there visited the sister and brother-in-law of petitioner's wife. The brother-in-law was a credit manager. At some time during the visit, the brother-in-law suggested to petitioner, that, since both petitioner and his wife had worked in the operation of the theatre business, they "should be in partnership" and the "returns should be made in partnership." Petitioner wrote to his son about the suggestion and it was decided that when petitioner returned to Norfolk they would have a certain registered public accountant prepare the income tax returns. After petitioner's return to Norfolk, the petitioner1950 Tax Ct. Memo LEXIS 212">220 and his son first consulted with the accountant. Upon the accountant's advice, a paper styled"Articles of Partnership" was signed by petitioner and his wife, as follows: "THIS AGREEMENT, Made this first day of January, 1944, between E. L. Callamer and Ada Callamer, of the City Norfolk, State of Virginia, WITNESSETH: "The said Parties have agreed, and by these presents do agree, to associate themselves as Partners in the business of operating what is known as moving picture theatre, or other amusements that would be of benefit to the Partnership. Said Partnership shall continue from the date of this agreement until mutually agreed to dissolve. "And it is further agreed, between the said Partners, that the name of the Partnership hereby formed unless otherwise changed by agreement shall be the Park Theatre. "All profits, gains and increase which shall be made in the conduct of the said business shall be equally and proportionately divided between them, share and share alike. And all losses that shall arise from the conduct of the business shall be borne equally between the said Partners. "In Witness Whereof, we have hereunto set our hands, the day and year first above written. 1950 Tax Ct. Memo LEXIS 212">221 " The petitioner and his wife filed separate returns for the years 1943 and 1944. The Commissioner determined that the petitioner was taxable on the net earnings of the Park Theatre. The petitioner did not at any time really and truly in good faith and acting with a business purpose intend to join together with his wife as partner in the operation of the Park Theatre. Opinion VAN FOSSAN, Judge: The question to be determined is whether the petitioner and his wife operated the Park Theatre as a partnership in 1943 and 1944. The petitioner does not rely upon the agreement executed in January, 1944. Counsel for petitioner at the hearing stated that it had no operative or legal effect, was executed only for the purpose of recording under the Fictitious Name Statute and that it may be disregarded. It is contended that from the inception of the enterprise in 1933 until their retirement in 1943, the petitioner and his wife were in fact operating the business as partners, and that, after their retirement, the business was conducted by the son for their joint account. Whether petitioner and his wife were partners from the time of the purchase of the theatre property in October, 1933, 1950 Tax Ct. Memo LEXIS 212">222 to 1944, inclusive, depends upon whether they "in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise." ; . From a careful examination of all the evidence it is our conclusion that the petitioner and his wife never thought of a partnership until it was suggested to them by their brother-in-law in California sometime in 1943. It is true that petitioner's wife from the outset rendered services in the operation of the theatre. In our opinion, these services were not rendered as a partner, but as a loyal wife devoted to her husband's welfare and affairs, both personal and business. She testified that when petitioner bought the business, - " * * I told him that I would go in and help him to try to make a go of it. * * * I just made my whole life and my work with him because I felt like I just wanted to be with him all the time." When he became ill in November, 1942, she remained at his side and devoted all her time to him. Petitioner's wife contributed no capital originating with her. She testified that she signed1950 Tax Ct. Memo LEXIS 212">223 the notes because requested to do so. She had no property or funds of her own at the time of the purchase of the theatre property and for some time subsequent thereto. Neither did petitioner's wife participate in the control and management of the business, nor perform vital services therein. She served as cashier but so did her daughter. When there was any disturbance in the theatre she called her husband's attention to it so he could take care of it. She did not reprimand the janitor for not properly cleaning the theatre. She called her husband's attention to it so that he could speak to the janitor about it. She never purchased or booked pictures. Although she sometimes listened to the discussions regarding pictures carried on in the theatre office between her husband and son and salesmen, she usually walked out of the office when they were "discussing the business." Not every association of a husband and wife in business creates a partnership. Nor does it always follow that the parties intend such a relationship from the fact that they both sign notes to borrow money for use in the business. There must be an intention on the part of both parties, express or reasonably implicit1950 Tax Ct. Memo LEXIS 212">224 in their conduct, to form a partnership. Here we are not convinced that the parties so intended. On the contrary, it is our conclusion that the petitioner and his wife did not really and truly intend to join together for the purpose of carrying on the theatre business as partners, and we have so found. , and , cited by the petitioner, are distinguishable upon the facts. Each case must be determined on its own peculiar facts. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4512705/	TO BE PUBLISHED IN THE OFFICIAL REPORTS OFFICE OF THE ATTORNEY GENERAL State of California XAVIER BECERRA Attorney General _________________________ : OPINION : No. 17-101 : of : March 3, 2020 : XAVIER BECERRA : Attorney General : : CATHERINE BIDART : Deputy Attorney General : : ________________________________________________________________________ MARTIN D. KOCZANOWICZ, CITY ATTORNEY FOR THE CITY OF MORENO VALLEY, has requested an opinion on the following questions: 1. Under Government Code sections 53200–53210, may a city council lawfully provide its members with health and welfare benefits through a plan into which the city pays a flat rate plus a percentage of the average of the salaries of selected managerial employees, where the extra percentage is not made available to other city officers and employees? 2. May an unintentional violation of Government Code sections 53200–53210 lead to criminal penalties? 3. If a city council provides its own members with health and welfare benefits that exceed what is allowed under Government Code sections 53200–53210, what recourse does the city have to recoup its overpayment, including interest on that overpayment? 1 17-101 4. May a city council approve a settlement agreement between the city and a current city council member to repay the city for the excessive health and welfare benefits received—including an agreement that waives some or all of the city’s overpayment—if that member is recused from voting on the agreement? CONCLUSIONS 1. No, under Government Code sections 53200–53210, a city may not lawfully provide its city council members with health and welfare benefits through a plan into which the city pays a flat rate plus a percentage of the average of the salaries of selected managerial employees, where the extra percentage is not made available to other city officers and employees. 2. A violation of Government Code sections 53200–53210 that is unintentional could lead to criminal penalties only if it resulted from a failure to ascertain the relevant legal obligations that was so unreasonable as to constitute criminal negligence. 3. The city may seek to recoup its overpayment of city council members’ health and welfare benefits, including interest, in a civil action against those who received or approved the excessive benefits. 4. A city council may approve a settlement agreement between the city and a current city council member to repay the city for the excessive health and welfare benefits received if that member is recused from voting on the agreement and the other “remote interest” requirements of Government Code section 1091, subdivision (b)(15) are met. Although a city has discretion to waive a claim in part or in full if doubt or a dispute exists as to the claim’s validity or amount, a city may not waive a valid claim of an indisputable amount because doing so would result in an unconstitutional gift of public funds. ANALYSIS This opinion addresses a set of related questions arising from a city council’s decision to grant its members a specialized package of health and welfare benefits. As described to us, the members’ benefit plan consisted of city contributions toward a “cafeteria plan”1 from which members could purchase health-related benefits. For the city council members’ plan, the city provided contributions at a flat rate plus a percentage of the average of the salaries of selected city managerial employees, whose salaries were 1 A cafeteria plan is so called “because the beneficiary can choose from a selection of benefits as would a cafeteria patron choosing food items.” (Sturgeon v. County of Los Angeles (2015) 242 Cal.App.4th 1437, 1441, fn. 3.) 2 17-101 higher than that of the city council members themselves.2 The benefit plans that the city made available to other city employees and officers did not provide the same level of benefits. Instead, the other plans provided contributions at the flat rate alone, or the flat rate plus a percentage of the employee’s or officer’s own salary. The facts as presented to us indicate that the measure adopting this way of calculating the contributions for council members was presented to the city council by the then city manager, who indicated that the proposal had been reviewed by the then city attorney and complied with certain requirements of state law. The possible violation addressed by the present request was discovered several years later. The first question to be considered is whether the subject benefit plan was in compliance with the state statutes governing employment benefits for local legislative bodies.3 If not, then could unintentional violations of the governing laws result in criminal penalties? What recourse would the city have to recoup an overpayment of benefits, and would interest be available? And, finally, could the city approve a settlement agreement— including one that waived some or all of the overpayment—with a current city council member who was subject to the agreement, if that member were recused from the vote? We address each of these questions in turn below. Question 1 We first consider whether a specialized benefit plan like the one described here is permitted under the relevant statutes. We conclude that it is not permitted. Government Code sections 53200–53210 regulate the provision of health and welfare benefits to officers and employees of local agencies, including cities.4 Health and welfare benefits refer to “hospital, medical, surgical, disability, legal expense or related benefits including, but not limited to, medical, dental, life, legal expense, and income protection insurance or benefits, whether provided on an insurance or a service basis,” as well as certain group life insurance.5 A city may provide such benefits to its officers and 2 We are informed the benefits equaled 6 percent of the average of the salaries of the Public Works Director, Community Development Director, Economic Development Director, Administrative Services Director, Finance Director, and Parks and Community Services Director. 3 Gov. Code, §§ 53200–53210. 4 For purposes of the statutory scheme, a city is a local agency. (Gov. Code, § 53200, subd. (a).) 5 Gov. Code § 53200, subd. (d). 3 17-101 employees, including council members, subject to certain limits.6 These implement an express statutory purpose to uniformly limit local legislators’ benefits.7 One limit, set out in Government Code section 53202.3, requires that when local legislators craft a benefit plan for themselves, they must share the same benefit plan widely with others: “All plans, policies or other documents used to effectuate the purposes of this article shall provide benefits for large numbers of employees.”8 A second limit, set out in Government Code section 53208.5, subdivision (b) provides: Notwithstanding any other provision of law, the health and welfare benefits of any member of a legislative body of any city, including a charter city, . . . or any other political subdivision of the state shall be no greater than that received by nonsafety employees of that public agency. In the case of agencies with different benefit structures, the benefits of members of the legislative body shall not be greater than the most generous schedule of benefits being received by any category of nonsafety employees.9 Here, the members’ benefits were based on a flat rate plus a percentage of the average of the salaries of some of the city’s executive managerial employees, whose salaries exceeded those of the city council members themselves. This additional percentage was not provided to non-council members. Instead, all other city officer and employee benefits were based on the flat rate alone, or the flat rate plus a percentage of the employee’s own salary. 6 Gov. Code, § 53201. Government Code section 1090, which prohibits financial conflicts of interest in making public contracts, does not prohibit local legislators from providing themselves with benefits generally. (Gov. Code, § 53208 [“Notwithstanding any statutory limitation upon compensation or statutory restriction relating to interest in contracts entered into by any local agency, any member of a legislative body may participate in any plan of health and welfare benefits permitted by this article”].) 7 Gov. Code, § 53208.5, subd. (a) (legislative findings and declarations). 8 Gov. Code, § 53202.3. 9 Gov. Code, § 53208.5, subd. (b). 4 17-101 The use of an enriched benefit formula for council members is contrary to Government Code section 53208.5, subdivision (b), which states that local legislators’ benefits “shall not be greater than the most generous schedule of benefits being received by any category of nonsafety employees.”10 In addition, a failure to offer the same plan to “large numbers of employees” is contrary to Government Code section 53202.3.11 Thus we conclude that, under Government Code sections 53200–53210, a city may not provide its city council members with health and welfare benefits through a plan into which the city pays a flat rate plus a percentage of the average of the salaries of selected managerial employees, where the extra percentage is not made available to other city officers and employees. Question 2 Question 2 asks whether criminal penalties could result from an unintentional violation of Government Code sections 53200–53210. We conclude that criminal penalties could only result from such a violation if it met the high standard for criminal negligence. We have previously opined that a willful violation of sections 53200–53210 may be punishable as a misdemeanor, and may subject the official to removal from office under 10 See Gov. Code, § 53208.5, subd. (b). The enriched formula used an average of six higher-paid executive managerial employee salaries (see note 2, ante) instead of the members’ own individual salaries. Whether those six higher-paid executive managerial employees would themselves comprise a “category of nonsafety employees” for purposes of section 53208.5, subdivision (b), is unclear. Even if they did, however, it could not reasonably be said that they had a similarly “generous schedule of benefits” to the city council members, because the executive managerial employees’ benefits were based on their own individual salaries, while the city council members’ benefits were based on the average salaries of a separate group of higher-paid employees. 11 See Gov. Code, § 53202.3. The governing statutory scheme does not define “large numbers of employees” as used in Government Code section 53202.3. (Gov. Code, § 53202.3, italics added; but see Gov. Code, § 53200, subd. (e) [“‘Employees’ or ‘officers and employees’ mean all employees and officers, including members of the legislative body, who are eligible under the terms of any plan of health and welfare benefits adopted by a local agency pursuant to this article”].) Under any reasonable interpretation of that term, however, a benefits plan offered only to five council members and not to any other city employees would not qualify as a plan that “provide[s] benefits for large numbers of employees.” 5 17-101 Government Code section 3060 et seq.12 The question here, though, is about an unintentional violation, not a willful one.13 We conclude that an unintentional violation could in theory lead to criminal liability as a misappropriation of public funds, but only if the violation resulted from conduct rising to the level of “criminal negligence.” Penal Code section 424, subdivision (a), states: Each officer of this state, or of any county, city, town, or district of this state, and every other person charged with the receipt, safekeeping, transfer, or disbursement of public moneys, who . . . [w]ithout authority of law, appropriates the same, or any portion thereof, to his or her own use, or to the use of another; . . . [i]s punishable by imprisonment in the state prison for two, three, or four years, and is disqualified from holding any office in this state.14 A city council member’s act of authorizing the provision of public benefits could constitute a disbursement of public moneys within the meaning of Penal Code section 424.15 Doing so without legal authority would amount to a crime, however, only if the member had the requisite mental state. The California Supreme Court has repeatedly stated 12 83 Ops.Cal.Atty.Gen. 124, 128–129 (2000); see Gov. Code, §§ 1222 (“willful omission to perform any duty enjoined by law upon any public officer, or person holding any public trust or employment, where no special provision is made for the punishment of such delinquency, is punishable as a misdemeanor”) & 3060 et seq. (providing for removal of official for “willful or corrupt misconduct in office”). 13 The prohibition against conflicts of interest in public contracts (Gov. Code § 1090) provides for criminal penalties for willful violations (Gov. Code, § 1097), not unintentional ones. 14 Pen. Code, § 424, subd. (a). 15 See People v. Hubbard (2016) 63 Cal.4th 378, 394 (holding that “an individual is ‘charged with the receipt, safekeeping, transfer, or disbursement of public moneys’ under the meaning of section 424 so long as he or she exercises a degree of material control over public funds that amounts to being ‘charged with’ such authority”); see also People v. Battin (1978) 77 Cal.App.3d 635, 649–650 (supervisor’s certification of time sheets from which county staff was paid constituted disbursement of public monies under Penal Code section 424); Webb v. Superior Court (1988) 202 Cal.App.3d 872, 887 (“that petitioner was not directly, in his job description or the common responsibilities of his position, charged with receipt, safekeeping, transfer or disbursement of public funds does not necessarily preclude a prosecution under section 424. It is sufficient if the public official controls public funds so as to cause their expenditure for nonpublic purposes”). 6 17-101 that to be convicted under Penal Code section 424, an official must know or be criminally negligent in not knowing that he or she lacks legal authority.16 Criminal negligence is not ordinary negligence, but is “aggravated, culpable, gross, or reckless.”17 It requires “a higher degree of negligence than is required to establish negligent default on a mere civil issue.”18 An official entrusted with control of public funds would generally not be criminally liable for misappropriation if he or she believed the action to be legally authorized, unless that belief was “objectively unreasonable, i.e., [was] the product of criminal negligence in ascertaining legal obligations.”19 Thus, in response to Question 2, we conclude that an unintentional violation of Government Code sections 53200–53210 could lead to criminal penalties only if it were criminally negligent. Question 3 We next consider whether the city may recoup its overpayments from those who received or approved excessive benefits and, if so, whether interest is available.20 An act that is in excess of what is legally permitted is ultra vires—i.e., outside of the actor’s authority and beyond his or her legal discretion.21 Therefore if a city adopted a resolution to provide benefits that were not in compliance with Government Code sections 53200–53210, that resolution would be void.22 A city may seek repayment of excess 16 E.g., People v. Hubbard, supra, 63 Cal.4th at p. 397; People v. Bradley (2012) 208 Cal.App.4th 64, 78; Stark v. Superior Court (2011) 52 Cal.4th 368, 395–396. 17 Stark v. Superior Court, supra, 52 Cal.4th at p. 399. 18 Ibid., internal quotation marks omitted. 19 Ibid. 20 We address only the question we have been asked: whether a city may recoup its “overpayment” under the circumstances described to us. We understand that “overpayment” refers to the amount in excess of what could have been provided lawfully. We have not been asked to address, nor do we, whether a city could recoup anything beyond that amount on the ground that the resolution was void. 21 See People ex rel. Harris v. Rizzo (2013) 214 Cal.App.4th 921, 941–944; Lockyer v. City and County of San Francisco (2004) 33 Cal.4th 1055, 1086 (where public official’s authority to act in particular area derives wholly from statute, the scope of that authority is measured by terms of the governing statute). 22 Big Creek Lumber Co. v. County of Santa Cruz (2006) 38 Cal.4th 1139, 1150 (“Local 7 17-101 compensation through, among other means, a civil action for waste23 or to declare void a resolution purporting to approve excess benefits.24 Those who approved the excessive benefits would be liable for the unlawful expenditures, but only if they failed to use due care or reasonable diligence in approving the excess benefits.25 Those who received the excessive benefits would be liable to the city for repayment,26 and no immunity would be available for receiving excess benefits in good faith.27 In addition, a city could seek to recover the unlawful benefits through a cause of action under Government Code section 1090, which prohibits conflicts of interest in public contracts. A cause of action under section 1090 could seek to recover from members who approved benefits in which they had a prohibited financial interest and from members who received the benefits.28 Finally, a city could also seek to recover against those who approved the unauthorized expenditures under a cause of action for a breach of fiduciary duty.29 Lastly, interest would be recoverable on a city’s claim for damages. By statute, prejudgment interest would apply to damages if their amount were certain or capable of legislation in conflict with general law is void,” quotation marks and citations omitted); 83 Ops.Cal.Atty.Gen. 14, 19 (2000) (“Where local legislation conflicts with general law, it is void”). 23 People ex rel. Harris v. Rizzo, supra, 214 Cal.App.4th at p. 945. Although “waste does not encompass the great majority of governmental outlays of money . . . nor does it apply to the vast majority of discretionary decisions made by state and local units of government” (Chiatello v. City and County of San Francisco (2010) 189 Cal.App.4th 472, 482–483), an illegal expenditure of public funds is waste (Humane Soc. of U.S. v. State Bd. of Equalization (2007) 152 Cal.App.4th 349, 356). 24 People ex rel. Harris v. Rizzo, supra, 214 Cal.App.4th at pp. 941, 945. 25 People ex rel. Harris v. Rizzo, supra, 214 Cal.App.4th at pp. 942–943, citing Stanson v. Mott (1976) 17 Cal.3d 206; see id., p. 945; see also 83 Ops.Cal.Atty.Gen. 124, supra. 26 People ex rel. Harris v. Rizzo, supra, 214 Cal.App.4th at pp. 935–936, 942. 27 Stevens v. Geduldig (1986) 42 Cal.3d 24, 35; Aebli v. Board of Ed. of City and County of San Francisco (1944) 62 Cal.App.2d 706, 727–728. 28 See Gov. Code, § 1090 et seq.; Los Angeles Memorial Coliseum Com. v. Insomniac, Inc. (2015) 233 Cal.App.4th 803, 822–824); People ex rel. Harris v. Rizzo, supra, 214 Cal.App.4th at pp. 948–949 & fn. 29; Thomson v. Call (1985) 38 Cal.3d 633, 645–652. 29 People ex rel. Harris v. Rizzo, supra, 214 Cal.App.4th at pp. 950–951. 8 17-101 calculation.30 Post-judgment interest would apply on any unpaid principal of a judgment from its date of entry.31 So, in response to Question 3, we conclude that a city may seek to recoup its overpayment of city council members’ health and welfare benefits, including interest, by a cause of action against those who received or approved the excessive benefits. Question 4 Question 4 asks whether a city council may enter into a settlement agreement with a sitting council member who received or approved excess benefits. We conclude that the parties may enter into such an agreement if they observe requirements for disclosure and recusal set forth in Government Code section 1091, subdivision (b)(15), which governs this situation. Government Code section 1090 generally prohibits a city council from making a contract32 (including a litigation settlement agreement33) if a member of the council has a financial interest in the contract.34 Some financial interests are remote enough not to be absolutely prohibited.35 A city council may make a contract despite a member’s remote interest if: “(1) the officer in question discloses his or her financial interest in the contract to the public agency, (2) such interest is noted in the entity’s official records, and (3) the officer abstains from any participation in the making of the contract.”36 30 Civil Code, § 3287, subd. (a); Leaf v. Phil Rauch, Inc. (1975) 47 Cal.App.3d 371, 376 (prejudgment interest is matter of right where damages-certainty requirement in Civil Code section 3287 is met); see Collins v. City of Los Angeles (2012) 205 Cal.App.4th 140, 150, fn. 7 (surveying cases). 31 Code Civ. Proc., §§ 685.010–685.020. 32 The “making of a contract” includes “planning, preliminary discussions, compromises, drawing of plans and specifications and solicitation of bids.” (Stigall v. City of Taft (1962) 58 Cal.2d 565, 571.) 33 Weddington Productions, Inc. v. Flick (1998) 60 Cal.App.4th 793, 810–811 (settlement agreement is a contract). 34 Gov. Code, § 1090, subd. (a). 35 See Gov. Code, § 1091, subd. (a). 36 89 Ops.Cal.Atty.Gen. 217, 220 (2006). 9 17-101 A public official has a remote interest in a settlement agreement where he or she is “a party to litigation involving the body or board of which the officer is a member in connection with an agreement” and the following requirements are met: (A) The agreement is entered into as part of a settlement of litigation in which the body or board is represented by legal counsel. (B) After a review of the merits of the agreement and other relevant facts and circumstances, a court of competent jurisdiction finds that the agreement serves the public interest. (C) The interested member has recused himself or herself from all participation, direct or indirect, in the making of the agreement on behalf of the body or board.37 In entering into such a settlement, may a city waive a reimbursement obligation for excess benefits? “[G]enerally speaking, a municipality has the power to settle and compromise claims in its favor or against it where there is a bona fide reasonable doubt or dispute as to the validity thereof or the amount due with respect thereto.”38 On the other hand, a city may not waive a repayment obligation if the waiver constitutes a gift of public funds contrary to section six of article XVI of the California Constitution.39 The threshold question in determining whether an expenditure (including the failure to collect money owed) constitutes a gift of public funds is whether the funds would be used for a public purpose.40 If the city were entitled to reimbursement in an amount certain, but waived its right to receive all or part of those funds without good reason, the amount retained by the council member and not returned to the city could be a gift. On the other hand, if there were consideration for waiving or compromising the reimbursement amount—for instance, if there were a legitimate question about the validity of the debt or the amount owed—then the settlement could serve a valid public purpose.41 37 Gov. Code, § 1091, subd. (b)(15). See also Sen. Jud. Comm., analysis of Assem. Bill No. 2801 (2007–2008 Reg. Sess.), as amended May 27, 2008 (remote interest exception for party to litigation should be added in light of 91 Ops.Cal.Atty.Gen. 1 (2008) and 86 Ops.Cal.Atty.Gen. 142 (2003)). 38 Whitson v. City of Long Beach (1962) 200 Cal.App.2d 486, 505. 39 Cal. Const., art. XVI, § 6. 40 Jordan v. California Dept. of Motor Vehicles (2002) 100 Cal.App.4th 431, 450. 41 Ibid. (“The settlement of a good faith dispute between the State and a private party is an appropriate use of public funds and not a gift because the relinquishment of a colorable legal claim in return for settlement funds is good consideration and establishes a valid 10 17-101 Thus, in response to Question 4, we conclude that a city council may approve a settlement agreement between the city and a current city council member to repay the city for the excessive health and welfare benefits received if that member is recused from voting on the agreement and the other “remote interest” requirements of Government Code section 1091, subdivision (b)(15) are met. Although a city has discretion to waive a claim in part or in full if some real doubt or dispute exists as to the claim’s validity or amount, a city may not waive a valid claim of an indisputable amount because doing so would result in an unconstitutional gift of public funds. ***** public purpose. . . . The compromise of a wholly invalid claim, however, is inadequate consideration and the expenditure of public funds for such a claim serves no public purpose and violates the gift clause”). In an analogous situation, the court of appeal held that a city’s retirement board would make an unconstitutional gift of public funds if its failure to enforce an ordinance would result in an overpayment of retirement benefits. (Atchley v. City of Fresno (1984) 151 Cal.App.3d 635, 651.) 11 17-101	01-04-2023	03-04-2020
https://www.courtlistener.com/api/rest/v3/opinions/4477392/	OPINION. FisheR, Judge: Respondent concedes that petitioner’s license agreement with its principal stockholder, Ted Nelson, was an intangible asset which made important contributions to its income and was, therefore, a qualifying factor under section 722 (c). Respondent denies, however, that petitioner’s excess profits tax credits, computed under the invested capital method, are an inadequate standard of normal earnings or that petitioner is entitled to excess profits tax relief for either of the taxable years involved. The reconstruction of normal base period earnings under section 722 (c) is similar to that in certain types of section 722 (b) (4) cases; that is,, the average base period net income is determined in relationship to what the taxpayer’s earning level would have been at the end of tlie base period if the business had been commenced 2 years prior thereto. See sec. 35.722-4 (c) of Regs. 112; E. P. C. 35; and Bulletin on Section 722, Part VII (E), p. 136. In making such determination, in the instant case, it would be assumed that the taxpayer began business at December 31, 1937, with the equipment and productive capacity it possessed at the end of its first excess profits tax taxable year. E. P. 0. 35 further summarizes the approach to reconstruction of base period earnings in 722 (c) cases as follows: Reconstruction based upon the nature of the taxpayer and the character of its business involves problems similar to those encountered in ante-dating events where the push-back rule is used in cases under section 722 (b) (4). The new business is moved back into the pre-1940 economy but its effect on competing or related enterprises must be recognized. Elements, such as war demand, which cannot be moved back under the push-back rule, cannot be moved back under section 722 (c). In short, the problem is to determine what the performance of the particular business would have been under pre-1940 economic conditions, as these conditions would have been had it performed during that period. While there is evidence that there were potential peacetime uses for stud-welding, as set forth in our findings, there is no satisfactory proof in the record that under the peacetime conditions existing in the base period and without the impetus of war-induced shipbuilding activities, petitioner would have been able to develop a profitable stud-welding business within the 2-year period from December 31, 1937, to December 31,1939. Financing was readily available to petitioner through the R. F. C. because of the urgency of war conditions. There is nothing in the record to indicate that it could have procured the necessary finances on the basis of peacetime needs during the base period. The problem of building up a market for its product would have been a serious one. The product would not have been known to any extent to peacetime users on December 31, 1937. Many prospective users had equipment for stud-welding by the process of resistance welding. While petitioner’s product had some advantages, and could be used in addition to as well as in place of the resistance-welding process, it can hardly be doubted that users would have been slow to scrap the expensive equipment which they already had. Moreover, while petitioner’s experience indicates that the sales could have been effected speedily where merely a simple substitution of stud-welding for drilling and tapping or hand welding was involved, it was admitted that (even when its product was established) where basic changes of design and tooling were necessary, selling a customer on the equipment might take from 9 months to a year. There is nothing in the record to show that a sales force adequate in numbers and training could have been developed under base period conditions which would have resulted in a peacetime demand at a profitable level by December 31, 1939. There is no more than the barest speculation as to what that demand might have been, or the point which it might have reached by the end of the base period. Likewise, there is no indication of what the initial development expense would have been during the first 2 years of activity under base period conditions. Without attempting to detail all of the adverse factors indicated by the record, we merely add to what has already been said that there is no reliable basis in the record on which we might determine the effect of base period conditions on selling price, especially in dealing with a relatively unknown product. Petitioner has been allowed excess profits credits based on invested capital of $16,229.41 for 1944 and $14,301.07 for 1945. In its proposed reconstruction, petitioner takes as a starting point its actual sales for the month of March 1943, the last month of its first complete year of operations, and by relating this production to certain industrial production statistics it arrives at a constructive average base period net income of $98,000. This figure is based on 1939 constructive net sales of $1,071,700 and a net profit for the year, computed on a 10 per cent ratio of net income to net sales, of $107,200. We realize petitioner’s difficulties in reconstructing base period earnings, but we cannot accept a reconstruction based initially on wartime sales and back-cast on a purely speculative basis. Nor can we substitute our own judgment when there is no basis in the record for the exercise of judgment. On the contrary, we might well say here, as we said in Jackson-Raymond Co., 23 T. C. 826, 836, that “* * * we cannot escape the conviction that petitioner’s business gained the success it did largely because of war conditions, and that no acceptable basis for reconstructing it as a normal, peacetime enterprise has been established. Compare Crowncraft, Inc., 16 T. C. 690; Fezandie & Sperrle, Inc., 5 T. C. 1185.” We said in Crowncraft, Inc., 16 T. C. 690, 698, in denying relief under section 722 to a manufacturer of aircraft assembly jigs, that: It [the taxpayer’s business] grew up with the war, was successful because of the war, and ceased with the ending of hostilities. Excess profits taxes were imposed not only to raise revenue, but to take the “excess profits out of war.” Petitioner’s excess profits are exactly the type of profits such taxing provisions were intended to cover. Fezandie & Sperrle, Inc., 5 T. C. 1185 (1945). * * * While petitioner’s operations did not end with the war, the important consideration is that it grew up with the war and was successful because of the war. And it has not established what it might have accomplished under base period conditions. For the reasons stated, we think that respondent’s disallowance of petitioner’s claims for relief must be sustained because of the failure of petitioner to meet his burden of establishing any acceptable basis for a reconstructed average base period net income that would result in greater excess profits credits than those available to petitioner under the invested capital method. See Green Spring Dairy, Inc., 18 T. C. 217; Sartor Jewelry Co., 22 T. C. 773. Reviewed by the Special Division. Decision will he entered for the respondent.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4477393/	OPINION. Black, Judge: Petitioner’s claim for relief is based primarily on the ground that the character of its business was changed during the base period, within the meaning of section 722 (b) (4), from that of a builder of composite wood bus bodies to that of a builder of integral all-metal buses, and that its average base period net income does not reflect the normal operation of the business, as changed. Petitioner also claims that the business did not reach by the end of the base period the earning level that it would have reached had the change in the character of its business been made 2 years earlier, and petitioner is therefore entitled to reconstruct its normal average base period net income by assuming that the change in the character of its business had been made 2 years earlier. Petitioner has also claimed that it is entitled to relief under section 722 (b) (1) because during the last year of its base period, from June 8 through October 19, 1940, petitioner’s normal operation was completely disrupted by a strike at its plant. However, no relief is prayed for separately on this ground because the strike occurred after December 31, 1939, and petitioner therefore says such relief depends on the constructive level of normal base period earnings granted petitioner on its claim under section 722 (b) (4). Eespondent allowed petitioner’s claims for relief .in part and determined its constructive average base period net income for the taxable years at issue as follows: Constructive average lase Tear ending November SO period net income 1941_$33,143.42 1942-1946 _ 43,870.46 Such determination resulted in a partial reduction of petitioner’s excess profits tax for the taxable years 1941,1942, and 1948, but in no reduction for the taxable years 1944, 1945, and 1946 due to the 80 per cent limitation imposed by section 710 (a) (1) (B) of the 1939 Code. Petitioner’s average base period net income, computed without the benefit of section 722, is $18,277.22 for 1941 and $26,192.29 for the other taxable years. Petitioner contends here that it is entitled to a constructive average base period net income of $123,137. While the respondent concedes that there was a base period “change in the operations” of petitioner’s business by reason of its introduction of the integral-type buses, he denies that there was any difference in petitioner’s products. He argues this point at considerable length in his brief. This argument seems to us without merit. Belief under subsection (b) (4) is predicated upon a base period change “in the character of the business”; and such a change is defined as including “a change in the operation or management of the business” or “a difference in the products.” Whether the change in the character of petitioner’s business came about by a change in operation, or a difference in products, or both, our task of determining a fair and just amount representing petitioner’s normal base period earnings under the changed conditions remains the same. We might observe at this point that although it has been stipulated that petitioner’s base period began J anuary 7, 1936, and extended to November 30, 1940, in reconstructing normal base period earnings no consideration can be given to events taking place after December 31, 1939. See Wisconsin Farmer Co., 14 T. C. 1021. The changes to consider here all took place prior to J anuary 1,1940. The evidence before us leaves little doubt that petitioner was losing business and losing its competitive position in the bus market during much of its base period because of its failure to follow the industry-wide transition to the integral transit-type bus. It decided to make the changeover in 1937 and sold its first integral-type bus of its own manufacture in April 1938. This change from the manufacture of bus bodies to the manufacture of complete integral-type buses was a substantial change and it affected all departments of petitioner’s business. It is true that petitioner continued to build bus bodies but in addition it had to go out in 4he market and purchase the motors, axles, wheels, and other parts for the assembled chassis on which the bodies were to be built. In the sales end of the business, petitioner had to establish a market for its integral-type buses. Its sales commissions and selling expenses more than doubled over the period 1936-1989. These changes necessarily took time and required a considerable development period. Petitioner’s net sales fell off from $583,739 in 1936 to $491,598 in 1937, and $393,255 in 1938. It had a net profit of $71,942 in 1936, net losses of $12,112 in 1937 and $7,632 in 1938. There was a recovery in 1939 with net sales of $781,539 and a net profit of $48,103. There is no reason to doubt, on the evidence before us, that this upward trend would have continued in 1940 but for the strike which closed petitioner’s plant from June 8 to October 22 of that year. As a result of the strike, petitioner’s 1940 net sales fell back to $511,924 and it had a loss of $4,330. The upward trend was resumed in 1941. Respondent takes the position that petitioner reached its normal level of earnings under the changed operations by the end of its fiscal year 1939. He has computed petitioner’s constructive average base period net income by backcasting petitioner’s actual earnings of $48,103 for its fiscal year 1939 on a 91.2 general business index. Petitioner does not question the use of the general business index for backcasting but it does contend that the Commissioner erred in his use of $48,103 for backcasting. It is petitioner’s contention that when the 2-year push-back rule is applied its constructive net income for its fiscal year 1940 is $135,018 and that when this is back-cast by 0.912, its constructive average base period net income is $123,137. This latter figure is the constructive average base period net income which petitioner contends should be used in computing the measure of its relief under section 722, instead of the $43,870.46 which the Commissioner has used. Petitioner did not sell its first integral, transit-type bus until April 1938. Its total for that year was 37 buses and its total dollar sales were $393,255. In 1939, 103 integral buses were sold, and total dollar sales amounted to $781,539. In the table shown in our Findings of Fact, petitioner’s sales of bodies were decreasing and the sales of integral buses were increasing. We have found as a fact that by the end of petitioner’s base period petitioner had not reached the level of earnings it would have reached if the change in its business, that is, the change from manufacturing bodies to manufacturing integral buses, had occurred 2 years earlier than it did. At the end of 1939, petitioner had had an experience of 1 year and about 7 months in manufacturing and marketing integral buses. It sold 37 buses in 1938 and 103 in 1939. Of the 1939 sales, 80 were in the last 6 months of that fiscal year. This indicates a continuing growth of the business throughout 1939. This growth might have been completed and a normal level of earnings reached in the last base period year, 1940, but for the strike which closed petitioner’s plant from June 8 to October 22 in that year. The effect of the strike carried over into the year 1941. With 2 years’ additional experience under the base period changes, we think that petitioner would in all probability have reached a normal level of earnings both in the manufacture and sale of integral buses and in the sale of parts in the fiscal year 1939. Absent the strike, this level would have been maintained or perhaps exceeded in 1940. Petitioner established a separate department for supplying replacement parts to its customers as a necessary adjunct of the business of manufacturing integral buses. This developed into a profitable branch of the business. The evidence is that ordinarily the need for substantial replacement parts for a bus begins after about 18 months or 2 years of use and continues for the life of the bus. The sales in the parts and service department increased from $9,874 in 1939, which was about the 1936-1939 average, to approximately $23,000 in 1940. At the end of 1939, there were 16 of petitioner’s buses that had been in service as long as 18 months but none for as much as 2 years. With petitioner’s 2 years’ additional experience in manufacturing and selling integral buses, based on the conditions existing at the close of the year 1939 and on the outlook for petitioner’s business at that time, and making what we consider proper adjustments for increased sales of buses and replacement parts, we think that a fair and just amount representing, constructive average base period earnings is $72,500. This amount is subject to the statutory adjustment for taxes in computing the constructive average base period net income for the fiscal year ended November 30,1941. Eeviewed by the Special Division. Decisions will be entered wider Rule 50.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4477394/	OPINION. Tietjens, Judge: The first part of this Opinion will pertain to Flotill Products, Incorporated, Docket No. 31942. The term “petitioner” as herein used will refer to that company. Respondent determined that Flotill Products, Inc., qualifies for excess profits tax relief under section 722 (b) (4)— by virtue of your incorporation during the base period (1939), coupled with a change in the character of the business continued by the new corporation, as evidenced by the change in management policies subsequent to acquisition of undivided control by the new ownership in 1939. Respondent has made a partial allowance of petitioner’s claims for relief based on a constructive average base period net income of $106,576.06. Petitioner contends that it is entitled to a constructive average base period net income of $247,000. Petitioner complains that in computing its average base period net income in this manner respondent has failed to apply “or properly to apply” the 2-year push-back rule of section 722 (b) (4). Respondent insists to the contrary, that he has applied, and properly applied, the push-back rule. He refers to the ruling of the Excess Profits Tax Council that— In view of all of the foregoing factors, the Council panel has decided that the claimant’s earnings from its actual pack in 1939 comprises a fair and just approximation of the amount which might have been earned at the end of the base period if the qualifying changes had' occurred two years earlier. Respondent, in his brief, refers to it as “a mere coincidence of fact” that the actual earnings for the last year of the base period were considered to be the same as the level of earnings based on the actual length of the development period after the changes. As pointed out, respondent recognizes that in 1939 there were qualifying changes in the character of the business under section 722 (b) (4). These changes were inaugurated by Tillie Weisberg when siffe acquired the controlling interest in the petitioner corporation in March 1939; in fact, some of the changes were begun late in 1938, when it became evident that she would acquire the Del Gaizos’ stock interests. She increased the contracted tomato acreage with the farmers and began installing new, improved equipment and generally modernizing the plant. She increased the sales activities and established new outlets for petitioner’s products. The contract acreage was increased from 1,650 acres in 1938 to approximately 2,712 acres in 1939, and the 1940 acreage was further increased to 5,165 acres. The entire 1939 pack, which was almost twice the 1938 pack, had been sold by the middle of November, about the end of the 1939 packing season. At December 31,1939, and at the close of petitioner’s base period, August 31, 1940, there was a well-established market for the pear-shaped tomatoes and tomato paste which the petitioner was producing, and the prospects were for further market expansion. In view of the evidence in this case, we think respondent’s determination of the amount representing a fair and just amount as petitioner’s average base period net income as recited in our Findings of Fact was too low. At the same time, petitioner’s proposed reconstruction results in too high a figure in this respect. From our study of the evidence, we are convinced that because of the sholt period for development under the changed conditions petitioner’s earnings had not reached their normal level by the end of the base period. After carefully considering the whole record and petitioner’s proposed reconstruction of base period earnings, we have concluded that a fair and just amount representing petitioner’s average base period net income is $140,000. Petitioner concedes that its constructive average base period net income should be adjusted for taxes in its excess profits credit for 1941. We turn now to Flotill Sales Corporation, Docket No. 32302, and hereinafter the term “petitioner” will be used to refer to that company. Petitioner claims excess profits tax relief for the taxable year ending August 31,1943, under section 722 (c)1 It contends that in computing its excess profits tax credit for that year it was deprived of the use of its base period income experience under section 713, Internal Revenue Code of 1939, by section 740, and that the credit based on invested capital is an inadequate standard of normal earnings because the sales contract with Flotill Products, California, which was the principal source of its earnings, was an intangible asset not includible in in ssted capital. Respondent has computed petitioner’s excess profits credit under section 713 (the income method) for 1941 and 1942 in the respective amounts of $11,422.01 and $12,964.19, and under section 714 (the invested capital method) for 1943 in the amount of $4,934.95, in accordance with petitioner’s returns for those years. Section 722 (c) provides relief only for corporations “not entitled to use the excess profits credit based on income pursuant to section 713.” Section 712 provides “a domestic corporation which was in existence before January 1, 1940” must compute its excess profits credit under section 713 (income method) or section 714 (invested capital method), whichever results in the lesser tax. Respondent takes the position that petitioner was “in existence” during the entire base period and is therefore not qualified for relief under section 722 (c). Petitioner does not deny that it was in existence prior to January 1, 1940, but contends that it was deprived of the right to compute its excess profits credit under section 713 by reason of section 740,2 Internal Revenue Code of 1939. Section 740 deals with methods for computing excess profits credit based on income where, under certain circumstances, there has been a change in ownership of the business. So far as here material, it requires the apportionment of the base-period income experience of the “acquiring” corporation and the “component” corporation. It does'not deny the component corporation (in this case, Flotill Sales) the use of - its base period experience hut does set a limitation on such use. We may assume, as petitioner here contends, that under section 740 (c) and by reason of the transfer of this business and assets to Flotill Products, California, in August 1939, and the fact that it had no income thereafter during the base period, it was deprived, in computing its excess profits tax for 1943, of the credit based on its income experience which it had used and which respondent allowed for the prior excess profits tax years 1941 and 1942. As we construe the statute, the right to relief under section 722 (c) is not dependent upon the application of any of the provisions of section 740. Section 722 (c) provides that— 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 * * * Section 712 (a) provides that— In the case of a domestic corporation which was in existence before January 1, 1940, the excess profits credit for any taxable year shall be an amount computed under section 713 or section 714, whichever amount results in the lesser tax under this subchapter for the taxable year for which the tax under this subchapter is being computed. * * * Section 713 provides for tbe computation of such credit under the income method and section 714 under the invested capital method. Thus, only a taxpayer not entitled to use the income method under section 713 is eligible for relief under section 722 (c), and the sole test for determining that right is whether the taxpayer was “in existence before January 1, 1940.” Since petitioner admittedly was in existence at least up to August 18, 1939, it meets the requirements of section 713 and it, therefore, fails to qualify for relief under section 722 (c). We have heretofore said that a corporation is “in existence” for the purpose of section 712 (a) from the day it is created until its corporate rights are legally terminated. Eveready Loan Co., 2 T. C. 1035. We said in that case: Congress, in the exercise of its sovereign power to tax, might have set forth, in most unequivocal language, the test to be applied in ascertaining when a domestic corporation was “in existence” for the purposes of section 712 (a). It would have been a simple matter to have specifically made, beyond any question whatever, the actual conducting of business the test. Such requirement would have been binding and conclusive, declarations in state corporation laws regarding the date from which “existence” runs to the contrary notwithstanding. Rudolph Wurlitzer Co. v. Commissioner, 81 Fed. (2d) 971. * * * Corporations are creatures of law. They have no being save at government will and have no powers apart from those authorized by grant or implied therefrom. They come into existence, in a legal sense, at the moment the conditions precedent thereto, as determined by the statute under which they are formed, are complied with. They are thereafter “in existence” until their life is terminated. * * * For the reasons stated, respondent is sustained in his determination that petitioner was in existence during the base period, and is, therefore, not entitled to relief under section 722 (c). Reviewed by the Special Division. Decision will be entered wider Bule 50 m Docket No. 3191$. Decision will be entered for the respondent i/n Docket No. 3&302. 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, ******* 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). For the purposes of section 713 (g) and section 743, the beginning of the taxpayer’s first taxable year under this sub-chapter shall be considered to be that date after which capital additions and capital reductions were not taken into account for the purposes of this subsection. SBC. 740. DEFINITIONS. (c; Income of Certain Component Corporations Not Included. — * * * ******* For the purposes of section 742, In the case of a corporation which is a component corporation in a transaction described in subsection (a), in computing for any taxable year the Supplement A average base period net income of the acquiring corporation in such transaction or of a corporation of which such acquiring corporation becomes a component corporation, no account shall be taken of the excess profits net income of such component corporation for any period beginning with the day after such transaction.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625853/	HARRY CARL TAYLOR II AND KAREN (EDWARDS) TAYLOR, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentTaylor v. CommissionerDocket No. 3787-83.United States Tax CourtT.C. Memo 1985-449; 1985 Tax Ct. Memo LEXIS 179; 50 T.C.M. (CCH) 911; T.C.M. (RIA) 85449; August 27, 1985. Harry Carl Taylor II, pro se. Ronald T. Jordon, for the respondent. FEATHERSTONMEMORANDUM FINDINGS OF FACT AND OPINION FEATHERSTON, Judge: Respondent determined a deficiency in the amount of $3,283 in petitioners' Federal income tax for 1980. The issue for decision is whether petitioners are entitled under section 162(a)(2)1 to a deduction in the amount of $7,596.30 for living and transportation expenses incurred by petitioner Harry Carl Taylor II while working in Charleston, 180 West Virginia, during the period from January 1 to August 1, 1980. The answer depends upon whether he was "away from home" within the meaning of the section during that period. FINDINGS OF FACT Petitioners Harry Carl Taylor II and Karen (Edwards) Taylor, both natives of West Virginia, were legal residents of Charleston, West Virginia, when they filed their petition. They filed their joint Federal income tax return for 1980 with the Internal Revenue Service Center, Memphis, Tennessee. The issue to be decided turns mainly upon the activities of Harry Carl Taylor II and, for convenience, he will be referred to as petitioner. Petitioner received a Baccalaureate Degree from West Virginia University in 1967, a law degree from West Virginia University College of Law in 1976, and a Doctor of Philosophy degree from West Virginia University graduate school in 1977. He is licensed to practice law only in West Virginia. Upon his graduation from law school in 1976, petitioner took a job with the United States Navy Judge Advocate General Corps as a prosecutor of criminal cases. 181 In addition, he handled some Navy tort cases. He was stationed in Norfolk, Virginia, and lived in Virginia Beach. He remained with the Navy until 1979. In June 1979, petitioner took a job as a contracts administrator with Virginia Electric and Power Company (VEPCO) in Richmond, Virginia. Shortly thereafter, petitioner Karen (Edwards) Taylor (Mrs. Taylor) accepted employment as a librarian for the Henrico County, Virginia, school system. Petitioners purchased a residence near Richmond where they lived together until early 1980. In January 1980, petitioner learned that he might lose his job with VEPCO due to personnel cutbacks. He resigned his position with VEPCO and accepted a position as an associate in McKittrick & Vaughn, a law firm in St. Albans, West Virginia. He did not have a written employment contract with the firm, and he received no guaranty, written or oral, as to the length of his employment. Petitioner understood, however, that he could stay with the firm as long as his services were satisfactory to his employer. Petitioner lived in a boarding house in Charleston and frequently traveled to Richmond to be with Mrs. Taylor. Mrs. Taylor continued her employment182 as school librarian until August 14, 1980, living in the family residence in Richmond. Petitioners continued to maintain their memberships in various social clubs, lodges, and a church in the Richmond area at least until late 1980. Almost immediately upon the beginning of his employment with McKittrick & Vaughn, petitioner was assigned and given primary responsibility for a large number of the firm's cases, many of which had been pending for a considerable period of time in the courts of several West Virginia counties. His assignment "was to work on cases and get them ready for trial and to litigate them as they were set." The cases assigned to petitioner involved a variety of issues, including workmen's compensation claims, social security claims, criminal charges, divorce suits, personal injury claims, real estate cases, contract disputes, and injunction proceedings. During the first 8 months of 1980, he worked with another attorney in the firm in handling the trial of one case; in all others, he handled the trials alone. In some cases, petitioner was introduced to the clients by a member of the firm; in others, he contacted the clients directly by telephone in preparing183 the cases for trial. Petitioner's name was placed on the law firm's stationery about the middle of 1980. Petitioner worked with the law firm of McKittrick and Vaughn until May 1983. At that time, the firm split. From May to July 1983, petitioner worked for Mr. McKittrick. From July 1983 to the date of the trial, petitioner engaged in the practice of law as a sole practitioner in Charleston, West Virginia. On schedule A of their 1980 income tax return, petitioners took a miscellaneous itemized deduction in the amount of $7,596.30 for living expenses claimed to have been incurred by petitioner between January 1980 and August 1980 while living in Charleston and transportation expenses claimed to have been incurred by him in traveling between his place of employment in Charleston and the family residence in Richmond. In the notice of deficiency the deduction was disallowed with the following explanation: It is determined that the amount of $7,596.30 shown on your return as Miscellaneous Deductions is not allowable pursuant to section 162 of the Internal Revenue Code. Accordingly, your taxable income is increased $7,596.30. 2184 OPINION Section 162(a)(2)3 provides for the allowance of a deduction for ordinary and necessary business expenses, including amounts expended for traveling and for meals and lodging "while away from home in the pursuit of a trade or business." Petitioner contends that Richmond was his home from January 1 to August 1, 1980, and that he is, therefore, entitled to a deduction for his expenses of traveling back and forth between Richmond and Charleston and for his expenditures for meals and lodging while away from Richmond during that period. A taxpayer's home, for purposes of section 162(a)(2), is generally the taxpayer's abode at or near his principal place of employment. Michel v. Commissioner,629 F.2d 1071">629 F.2d 1071, 1073 (5th Cir. 1980),185 affg. per curiam a Memorandum Opinion of this Court; Curtis v. Commissioner,449 F.2d 225">449 F.2d 225, 227 (5th Cir. 1971), affg. a Memorandum Opinion of this Court; Jones v. Commissioner,444 F.2d 508">444 F.2d 508, 509 (5th Cir. 1971), affg. 54 T.C. 734">54 T.C. 734 (1970). Underlying this definition is the premise that a person will normally choose to make his home near his work; if he chooses to live elsewhere for personal or family reasons, the traveling and living expenses that he incurs as a result of that decision are nondeductible personal expenses under section 262. Kroll v. Commissioner,49 T.C. 557">49 T.C. 557, 562-563 (1968); see James v. United States,308 F.2d 204">308 F.2d 204, 206 (9th Cir. 1962). "The exigencies of business rather than the personal conveniences and necessities" of the taxpayer control in determining whether such expenses are deductible. Commissioner v. Flowers,326 U.S. 465">326 U.S. 465, 474 (1946). In identifying a taxpayer's "principal place of employment," an exception is made for temporary employment--employment that is expected to last for only a short period of time. Jones v. Commissioner,444 F.2d at 510.186 A taxpayer accepting such temporary employment may be permitted to deduct his travel expenses and duplicative expenses for meals and lodging even though such expenses are not incurred for the benefit of his employer. Commissioner v. Peurifoy,254 F.2d 483">254 F.2d 483, 486 (4th Cir. 1957), revg. 27 T.C. 149">27 T.C. 149 (1956), affd. per curiam 358 U.S. 59">358 U.S. 59 (1958); Jones v. Commissioner,444 F.2d at 510. But if the prospects are that his work will continue for an "indefinite" or "indeterminate" or "substantially long" period, then the deduction is not allowable. Jones v. Commissioner,444 F.2d at 510; Curtis v. Commissioner,449 F.2d at 227-228. Whether employment is temporary or indefinite is a factual question to be decided from all of the facts and circumstances of the case. Michel v. Commissioner,629 F.2d at 1073; Scotten v. Commissioner,391 F.2d 274">391 F.2d 274 (5th Cir. 1968), affg. per curiam a Memorandum Opinion of this Court. We do not think petitioner has shown that his employment with the Charleston law firm was temporary. We find that it was for an indefinite or indeterminate187 period. By its very nature, petitioner's work in preparing the numerous cases assigned to him for trial and trying them in the courts was expected to take a substantial period of time. Trial work requires research of the applicable law, investigation of relevant facts, collection of evidence, and planning its presentation. Although files are kept on such cases, much vital information acquired in trial preparation can hardly be recorded in files. It includes the trial attorney's mental impressions and judgments. A law firm employing an attorney to try a large number of pending cases would expect that attorney to stay with the firm for a substantial period of time. Indeed, petitioner testified that he understood that he could stay with the firm as long as his services were satisfactory. True, petitioner testified that, when he resigned from VEPCO and became an associate with the law firm, he wished to look around for some other job in Virginia or Washington, D.C., and that he made his commitment to live in West Virginia only after Mrs. Taylor's mother died in August 1980. But we think it relevant that petitioner resigned from VEPCO to accept the position with the law firm; VEPCO188 did not terminate his services. Both he and Mrs. Taylor were born and reared in West Virginia. He had attended college and law school there and was not a member of the Bar of any other State. In becoming an associate in the Charleston firm, he was, in a sense, returning home. He was taking advantage of the trial experience that he had obtained while serving in the Judge Advocate General's office of the Navy to enter the practice of law in his home State. We recognize that petitioner might have been willing during the first 7 months of 1980 to leave the Charleston firm if he had received a better job offer. Many employees are always on the lookout for better jobs and will accept better jobs when they become available. We are convinced, however, that both petitioner and his firm expected him to stay with the firm for an indefinite or an indeterminate period. That is sufficient to make his abode in the Charleston area his home within the meaning of section 162(a)(2). Petitioner emphasizes that he had duplicative expenses of maintaining the Richmond home and the expenses of living in Charleston. But this duplication was not due to the exigencies of petitioner's work in Charleston. 189 It was due to Mrs. Taylor's retention of her job with the Henrico County school system near Richmond while petitioner worked in Charleston. The choices by Mrs. Taylor to retain her Henrico County job and by petitioner to accept work in Charleston does not justify allowance of a deduction for his traveling and living expenses. See Hammond v. Commissioner,20 T.C. 285">20 T.C. 285, 287 (1953), affd. 213 F.2d 43">213 F.2d 43 (5th Cir. 1954). We hold that petitioner was not away from his home within the meaning of section 162(a)(2) and is not, therefore, entitled to the disputed deduction. 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 noted.↩2. Respondent does not here contend that petitioner did not incur expenses in the amount claimed on the joint return. Further, the petition does not allege that certain other adjustments made in the notice of deficiency were erroneous.↩3. SEC. 162. TRADE OR BUSINESS EXPENSES. (a) In General.--There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including-- (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; * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625854/	Appeal of THOMAS G. BARBAS.Barbas v. CommissionerDocket No. 850.United States Board of Tax Appeals1 B.T.A. 611; 1925 BTA LEXIS 2862; February 25, 1925, decided Submitted January 22, 1925. 2862 In the absence of evidence as to inventory value on March 1, 1913, or whether the cost of goods was paid and deducted as an expense prior to the change, a taxpayer changing from a cash receipts and disbursements basis to an accrual basis, will take up in income in the year for which such change is made the inventory as of the beginning of the year. William J. Murray, C.P.A., for the taxpayer. Robert A. Littleton, Esq. (Nelson T. Hartson, Solicitor of Internal Revenue) for the Commissioner. GRAUPNER 611 Before GRAUPNER, LITTLETON, and SMITH. This appeal is from a deficiency in tax for the year 1920. FINDINGS OF FACT. For the year 1920, and for a number of years prior thereto, the taxpayer was a partner in the Home Candy Works, a copartnership, of Detroit, Mich. The copartnership commenced business about 1906. The books of account to the end of 1919 were on a cash receipts and disbursements basis. Books were opened on an accrual basis beginning January 1, 1920. Prior to 1920 no inventories had been used in computing net income. The books of account which were opened for 1920 showed an opening inventory of $24,920.99 for merchandise2863 and $1,532.89 for supplies. In amending the returns of the two equal partners for the year 1920, the Commissioner has added to the net income of each partner one-half of the total inventories at January 1, 1920, upon the theory that the supplies and merchandise on hand at January 1, 1920, had been charged to expense in prior years. 612 DECISION. The determination by the Commissioner of a deficiency in tax in the sum of $1,506.35, for the year 1920, is approved. OPINION. GRAUPNER: This appeal was presented on behalf of the taxpayer in the same manner that the , was presented. The reasons for the decision in this case were given in our opinion in that appeal.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625855/	CHARLES E. BANKS AND ROSE M. BANKS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentBanks v. CommissionerDocket No. 15929-88United States Tax CourtT.C. Memo 1991-641; 1991 Tax Ct. Memo LEXIS 700; 62 T.C.M. (CCH) 1611; T.C.M. (RIA) 91641; December 26, 1991, Filed 700 Decision will be entered under Rule 155. Leo K. O'Brien, for the petitioners. Bruce A. Anderson, for the respondent. RUWE, Judge. RUWEBMEMORANDUM FINDINGS OF FACT AND OPINION Respondent determined deficiencies and additions to tax in petitioners' Federal income tax as follows: Additions to TaxYearDeficiencySec. 6653(a)(1) 1Sec. 6653(a)(2)Sec. 66611982$ 15,377$ 76950 percent of$ 3,844the interestdue on $ 15,377198315,17175950 percent of3,793the interestdue on $ 15,171198414,76873850 percent of3,692the interestdue on $ 14,768After concessions, 2 the issues for decision are: (1) Whether Rose M. Banks (hereinafter petitioner) received unreported income in the amounts of $ 47,430, $ 52,266, 701 and $ 43,382 for the taxable years 1982, 1983, and 1984, respectively; (2) whether petitioners are liable for additions to tax under section 6653(a)(1) and (2) for negligence or intentional disregard of rules or regulations; and (3) whether petitioners are liable for additions to tax under section 6661 for substantial understatement of income tax liability. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts, supplemental stipulation of facts, and attached exhibits are incorporated702 herein by this reference. Petitioners resided in Colorado Springs, Colorado, at the time they filed their petition in this case. Petitioners were married on December 29, 1961, and have seven children ranging in age from 15 years to 26 years. Charles E. Banks was born on September 24, 1939, and was honorably discharged from the U.S. Army (Field Artillery) on June 30, 1982, with the rank of E-7 after 20-1/2 years of service. Charles E. Banks' last overseas assignment was in Bamberg, Germany, from November 1978 to May 1981, and his last assignment before discharge was Fort Sill, Oklahoma, from May 1981 to June 1982. Petitioner was born on February 11, 1945, and was in the eleventh grade of high school when she married Charles E. Banks. After their marriage, petitioner accompanied her husband on all his military assignments except his last assignment at Fort Sill, Oklahoma, when petitioner and her family returned to Colorado Springs, Colorado in May 1981. Petitioner is an ordained minister in the "Pentecostal Church of God in America" faith. During the taxable years 1982, 1983, and 1984, petitioner was the pastor of the Colorado Springs Fellowship Church. As part of her occupation703 as pastor, petitioner conducted religious worship services, counseled members of the Church, and performed marriages, funerals, and baby dedications. While in Bamberg, Germany, petitioner acted as lay leader of the Bamberg Fellowship Group. For a period of time, petitioner received a salary from the members of the Bamberg Fellowship Group of up to $ 1,000 per month. This salary was eventually discontinued because the post's chaplain, Chaplain Smith, determined that petitioner's receipt of a salary from church members violated Army regulations and that members were required to make their contributions to the chaplain's fund from which amounts were then to be disbursed to petitioner. Petitioner received a salary of $ 220 from the chaplain's fund. While in Bamberg, Germany, petitioner also received cash transfers and tithes from members of the Bamberg Fellowship Group. Friction developed between petitioner and Chaplain Smith and, as a result, the United States Army conducted an investigation of petitioner's activities as lay leader of the Bamberg Fellowship Group. The investigation was to determine, among other things: (1) Whether there were any improprieties with respect to the704 solicitation of money or gifts for petitioner or the Bamberg Fellowship Group; and (2) whether there were any improprieties with respect to the tithing procedures employed by petitioner and the Bamberg Fellowship Group. The investigating officer found that the monies deposited by the Bamberg Fellowship Group members into the weekly offertory decreased when Chaplain Smith informed petitioner that she had to receive a decreased salary directly from the chaplain's fund and that the monies received in the offertory had to be deposited into the chaplain's fund. The investigating officer also found that the practice of tithing began when Chaplain Smith informed petitioner that her salary was in violation of United States Army regulations. The investigating officer came to the "inexorable conclusion * * that the institution of tithings is a subterfuge for Mrs. Banks' loss of salary, also referred to by her as a 'love gift'" and that it was "used as a ruse to provide Mrs. Banks with an augmented 'salary'." After returning to the United States in May 1981, petitioner formed the Colorado Springs Fellowship Church (the Church), which is described as a nondenominational protestant church705 with a pentecostal background. During this time, petitioner continued to receive cash transfers from members of the Bamberg Fellowship Group who were still in Bamberg, Germany. Several members in the Bamberg Fellowship Group followed petitioner to Colorado Springs and became members of the Church. The Church was incorporated on June 1, 1982, as a nonprofit corporation under the laws of the State of Colorado. The Church received IRS approval as an organization exempt from taxation pursuant to section 501(c)(3) for the period of December 31, 1983, forward. The Church also received an exemption from local sales, use, and property taxes. Petitioner preached, as part of the Pentecostal religion, that members were to make tithes. Members of the Church also transferred cash to petitioner on four "special" days of each of the years in issue: petitioner's birthday, Mother's Day, the Church's anniversary, and Christmas. Prior to making these transfers, members of the Church met amongst themselves to discuss the transfers. Attached as an appendix is a list of transfers made by the individual church members on the four "special" days for each of the years in issue, as well as the totals706 of these transfers. The individual "special" day transfers to petitioner, which are listed in the appendix, total $ 41,919 for 1982, $ 43,175 for 1983, and $ 46,900 for 1984. 3 Petitioner deposited most of the money she received on these four "special" days into her personal checking account and considered all the money transferred to her as her's to do with as she saw fit. After respondent commenced his examination of petitioners, they discontinued accepting transfers of money on the Church anniversary, petitioner's birthday, Christmas, and Mother's Day or any other occasion. 707 Daisy Bowden was a member of the Church, a church counselor, and petitioner's friend for 20 years. She collected a substantial portion of the monies transferred to petitioner on the four "special" days. Sometimes Daisy Bowden suggested the amount that members were to transfer to petitioner. The members transferred the funds to petitioner because she was their minister, she had done an outstanding job in the past, she was there to help them with their problems when they needed her, and they wanted to keep her as their minister in the future. In addition to the transfers to petitioner, members of the Church made contributions to the Church. The Church kept records of these contributions. These records reflect that the members contributed $ 25,693.75 to the Church in 1982, $ 109,807.41 in 1983, and $ 113,785.20 in 1984. The Church's bank account records indicate that the Church deposited $ 25,693.75 into its account in 1982, $ 112,107.41 in 1983, and $ 113,826.20 in 1984. On a monthly basis, with the exception of four months, the amount of contributions coincides exactly with the amount of deposits. 4708 The Church also kept detailed records of its expenses. These records consisted of quarterly income statements which gave an itemized account of expenses and a monthly statement of expenses which identified disbursements from the Church bank account by check number and stated the reason for the disbursement. For the taxable years 1982, 1983, and 1984, petitioner drew a salary of $ 10,985, $ 17,223, and $ 41,945, respectively, from the Church. For the taxable years 1985, 1986, and 1987, petitioner drew a salary of $ 46,900, $ 48,800, and $ 44,850, respectively, from the Church. At the time of trial, her salary was $ 1,000 per week. Petitioners' income tax return for each of the years in issue was prepared by an employee of H & R Block. OPINION Respondent's notice of deficiency determined unreported income on the basis of deposits to petitioners' bank accounts. The evidence presented at trial indicated that the source of these deposits was the cash transfers which petitioner received from church members. Petitioners' primary contention is that these transfers were nontaxable gifts. Section 61(a) provides that gross income includes all income from whatever source derived unless709 excluded by a specific provision of the Code. It is well established that compensation for services, in whatever form received, is includable in gross income. Sec. 61(a)(1); Commissioner v. Duberstein, 363 U.S. 278">363 U.S. 278, 4 L. Ed. 2d 1218">4 L. Ed. 2d 1218, 80 S. Ct. 1190">80 S. Ct. 1190 (1960); Old Colony Trust Co. v. Commissioner, 279 U.S. 716">279 U.S. 716, 73 L. Ed. 918">73 L. Ed. 918, 49 S. Ct. 499">49 S. Ct. 499 (1929). Section 102(a) excludes from gross income the value of property acquired by gift. Whether a payment is a gift under section 102(a) or gross income under section 61(a) is a factual question, and petitioners bear the burden of proof. Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 78 L. Ed. 212">78 L. Ed. 212, 54 S. Ct. 8">54 S. Ct. 8 (1933). In Commissioner v. Duberstein, supra at 285-286, the Supreme Court stated the governing principles in this area: the mere absence of a legal or moral obligation to make such a payment does not establish that it is a gift. And, importantly, if the payment proceeds primarily from "the constraining force of any moral or legal duty," or from "the incentive of anticipated benefit" of an economic nature, it is not a gift. And, conversely, "where the payment is in return for services rendered, it is irrelevant that the donor derives no710 economic benefit from it." A gift in the statutory sense, on the other hand, proceeds from a "detached and disinterested generosity," "out of affection, respect, admiration, charity or like impulses." And in this regard, the most critical consideration, * * * is the transferor's "intention." "What controls is the intention with which payment, however voluntary, has been made." [Fn. refs. and citations omitted.]The intention of the transferor is a question of fact to be determined by "the application of the fact-finding tribunal's experience with the mainsprings of human conduct to the totality of the facts of each case." Commissioner v. Duberstein, supra at 289. We must make an objective inquiry into the circumstances surrounding the transfer rather than relying on the transferor's subjective characterization of the transfer. Commissioner v. Duberstein, supra at 286; Bogardus v. Commissioner, 302 U.S. 34">302 U.S. 34, 43, 82 L. Ed. 32">82 L. Ed. 32, 58 S. Ct. 61">58 S. Ct. 61 (1937). Applying these principles to the facts of this case, we find that petitioner has failed to prove that the amounts of money she received from her congregation were gifts within the meaning of section711 102(a). The transfers arose out of petitioner's relationship with her congregation as its minister. Petitioners presented the testimony of several members of her congregation. 5 These witnesses testified that they made transfers to petitioner because she was their pastor. They also testified that they made the transfers because of their "appreciation" of petitioner and her ministry, because she had done a lot of things for them and was there to help them with their problems, and to say thank you. One member testified that the transfers were made because petitioner was a good pastor and the congregation wanted to keep her. This indicates that the transfers were in consideration for services rendered and, therefore, negates the essential element of a gift. Webber v. Commissioner, 219 F.2d 834">219 F.2d 834, 836 (10th Cir. 1955). The evidence indicates that the primary reason for the transfers at issue was not detached and disinterested generosity, but rather, the church members' desire to reward petitioner for her services as a pastor and their desire that she remain in that capacity. 712 There was strong, objective evidence that the amounts transferred to petitioner were part of a highly structured program for transferring money to petitioner on a regular basis. All the transfers reflected on the affidavits were made on the same four "special" days of each year. Almost all the individuals listed on the affidavits made transfers on these specified dates. From year to year, transfers on certain dates tended to be larger than transfers on other dates. For instance, for each of the years in issue, the transfers on the Church's anniversary were approximately four times the amount of the transfers on petitioner's birthday. Also, the transfers on a particular date from the various members were, for the most part, limited to two or three denominational amounts. The regularity of the payments from member to member and year to year indicates that they were the result of a highly organized program to transfer cash from church members to petitioner. The existence of such a program suggests that the transfers did not emanate from a detached and disinterested generosity but, instead, were designed to compensate petitioner for her service as a minister. 6713 Respondent presented the testimony of Walter McVicker. Mr. McVicker was a member of petitioner's congregation in both Bamberg, Germany, and Colorado Springs, Colorado. Mr. McVicker testified that the practice of making transfers to petitioner began in Germany. Mr. McVicker testified that members made pledges 7 of cash to petitioner on the four "special" days of the year and that the amount "pledged" by the individual church members was determined at open meetings at the Church. Mr. McVicker testified that on the occasions when he was close to failing to meet his pledges, he was counseled that failure to pay the pledge was like going back on his word to God, and that it was more important to pay the pledge than it was to pay his rent and utility bills. Mr. McVicker also testified that before one became an official member of the Church, they had to understand the tithing and pledging system. After714 reviewing the entire record, we find that the transfers from the church members to petitioner were compensation for services. Accordingly, we hold for respondent on this issue. We note that respondent does not contend, nor do we find, that any of the contributions to the Church represent taxable income to petitioners. The Church's bank records indicate that contributions to the Church were deposited into its account, and the testimony at trial indicates that most of the transfers to petitioner were deposited into her personal account. Respondent's determination is based on actual deposits to petitioners' personal bank account. Petitioners argue two alternative positions in the event that we find that the transfers to petitioner were compensation for services. First, they argue that petitioner received this income as a conduit for the Church and is therefore not taxable on it. Second, they argue that if we find that petitioner was not a conduit for the Church, then we should find that she nevertheless gave the money to the Church and other charities and is therefore entitled to an off-setting deduction under section 170. Both of these alternative arguments fail. With respect715 to petitioners' claim that petitioner acted as a conduit or agent for her Church, the law is well settled that an agent is one who receives the funds as a true agent and has no claim of right to the funds. Goodwin v. Commissioner, 73 T.C. 215">73 T.C. 215, 230 (1979), overruled on other grounds Wright v. Commissioner, 84 T.C. 636">84 T.C. 636, 638 (1985); Diamond v. Commissioner, 56 T.C. 530">56 T.C. 530, 541 (1971), affd. 492 F.2d 286">492 F.2d 286 (7th Cir. 1974); see also Florists' Transworld Delivery Assn. v. Commissioner, 67 T.C. 333">67 T.C. 333 (1976). At trial, petitioner testified that the money was given to her outright and with no strings attached. Thus, the argument that petitioner acted as an agent or conduit is inconsistent with her own testimony. In addition, the Church kept detailed records of its receipts and expenditures and used its own separate bank account for its financial transactions. Petitioner did not present similar records of her receipts and expenditures in her capacity as the Church's agent. With respect to petitioners' argument that they are entitled to an off-setting deduction under section 170 because petitioner 716 contributed the funds to her Church and other charities, we are unable to determine the amount of section 170 contributions, if any, that petitioner made. Petitioners failed to introduce documents supporting their alleged contributions. See sec. 1.170A-13, Income Tax Regs. On brief, petitioners acknowledge their inability to document their alleged contributions and ask us to apply the rule enunciated in Cohan v. Commissioner, 39 F.2d 540">39 F.2d 540 (2d Cir. 1930). In Cohan, the Second Circuit held that when the evidence indicates that a taxpayer incurred deductible expenses, but the taxpayer is unable to substantiate the amount of the expenses, the Court should approximate the amount of deduction as much as possible, "bearing heavily * * * upon the taxpayer whose inexactitude is of his own making." Cohan v. Commissioner, supra at 544. In order for the Cohan rule to apply, petitioners must establish that they actually made contributions which are deductible under section 170 and provide us with some basis for estimating the amount of the contributions. Recklitis v. Commissioner, 91 T.C. 874">91 T.C. 874, 895 (1988); Ronnen v. Commissioner, 90 T.C. 74">90 T.C. 74, 102-103 (1988);717 Epp v. Commissioner, 78 T.C. 801">78 T.C. 801, 807 (1982). Petitioners presented no credible evidence which would provide us with some basis for estimating the amount of the contributions, if any. 8 In light of the fact that petitioners have not, in any event, met the requirements of the Cohan rule, we need not decide whether the Cohan rule applies to years governed by the substantiation requirements of section 1.170A-13, Income Tax Regs.Finally, we note that both petitioners' conduit and the offsetting deduction theories involve transfers718 of money from them to or on behalf of the Church. Petitioners testified that most of the money which was transferred to petitioner from church members was deposited into their checking account. Thus, in order for the money to be transferred to or for the benefit of the Church, the money would have to be withdrawn from their checking account. On brief, petitioners admit that they had all their canceled checks and bank statements but did not introduce them into evidence because they could not recall what the specific expenditures were for. 9Petitioners also argue that if we find that the transfers are taxable to them and that they do not qualify for any offsetting deductions, then they are entitled to income averaging under sections 1301 through 1305. Petitioners bear the burden of proving that they are entitled to income averaging. Rule 142(a). Under section 1301, taxpayers719 whose averagable income for the computational year exceeds $ 3,000 are entitled to income averaging. For purposes of this case, averagable income for taxable years 1982 and 1983 equals the amount by which taxable income for the computational year exceeds 120 percent of average base income, and averagable income for the taxable year 1984 equals the amount by which taxable income for the computational year exceeds 140 percent of average base income. Sec. 1302(a)(1). For purposes of this case, average base income for taxable years 1982 and 1983 equals the average taxable income for the 4 taxable years immediately preceding the computational year, and for the taxable year 1984, average base income equals the average taxable income for the 3 taxable years immediately preceding the computational year. Sec. 1302(b) and (c). Petitioners have failed to present evidence of their taxable income for the 4 years immediately preceding taxable years 1982 and 1983 and the 3 years immediately preceding the taxable year 1984. Consequently, we are unable to determine that they are entitled to income averaging. The next issue for decision is whether petitioners are liable for the additions to 720 tax for negligence or intentional disregard of rules or regulations under section 6653(a)(1) and (2). Section 6653(a)(1) imposes a 5-percent addition to tax if any part of any underpayment of tax is due to negligence or intentional disregard of rules or 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 or regulations. Respondent's determination is presumed correct and petitioners bear the burden of proving otherwise. Rule 142(a); Bixby v. Commissioner, 58 T.C. 757">58 T.C. 757, 791-792 (1972). Negligence within the meaning of section 6653(a) 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, 947 (1985). Petitioners argue on brief that they believed that the transfers were gifts and therefore are not taxable. Petitioners subjective belief is not at issue; the issue is whether a reasonable person would have believed that these transfers were gifts under section 102. After reviewing the721 entire record, we believe that a reasonable person under the circumstances would not have reached this conclusion. Petitioners also argue that they are not negligent because they relied on advice from a return preparer and a representative of respondent. If a taxpayer shows good faith reliance upon the advice of a competent and experienced accountant or attorney in the preparation of a tax return, the addition to tax for negligence does not apply. Conlorez Corp. v. Commissioner, 51 T.C. 467">51 T.C. 467, 474-475 (1968). To show good faith reliance, the taxpayer must establish that the return preparer was supplied with all 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). Petitioners failed to make this showing. Petitioners also allege that an employee of the Internal Revenue Service had advised them that the amounts in issue were not taxable. Petitioner testified that she told respondent's representative that the transfers she received were gifts. We fail to see how petitioners can shift the responsibility of underreporting income when they supplied the representative, 722 upon whose advice they allege they relied, with incorrect information. Petitioners have failed to satisfy their burden of proof, and we hold for respondent on this issue. The final issue for decision is whether petitioners are liable for additions to tax under section 6661 for substantial understatement of income tax liability. Section 6661 imposes an addition to tax in an amount equal to 25 percent of the amount of any underpayment attributable to a substantial understatement of income tax. 10Pallottini v. Commissioner, 90 T.C. 498 (1988). The amount of the understatement is equal to the excess of the amount of tax required to be shown on the return for the tax year less the amount of the tax shown on the return. Woods v. Commissioner, 91 T.C. 88">91 T.C. 88, 94 (1988). An understatement is substantial if it exceeds the greater of 10 percent of the tax required to be shown on the return, or $ 5,000. Sec. 6661(b)(1). The deficiencies that we uphold for 1982, 1983, and 1984 qualify as "substantial understatements" as defined in section 6661(b). 723 Petitioners argue that they are entitled to relief under section 6661(c). The reasonable cause exception to section 6661, under which petitioners seek relief, provides that the Secretary may waive the addition to tax under section 6661 upon a showing by the taxpayer that there was reasonable cause for the understatement and that the taxpayer acted in good faith. Sec. 6661(c) (emphasis supplied). We only review respondent's decision not to waive the section 6661 addition to tax upon a showing by petitioners that respondent abused his discretion in refusing to waive the addition to tax. Mailman v. Commissioner, 91 T.C. 1079">91 T.C. 1079, 1083, 1085 (1988). The Secretary has not agreed to waive the section 6661 additions to tax, and petitioners have not shown that the Secretary abused his discretion by not granting a waiver. Accordingly, we hold for respondent on this issue. To reflect concessions, Decision will be entered under Rule 155. APPENDIX TRANSFERS TO ROSE M. BANKS 1982Rose Banks'Mother'sChurch1982BirthdayDayAnniv.ChristmasTotalsAnderson, Odette$ 100$ 25$ 500$ 500$ 1,125Anderson, Robert100255005001,125Bowden, Daisy2501001,0005001,850Bowden, Norman2501001,0005001,850Clark, AmosClincy, Brenda10025500250875Cook, Cindy250251,0002501,525Cook, Noel250251,0002501,525Cox, Anthonette (Willie)25050250125675Cox, Herman25050250125675Dear, Alrene10025500250875Goggans, Janice3001003,0005003,900Graham, Leanna3001001,5005002,400Griffin, Michael100251,0005001,625Griffin, Vanessa10025500250875Harper, Denver10050250250650Harper, Sarah10050250250650Harris, Joyce10025250125500Harris, Kirk10025250125500Henley, Jesse10050250250650Henley, Wilma10050250250650Jewell, Derek10050250400Jewell, Gwendolyn10050250400Junious, Frank200505002501,000LaSalle, Gilda100255005001,125Leslie, Helen10025250125500Leslie, Jimmy10025250125500McGhee, Delinda10025250150525McGhee, Larry10025250150525Munoz, Jacqualine10025500250875Nelson, Morrell (Arlene)125251,5005002,150Phillips, Curtis1251005005001,225Phillips, Ingrid1251005005001,225Pope, CromwellPope, LynetteRhoades, James10025250172547Rhoades, Sylvia10025250172547Sanders, Frederick5002,0001,0003,500Spurlock, GarrettSpurlock, RuthStewart, Clinton200505005001,250Stewart, DanaWilson, Ella100255005001,125Total:$ 5,675$ 1,600$ 23,000$ 11,644$ 41,919724 1983Rose Banks'Mother'sChurch1983BirthdayDayAnniv.ChristmasTotalsAnderson, Odette$ 100$ 25$ 250$ 250$ 625Anderson, Robert10025250250625Bowden, Daisy250501,0005001,800Bowden, Norman250501,0005001,800Clark, Amos10025600250975Clincy, Brenda12525500250900Cook, Cindy250505002501,050Cook, Noel250505002501,050Cox, Anthonette (Willie)250505002501,050Cox, Herman250505002501,050Dear, Alrene10025500250875Goggans, Janice3001001,5005002,400Graham, Leanna3001001,5005002,400Griffin, Michael100251,0002001,335Griffin, Vanessa10025500250875Harper, Denver10050250125525Harper, Sarah10050250125525Harris, Joyce10025250125500Harris, Kirk10025250125500Henley, Jesse10050250250650Henley, Wilma10050250250650Jewell, Derek10025250125500Jewell, Gwendolyn10050250125525Junious, Frank10025500250875LaSalle, Gilda100255005001,125Leslie, Helen10025500100725Leslie, Jimmy10025500100725McGhee, Delinda10025250125500McGhee, Larry10025250125500Munoz, Jacqualine10025500250875Nelson, Morrell (Arlene)10025500250875Phillips, Curtis125100500250975Phillips, Ingrid125100500250975Pope, Cromwell100251,1005001,725Pope, Lynette100251,1005001,725Rhoades, James10025250250625Rhoades, Sylvia10025250250625Sanders, Frederick5002,0001,0003,500Spurlock, Garrett10025250125500Spurlock, Ruth10050250125525Stewart, Clinton200501,0005001,750Stewart, DanaWilson, Ella10025500500875Total:$ 6,075$ 1,650$ 23,800$ 11,900$ 43,175725 1984Rose Banks'Mother'sChurch1984BirthdayDayAnniv.ChristmasTotalsAnderson, Odette$ 100$ 25$ 250$ 250$ 625Anderson, Robert10025250250625Bowden, Daisy250501,0005001,800Bowden, Norman250501,0005001,800Clark, Amos10025500250875Clincy, Brenda125255005001,150Cook, Cindy250505002001,000Cook, Noel250505002001,000Cox, Anthonette (Willie)250255002501,025Cox, Herman250255002501,025Dear, Alrene100255005001,125Goggans, Janice100251,0005001,625Graham, Leanna500506,0001,0007,550Griffin, Michael100251,0002001,325Griffin, Vanessa100251,0002501,375Harper, Denver10025250250625Harper, Sarah10025250250625Harris, Joyce10025250250625Harris, Kirk10025250250625Henley, Jesse10025250200575Henley, Wilma10025250200575Jewell, Derek10025200200525Jewell, Gwendolyn10025200200525Junious, Frank100255005001,125LaSalle, Gilda10025500250875Leslie, Helen10025125250500Leslie, Jimmy10025125250500McGhee, Delinda10025200200525McGhee, Larry10025200200525Munoz, Jacqualine10025400400925Nelson, Morrell (Arlene)100255005001,125Phillips, Curtis250505005001,300Phillips, Ingrid250505005001,300Pope, Cromwell10025250250625Pope, Lynette10025250250625Rhoades, James10025250250625Rhoades, Sylvia10025250250625Sanders, Frederick5002,0001,0003,500Spurlock, Garrett10025250250625Spurlock, Ruth10025250250625Stewart, Clinton10025300300725Stewart, Dana10025300300725Wilson, Ella10025500250875Total:$ 6,325$ 1,225$ 25,050$ 14,300$ 46,900726 1983, 1984, 1985Grand TotalAnderson, Odette$ 2,375Anderson, Robert2,375Bowden, Daisy5,450Bowden, Norman5,450Clark, Amos1,850Clincy, Brenda2,925Cook, Cindy3,575Cook, Noel3,575Cox, Anthonette (Willie)2,750Cox, Herman2,750Dear, Alrene2,875Goggans, Janice7,925Graham, Leanna12,350Griffin, Michael4,275Griffin, Vanessa3,125Harper, Denver1,800Harper, Sarah1,800Harris, Joyce1,625Harris, Kirk1,625Henley, Jesse1,875Henley, Wilma1,875Jewell, Derek1,425Jewell, Gwendolyn1,450Junious, Frank3,000LaSalle, Gilda3,125Leslie, Helen1,725Leslie, Jimmy1,725McGhee, Delinda1,550McGhee, Larry1,550Munoz, Jacqualine2,675Nelson, Morrell (Arlene)4,150Phillips, Curtis3,500Phillips, Ingrid3,500Pope, Cromwell2,350Pope, Lynette2,350Rhoades, James1,797Rhoades, Sylvia1,797Sanders, Frederick10,500Spurlock, Garrett1,125Spurlock, Ruth1,150Stewart, Clinton3,725Stewart, Dana725Wilson, Ella2,875$ 131,994Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended and in effect for the taxable years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. Respondent based his deficiency determination on bank deposits which he contends represent unreported income. Respondent concedes that $ 3,000 of the deposits which he included in his determination in 1983 does not represent unreported income. The parties now stipulate that the amount of deposits in dispute is $ 47,430, $ 52,266, and $ 43,382 for the taxable years 1982, 1983, and 1984, respectively. The parties specifically call upon this Court to determine the character of these deposits.↩3. The information in the appendix is derived from affidavits obtained by petitioners for use in this case. We note that the total amounts reflected on these affidavits for 1982 and 1983 are less than the amount of bank deposits which respondent determined represented unreported income. At trial, petitioners' counsel acknowledged that transfers from at least one former member were not reflected on the affidavits because petitioners were unable to contact him. We do not know whether other former church members also were not contacted. Moreover, the affidavits only reflect transfers made on the four "special" days of the year. Several witnesses testified that they made "gifts" to petitioner on other days of the year. For 1984, respondent determined unreported income of $ 43,382 based on petitioners' bank deposits. The affidavits for 1984 reflect $ 46,900 in transfers. Respondent has not claimed an increased deficiency for 1984 on the basis of these affidavits.↩4. The deposits for Feb. 1984 were $ 375 less than the contributions for that month. However, the deposits for Mar. 1984 were $ 375 more than the contributions for that month. The deposits in July 1984 were $ 41 more than the contributions, and the deposits in May 1983 were $ 2,300 more than the contributions.↩5. The parties stipulate that the testimony of these members is representative of the testimony that would be given by other members of the congregation.↩6. In what appears to be an attempt to show that the transfers were spontaneous, some of the witnesses testified that they did not know when other members made transfers to petitioner or the amounts of those transfers, if any. However, other witnesses testified that there were group meetings held to determine the amount that the members would transfer to petitioner on the four "special" days of the year. The affidavits, which petitioners procured for purposes of this trial, indicate that almost all the individuals listed on the affidavits made transfers to petitioner on the four "special" days of the year and that these transfers were similar in amount. See appendix.↩7. By using the word "pledge," we do not mean to indicate that these transfers were voluntary gifts or donations.↩8. Petitioners argue on brief that the testimony indicates that all the money transferred to petitioner was utilized for the Church, parsonage, charities, and the needy. The testimony cited by them in support of this position clearly states that the funds were used, in part, for personal use. On their returns, petitioners deducted charitable contributions in the amounts of $ 150, $ 6,000, and $ 6,000 during the taxable years 1982, 1983, and 1984, respectively.↩9. By contrast, the church's records identified disbursements from its account by check number and indicated the nature of the expenditure.↩10. The Omnibus Budget Reconciliation Act of 1986, Pub. L. 99-509, sec. 8002(a), 100 Stat. 1874, 1951, increased the section 6661(a)↩ addition to tax to 25 percent of the underpayment attributable to a substantial understatement for additions to tax assessed after Oct. 21, 1986.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625857/	D. L. LARSH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Larsh v. CommissionerDocket No. 12621.United States Board of Tax Appeals6 B.T.A. 1086; 1927 BTA LEXIS 3322; April 29, 1927, Promulgated 3322 Tom F. Carey, Esq., for the petitioner. Arthur H. Murray, Esq., for the respondent. GREEN 1086 GREEN: In this proceeding the petitioner seeks a redetermination of his income-tax liability for the year 1920, for which the Commissioner determined a deficiency in the amount of $1,444.23. The error 1087 alleged is the disallowance of an alleged loss resulting from the sale of certain shares of stock. FINDINGS OF FACT. Prior to the taxable year here in question the petitioner herein purchased 260 shares of the capital stock of the Artesia Alfalfa Milling Co. at a cost of $6,375. This company was organized to manufacture meal from alfalfa hay. The artesian wells which were the source of water supply for the alfalfa growers in that vicinity began to fail and in 1920 it was evident that the company could no longer hope to operate at a profit. During the year 1920 the petitioner herein sold 255 shares of said stock to his brother for the consideration of one dollar and assigned and delivered the stock certificates to the purchaser. This transfer was made upon the advice of counsel and for the express purpose of establishing losses on the3323 stock. The bill of sale given at the time the transfer was made contains the following recitation: It is expressly understood that [this] is a Bona-fide sale without any reservations whatever. The stock represents no value to me for in my judgment the assets of the company if sold, would fall short several thousand dollars of paying its note indebtedness. You being in charge of the business should be entitled to the stock in preference to others. And if possible to make it of any value in the future, I will be glad to see you have the benefit. A portion of the note indebtedness referred to in the quotation consisted of $15,000 loaned by the petitioner to the company in the year 1917. There has been paid upon the principal and interest of such note up to and including October 13, 1925, the sum of $120. The Commissioner in his computation of the deficiency allowed no deduction for the loss sustained by reason of the sale. The petitioner sustained a loss in the sum of $6,246.50. Judgment will be entered after 15 days' notice, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625858/	CAPITOL THEATRE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Capital Theatre Co. v. CommissionerDocket No. 6224.United States Board of Tax Appeals8 B.T.A. 287; 1927 BTA LEXIS 2937; September 22, 1927, Promulgated 2937 1. Theatre leases determined to have no bonus value on date of acquisition by petitioner. 2. Petitioner's gross income determined for the eight-month period, January 1 to August 31, 1920. John D. Watkins, Esq., and J. Roberts Sherrod, Esq., for the petitioner. A. George Bouchard, Esq., for the respondent. LANSDON 287 The respondent has determined a deficiency in income and profits taxes of the Capitol Theatre Co. for the year 1920 in the amount of $10,023.01. Two issues are involved: (1) The refusal by the respondent to allow as a deduction from gross income for the first eight months of 1920, an item of $4,285.68, claimed by the petitioner as exhaustion of leasehold interests; (2) the inclusion by the respondent in the petitioner's gross income for the first eight months of 1920, of an amount of $37,266.66, whereas the petitioner alleges that only $12,000 was actually received by or accrued to it, and that its income for said period is accordingly erroneously increased by the sum of $25,266.66. The parties litigant stipulated that the correct deduction for exhaustion, wear, and tear of improvements on leased property for the2938 first eight months of 1920 was $5,869.18. The remainder 288 of the deduction originally claimed by the petitioner under this heading was necessarily waived, in view of the stipulation of the parties. FINDINGS OF FACT. The petitioner is a Georgia corporation with its principal office at 485 Fifth Avenue, New York, N.Y. It was incorporated by an order of the Bibb County Superior Court, Macon, Ga., on October 21, 1916, with a capital stock of $50,000, all of which was issued to its incorporators, G. T. Howard and Brown Wimberly, in the proportion of two-thirds to the former and one-third to the latter. Howard and Wimberly were during and subsequent to 1916 engaged in the cotton export business in Macon, under the name of the Taylor Cotton Co., and had been for many years. On April 29, 1916, the premises known at Nos. 366, 368, and 370, Second Street, Macon, Ga., consisted of land and of two-story brick buildings which were constructed about the year 1902 or 1903 at a cost of $30,000. The ground floors of these buildings were, at that time, occupied by a jewelry store and a shoe store; the upper floors by doctors and an insurance company. Such buildings were in good2939 condition and were located in the heart of the business district of Macon. The properties here involved were leased to Howard and Wimberly by two lease contracts in writing dated, respectively, April 29, 1916, and July 24, 1916. The lease dated April 29, 1916, covered the entire premises above described, except the ground floor of the building known as 366 Second Street, which was covered by the lease dated July 24, 1916. The specified duration of each of said leases was from July 1, 1916, to September 30, 1921, inclusive, with option in the lessees to renew for an additional term of five years, expiring September 30, 1926, upon giving the lessor six months' notice in writing. The lease dated April 29, 1916, provided for a graduated scale of rental payments as follows: From July 1 to September 30, 1916, $250 per month; from October 1, 1916, to September 30, 1919, $350 per month; from October 1, 1919, to September 30, 1921, $400 per month; and, in case the lessees' option to renew were exercised, $450 per month throughout the renewal term of five years. The lease dated July 24, 1916, also provided for a graduated scale of rental payments as follows: From July 1, 1916, to2940 September 30, 1920, $125 per month; from October 1, 1920, to September 30, 1921, $150 per month; and, in case the lessees' option to renew were exercised, $150 per month throughout the renewal term of five years. The lease dated April 29, 1916, contains, among others, the following additional provisions: 289 The lessees shall have the right at their option to renew this lease at its expiration for an additional term of five years expiring on the 30th day of September, 1926, upon the same terms and conditions, at a monthly rental of Four Hundred and Fifty Dollars ($450.00) per month. The lessees shall give the lessor written notice six months in advance of the expiration of the lease if they desire to exercise this right of renewal, and shall give rent notes in evidence of renewal as aforesaid. The lessor binds herself to remove her tenants from the upper floors of the buildings now on said property, and to deliver to the lessees peaceable and quiet possession of said property on said first day of July, 1916, save and except that the said lessees undertake to arrange with the tenants of the storehouses on the ground floor of said building for their removal from the2941 same, the said lessees to pay any expenses necessary to secure the removal of said tenants upon the ground floor of said property. The lessees agree and undertake that at the expiration of this lease, or any renewal thereof, they will, if the lessor so desires, restore the property to the same condition it was in at the time of the making of this lease, and deliver the property to the lessor in substantially the same condition it was at the time the said lessees received the same. If the lessor shall desire the property to remain as a picture show, then the lessees shall not be liable to pay any sum on account of this clause in this agreement, but if the lessor shall desire to change the property into a mercantile building, then the amount necessary to put the property back in the same condition it is now shall be ascertained and paid to the lessor in cash. The lessees agree to deposit with the Macon Savings Bank as Trustee security satisfactory to the lessor for the performance of this clause. The liability of the lessees to pay any sum under this clause shall not exceed Ten Thousand Dollars. If the lessees shall desire to sell said securities so deposited or to use them, the2942 lessees shall have this privilege by substituting other securities in lieu thereof, satisfactory to the lessor. If at any time the value of the securities so deposited shall depreciate so that the market value of the same shall not be Ten Thousand Dollars, then the lessees agree to deposit additional securities or to substitute other securities in the place thereof so as to make the value of the securities so deposited Ten Thousand Dollars. The lessor shall pay all taxes and assessments upon the property described in this lease, but the lessee shall refund to the lessor an amount equal to the taxes paid by the lessor on account of the permanent improvements placed upon the property by the lessees, the taxable value of said permanent improvements to be determined by taking three-fourths of the amounts actually expended by the lessees for permanent improvements. In case the leased premises are totally destroyed or rendered untenantable by fire, flood, earthquake, or windstorm, then and in that event they shall be replaced in the same condition they were in at the time of the fire, each party contributing to the replacing thereof in proportion to his interest therein. In case2943 the premises are so destroyed or rendered untenantable, then and in that event the monthly rental agreed to be paid shall abate, and the lessees shall pay to the lesser one-half the agreed rental during the time the premises are not tenantable. It is hereby agreed that the property shall be fully insured from loss or damage by fire in good and responsible fire insurance companies, the loss to be made payable by proper stipulations in said policies to said Macon Savings Bank as trustee. The lessor shall pay the premium on Sixty-Five Hundred Dollars ($6,500.00) of said insurance. The lessees shall pay the premiums on the balance. In the event of fire, all amounts collected on said policies shall be held in trust by the trustee, and a sufficient sum shall be applied by the lessees to 290 replace the buildings or buildings destroyed or injured in the condition they were in at the time of the fire. The Trustee shall be in no way liable or responsible for the insuring of the property or keeping it insured. The Trustee shall allow the insurance money received on the policies to be applied by the lessees to replacing the property destroyed or injured, and the trustee shall, 2944 upon request, pay over the same to the lessees for that purpose, in installments of not more than twenty-five per cent at a time, on receipt of a certificate by the lessees and some reputable contractor or builder showing that a sum at least equal to the amount of money so requested to be paid over has been expended, or an indebtedness therefor incurred by the lessees in replacing the property lost or damaged; and such certificate shall be sufficient evidence to the trustee that such sum has been paid, or such indebtedness incurred, as therein stated. The lease dated July 24, 1916, contains similar provisions in practically identical language, except that it does not provide for a deposit with a trustee to insure the performance of the clause respecting restoration of the property at expiration of the lease. Immediately following the acquisition of the lease of April 29, 1916, Howard and Wimberly began the remodeling of the premises and the construction of the Capitol Theatre. For these purposes, the sum of $45,158.51 was expended in 1916, and the sum of $5,139.96 January, 1917, making a total of $50,298.47. Of this amount, $10,606.68 was paid to prior lessees then on the premises, 2945 to induce them to vacate their leases; a total of $900 was paid to the lessor as rent prior to November, 1916; and a total of $625 was paid prior to November 11, 1916 to lawyers and as salary to B. H. DeBruler, who was manager and superintendent of the Capitol Theatre during the period of construction and thereafter. The Capitol Theatre opened its doors and commenced operations as a motion picture theatre on November 11, 1916. On December 6, 1916, the theatre and motion picture business were conveyed by Howard and Wimberly to the petitioner by an indenture, the material clauses of which read as follows: Witnesseth, That for and in consideration of the sum of Sixty-Nine Thousand Nine Hundred and Ninety Dollars the parties of the first part have this day bargained, sold, aliened and conveyed, and by these presents do bargain, sell, alien, convey and confirm unto the party of the second part, its successors and assigns, the following described property, to wit: A certain moving picture business situate at Nos. 366, 368, and 370 Second Street in the city of Macon, Georgia, together with all the appurtenances, improvements, apparatus, furniture, decorations, fixtures, notes, choses2946 in action, accounts, and any and all other things connected with said moving picture business, together with the good will. Also, two certain leases dated the 29th day of April, 1916, and the day of July, 1916, from Mrs. Josephine Jones Miller to the parties of the first part, with all its rights, privileges and liabilities, and for the term stated in said leases, together with any renewals thereof. It is the intention of this instrument to convey to the party of the second part said moving picture show now being operated as a going concern, together with any and all property rights appurtenant to and connected therewith. To Have and To Hold said bargained property in fee simple forever. 291 The true consideration for this conveyance is not recited in the indenture of December 6, 1916. The consideration received by Howard and Wimberly for this conveyance was the entire authorized capital stock of the petitioner of a par value of $50,000. The physical assets of the petitioner at the close of the year 1916 were: building, $34,362.94; fixtures and equipment, $9,288.83; total, $43,651.77. The physical assets of the petitioner at the close of the year 1917 were: building, 2947 $36,088.04; fixtures and equipment, $12,903.24; total, $48,991.28. The net income of the Capitol Theatre for the period from November 11, 1916, to December 31, 1916, was $2,474.64. The petitioner operated the Capitol Theatre for about nine months. The operation of the Capitol Theatre was turned over to the Macon Photo Play Theatre Co. from the latter part of August, 1917. G. T. Howard, Brown Wimberly, E. W. Gould, and L. A. Mitchell petitioned the Superior Court of Bibb County, Georgia, on November 15, 1917, to incorporate them under the name of the Macon Photo Play Theatres Co. with a capital stock of $1,000, all of which had been paid in, and their petition was granted, and they were incorporated by order of said court dated December 15, 1917. Howard had a four-tenths interest in the company, and, the other three incorporators had a two-tenth interest each. The petitioner sublet the Capitol theatre to this corporation, under oral lease, which provided for the payment of a monthly rental of $1,500, in addition to the rent stipulated in the original leases, above mentioned. Howard, Wimberly, Gould, and Mitchell each received salaries from the Macon Photo Play Theatres Co. 2948 during the period it operated the Capitol Theatre. B. H. DeBruler was elected manager. The Macon Photo Play Theatres Co. never had minute books, or formal meetings. There were no formal declarations of dividends. Its four incorporators and shareholders, however, met together and conferred on policies regularly. The profits of said company were distributed regularly. The Macon Photo Play Theatres Co. reported its income as a personal service corporation. The Macon Company operated the Capitol Theatre until August 30, 1920, when the oral lease between it and the petitioner was terminated. During the three years the Macon Company operated the Capitol Theatre, checks for rent were made out in the name of the petitioner, but checks for profits were made out in the individual names of its shareholders. The returns of the Macon Company show that its profits were distributed to G. T. Howard, Brown Wimberly, E. W. Gould, and L. A. Mitchell, in the ratios above given. Howard and Wimberly sold one-half of their holdings in the petitioner about September 1, 1920, for $75,000, and shortly thereafter after 292 the remainder of their holdings in the petitioner to Southern Enterprises2949 of Atlanta, Ga., which was controlled by New York interests with offices in New York City. The operation of the petitioner and its theatre were thereupon turned over to the purchasers, and they filed a return covering the last four months of 1920. The net income reported in this return was accepted by the Commissioner, and amounts to $1,549.76. When Howard and Wimberly began the construction of the Capitol Theatre in 1916, and prior to the incorporation of the petitioner, a record of the expenditures was kept in a joint account on the books of the Taylor Cotton Co., headed "Howard and Wimberly." This was done because they owned the Taylor Cotton Co., had their offices there, the Taylor Cotton Co. advanced the money for the improvements, and it was the most convenient place to keep the account. After the petitioner began to operate the theatre, its manager kept a record of the receipts and expenditures at the petitioner's office, but Howard and Wimberly continued to keep a joint ledger account on the books of the Taylor Cotton Co. of everything they received and expended in connection with the petitioner. After the operation of the Capitol Theatre was turned over to the Macon2950 Company, the petitioner had no office except the office of Howard and Wimberly with the Taylor Cotton Co. The petitioner then stopped keeping a detailed record of receipts and expenditures. Howard and Wimberly continued to keep the joint account on the ledger of the Taylor Cotton Co. In the 1918 ledger of the Taylor Cotton Co. the name "Howard and Wimberly" for this joint account was scratched out and the name "Capitol Theatre Company, Macon, Ga.," substituted therefor at the suggestion of the revenue agent. The return for the first eight months of 1920 was made under the following circumstances: Wimberly moved to Savannah, Ga., after selling his interest in the Capitol Theatre Co. in 1920. He had no interest of any kind in the company after the sale. In 1924 he was approached several times by revenue agents attached to the Savannah, Ga., office, in reference to making a return for the Capitol Theatre Co. to cover the first eight months of 1920. Finally he directed one of his clerks to give the agent a copy of an account on the ledger of the Taylor Cotton Co. headed "Capitol Theatre Company, Macon, Georgia." The clerk copied the debit and credit sides of this account from2951 January 1, 1920, to August 31, 1920, the debit side totaling $8,170.54 and the credit side $37,295.41, prepared a letter of transmittal to the collector at Savannah, which Wimberly signed without examining the attached copies. This letter was sent to the collector, who then sent Wimberly a blank return with request to sign it, which Wimberly did, and the copy of the credit side of the account was attached to the return as the gross income of the 293 Capitol Theatre Co. for the first eight months of 1920 and the copy of the debit side of the account was attached to the return as the expenses or deductions of the company for the same period. A net income of $29,897.40 was determined by the Commissioner for the first eight months of 1920, and was arrived at by deducting the debit side of the account just referred to from the credit side, with the exception of $772.53, representing Federal income-tax payments. Of the amount so allowed as a deduction from gross income by the Commissioner, the parties litigant have stipulated that $5,867.49 represented capital expenditures, and should not be allowed as a deduction from gross income. The debit side of the account contained no2952 item representing depreciation on the improvements made to the leased premises and no depreciation was allowed on said improvements in determining the petitioner's taxable net income for the first eight months of 1920. A deduction for depreciation of said improvements had been allowed the petitioner is prior years. The parties have stipulated that the petitioner is entitled to a deduction from gross income of $5,869.18 for exhaustion, wear and tear of improvements during this eight-month period. The two leases dated April 29, 1916, and July 24, 1916, together with the motion picture business of the Capitol Theatre, conveyed to the petitioner by the indenture dated December 6, 1916, had a fair market value on that date of $50,298.47. The gross income of the petitioner for the period January 1 to August 31, 1920, was $1,500 per month, or $12,000. The net income of the petitioner for the period September 1 to December 31, 1920, was $1,549.76. OPINION. LANSDON: The petitioner claims that the two leases dated April 29, 1916, and July 24, 1916, involved in this proceeding, had a fair market or bonus value at date of acquisition by it (December 6, 1916) of $80,623.06, or about2953 $30,000 in excess of the actual expense of Messrs. Howard and Wimberly in getting the leased premises vacated and remodeling the same into a motion picture theatre. An inspection of the rigid terms of the leases and a consideration of the incomplete evidence adduced by the petitioner on the question of their fair market value on December 6, 1916, convince this Board that the petitioner has not established that said leases had any value on the date of their acquisition in excess of $50,298.47, the cost of the improvements upon which the parties have stipulated that the petitioner is entitled to deduction for exhaustion in the amount of $5,869.18. The action of the respondent is, therefore, approved as to this phase of the petitioner's appeal. The respondent was in error in including in the petitioner's gross income the profits of the Macon Photo Play Theatres Co. distributed 294 by it to its own incorporators and shareholders. The Macon Company leased the Capitol Theatre from the petitioner by an oral lease, paying to the latter a net rental of $1,500 per month. These rental payments represented the only gross income of the petitioner for the eight-month period January2954 1 to August 31, 1920. The petitioner's taxable net income for the four-month period September 1 to December 31, 1920, as set forth in the deficiency notice forming the basis of this proceeding, was $1,549.70. Other deductions which are allowed the petitioner in the deficiency notice, and are not the subject of dispute, total $1,530.52. The taxable net income of the petitioner should be recomputed in conformity with the findings of fact and the opinion herein above expressed. Judgment will be entered on 10 days' notice, under Rule 50.Considered by STERNHAGEN, GREEN, AND ARUNDELL.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625859/	MONROE SWAN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentSwan v. CommissionerDocket No. 23351-83.United States Tax CourtT.C. Memo 1985-521; 1985 Tax Ct. Memo LEXIS 105; 50 T.C.M. (CCH) 1256; T.C.M. (RIA) 85521; October 7, 1985. Monroe Swan, pro se. Sheldon M. Kay, for the respondent. SWIFTMEMORANDUM FINDINGS OF FACT AND OPINION SWIFT, Judge: In a statutory notice dated July 14, 1983, 1 respondent determind a deficiency in petitioner's 1978 Federal income tax liability, and additions to tax, as follows: Additions to TaxDeficiencySections 6653(a) 2 6651(a)$2,592.40$298.07$364.25106 Following concessions, the primary issue remaining for decision is whether the value of services provided by summer youth workers employed under a federally funded program but diverted (at least in part) by petitioner to his political campaign constitutes gross income properly taxable to petitioner, and if so, the amount of income with respect thereto chargeable to petitioner. Also at issue herein are additions to tax under sections 6651(a) and 6653(a). FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. The pertinent facts are summarized below. Petitioner, Monroe Swan, was a resident of Milwaukee, Wisconsin, at the time the petition herein was filed. Petitioner executed a Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income107 Tax Return) for the year 1978, extending the time for filing his 1978 Federal income tax return until June 15, 1979. Petitioner, however, did not actually file his 1978 Federal income tax return until June 19, 1980. From 1972 through 1978, petitioner was a senator in the Wisconsin legislature, representing the Wisconsin sixth legislative district (an area encompassing north central Milwaukee). For the four-and-a-half years preceding his election to the state senate, petitioner was director of the Concentrated Employment Program (CEP) in Milwaukee. The CEP was a federally funded program that attempted to help disadvantaged persons obtain employment. In 1978, petitioner ran for the office of Lieutenant Governor of the State of Wisconsin. Petitioner qualified for the ballot, but lost the election. During the spring and summer of 1978, petitioner maintained a district office at 2210 N. Third Street, Milwaukee, Wisconsin, in connection with his position as a state senator. His office in the building at that address was one of a number of offices in that building for officials representing four different levels of government (namely, Federal, state, county, and city). The office108 building was referred to as the "Joint Legislative Service Center" (hereinafter referred to as "JLSC"). The rent attributable to petitioner's office and the salary of petitioner's administrative aide, Carole Geary, were paid by the State of Wisconsin. Ms. Geary also served as the unpaid coordinator of various aspects of the JLSC building. Many of the campaign activities conducted in connection with petitioner's campaign for Lieutenant Governor (such as strategy meetings and the production of campaign literature) were conducted out of petitioner's office in the JLSC building, primarily in petitioner's conference room, located to the rear of his main office. The controversy herein arises out of petitioner's participation in a federally funded program to provide summer employment for high school-age youth from low-income families. The program was administered through the Department of Labor pursuant to the Comprehensive Employment Training Act ("CETA"), and was administered locally through a number of organizations, including, among others, the Milwaukee Public School Board and the "Commandos," a Milwaukee youth organization. Under the CETA program, these organizations would place109 youths in various jobs for the summer, generally with governmental or non-profit organizations. The program provided youths with summer employment for an eight-week period during which time they were expected to work four hours per day, as part of either a morning or afternoon shift. The youths were paid hourly wages equal to the prevailing minimum wage. Petitioner first became involved in the CETA youth employment program in 1976 when he requested that various Federal, state, county, and local government offices located in the JLSC building be designated as summer youth job sites by the Milwaukee School Board. His request was initially denied on the basis that the activities conducted at the government offices in the JLSC building were too political and that there was no adequate assurance that the youths would not be used for improper political purposes. Petitioner then contacted the Chief Clerk of the Wisconsin State Senate, who wrote a letter to the Milwaukee School Board. Subsequently, the various sponsoring agencies reversed their decision and six youths were assigned to one of the offices at the JLSC building (apparently to work in petitioner's office) during the summer110 of 1976. Six youths also were assigned to offices in the JLSC building during the summer of 1977. In a letter dated May 24, 1978, petitioner requested the Milwaukee Public School Board to assign 10 youths to his office for the summer of 1978. The letter indicated that "the youth will be engaged in clerical, janitorial and field work." The 10 youths requested from the Milwaukee Public School Board and 10 additional youths from the Commandos were assigned to petitioner's office inthe JLSC building for eight weeks during the summer of 1978. Some of the 20 youths assigned to petitioner's office were relatives or friends of petitioner, including his son, Allyn Swan; his nieces, Kimberly, Antoinette, and Lorie Johnson; and his nephew, Everett Swan. Although the sponsoring organizations (namely, the Milwaukee Public School Board and the Commandos) were supposed to send supervisors to petitioner's office periodically to check on the progress of the program and to ensure that the youths were being utilized properly, in fact little or no such supervision occurred. Carole Geary, petitioner's administrative aide, was primarily responsible for the day-to-day activities of the youths assigned111 to petitioner, but she acted pursuant to the directions of petitioner. Following a grand jury investigation, an indictment was returned against petitioner on July 23, 1980, in the United States District Court for the Eastern District of Wisconsin, charging him with 20 counts of "knowingly and willfully embezzling and misapplying monies subject to a grant under the Comprehensive Employment Training Act in violation of section 665 of Title 18." 3 The indictment charged that petitioner misappropriated the services of the 20 youths assigned to his office during the summer of 1978. The indictment was based on the allegation that petitioner used the youths to perform political activities for him in connection with his campaign for Lieutenant Governor. 112 Following a trial before the Honorable Myron L. Gordon held in October of 1980, petitioner was found guilty of two felonies (with respect to the services of Carolyn Holman and Marilyn Holman) and four misdemeanors (with respect to the services of Allyn Swan, Daphne Greer, Bonita Pyant, and Everett Swan). The other 16 counts were dismissed because the government failed to introduce sufficient specific proof to warrant convictions with respect thereto. United States v. Swan, Docket No. 80-CR-90 (E.D. Wis. Nov. 20, 1980). For each felony conviction, the government was required to prove a misappropriation of services valued at more than $100; for each misdemeanor conviction, the government was required to prove a misappropriation of services with a value of $100 or less. Petitioner's convictions were affirmed by the United States Court of Appeals for the Seventh Circuit. United States v. Swan, No. 80-2720 (7th Cir, filed July 27, 1981). Respondent determined that petitioner was taxable on the entire wages paid to all 20 youths during the summer of 1978. That determination requires us to consider the specific evidence concerning the work performed by each of the 20 youths113 while employed under the CETA program. Even though the parties stipulated into evidence the entire transcript of petitioner's criminal trial on charges of misappropriating services of the youths and even though additional witnesses were called at the trial herein, the evidence is very confusing and unclear as to what specific work the youths performed during the summer of 1978 and the extent to which their work constituted improper political activities associated with petitioner's campaign for Lieutenant Governor. As previously mentioned, we do know that 14 of the criminal counts against petitioner were dismissed by the district court. With regard to the remaining six counts, petitioner was convicted of four misdemeanors (for misappropriating $100 or less) and two felonies (for misappropriating in excess of $100). Although it would make our fact finding in this case much easier if we simply could track the findings of the district court, 4 that approach is not permissible to us due to the difference between the standard of proof in a criminal proceeding and the standard of proof in a civil tax proceeding it this Court. 114 We first will set forth general findings concerning all of the youths, followed by brief separate findings concerning the activities of each of the youths with respect to whom we have sufficient evidence to make separate findings. Evidence Concerning All of the Youth WorkersUpon arriving at petitioner's office to begin work, the youths were given an orientation conducted by Carole Geary. The orientation consisted of introductions to adult employees at the various offices in the JLSC building, a discussion of what the various offices did and explanations of the different levels of government represented by the offices in the JLSC building. The orientation included instructions as to the proper way to answer telephone calls and to address people in a work environment. The orientation period lasted approximately one week. Because the youths sponsored by the Commandos started one week later than those sponsored by the Milwaukee School Board, the orientation process was repeated for the Commando youth workers and the total orientation period extended over two weeks. Following completion of the orientation, most of the youths were assigned to clean up the basement area115 of the JLSC building. They refused, however, to do such a menial task and after wasting a few days, they announced that they would not do janitorial work of any kind. Some of the youths did repaint the main lobby area of the JLSC building. In addition to janitorial work, the youths generally were supposed to perform and gain experience in various types of office work such as filing, typing, answering telephones, and working with people. Most of the youths did spend some time filing, typing, and answering telephones in petitioner's office. The youths also spent some time addressing and stuffing envelopes for petitioner in a conference room in the JLSC building. They worked on three different types of correspondence: (1) A general newsletter containing the salutation "Dear Constitution;" (2) a campaign brochure describing petitioner's accomplishments and soliciting support for his campaign for Lieutenant Governor; and (3) a thank-you letter to people who had signed petitioner's nominating petitioner for Lieutenant Governor. On some days, some of the youths were instructed to go to certain food stores in Milwaukee for the purpose of soliciting signatures on nominating petitions116 for petitioner's campaign for Lieutenant Governor. Transportation for and supervision of these trips were provided by either Robert Swan (petitioner's brother and campaign director at the time) or by Frank Johnson (a janitor in the JLSC building) who, as an unpaid volunteer for petitioner, would take youth workers out in the afternoon after completing his 8 a.m. to 12 noon shift. It is not clear from the record how many youths were involved in this activity, but it would appear that at least six such trips were made, each of which was three to four hours in duration. At petitioner's direction, some of the youths also visited the Milwaukee City Hall to check the official list of registered voters against a list provided by petitioner's office in order to identify which registered voters actually voted in the prior election. This activity apparently involved six youths each day for approximately seven work days, although the individuals changed from day to day. One trip also apparently was made to Madison, Wisconsin, to check voter registration lists in that city. Transportation for and supervision of these trips was provided by Monica Harris and Shirely Sneed, adult employees117 in petitioner's office. The information that resulted from these trips was used in petitioner's campaign for Lieutenant Governor. Irrespective of the type of activity to which the youths were assigned, they in fact spent much of their time doing nothing or engaging in non-productive and disruptive behavior. Many of the youths spent most of their four-hour shifts arguing with one another, playing radios that they had brought with them at loud levels, and dancing. While this behavior was carried on more frequently by some youths than by others, misbehavior and disruptive activity were a constant problem and continued throughout the time the youths were assigned to petitioner's office. These activities upset Carole Geary, who complained about this behavior repeatedly to petitioner. Petitioner held a meeting with the youths some four to five weeks into the program in which he informed them that their behavior was not acceptable and required substantial improvement. Their behavior did not in fact improve following that meeting. Frustrated and upset with the poor performance of all of the youths, approximately six weeks into the program petitioner ordered Carole Geary to tell all118 of the youths not to come to work for the last two weeks of the eight-week employment period. Petitioner, however, did not report his early termination of the youths to the sponsoring agencies, and he reported that the youths had worked for those two weeks with the result that they were paid therefor with CETA funds. Findings Concerning Individual Youth WorkersMarilyn HolmanPetitioner was convicted of a felony for misappropriating the services of Marilyn Holman ("Marilyn"). Her misappropriated services were determined to have a value in excess of $100. Marilyn testified at both petitioner's criminal trial and at the trial herein. Marilyn started working one week late and apparently did not participate in the orientation program. She worked two four-hour shifts during her first week to make up for the week she missed. Among other things, Marilyn was assigned to obtain signatures for petitioner's nominating petitions for Lieutenant Governor. Robert Swan, petitioner's brother and campaign manager, took her to two Milwaukee food stores for this purpose. She spent three four-hour shifts carrying out this task. However, on the first day she became discouraged119 after obtaining only 11 signatures in the first few minutes, and spent the rest of the shift sitting and eating plums which she had purchased at the food store. On each of the next two days she worked the entire four-hour shift and obtained approximately 40 signatures each day. Marilyn also was assigned to address and stuff envelopes with thank-you letters from petitioner to persons who had signed his nominating petitions for Lieutenant Governor. This task took approximately six days. At some point, Marilyn was taken to the Milwaukee City Hall to check voter registration lists to determine who had voted in the prior election and to compare names and addresses with the lists maintained by petitioner's office. She performed this task on four separate days. On one day, Marilyn also apparently was taken to Madison, Wisconsin, to check voter registration lists and to address envelopes. The following day, Marilyn stuffed letters in the envelopes, but the nature and content of the letters is unclear from the record. Marilyn testified that she spent the majority of her time during the summer stuffing and addressing envelopes, and that she did not typing or filing. She answered the120 phone infrequently. Carolyn HolmanCarolyn Holman ("Carolyn"), who is Marilyn's sister, is the only other youth with respect to whose services petitioner was convicted of a felony. She testified at petitioner's criminal trial, but not at the trial herein. Carolyn's testimony in the criminal trial was substantially similar to Marilyn's. Carolyn testified that she started two weeks late, but made up the time working double shifts. She was sent to local stores to obtain signatures on petitioner's nominating petition on two occasions, for approximately three hours on each occasion. She testified that she went to the Milwaukee City Hall to check voter registration lists on five different four-hour shifts. As did her sister Marilyn, Carolyn testified that she spent the greatest portion of her time stuffing and addressing envelopes. She only answered the phone and filed papers during one afternoon. Allyn SwanAllyn Swan ("Allyn"), who is petitioner's son, is one of the youth workers with respect to whose services petitioner was convicted of a misdemeanor -- that is, the value of the embezzled services was found not to exceed $100. Allyn testified at both his father's121 criminal trial and at the trial herein. Allyn testified at the trial herein that the time he spent circulating petitions for his father's campaign for Lieutenant Governor was volunteer time. He testified at petitioner's criminal trial, however, that he did not recall whether he was paid with CETA funds for the time he spent circulating nominating petitions. Allyn also testified at the criminal trial that some of his time as a youth worker was spent cleaning up the JLSC offices, answering telephones, and stuffing envelopes with campaign-related material. Daphne GreerDaphne Greer ("Daphne") is one of the youth workers with respect to whose services petitioner was convicted of a misdemeanor. She did not testify at the criminal trial, nor at the trial herein. Marilyn testified at both the criminal trial and at the trial herein that Daphne went with her to obtain signatures for petitioner's campaign for Lieutenant Governor. Carolyn testified at the criminal trial that Daphne was one of the youths selected to go to Milwaukee City Hall to check voter registration lists. Bonita PyantBonita Pyant ("Bonita") was one of the four youths with respect to whose services petitioner122 was convicted of a misdemeanor. In the criminal trial, Marilyn, Carolyn, and Monica Harris all testified that Bonita was one of the youths selected to check voter lists at Milwaukee City Hall. Other than the foregoing, there are no other references to Bonita in the record. Everett A. SwanEverett A. Swan ("Everett") is the last of the four youths with respect to whose services petitioner was convicted of a misdemeanor. The only evidence with respect to Everett's specific activity as a youth worker is testimony at petitioner's criminal trial by Shirley Sneed, Monica Harris, and Marilyn to the effect that Everett was taken to Milwaukee City Hall for one to one-and-a-half weeks for the purpose of checking voter lists. The Remaining 14 Youth WorkersAll 14 criminal counts relating to the services of the remaining 14 youths 5 were dismissed by the district court on the ground that the government failed to introduce proof with sufficient specificity to warrant conviction, even as to the misappropriation of services with a value not in excess of $100 per individual. Other than the general findings set forth above, there is no specific evidence in this case relating to the123 separate activities of the remaining 14 youths during the summer of 1978. OPINION Gross income, as defined in section 61(a), includes all income from whatever source derived, unless specifically excluded. Sec. 1.61-1(a), Income Tax Regs.6 In defining gross income, Congress intended to exert the "full measure of its taxing power." Helvering v. clifford,309 U.S. 331">309 U.S. 331, 334 (1940). The key factors in the realization of income are the receipt of money, property, or services without124 the obligation to repay and without any restriction as to the disposition or utilization of the money or property. James v. United States,366 U.S. 213">366 U.S. 213, 219 (1961); Mais v. Commissioner,51 T.C. 494">51 T.C. 494, 498-499 (1968). It is irrelevant whether the money, property, or services are received lawfully or unlawfully. James v. United States,supra at 219. As we previously have stated with respect to embezzlement of money-- It is beyond question that amounts embezzled by a taxpayer constitute taxable income. James v. United States,366 U.S. 213">366 U.S. 213 (1961). [Dragatsis v. Commissioner,T.C. Memo 1984-122">T.C. Memo. 1984-122, 47 T.C.M. (CCH) 1260">47 T.C.M. 1260 at 1263; 53 P-H Memo T.C. par. 84,122 at 436.] That proposition applies equally to the embezzlement or misappropriation of property and services. Accordingly, the key issues for decision herein are whether petitioner embezzled or misappropriated for his personal benefit the services of the summer youth workers and, if so, the value of the services embezzled or misappropriated. We find (as did the Federal district court) that petitioner embezzled or misappropriated a125 portion of the services of the summer youth workers. Over the course of the first six weeks of the youth placement program, petitioner directed that a number of the youths participate in activities directly related to his personal political campaign for Lieutenant Governor of the State of Wisconsin. Participation in such political activity by the youths was a violation of Federal law and constituted the conversion by petitioner of those services to his personal benefit. The fact that petitioner, in part, may have been motivated by a desire to assign the youths more interesting and challenging work than cleaning up the basement of the building and by a need simply to get the disruptive youths out of his office, is not controlling. At least in part, the services of the youths were misappropriated to petitioner's personal benefit. To that extent and based upon the value thereof, petitioner realized taxable income. The more difficult issue in this case pertains to what portion of the services of the youths was related to work within the scope of the CETA program and what portion of that services was related to petitioner's political campaign.It is only the value of the latter portion126 that results in taxable income to petitioner. Respondent's deficiency determination and his position herein treats the entire wages paid to the youths under the CETA program in the summer of 1978 as taxable income to petitioner, apparently on the premise that all of the time and services for which the youths were paid were misappropriated by petitioner. That position is directly contrary to the evidence herein that a substantial portion of the services rendered by the youths did not relate to petitioner's campaign for Lieutenant Governor and was office-related work within the scope of the CETA program. It is also generally inconsistent with the holding of the Federal district court which, in a criminal context, found that petitioner only misappropriated services of the youths with a value in excess of $100 in two instances and services with a value not in excess of $100 in four instances. Based upon our evaluation of the evidence in this case and taking into account the burden of proof which is on petitioner in this proceeding, we conclude that the following percentages of the services of each youth were misappropriated by petitioner: Percentageof ServicesNameMisappropriatedMarilyn Holman50%Carolyn Holman50%Allyn Swan35%Daphne Greer35%Bonita Pyant35%Everett Swan35%Robert Swan, Jr.20%Revita Walls20%Debra Walls20%Alvis Rodgers20%Kimberly Johnson20%Vonnie Darby20%Phillip Washington20%Kenneth Greer20%Finette Howard20%Marsha Howard20%Sharon Howard20%Antionette Johnson20%Lorie Johnson20%Kevin Reed20%127 These findings are based upon all of the evidence in this case, particularly the evidence which establishes that during a substantial portion of the six weeks they were on the job the youths did not perform services in connection with petitioner's political campaign. Painting the lobby of the JLSC building, answering phones, filing, and addressing letters to constituents are services that were performed by the youths that were within the scope of the CETA- funded program, and it would be improper to charge petitioner with income with respect to those services. A significant portion of the time the youth workers were supposed to be working, they were disobedient and unruly. The sponsoring organizations of the teenage youths, to a degree, surely must have anticipated such conduct, and by virtue of their lack of supervision and failure to monitor the activities of the youths, the sponsoring organizations can be regarded as condoning such unproductive activities. Clearly, it would be incorrect to charge petitioner with income with respect to the time wasted by the youths and to the disruptive behavior that occurred against petitioner's wishes and in spite of his efforts and those128 of his staff to keep the youths under control. We next turn to the question of how to value the portion of the services of the youths that we have determined was misappropriated by petitioner. When income is received in the form of services, the amount of income received with respect thereto is measured by the money paid therefor, or if payment for the services takes the form of property or other services, by the fair market value of the property or other services paid therefor. Sec. 1.61-2(d)(1), Income Tax Regs.7In this case, the youths received cash wages in payment for their summer "work." The wages were paid with CETA funds through the sponsoring organizations. Accordingly, the value of the services of129 the youths is to be measured herein by the amount of wages the youths received during the eight weeks of the summer of 1978 in connection with their assignment to petitioner's office in the JLSC building. Set forth below is a schedule of the total wages paid to each youth and the portion thereof that represents income chargeable to petitioner based upon our prior findings herein as to the percentage of the services performed by each youth that was related to petitioner's campaign for Lieutenant Governor: TotalPercentage ofIncomeWagesServicesChargeableNameReceivedMisappropriatedto PetitionerMarilyn Holman$466.4050%$ 233.20Carolyn Holman459.8050%229.90Allyn Swan459.8035%160.93Daphne Greer466.4035%163.24Bonita Pyant466.4035%163.24Everett Swan8 1,120.0035%392.00Robert Swan459.8020%91.96Revita Walls459.8020%91.96Debra Walls459.8020%91.96Alvis Rodgers459.8020%91.96Kimberly Johnson347.1520%69.43Vonnie Darby351.1220%70.22Phillip Washington341.8520%68.37Kenneth Greer453.1520%90.63Finette Howard466.4020%93.28Marsha Howard466.4020%93.28Sharon Howard466.4020%93.28Antionette Johnson429.3020%85.86Lorie Johnson461.1020%92.22Kevin Reed466.4020%93.28Total income to be charged to Petitioner$2,560.20130 The next issue for consideration is the applicability of the addition to tax under section 6651(a) for failure to timely file his 1978 federal income tax return. Petitioner bears the burden or proving that his failure to timely file was due to reasonable cause and not to willful neglect. Kindred v. Commissioner,669 F.2d 400">669 F.2d 400 (6th Cir. 1982), affg. a Memorandum Opinion of this Court; Rule 142(a). The only explanation offered by petitioner for filing his 1978 return over a year late is that he was waiting to file the return until after Congress resolved the issue of the deductibility of a state legislator's per diem allowance. We find that petitioner's explanation does not constitute reasonable cause, and we find for respondent on this issue. Finally, we consider whether petitioner is liable for131 the addition to tax under section 6653(a) for negligence or intentional disregard of rules and regulations. Such a determination by respondent is presumed correct, and petitioner has the burden of showing that he exercised due care. Bunnel v. Commissioner,50 T.C. 837">50 T.C. 837, 843 (1968). It is clear from the evidence that petitioner did not appreciate the fact that the misappropriated youth services would constitute taxable income to him. In large part, petitioner was motivated by the good faith desire simply to keep the youths off the street and, after they became unruly in his office, to give them something meaningful to do out of his office. Under the circumstances of this case we do not find that petitioner was negligent or that he intentionally disregarded the rules and regulations in failing to report as his taxable income the income attributable to the personal benefit he received from the services of the youth workers. Accordingly, we find that petitioner is not liable for the addition to tax under section 6653(a). In accordance with the foregoing resolution of the issues, Decision will be entered under Rule 155.Footnotes1. Although not entirely clear from the record, petitioner apparently executed a Form 872 to extend the statute of limitations on assessment to June 30, 1984. ↩2. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended, and in effect during the year in issue and all rule references are to the Tax Court Rules of Practice and Procedure.↩3. 18 U.S.C. § 665(a) (1976) provides: (a) Whoever, being an officer, director, agent, or employee of, or connected in any capacity with, any agency receiving financial assistance under the Comprehensive Employment and Training Act of 1973 embezzles, willfully misapplies, steals, or obtains by fraud any of the moneys, funds, assets, or property which are the subject of a grant or contract of assistance pursuant to this Act shall be fined not more than $10,000 or imprisoned for not more than two years, or both; but if the amount so embezzled, misapplied, stolen, or obtained by fraud does not exceed $100, he shall be fined not more than $1,000, or imprisoned not more than one year, or both.↩4. Under such an approach we could simply find that (1) with regard to 14 youth workers, no misappropriation occurred, (2) with regard to four youth workers a misappropriation occurred but in amounts which did not exceed $100, and (3) with regard only to two youth workers could we find that a misappropriation occurred in excess of $100.↩5. Namely, Robert Swan, Jr., Revita Walls, Debra Walls, Alvis Rodgers, Kimberly Johnson, Vonnie Darby, Phillip Washington, Kenneth Greer, Finette Howard, Marsha Howard, Sharon Howard, Antionette Johnson, Lorie Johnson, and Kevin Reed.↩6. Section 1.61-1(a), Income Tax Regs., in pertinent part, provides as follows: Sec. 1.61-1. Gross Income. (a) General definition. Gross income means all income from whatever source derived, unless excluded by law. Gross income includes income realized in any form, whether in money, property, or services. Income may be realized, therefore, in the form of services, meals, accommodations, stock, or other property, as well as in cash. * * ↩7. Section 1.61-2(d)(1) provides in pertinent part as follows: (d) Compensation paid other than in cash. (1) In general. Except as otherwise provided * * if services are paid for in property, the fair market value of the property taken in payment must be included in income as compensation. If services are paid for in exchange for other services, the fair market value of such other services taken in payment must be included in income as compensation. * * *↩8. The $1,120 which the parties have stipulated was paid to Everett Swan appears to be incorrect in light of the amounts paid to the other youths. The parties are instructed to recompute the income chargeable to petitioner with respect to the total actual wages paid to Everett Swan under the CETA program to the extent that such total wages were less than $1,120.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625860/	Appeal of HAGERSTOWN SHOE & LEGGING CO. 1Hagerstown Shoe & Legging Co. v. CommissionerDocket No. 463.United States Board of Tax Appeals1 B.T.A. 666; 1925 BTA LEXIS 2832; February 28, 1925, decided Submitted February 10, 1925. 2832 The taxpayer corporations were affiliated. John F. McCarron, Esq., for the taxpayer. John D. Foley, Esq. (Nelson T. Hartson, Solicitor of Internal Revenue) for the Commissioner. STERNHAGEN 666 Before JAMES, STERNHAGEN, TRAMMELL, and TRUSSELL. The appeal is based on the Commissioner's failure to permit the taxpayers to file a consolidated return as affiliated corporations for the calendar years 1919 and 1920. FINDINGS OF FACT. The taxpayers are Maryland corporations with principal office at Hagerstown. The Hagerstown Shoe & Legging Co. (hereinafter called the Hagerstown Company) was organized in 1911. The Byron Shoe Manufacturing Co., Inc. (hereinafter called the Byron Company), was organized in 1919. In 1911 Five brothers, William C. Byron, Edward W. Byron, Harry W. Byron, Lewis T. Byron, and Joseph C. Byron, decided to go into the shoe business and organized the Hagerstown Company 667 to make leggings and stitch-down shoes. The stitch-down shoe is stitched up and down through the inner and outer soles, with the stitches showing on the outside. It is a seasonal article, which sells almost entirely in the spring, and2833 the stock is accumulated from July until January, for sale the following spring. The manufacture of stitch-down shoes alone was uneconomical. Salesmen could not be kept on the road to handle only a one-season business. It was found expedient in 1919 to broaden the scope of the business and make the so-called McKay shoe, that could be sold all the year round, and for this purpose the Byron Company was organized and a new factory was constructed. As stated by the president at the hearing, "the business was not balanced, and we concluded then that we needed a branch, and we would manufacture the McKay shoe by the Byron Shoe Co." The Byron Company is colloquially called the McKay company and the McKay factory, and the Hagerstown Company is referred to as the legging company or the stitch-down factory. The Byrons looked upon the two companies as one "community of business," and in 1919 and 1920 the business of both corporations was conducted as a business unit. Lewis T. Byron was president of both, drawing his salary entirely from the Hagerstown Company, and at his death in 1922 was succeeded by Joseph C. Byron as president of both. L. V. Hershey was secretary of the Hagerstown Company2834 and treasurer of the Byron Company, and is now secretary and treasurer of both companies, drawing two-thirds of his salary from the former and one-third from the latter company. "In order to tie the unit further together," the Hagerstown Company was the selling agent for the Byron Company, - "for the entire organization," - and the salesmen sold for both companies. The Byrons fixed the percentage rate of compensation which the Hagerstown Company received for selling. It is an arbitrary figure. "Sometimes it works out and sometimes it doesn't. Sometimes they lose money and sometimes they do not. But the two companies are operated as one company under [the Byrons'] instructions." At the time of the organization of the Hagerstown Company, in 1911, the Byrons furnished the capital. They took in other stockholders, all of whom were employed by the corporation in the factory, and furnished the money to enable them to acquire their stock. This was done from time to time after the organization of the corporation as to various employees. These employees in all instances gave identical notes to the Byrons for the future payment of the purchase price of the stock, secured by the2835 stock as collateral, and the notes were to be paid out of the earnings as the company grew and became successful and paid dividends. This plan of stockholding by employees was also true of the Byron Company. The Byrons regarded themselves as having the right to control the entire business of both companies because they had furnished the capital. They therefore imposed restrictions upon the acquisition of stock by the employees, "so that the ownership of the company might not get out of the hands of the Byron family." Every acquisition of stock by persons other than the members of the Byron family was subject to conditions stated in the note, in the by-laws and stock certificate, and in an agreement with the Byrons for repurchase. These provisions 668 must be set forth verbatim. The note for the payment of the purchase price of the stock: $ Six months after date I promise to pay to the order of Edward W. Byron, Wm. C. Byron, Harry W. Byron, Lewis T. Byron and Joseph Co. Byron dollars, with interest at 5% per annum, for value received, having deposited as collateral security for the same, the following named securities: SHARES OF THE CAPITAL STOCK OF THE HAGERSTOWN2836 SHOE & LEGGING COMPANY. I agree that the above named securities, and any others added to or substituted for them, may be held as collateral security for all the obligations and liabilities of the undersigned, due the said Edward W. Byron, Wm. C. Byron, Harry W. Byron, Lewis T. Byron and Joseph C. Byron or to become due, or that may hereafter be contracted, I hereby authorize the said Edward W. Byron, Wm. C. Byron, Harry W. Byron, Lewis T. Byron and Joseph C. Byron to sell the collateral security either at private or public sale, at any time thereafter, without advertisement or notice to me, and with the right on the part of the said Edward W. Byron, Wm. C. Byron, Harry W. Byron, Lewis T. Byron and Joseph C. Byron to become purchasers thereof at such sale, freed and discharged of any equity of redemption, the proceeds to be applied to the payment of the above mentioned obligations and liabilities, together with all legal or other costs and expenses for collection of this note, or sale and delivery of the collateral, any excess or deficiency to be paid or received be me, as the case may be, and I further authorize the said Edward W. Byron, William C. Byron, Harry W. Byron, Lewis T. 2837 Byron and Joseph C. Byron to use, transfer, or hypothecate the collateral security, they being required, on payment or tender at maturity of the amount of the said obligations and liabilities, to return an equal amount of said securities, and not the specific securities pledged. (Signed) The following provision in the by-laws is printed on the back of each stock certificate: No stock of this corporation shall be issued or transferred to any person who is not an officer or a director of this corporation, except with the consent of the board of directors evidenced by a resolution duly passed at a regular meeting of the board, or at a special meeting called for that purpose, and every member who desires to sell his stock, and every member who for any reason shall cease to be an officer or director, his personal representatives, legatees or assigns, shall be required, at the time of the taking of the next inventory, as hereinafter provided for, to offer in writing to the board of directors to sell the number of shares of the capital stock held by him to such person or persons as the board of directors shall designate by a resolution duly passed, at and for the same sum per share, 2838 as is equaled by the quotient obtained by dividing the total net amount of said inventory by the number of shares then outstanding, and such member, his personal representatives, legatees or assigns, shall immediately, upon the payment or tender to him, in cash, of such price per share, transfer and assign the shares of the stock held by him to such person of persons so designated by the board of directors; in the event, however, that the board of directors shall refuse or neglect to designate such person or persons at the next regular meeting after such offer is made, or in the event of the refusal or neglect of such person or persons to pay or tender to such member the said price per share for each and every share held by such member within ten days after such designation and the completion of said inventory, then such member, his personal representatives, legatees or assigns, may hold the said shares of stock or sell and transfer the same to any person or persons to be held absolutely free from the conditions and restrictions contained therein. Before the holder of the certificate for any shares of the capital stock who shall have obtained the same by bequest, or in the distribution2839 of the estate of any member who may hereafter die, or by purchase at any sale made under an execution issued against any member or any legal process, or otherwise, shall be entitled to have the same transferred on the books of this corporation, 669 the said shares shall first be offered to and refused by such person or persons designated by the board of directors at the same price as above and subject to the same conditions. No sale whatever of any shares of the capital stock shall pass any title thereto or be transferred on the books of this corporation, unless and until all the preceding conditions and requirements have been complied with, and no holder of any certificate of the same shall be entitled to any dividends thereon, or to share in any of the profits of this corporation until the shares are regularly transferred to him on the books of this corporation. The typical agreement of Joseph C. and Lewis T. Byron with Roger Whipple, assuring the latter a purchaser for his stock, is as follows: THIS AGREEMENT, made this 28 day of January, nineteen hundred and fourteen, by and between Lewis T. Byron and Joseph C. Byron, parties of the first part, and Roger Whipple2840 party of the second part. WITNESSETH: - That in consideration of the mutual covenants and agreements herein contained and in consideratin of the said party of the second part subscribing to and paying for 320 shares of the capital stock of the HAGERSTOWN SHOE & LEGGING CO., a corporation duly incorporated under the laws of the State of Maryland, the said parties of the first part hereby covenant and agree to purchase from the said party of the second part the said 320 shares of the capital stock of the said corporation, provided the said parties of the first part are requested, in writing, so to do by the party of the second part, at the time of the taking of any inventory of the property, assets and liabilities of said corporation on the 1st day of January and the 1st day of C. Byron, Harry W. Byron, Lewis T. Byron and Joseph C. Byron to use, at and for the same sum per share as shall be equal to the quotient obtained by dividing the total net amount of said inventory by the number of shares of the capital stock of said corporation then outstanding and to pay for the same, in cash, within ten days after the completion of said inventory and the making of such request, in writing, 2841 by the said party of the second part. And the said party of the second part hereby covenants and agrees that he will offer, in writing, to sell and sell to the said parties of the first part, their personal representatives or assigns, the said shares of stock and also all other shares of the capital stock of said corporation which he may hereafter acquire, at and for the price as above provided, before he offers to sell the same to any other person or persons, and further covenants and agrees, that in the event that he, the said party of the second part, shall at any time cease to be both an officer and director of said corporation, he will, at the time of the taking of the next inventory of the property assets and liabilities of said corporation thereafter, offer to sell and sell all his said stock of said corporation to the said parties of the first part, their personal representatives or assigns, at and for the same price ascertained, as above stated, such offer, in writing, and sale, however, to be subject to the approval of the board of directors of the said corporation, as provided for in said by-laws. Witness our hands and seals. LEWIS T. BYRON [SEAL] JOSEPH C. 2842 BYRON [SEAL] ROGER WHIPPLE [SEAL] Witness HARVEY H. HEYSER The majority of the stock in both corporations was owned by the Byron brothers. William C. Byron died before the Byron Company was formed, and Lewis T. Byron died in 1922. All the outstanding stock not owned of record by the Byrons was held by persons who were officers and employees of the corporations. They all worked in the factories. When they ceased to be officers of the corporations they were compelled to sell their stock to the Byrons. "That," said the witness Byron, "is the way we kept the control." 670 The vice president connected with the sales department of the companies went with the Hagerstown Company in 1913. He bought stock under the arrangement above described with a full realization of the restrictions in the by-laws and the contract quoted above, and completed the payments on the notes in 1917. He was not a stockholder of the Byron Company but was a director representing the Hagerstown Company, which owned 10 per cent of the Byron Company stock in 1919 and 20 per cent in 1920. After the death of Lewis T. Byron in 1922 he acquired some stock in the Byron Company. The employee2843 stockholders voted their stock as the Byrons voted. They regarded their interests as identical with the Byron interests, and that the best interest of the corporations was their own best interest. There was never any difference of opinion in the stockholders' and directors' meetings as to the best interests of the companies. All the stockholders were in entire accord with the handling and management of the company at all times. The employee stockholders did not feel strictly compelled to vote in accord with the Byrons, but they recognized that the Byrons were in control of the business through stockholdings and elections to the directorate. We find the following, as testified by an employee stockholder without contradiction: "The junior members of this corporation have mostly worked with their sleeves rolled up. The senior members of the corporation, as represented by the Byron brothers, have furnished the capital and done a great deal as to the general policies of the business. My position as a junior called for my putting my best efforts for the good of the business. I have never had any occasion to feel other than in accord with the business policy." Another employee stockholder2844 finished paying for his Hagerstown Company stock in 1919 and is still paying for his Byron Company stock. Some of the employees did not finish paying until 1921 and 1922. The stock ownership during the years in question is as follows: Hagerstown Company.Byron Company.Shares.Per cent.Shares.Per cent.1919.E. W. Byron49512.212512.5J. C. Byron55013.812412.4L. T. Byron55013.832532.5H. W. Byron55013.812512.5L. V. Hershey1002.510010Totals2,24556.179979.9R. L. Campbell40010H. H. Heyser50012.6J. F. Fechtig40010Roger Whipple40010R. C. Hershey10010W. D. Byron1.1W. H. Byron551.3Hagerstown Company10010Totals1,75543.920120.1Grand totals4,0001001,000100Hagerstown Company.Byron Company.Shares.Per cent.Shares.Per cent.1920.E. W. Byron49512.212512.5J. C. Byron55013.812512.5L. T. Byron55013.825025H. W. Byron55013.812512.5L. V. Hershey1002.512512.5Totals2,24556.175075R. L. Campbell40010H. H. Heyser50012.6J. F. Fechtig40010Roger Whipple40010W. H. Byron551.3Hagerstown Company20020L. T. Byron, jr505Totals1,75543.925025 Grand totals4,0001001,0001002845 671 The Commissioner determined a deficiency for the calendar years 1919 and 1920 of $52,388.26, of which he duly notified the taxpayer on August 29, 1924. DECISION. The Hagerstown Shoe & Legging Co. and the Byron Shoe Manufacturing Co., Inc., were affiliated in the calendar years 1919 and 1920, and their lability should be determined on the basis of a consolidated return. The tax should be recomputed and final decision will be made on stipulation or on seven days' notice, in accordance with Rule 50. OPINION. STERNHAGEN: We are to consider whether the foregoing facts combine into a situation where two corporations are affiliated so as to make the determination of their tax liability a single rather than a multiple problem. Clearly there is a commercial and economic unity in the enterprise. Probably for no other practical purpose would one consider the production of income by these two factories as a double function. Their owners and employees consider them a business unit, and the interest of each is the interest of all. The Byron Company was conceived in the necessities and inadequacy of the older company, and was deliberately created as a branch and supplement2846 to supply its patent need. If personnel and legal structure be disregarded the evidence leads unswervingly to the conclusion of a single united enterprise. Why the Byron Company was separately created does not appear, and we shall not speculate on its reason. For aught the evidence discloses its whole function could as well have been performed as an arm of the Hagerstown Company. The Byron brothers are the dominating and guiding spirit of the business. They originated it and formed the Hagerstown Company, which they alone financed. They operated the business and so completely controlled it that no one else questioned their management. They determined the extent of outside stock ownership and 672 its tenure, and by unequivocal written agreements they forestalled any opposition through discontentment. At no time had they less than a voting majority in absolute ownership or, we are satisfied, less than an irresistible influence over the whole. The president expressed the situation by calling the employees' stock ownership a plan of profit sharing. One needs only to read the written terms of the note, the by-laws, and the agreement, carefully drawn and fully comprehended2847 by the stockholders, to see that the tiller is always in the firm grasp of the Byron family. Theirs is the last and controlling word, however freely they may invite suggestion. The oarsman who at any moment may be cast overboard is no more free because he pulls an ardent stroke. Does it matter that most of the employees' stock was paid for so that title was freed from the pledge for the note? This was not ownership, for the power of free disposition, that sine qua non of ownership, was wholly wanting. The stockholder could only vote and share the profit. Indeed, his vote was futile unless in accord with the Byrons. And his ownership carried no responsibility, for in case of loss he had only to quit by selling his stock to the Byrons under his contract. Are we, in applying this statute, to look at the tabulated statement of stock ownership and, because it there appears that several persons are stockholders of one or the other legal entity and not of both, say that this alone is determinative? We have had occasion in other appeals on other questions to say, and we can not too often repeat, that all facts must be considered. These problems are not flat mathematical2848 or legalistic puzzles; they are vital, and must be examined in three dimensions with the light of reality. No solution otherwise arrived at could long survive. Here the table of percentages changes its color entirely in the light of the circumstances under which the percentage distribution exists, and, instead of indicating a substantial independent minority, indicates that "substantially all the stock of two * * * corporations is owned or controlled by the same interests." Footnotes1. Byron Shoe Manufacturing Co., Inc., is also a party to this appeal. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625861/	Margaret G. Harrison v. Commissioner.Harrison v. CommissionerDocket No. 89922.United States Tax CourtT.C. Memo 1962-172; 1962 Tax Ct. Memo LEXIS 138; 21 T.C.M. (CCH) 951; T.C.M. (RIA) 62172; July 23, 1962138 George G. Young, Jr., Esq., for the petitioner. Frederick A. Levy, Esq., for the respondent. RAUMMemorandum Findings of Fact and Opinion RAUM, Judge: The Commissioner determined a deficiency in income tax in the amount of $314 against petitioner for 1955. Petitioner resided in Havertown, Pennsylvania, in 1955. She did not file any Federal income tax return for that year. The present controversy is based upon a single item of income in the amount of $3,085.28 which the Commissioner attributed to petitioner for 1955. She contends that she never received any such income. It is stipulated that during 1955 petitioner "was a co-executrix of the estate of William J. Roberts who died on May 20, 1949." A will executed March 18, 1948, was offered for probate. Petitioner was named as an executrix thereunder. Subsequently, a will executed May 11, 1948, was discovered, and a petition was filed challenging the probate of the earlier will. A vigorous will contest thereupon ensued, in which petitioner supported the earlier will. After a jury trial the May 11, 1948, will was probated in place of the March 18, 1948, will. On February 13, 1953, the decree of the lower court was139 sustained by the Supreme Court of Pennsylvania, and on March 24, 1953, the Supreme Court of Pennsylvania denied rehearing. . Petitioner was paid $3,000 in fees as an executrix prior to 1955, which she claims to have received as executrix under the earlier will, and reported it as income for the year in which she received it. It is not in controversy herein. On July 1, 1955, petitioner received a check in the amount of $3,085.28 from the estate of the decedent, signed by herself and another person as "Executors". That check was issued pursuant to a schedule of distribution which had been filed with the probate court on June 2, 1955, listing a "commission" payable to petitioner in the amount of $3,085.28. And on July 1, 1955, petitioner signed an "Order to Satisfy Award", which acknowledged receiving the foregoing amount as an award representing commission on principal. Petitioner has never cashed the check. She persists in the contention that the second will was a fraudulent one, notwithstanding the decision of the Supreme Court of Pennsylvania, which has become final. We heard testimony that petitioner did not have140 her glasses when she signed the check, but we are satisfied that she knew what she was doing, and she took possession of the check, which she continued to hold until the time of trial herein, although she has mutilated that portion of it at the bottom where her signature appeared. Her failure to cash the check does not deprive it of the quality of income to her. Moreover, the evidence further shows that even after the decision of the Supreme Court of Pennsylvania, petitioner had requested, received, and cashed a $620.17 check as an executor's fee with respect to income of the estate. Her position in respect of the check presently in controversy is, to say the least, inconsistent. One who actually receives a check which would otherwise have the quality of income may not escape the income tax consequences by deliberately failing to cash it. Had she, for any legitimate reason, desired to maintain a position that refused to recognize the validity of the second will, she could have declined to receive the check in the first instance. We do not say that such failure to accept a proffered check would necessarily have resulted in a decision in her favor here; but the fact that she accepted141 the check puts beyond question any possibility of treating it other than as income to her. She cannot change the result by refusing subsequently to cash it. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625862/	Ellen E. Wyatt v. Commissioner.Wyatt v. CommissionerDocket No. 84429.United States Tax CourtT.C. Memo 1962-120; 1962 Tax Ct. Memo LEXIS 192; 21 T.C.M. (CCH) 638; T.C.M. (RIA) 62120; May 18, 1962James F. Shea, Esq., Guardian Bldg., Detroit, Mich., for the petitioner. Ralph W. Eisnaugle, Jr., Esq., for the respondent. FAYMemorandum Opinion FAY, Judge: Respondent determined deficiencies in petitioner's income tax for the years 1955 and 1956 in the amounts of $1,696 and $1,466.40, respectively. Petitioner concedes the correctness of respondent's action in disallowing a claimed capital loss deduction of $1,640 for the year 1955. The only contested issue is whether or not the respondent erred in treating as periodic payments of alimony193 the total amounts received by petitioner from her former husband. The case was submitted on a stipulation of facts and exhibits which are adopted as our findings of fact. The petitioner's residence is in Henderson, Kentucky. During the years 1955 and 1956 petitioner was a resident of the State of Michigan and filed her individual Federal income tax returns for said years with the district director of internal revenue, Detroit, Michigan. Petitioner was formerly the wife of Robert J. Lytle, hereinafter referred to as Robert, whom she had married on November 18, 1942. On August 21, 1954, petitioner filed a Bill of Complaint in Chancery in the Circuit Court for the County of Oakland, State of Michigan, No. D-31514, whereby she sought a divorce from Robert. On November 29, 1954, petitioner and Robert entered into an agreement entitled "PROPERTY SETTLEMENT AGREEMENT." The agreement recited, inter alia, that the petitioner was to receive all of the household goods, furniture and furnishings; that Robert was to receive the family residence and that each party could retain all personal clothing, jewelry and other personal effects of a like nature. In so far as is here important, the194 agreement provided: 4. That the defendant, Robert J. Lytle, shall pay forthwith to the plaintiff, Ellen E. Lytle, the sum of Seventy-five ($7500.00) Hundred Dollars and by execution of this agreement the plaintiff, Ellen E. Lytle, acknowledges receipt thereof. 5. The parties hereto agree that the defendant, Robert J. Lytle, shall pay to the plaintiff, Ellen E. Lytle, in addition to other sums herein payable, certain periodic payments to be provided for in the divorce decree under the entitlement "ALIMONY" and to be in the following form: "ALIMONY. IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the defendant, Robert J. Lytle, shall pay to the plaintiff, Ellen E. Lytle, on December 6, 1954, and on each and every Monday thereafter the sum of Two Hundred Dollars ($200.00) subject to the following terms, conditions and limitations: (a) Five (5) full years from and after December 6, 1954, the weekly sum of Two Hundred ($200.00) Dollars paid by the defendant, Robert J. Lytle, to the plaintiff, Ellen E. Lytle, shall be reduced to the sum of One Hundred ($100.00) Dollars, payable on each of said Mondays thereafter. (b) Upon the remarriage of the plaintiff, Ellen E. Lytle, during195 said full five (5) year period from and after December 5, 1954, payments made by the defendant, Robert J. Lytle, to the plaintiff, Ellen E. Lytle, shall be reduced to the sum of One Hundred ($100.00) Dollars payable on each of said Mondays thereafter. (c) Upon the remarriage of the plaintiff, Ellen E. Lytle, subsequent to the full five (5) year period beginning December 5, 1954, payments payable on each of said Mondays shall be terminated and the defendant, Robert J. Lytle, shall make no further payments of any amount whatsoever. 6. The defendant, Robert J. Lytle, further agrees that he will not at any time petition the Circuit Court for the County of Oakland for a decrease in the amount of periodic payments called for in the paragraph of the divorce decree entitled "Alimony" and the plaintiff, Ellen E. Lytle, further agrees that she will not at any time petition the Circuit Court for the County of Oakland for an increase in the periodic payments called for in the paragraph of the divorce decree entitled "Alimony". On the same day that the petitioner and Robert entered into the property settlement agreement, i.e., November 29, 1954, a decree of divorce from the bonds of matrimony196 was entered by the Circuit Court for the County of Oakland in the cause entitled "ELLEN E. LYTLE, Plaintiff, v. ROBERT J. LYTLE, Defendant. Number D-31514." The decree was interlocutory and did not become final until 45 days after the date of its entry. The divorce decree incorporated the terms of the property settlement agreement. During 1955 and 1956 petitioner received the amounts of $10,400 and $10,680, respectively, from Robert pursuant to paragraph 5 of the Property Settlement Agreement as incorporated in the Decree of Divorce. Robert continued to make the payments as required until March 28, 1957, on which date petitioner remarried. On October 7, 1957, the petitioner here petitioned the Circuit Court for the County of Oakland, Michigan, for issuance of an order requiring Robert to show cause why he should not be adjudged guilty of contempt. The basis for this proceeding was Robert's failure to make the required periodic payments to petitioner following her remarriage. Robert filed an answer to the petition asserting that the provision of the decree with reference to the periodic payments to the petitioner was in the nature of a property settlement rather than a requirement197 for the payment of alimony, and that, in the alternative, if the Circuit Court determined that the provision in the decree was an award of alimony it should be stricken and he should be relieved of further obligation. After a hearing the trial court concluded that the provisions of the property settlement agreement and divorce decree, with reference to the "periodic" payments, should be construed as imposing an obligation to pay alimony, and were not by way of property settlement. Robert was, therefore, adjudged guilty of contempt for his failure to make such payments and was ordered to pay within a period of 5 years the total amounts due or to become due at the rate of not less than $25 per week (in lieu of the $100 provided for in the "PROPERTY SETTLEMENT AGREEMENT" of November 29, 1954) beginning on June 2, 1958. Robert appealed the order of the Oakland County Circuit Court to the Supreme Court of the State of Michigan. On November 24, 1959, the Supreme Court of the State of Michigan in the case of Lytle v. Lytle, 99 N.W. 2d 377, in affirming, in part, the action of the lower court, stated that It is obvious from the language of the property settlement that the198 parties considered that the periodic payments specified therein should be by way of alimony rather than as constituting a part of a property settlement. * * * Of the amounts of $10,400 and $10,680 received by petitioner from Robert in 1955 and 1956, respectively, the petitioner on her income tax returns reported in each year the amount of $5,200 as alimony income. The respondent determined that the unreported balance of the amounts received by the petitioner from Robert in each of the years 1955 and 1956 was also includable in petitioner's income. Section 71(a) of the Internal Revenue Code of 1954 provides, in effect, that if a wife is divorced or legally separated from her husband under a decree of divorce or separate maintenance the payments received by her pursuant to the decree of divorce or separate maintenance are includable in her gross income if such payments (1) are imposed on or incurred by the husband under the decree of divorce or separate maintenance, or under a written instrument incident to such divorce or separation, (2) are made in discharge of a legal obligation based on the marital relationship, and (3) qualify as periodic payments. The199 record discloses that the petitioner was divorced from her husband Robert, that the payments involved were made and received by petitioner subsequent to her divorce and that the payments were imposed upon Robert under a written instrument incident to the divorce decree. Furthermore, in view of the facts which we have hereinabove found, there can be no doubt that these payments were not in the nature of a property settlement but were made by Robert in discharge of a legal obligation incurred because of the marital relationship. Thus, there remains for our consideration only one question, that is, whether or not the weekly payments made by Robert to petitioner were periodic payments or were installment payments within the meaning of section 71(c)(1) 1 of the Internal Revenue Code of 1954. 200 Petitioner contends that under the divorce decree she was guaranteed the sum $100of per week for five years with no conditions attached and that by multiplying the number of definite weeks of payment by the amount of such payments a principal sum is ascertainable. Under the laws of the State of Michigan, a court of chancery on the petition of either party has the power to revise and alter the amount of alimony or other allowance payable to the wife and children, or either of them, Michigan Statutes Annotated, volume 18, § 25.106; Nemecheck v. Nemecheck, 231 N.W. 82">231 N.W. 82 (Mich. 1930); Loomis v. Loomis, 262 N.W. 331">262 N.W. 331 (Mich. 1935); and this power of the trial court is not affected by the fact that the parties have between themselves contracted to make such alimony provisions permanent. Lytle v. Lytle, supra. See also Eddy v. Eddy, 249 N.W. 868">249 N.W. 868 (Mich. 1933). Furthermore, the modification of a decree under Michigan law is considered to be within the discretion of the trial court, Schuch v. Schuch, 300 N.W. 875">300 N.W. 875 (Mich. 1941), and may be obtained upon the showing of changed circumstances, such as the remarriage of the wife, 201 Herman v. Brennan, 211 N.W. 52">211 N.W. 52 (Mich. 1926); the health of the parties, Lamb v. Lamb, 83 N.W. 2d 323 (Mich. 1957); the death of the husband, Welsh v. Welsh, 78 N.W. 2d 120 (Mich. 1956); and the changed economic condition of either party, Butler v. Butler, 97 N.W. 2d 67 (Mich. 1959). In Alton F. Lounsbury, 37 T.C. 163">37 T.C. 163 (1961), on appeal (C.A. 9, April 2, 1962), this Court recently held under circumstances similar to those present here that alimony payments which are subject to modification by a State court upon changed circumstances are indefinite as to the amount of payment and consequently constitute periodic payments within the provisions of section 71 of the Internal Revenue Code of 1954. Note also sections 1.71-1(d)(3)(i) and 1.71-1(d)(3)(ii), Income Tax Regs. The Lounsbury case is applicable and controlling here and requires a resolution of the contested issue in favor of the respondent. We hold, therefore, that the payments in question were periodic and represented taxable income to petitioner. Decision will be entered for the respondent. Footnotes1. SEC. 71. ALIMONY AND SEPARATE MAINTENANCE PAYMENTS. * *(c) Principal Sum Paid in Installments. - (1) General Rule. - 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.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625863/	APPEAL OF CARL LANG, ABRAHAM LANG, AND IRVING LEWIN.Lang v. CommissionerDocket No. 2912.United States Board of Tax Appeals3 B.T.A. 417; 1926 BTA LEXIS 2669; January 21, 1926, Decided Submitted July 22, 1925. 2669 1. A partner agreed to sell his partnership interest to the other two partners, provided that the sales price should be $210,000 or $225,000, with varying provisions effective upon the exercise of either option by the vendees. Held, that the difference of $15,000 is not deductible as interest by the succeeding partnership. 2. The taxpayer's distributive share of partnership income determined. M. L. Seidman, C.P.A., for the taxpayers. Robert A. Littleton, Esq., for the Commissioner. MORRIS417 Before MARQUETTE and MORRIS. This appeal is from the determination of aggregate deficiencies in income taxes for the year 1922 in the amount of $3,028.61. The taxpayers were partners and the deficiency is divided: Carl Lang$1,793.29Abraham Lang651.44Irving Lewin583.88The main question is whether an item of $15,000 constituted interest and was therefore deductible in computing the net income of the partnership. A question is also raised as to whether the partnership income should be increased by $3,486.47, the difference between the profits used in the computation of the price to be paid Hoffman, upon the purchase2670 of his interest by the other two partners, and his profits as computed by the Commissioner. FINDINGS OF FACT. The taxpayers, Carl Lang and Irving Lewin, were, for the first 10 months of 1922, partners with one M. C. Hoffman, engaged in the manufacture of silk under the firm name of Lang & Hoffman. The three taxpayers were, for the last two months of 1922, partners, engaged in a business which succeeded to that previously referred to, the new partnership being conducted under the firm name of Lang & Lewin. 418 The firm of Lang & Hoffman was dissolved on November 1, 1922, pursuant to the following written agreement: Agreement made this 1st day of November, 1922, by and between Carl Lang and Irving Lewin of the City of New York, parties of the first part and Meyer C. Hoffman of the same place, party of the second part: The parties mutually agree as follows: The party of the second part agrees that he will retire from the co-partnership firm of Lang & Hoffman, manufacturers of and dealers in silks, now located at 118 Madison Avenue, New York City and will sell, assign and transfer to the parties of the first part all his interest in all the assets of every kind2671 and nature of said firm, including trade marks, trade names and copyrights upon payment by the parties of the first part of the purchase price agreed upon at the sum of Two hundred and ten thousand ($210,000) Dollars, to be paid at the times hereinafter provided. The parties of the first part agree to purchase the said interest of the party of the second part for the said sum of Two hundred and ten thousand ($210,000) Dollars, and to pay the same as follows: Twenty-five thousand ($25,000) Dollars upon the execution hereof; Twenty-five thousand ($25,000) Dollars on or before the expiration of fifteen days from the execution hereof and the balance of One hundred and sixty thousand ($160,000) Dollars on or before the 1st day of December, 1922, together with interest on said postponed payments at the rate of six per cent (6%) per annum from the date hereof. The party of the second part hereby agrees to loan to the parties of the first part at the time of the final payment hereunder, the sum of Twenty-five thousand ($25,000) Dollars to be evidenced by the negotiable promissory note of the parties of the first part payable with interest on May 1, 1923 and in case the successors of2672 the said co-partnership of Lang & Hoffman should become incorporated, the said note of Twenty-five thousand ($25,000) Dollars shall be secured by Fifty thousand ($50,000) Dollars at par value of the preferred stock of the said corporation. The said corporation, or if the said successors shall not be incorporated, then the said firm or co-partnership shall assume the payment of all liabilities and obligations of the said firm and the said parties of the first part shall execute and deliver to the party of the second part an agreement indemnifying him against any liability by reason of such liabilities or obligations of the said firm of Lang & Hoffman as now or then existing. Upon the consummation of the contract, the name of the party of the second part shall be discontinued in connection with the said business by the said firm or its successors. The said party of the second part shall have the right to enter and carry on any business similar to that now carried on by said firm and shall not be debarred from dealing with present customers of the said firm. The said firm or its successors in carrying on their business, may designate themselves as successors to the firm of Lang2673 & Hoffman. Upon the final payment the said party of the second part's connection with the said firm shall cease as of November 1, 1922, and said party of the second part shall not be entitled to any drawings or profits from said date, nor shall he be liable for any losses from said date. Until, however, the final payment is made hereunder, the party of the second part shall remain a partner with all rights as such. It is agreed as to any actions now pending, either in favor of or against the siad firm, the parties of the first and second parts shall share in the proceeds and bear any losses, damages or expenses that may accrue in accordance with their present partnership interests as if this agreement had not been made. 419 The parties of the first part agree that upon final payment they will procure for and deliver to the party of the second part a release from Abraham Lang, releasing the party of the second part of and from any claim on his part as a creditor of the said firm. The party of the second part agrees that upon final payment he will execute and deliver any further documents or papers necessary or proper to consummate the transfer of his said interests2674 in said business and to complete the agreement on his part. It is understood that the purchase price to be paid hereunder to the party of the second part includes the amounts owing by the said firm of Lang & Hoffman to the Estate of Charles Hoffman and to the party of the second part personally, the said party of the second part assuming and agreeing to pay the siad obligations to the said Estate and upon the closing hereunder the said party of the second part shall surrender for destruction the note of the firm held by the said Estate for Fifty thousand ($50,000) Dollars and the check or checks of the firm for Ten Thousand ($10,000) Dollars and will also at the time deliver an instrument in the form of a general release executed and acknowledged by the three executors of the Estate, releasing the firm of Lang & Hoffman from any liability whatsoever. At the same time the parties hereto will execute and deliver to one another general releases mutually releasing one another from all claims of every kind excepting matters to be performed under this agreement and the parties of the first part will at the same time deliver to the party of the second part a general release of all claims2675 against the party of the second part executed and acknowledged by Abraham Lang. It is further agreed that the parties of the first part shall have the option upon the first day of December, 1922, the date hereinbefore fixed for the closing of this contract, provided they shall have given at least ten (10) days notice in writing of the exercise of said option to the party of the second part, to purchase the interest of the party of the second part in said business at the price of Two hundred and twenty-five thousand ($225,000) Dollars instead of the price of Two hundred and ten thousand ($210,000) Dollars hereinbefore provided, such price of Two hundred and twenty-five thousand ($225,000) Dollars to be paid as follows: One hundred thousand ($100,000) Dollars in cash, the party of the first part to receive credit on account of such payment for the sum of Twenty-five thousand ($25,000) Dollars paid on the execution hereof and any further sum paid by him prior to the closing of this contract, and the balance of the purchase price amounting to One hundred and twenty-five thousand ($125,000) Dollars shall be paid by the parties of the first part as follows: Twenty-five thousand ($25,000) 2676 Dollars on the 1st day of February, 1923; Twenty-five thousand ($25,000) Dollars on the 1st day of May, 1923; Twenty-five thousand ($25,000) Dillars on the 1st day of August, 1923; Twenty-five thousand ($25,000) Dollars on the 1st day of November, 1923 and Twenty-five thousand ($25,000) Dollars on the first day of February, 1924. Said instalments to be evidenced by the promissory negotiable notes of the parties of the first part, payable at said respective dates without interest. It is agreed that in case of default for ten (10) days in payment of any of the aforesaid notes, all of the remaining notes shall immediately become due and payable at the option of the party of the second part. The Twenty-five thousand ($25,000) Dollars loan does not apply to this alternative proposition. It being understood that if the said business shall then or thereafter be incorporated the said notes shall be secured by the stock preferred and common of the said corporation issued to or held by the said parties of the first part or their nominees or belonging to them but not less than two hundred and 420 ten thousand ($210,000) Dollars in book value, exclusive of good will, trade marks, 2677 trade names or labels. It being agreed that if the parties of the first part should refuse to deliver the said stock as security after the incorporation of the business, the party of the second part may at his option, call and declare due all of the aforesaid notes delivered to him in addition to any remedy that he may have to recover the said securities. It being understood that the parties of the first part may anticipate the said payments or any of them. And also as payments are made that the party of the second part will surrender to the parties of the first part five per cent (5%) of the said stock deposited as collateral. Should the parties of the first part default in carrying out this contract in accordance with either of the foregoing alternatives, then the party of the second part may retain as liquidated damages, the sum of Ten thousand ($10,000) Dollars out of the amounts theretofore paid by the parties of the first part on account hereof and the balance shall then be returned to the parties of the first part and this contract shall cease and be void, and the interest of the party of the second part in said business to remain unimpaired. The partnership of2678 Lang & Lewin was forthwith organized on November 1, 1922, the books of the old partnership being continued and not closed. The individuals, Carl Lang and Lewin, exercised the option stated in their agreement with Hoffman to pay the amount of $225,000 for Hoffman's interest in the partnership assets of Lang & Hoffman, and $100,000 was paid on account during 1922, the balance of $125,000 being covered by notes delivered in 1922 but payable over 1923 and 1924. The profits of the partnership of Lang & Hoffman were divisible between: Per cent.Hoffman45Lang45Lewin10The profits of the partnership of Lang & Lewin were divisible between: Per cent.Carl Lang60Abraham Lang20Lewin20The aggregate net profits of both partnerships, Lang & Hoffman, and Lang & Lewin, for the year 1922, were $72,233.74. In arriving at the value of Hoffman's interest as of November 1, 1922, the profits for the entire year were estimated at $75,000 and Hoffman's interest therein at $34,412.50. The taxpayers subtracted this amount from the aggregate net profits of the two partnerships, and then deducted $15,000 as interest, the balance being returned2679 by them according to their respective interests. 421 The Commissioner treated both partnerships as a single business unit during the year 1922 and computed the net income as a unit. As the actual amount of net income was $72,233.74, instead of $75,000, the Commissioner determined that the taxable income of each partner was: Hoffman$30,926.03Carl Lang24,784.63Abraham Lang8,261.54Lewin8,261.5472,233.74Hoffman's profits were first computed by the Commissioner and subtracted from the aggregate net profits of the two partnerships, the remainder being allocated to the taxpayers in proportion to their interests in the new partnership. The Commissioner conceded at the hearing that an amount of $8 interest, withheld at the source on tax-free covenant bonds, was erroneously included in the income of Carl Lang. DECISION. The deficiencies should be computed in accordance with the foregoing findings of fact and the following opinion. Final determination will be settled on 10 days' notice, under Rule 50. OPINION. MORRIS: The taxpayers contend that the difference between $210,000 which Carl Lang and Lewin might have paid under the agreement2680 with Hoffman, and the $225,000 which they in fact paid, or $15,000, was in the nature of interest and deductible by the partnership of Lang & Lewin in determining its income for 1922. The best evidence of its nature is the contract itself. The language is specific: The parties of the first part shall have the option upon the first day of December, 1922 * * to purchase the interest of the party of the second part in said business at the price of $225,000 instead of the price of $210,000. Under the first option the purchasers were obligated to pay the entire sum of $210,000 by December 1, 1922, with interest at the rate of 6 per cent from November 1, 1922, on the installment payments provided for under that option. Under the second option, fixed and flat amounts were provided for, $100,000 by December 1, 1922, against which the $25,000 paid at the execution of the agreement of November 1, 1922, would be credited, and the balance of $125,000 in five payments of $25,000 each on February 1, May 1, August 1, and November 1, 1923, and February 1, 1924. The installments 422 were "to be evidenced by the promissory negotiable notes of the parties of the first part, payable2681 at said respective dates without interest." The fact that interest at 6 per cent was provided for under the first option and no interest on deferred payments under the second, might be the basis for the argument that the $15,000 was in the nature of interest, but it is just as conceivable that, by reason of the higher purchase price, Hoffman was willing to waive any claim to interest. The parties were free to make such arrangement and provide such terms as they saw fit - interest under one situation, no interest under another. The taxpayers, Carl Lang and Lewin, elected to pay a higher price, obtain a longer period for completing the payment and to save themselves from any interest obligations during that period. The second question raised in the appeal is solved by a correction of what, in our opinion, is an improper allocation by both the taxpayers and the Commissioner of the aggregate net profits of the two partnerships to the various partners. The evidence shows a different interest in the partnership income of the two partnerships than that determined by the Commissioner. It also appears that, upon the dissolution of the old partnership, the books were not closed to determine*2682 the profits for the ten-month period. The aggregate net profits for the year 1922 were $72,233.74, but the net income of each partnership can not be determined. Under these circumstances, it is our opinion that ten-twelfths of the net profits for the year should be allocated to the partnership of Lang & Hoffman and two-twelfths to the partnership of Lang & Lewin, and should be accounted for by the taxpayers in proportion to their respective interests therein, as set forth in the findings of fact.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625864/	Charles Schwartz & Company, a corporation v. Commissioner.Charles Schwartz & Co. v. CommissionerDocket No. 4126.United States Tax Court1945 Tax Ct. Memo LEXIS 97; 4 T.C.M. (CCH) 841; T.C.M. (RIA) 45280; August 20, 194597 Bernard W. Vinissky, Esq., 10 S. La Salle St., Chicago 3, Ill., for the petitioner. Carroll Walker, Esq., for the respondent. ARUNDELLMemorandum Findings of Fact and Opinion Finding that the salaries paid by petitioner to its officers in the calendar years 1940 and 1941 were excessive, respondent disallowed deductions of portions thereof and determined deficiencies in income and excess profits taxes as follows: ExcessYearIncome TaxProfits Tax1940$ 860.2019413,765.03$8,403.13In this proceeding for a redetermination, the only question is whether the salaries paid the corporate officers were reasonable. Other minor adjustments made by the respondent are not contested, and effect will be given thereto in the recomputation under Rule 50. Findings of Fact Petitioner is a corporation organized under the laws of the State of Illinois, on October 2, 1931, having an authorized capital stock of $50,000, consisting of 500 shares of the par value of $100 each. The sum of $5,000 was paid in at the time of organization. Petitioner's returns for the years 1940 and 1941 were filed with the collector for the first district of Illinois. 98 Petitioner is the successor to a business begun in Chicago by Charles Schwartz about 1900, and continued by him individually for 10 or 11 years. He then had a horse and wagon and was engaged in the buying of sacks and bags from various groceries and factories and selling them to a dealer. In 1912 or 1913, he formed a partnership known as Sklar & Schwartz, which engaged in the buying of used bags from peddlers who collected them from various sources of supply, the processing of some of the bags, and the selling of others. The partnership business, operating in a small store, lasted until 1916 or 1917, at which time it was dissolved and Samuel C. Schwartz, a son of Charles, began to work with his father. Until 1919, father and son continued doing business in the quarters occupied by the old partnership. In that year they moved to a new location, where Charles Schwartz bought the building. At the time of incorporation in 1931, Harold W. Schwartz, another son of Charles, came into the business. From about 1925 to 1929 he had worked part time for the business after school hours and full time during summer vacations, doing shipping, receiving, delivery, processing, office work, etc. 99 From 1931 to 1933 the corporation was engaged in the business of buying and selling all types of used bags and sacks, continuing with the same general method previously employed by Charles Schwartz. In 1933 the idea was conceived of making towels from used bags. In about 1935 the business was moved to its present location. Jack Schwartz, another son of Charles, began work for the company full time in 1933. Prior thereto for several years he had worked part time in the afternoons after school and full time during summer vacations. At some time prior to the taxable years in question, Edward Schwartz, another son of Charles Schwartz, came into the business. During the years 1940 and 1941, towels were the principal product of petitioner's business. Minor products were polishing cloths, painters' drop cloths, wiping cloths, and burlap sugar bags. The towels and the other items were made from old cotton sacks that had been used for flour, feed, sugar, salt, and other products. Petitioner purchased the old bags in carload and truckload lots. Upon the arrival of shipments, the bags were unloaded and vacuum cleaned. From the cleaning room the bags went to the ripping room where the100 seam threads were removed and the bags laid out in sheets. The next step in the process, which petitioner pioneered and developed, was the washing, de-inking, and bleaching operation, performed by an outside firm on a contract basis. The sheets were then graded and sorted as to size, weight, and quality in petitioner's plant. In making the towels, the sheets were sewn, clipped, and packaged in production and line movement. Some towels were printed and dyed in various colors, the printing and dyeing operations being done by outside plants on contract. Torn portions of the sheets were used for making polishing cloths and precision wiping cloths. Among the machines used in the processing operations in petitioner's plant were vacuum cleaning machines, sewing machines, tying machines, packaging machines, baling machines, carton strapping machines and cellophane wrapping machines. Petitioner is the only concern in the country exclusively engaged in this type of business. The following table shows petitioner's annual net sales from 1931 to 1941, the annual sales of towels from 1933 to 1941, and the net worth at the end of each year from 1931 to 1941: NetTowelNetYearSalesSalesWorth1931$ 7,796.68$ 4,755.46193240,485.994,289.53193352,689.28$ 110.005,120.66193488,472.182,826.257,107.841935152,051.7110,806.609,582.361936258,915.62154,080.2314,432.641937326,579.71158,318.4429,249.771938451,370.74221,494.7944,763.521939522,779.19297,212.4562,858.901940605,530.34395,469.7574,526.561941875,489.07560,961.97107,041.69101 In 1933 petitioner had only one sewing machine in its plant, but by 1939 the number had increased to 10; in 1940 to 14; and in 1941 to 24. A baling machine was purchased in 1938, pinking machine and a cloth laying machine in 1939, a cutting machine, a tying machine, and an additional vacuum cleaning machine in 1940, and a cellophane wrapping machine in 1941. The monthly average of the number of petitioner's employees increased from 52.8 persons in 1939 to 68.5 in 1940, and to 98.5 in 1941. Petitioner's Federal income taxes paid in the years 1938 through 1941 were as follows: 1938$ 1,287.9619392,427.0819401,527.31194110,131.45During the years 1940 and 1941, 400 of the 500 shares of authorized capital stock of petitioner were outstanding and held by the five members of the Schwartz family as follows: Percent-age ofCerti-OutstandingficateStockholderSharesShares27Charles Schwartz7218%28Samuel C. Schwartz20451%29Harold W. Schwartz6817%30Jack Schwartz328%31Edward Schwartz246%In 1938 and 1939 the corporation had but three officers, Charles Schwartz, Samuel C. 102 Schwartz, and Harold W. Schwartz. On January 2, 1940, at the annual stockholders' meeting, those three were elected directors of the corporation for that year. The same three were reelected directors for the year 1941 at the annual stockholders' meeting on January 2d of that year. At the annual meeting of the board of directors on January 2, 1940, Charles Schwartz was elected chairman of the board, Samuel C. Schwartz, president of the corporation Harold W. Schwartz, vice-president, Jack Schwartz, treasurer, and Edward Schwartz, secretary. Pursuant to resolutions of the board thereupon adopted, Harold W. Schwartz was appointed director of sales and Edward Schwartz assistant director of sales, and the salaries of the several officers were fixed in the amounts shown in the table set out hereafter. At the annual meeting of the board of directors on January 2, 1941, the same officers were reelected and, pursuant to a resolution adopted by the board, the salaries of the several officers were fixed as shown in the following table of salaries paid to the officers of petitioner from 1938 through 1941: OFFICERS' SALARIESCharlesSamHaroldJackEdwardSchwartzSchwartzSchwartzSchwartzSchwartz1938$ 8,000.00$ 8,000.00$5,018.4919399,250.009,250.006,000.0019409,250.009,250.006,500.00$4,500.00$3,500.00194113,500.0013,500.009,500.006,500.005,000.00103 Petitioner's net income, both before and after deducting officers' salaries, in each of the years 1938 through 1941, was as follows: Net Income BeforeNet Income AfterDeducting Officers'Officers'Deducting Officers'SalariesSalariesSalaries1938$30,753.90$21,018.49$ 9,735.41193942,372.0224,500.0017,872.02194042,756.3933,000.009,756.39194179,965.5748,000.0031,965.57At the end of each year from 1939 through 1942, the capital stock, capital surplus, and earned surplus of petitioner were as follows: Capital StockCapital SurplusEarned Surplus1939$36,000.00$26,858.90194040,000.0034,526.56194144,000.00$8,000.0055,041.69194244,000.008,000.0080,965.18No dividends were declared or paid by petitioner during the years 1938 through 1941. In 1940 and 1941, Charles Schwartz was chairman of the board of directors of petitioner. He was the guiding man in formulating plans and policies for the company and was in full charge of the factory, the manufacture of towels, and the inspection of raw materials as they came in. The hiring and firing of employees were under104 his jurisdiction. He and his four sons had frequent meetings every day, and after business hours, to formulate plans and policies to pursue. Often he obtained loans for the corporation and personally guaranteed the notes. He had complete charge of the colored girls in the sewing department of the factory, in which there was a large labor turnover. During 1940 and 1941, he worked 10 or 11 hours a day. Samuel C. Schwartz was president and a member of the board of directors of petitioner in the taxable years in question. He was active in the business during those years, as were his father and brothers. His duties were the usual duties pertaining to the office of president - seeing that the policies formulated by the board of directors were carried out efficiently under his supervision. He was in charge of buying used bags throughout the United States. He travelled extensively, keeping in touch with markets throughout the country and making purchases directly from the various sources of supply. The buying of merchandise was a very important part of the business. Under his supervision the corporation purchased from 75 to 100 carloads of bags in 1940 and 1941. Purchases were made from105 various dealers throughout the territory without seeing the merchandise, and through his years of experience Samuel Schwartz knew with whom to trade and from what sources he could obtain the best quality of merchandise. He also often guaranteed loans made to petitioner. Frequently he spent from three to five hours a night at the laundry where petitioner's washing, de-inking, and bleaching were done, trying to further the program of business by making tests and improving the condition of the workmanship. He worked 9 to 10 hours per day at the business during 1940 and 1941, and in some months 14 to 15 hours per day. Harold W. Schwartz was vice-president, a member of the board of directors, and director of sales of petitioner in the taxable years. From 1929 to 1931 he had experience as buyer and as sales manager for other firms, such as Spiegle-May-Stern Mail Order Co., of Chicago, and Continental Undergarment Co., of Brooklyn. He went to work full time for petitioner upon its incorporation in 1931. In 1940 and 1941 he was salesmanager, advertising manager, and merchandiser for petitioner. The advertising and sales promotion were under his direct supervision, and he was assisted by106 his brother, Edward Schwartz. The company advertised through direct mail, by enclosures with its merchandise, and through newspapers and magazines. Harold Schwartz sold merchandise to Sears Roebuck, Montgomery Ward, Chicago Mail Order Co., Spiegel, and other chain organizations. Through his efforts, petitioner's products were advertised in catalogs issued by these various mail order houses. Under his direction the sales and advertising efforts resulted in a large "buyer acceptance" for petitioner's products. He worked between 10 and 11 hours per day at the business. In 1940 and 1941 Jack Schwartz was treasurer of petitioner. The records of the company were under his supervision and control. He coordinated all functions, methods of handling, and the routine between the office and the factory. He was, in effect, an office manager. The shipping and receiving department was under his charge. He hired all the men for that department. Merchandise was purchased by the company f.o.b. at point of shipment, and Jack Schwartz made arrangements for the proper carriers, so as to obtain the best freight rates available. He also had charge of purchasing gray goods for the company, and during the107 taxable years he purchased between 10 and 20 carloads, costing from $6,000 to $10,000 each. All general purchasing of equipment and machinery was under his control. He passed on credits to be allowed customers and made collections of money for the company. He worked about the same number of hours per day as did his father and brothers. Edward Schwartz was petitioner's secretary and assistant director of sales in 1940 and 1941. He assisted his brother, Harold, in the selling, advertising, and merchandising of petitioner's products. He had charge of the salesmen who called on independent stores and of the sales made to such stores. He trained sales help and office help in the handling of sales. He did a large amount of good will work with individual store managers of chain store organizations, promoting and creating a market for petitioner's products, and he did research for the purpose of selling the products to institutions such as hospitals, hotels, railroads, factories, etc. He worked about 10 or 11 hours per day. The growth and success of petitioner's business were due, in large part, to the efforts, the industry, and the experience of the five members of the Schwartz family108 - its officers during the years 1940 and 1941. The Commissioner disallowed a deduction of $5,000 for officers' salaries in 1940 and a deduction of $15,000 for officers' salaries in 1941 and allowed the following as "reasonable compensation" for the services rendered by each of the five officers in those years: 19401941Charles S. Schwartz$7,250.00$8,000.00Samuel C. Schwartz8,000.009,750.00Harold W. Schwartz5,500.006,500.00Jack Schwartz4,000.005,000.00Edward Schwartz3,250.003,750.00The salaries paid to the officers of petitioner during 1940 and 1941 were reasonable compensation for services actually rendered by the officers. Opinion ARUNDELL, Judge: The petitioner here contends that the salaries paid to its five officers in the years 1940 and 1941 were reasonable and represented compensation for services actually rendered by them. Respondent has disallowed $5,000 of the aggregate amount of officers' salaries for 1940 and $15,000 for 1941. We think petitioner has sustained its burden of proof that the salaries paid were reasonable. It is apparent from the findings that all five officers were active in the business throughout109 the taxable years, working 10 or 11 hours per day and often longer. Two of them, Charles Schwartz and Samuel Schwartz, had grown up with the business. All had training and experience peculiarly fitting them for their positions; and the tremendous growth in the business, the increase in net sales, in the equipment used, in the number of employees, and in the net worth were due largely, if not entirely, to their ingenuity, industry, and business acumen. In 1940, after the payment of the officers' salaries, a net income of over $9,000 remained as applicable to an investment of $74,500, and in 1941 the net income remaining after payment of the salaries was over $30,000. Petitioner's net worth in round figures increased from $62,000 in 1939 to $107,000 in 1941. The salaries paid had no relation to the stockholdings of the officers, and it is clear that they were not distributions of profits in disguise. We are, of course, aware of the rule that in the case of close family corporations, salaries paid to officers may be subjected to closer scrutiny, but we think the reasonableness of the salaries paid the officers in this case survives the most careful and critical analysis. It is true110 that no dividends were declared in the years 1938 through 1941, but where, after payment of salaries, a substantial surplus remained available, the mere fact that the corporation did not choose to pay dividends therefrom does not necessarily require a holding that the salaries were unreasonable. Petitioner's was the only business of its kind in the country. It was developed by the officers, all of whom devoted their entire time and energies toward bringing about its success. See Olympia Veneer Co., Inc., 22 B.T.A. 892">22 B.T.A. 892; Benz Bros. Co., 20 B.T.A. 1214">20 B.T.A. 1214; Webb & Bocorselski, Inc., 1 B.T.A. 871">1 B.T.A. 871. Here the directors voted the salaries at the beginning of the year before the year's earnings could be known - a fact which, it would seem, tends to negative any purpose to distribute profits rather than to fix reasonable compensation for services. Under all the circumstances, we see no reason why we should substitute our judgment as to what is reasonable for that of the directors. Klug & Smith Co., 18 B.T.A. 966">18 B.T.A. 966. We hold that in the recomputation petitioner is entitled to a deduction in the amount of the aggregate salaries paid to its officers*111 in each of the taxable years in question. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625865/	LYNA KATHRYN JONES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentJones v. CommissionerDocket No. 198-76.United States Tax CourtT.C. Memo 1977-329; 1977 Tax Ct. Memo LEXIS 114; 36 T.C.M. (CCH) 1323; T.C.M. (RIA) 770329; September 22, 1977, Filed Herbert Shafer, for the petitioner. Albert L. Sandlin, for115 the respondent. SCOTT MEMORANDUM FINDINGS OF FACT AND OPINION SCOTT, Judge: Respondent determined deficiencies in petitioner's income tax and additions to tax for the years and in the amounts as follows: Additions to the Tax, I.R.C. 1954 1IncomeSectionSectionSection YearTax6653(a)6651(a)(1)66541969$1,691.02$ 84.55$380.48$ 53.4319701,775.9688.80399.5957.1919712,030.00101.50456.7564.9619721,629.0381.45The issue for decision is whether amounts received by petitioner during the years here involved, other than the $9,000 of reported salary income in 1972, constituted taxable income or gifts. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Petitioner is a single individual who resided in Atlanta, Georgia, on the date of the filing of her petition in this case. Petitioner did not file Federal income tax returns for the calendar years 1969, 1970 and 1971. For the calendar year 1972 petitioner filed an individual income tax return (Form 1040A) on116 which she reported $9,000 as salary as manager of a retail store. Prior to 1969 petitioner had been employed as a bartender and cocktail waitress at various establishments in Atlanta, Georgia. During the period from January 21, 1969, through February 5, 1969, she was employed at the Carillon Hotel, Miami Beach, Florida, and received wages of $121.50. Sometime in February she left Miami and went to Las Vegas and attempted to find work in Las Vegas. She was unable to find work in Las Vegas which she was willing to take and sometime prior to July 1969 moved to Atlanta where she continued to live throughout the years here involved. In the latter part of 1969 or the early part of 1970, petitioner was in Fan and Bill's Restaurant and made the acquaintance of a married man (hereinafter referred to as James) who had a son and grandchild whose home was approximately 120 miles from Atlanta. Petitioner went with James to his hotel room and had sexual relations with him. On that occasion, James gave petitioner cash. Thereafter, whenever James came to Atlanta he would call petitioner and petitioner would join him in his hotel room and have sexual relations with him. On each occasion117 that James was in Atlanta, he gave cash to petitioner. This relationship between petitioner and James continued throughout the year 1972. On occasions, in addition to giving petitioner money, James would buy shoes for petitioner on his charge account and other clothing, and on one occasion he bought her a beautiful dress.In December 1971, James gave petitioner as a Christmas present a ring for which he paid $450. In early 1972, James acquired a retail store in a suburb of Atlanta and petitioner became the manager of this store at a salary of $200 a week plus an agreement for a percentage of the profits. Petitioner continued in the employ of this store until August of 1973 when her work at the store terminated because she and James had a disagreement. During the period from the time petitioner met James throughout the year 1972, James would sometimes take petitioner out to restaurants to dine, but he never came to petitioner's apartment. On October 17, 1969, petitioner purchased a used 1969 Cadillac Coupe De Ville automobile and on April 20, 1970, she purchased a new 1970 Cadillac Coupe De Ville. On November 11, 1971, petitioner purchased a new 1972 Cadillac Sedan De118 Ville and on June 23, 1972, purchased a used Triumph Spitfire Roadster. On July 17, 1972, petitioner purchased a used 1971 Toyota Corolla Sedan.On two occasions petitioner filed loan applications with banks in Atlanta in which she stated her occupation as an interior decorator and a partner in a business known as Unique Interiors. During the years 1969 through 1972, petitioner had 2 safety deposit boxes which she closed in 1973. During the years here in issue petitioner maintained both a checking account and savings account at the National Bank of Georgia and a savings account at First Federal Savings and Loan Association in which she made deposits. Petitioner paid some of her bills with checks drawn on her checking account and made other payments and expenditures in cash. During the years here in issue, petitioner had small amounts of interest income from her savings account. The following schedule shows petitioner's total deposits in her bank accounts during the years 1969 through 1972 plus her cash and other expenditures, and her interest income, less non-income items received by petitioner, including withdrawals from her bank accounts during these years: 1969197019711972Total Deposits: National Bank of Georgia- Checking Account$ 2,478.70$ 4,008.00$ 4,149.95$ 8,130.62National Bank of Georgia- Savings Account1,134.80First Federal Savings &Loan147.00659.00994.60$ 3,613.50$ 4,155.00$ 4,808.95$ 9,125.22Add: Cash & Other Expenditures: Loan Repayments$ 847.37$ 2,500.26$ 3,106.03$ 4,109.56Automobiles5,100.002,113.003,559.312,628.00Apartment Rental1,444.002,304.002,430.002,484.00Preferred Risk Insurance409.82399.03435.64Personal Living Expenses3,786.504,410.004,600.504,487.50Auto Repair59.2634.09233.66Taxes Withheld1,575.00FICA Tax468.00$14,791.38$15,951.34$18,937.91$25,546.58Interest Income$ 9.86$ 25.58$ 29.27$ 15.94Less: Non-Income Items: Loan Proceeds$ 4,760.00$ 3,842.13$ 5,207.83$ 998.00Savings Withdrawals937.69485.00575.00Check Withdrawals1,896.394,396.293,911.298,101.49Income Tax Refund76.00Insurance Proceeds112.57Excess of Deposits PlusExpenditures OverNon-Income Items$ 7,131.15$ 7,738.50$ 9,250.49$15,888.03119 Petitioner's first deposit in her checking account in the National Bank of Georgia was made on July 15, 1969, and was a cash deposit of $150. Of the total deposits petitioner made that year, only $43.70 was of checks. Of the total deposits made by petitioner during 1970 only $1,042.60 was of checks and in 1971 only $308.95 was of checks. Respondent in his notice of deficiency increased petitioner's reported income of $9,000 for the year 1972 by $6,888.03 and determined that during the years 1969 through 1971 when petitioner filed no Federal income tax returns that she had unreported income of $7,131.15, $7,738.50, and $9,250.49, respectively. He computed her tax by allowing the standard deduction in each year and one personal exemption. Respondent explained his computation by stating that in the absence of adequate records petitioner's taxable income had been computed by reference to bank deposits, cash payments, and personal and other non-deductible expenditures. Respondent determined that part of the underpayment of tax for each year was due to negligence and therefore determined an addition to tax under section 6653(a). He further determined that petitioner's failure120 to timely file tax returns for the years 1969 through 1971 was not due to reasonable cause and therefore determined the addition to tax under section 6651(a)(1). Respondent further determined that petitioner underpaid her estimated tax for the years 1969 through 1971 and asserted the addition to tax under section 6654. Petitioner stipulated the accuracy of the bank deposits, expenditures, interest and non-income items, as determined by respondent. Her only contention here is that the amounts she received from James, after her relationship with him began, were gifts and not taxable income. OPINION Section 61(a) provides that except as otherwise provided in the revenue laws, gross income means all income from whatever source derived. Petitioner here has stipulated receipts of funds as determined by respondent and, therefore, except to the extent that she is able to show that these funds were received from a source which, under some provision of the Internal Revenue Code, causes the funds not to be income, her receipts are taxable income. The only argument that petitioner makes to justify her contention that the amounts she received and did not report as taxable income are not121 income is that the amounts she received from James were gifts and, therefore, under the provisions of section 102(a), are not income. Initially, we point out that since petitioner, by her own testimony, did not meet James until the latter part of 1969 or the early part of 1970, the cash which she has admitted receiving in 1969 could not be explained as having been received from James. No explanation is offered by petitioner of the source of her receipts in 1969 except for the $121.50 she received as salary as a waitress in Miami. Respondent has determined that petitioner did not have adequate records from which to compute her taxable income, and petitioner has offered no evidence to dispute this conclusion. Under such circumstances, the use of a bank deposits plus non-deductible expenditures, minus non-income items method of computing a taxpayer's taxable income has been held to be proper. See , and cases there cited. It is clear, therefore, that petitioner has totally failed to show error in respondent's computation for the year 1969. Respondent in his brief argues at great length that the record122 is sufficient to show that the money received by petitioner in the years 1970 and 1971 and the money she received in 1972 in excess of her salary did not all come from James but that, in fact, petitioner received funds from the practice of prostitution. Even though petitioner in 1969 had stated to an FBI agent that she was engaged in prostitution and in 1973 made a similar statement to a special agent of the Internal Revenue Service, at the trial she testified that, after she established her relationship with James, she was a "kept woman" and did not practice prostitution. Respondent vigorously argues that petitioner did during the entire period here involved practice prostitution and that James was merely one of the men with whom she practiced prostitution. James' testimony at the trial was evasive and in certain respects directly contradictory of an affidavit furnished to a special agent of the Internal Revenue Service. However, in our view, whether petitioner practiced prostitution during the period after her relationship with James began throughout the balance of the years here involved is immaterial to a proper determination of this case. Certainly the funds which James gave123 to petitioner were not gifts within the meaning of the income tax statutes. James gave this cash to petitioner because petitioner had sexual relations with him when he was in Atlanta. In fact, petitioner herself testified that James "was getting his money's worth." Therefore, even if all the cash which petitioner received during the years here in issue came from James, it was not a gift within the meaning of section 102(a). James did not give money to petitioner from feelings of "detached and disinterested generosity, * * out of affection, respect, admiration, charity or like impulses" as required under the holding of , in order for money or property received by a taxpayer to be a gift under section 102(a). From a review of the computation of petitioner's income as made by respondent, it appears that the ring James gave her in 1971 as a Christmas gift and the shoes, dress, and other clothing he purchased for her as "gifts" are not included in her taxable income. Therefore, we do not have to determine whether these items should properly be considered as gifts. On the basis of the record as a whole, we sustain*124 respondent's computation of petitioner's taxable income and income tax for each of the years here in issue. Petitioner stipulated that she filed no returns for the years 1969 through 1971 and offered no explanation of her total failure to keep records of her receipts other than the salary she received in 1972. Therefore, on the basis of this record, petitioner has totally failed to show error in respondent's determination of additions to tax under sections 6653(a), 6651(a)(1), and 6654. Decision will be entered for the respondent. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as amended.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625866/	CHARLES E. PEARSALL & SON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Charles E. Pearsall & Son v. CommissionerDocket No, 50816.United States Board of Tax Appeals29 B.T.A. 747; 1934 BTA LEXIS 1482; January 16, 1934, Promulgated 1482 DELINQUENCY PENALTIES - REVENUE ACT OF 1926, SECTION 1103; REVENUE ACT OF 1928, SECTION 291. - "Reasonable cause" means such a cause as would prompt an ordinarily intelligent man to act under similar circumstances as did the taxpayer, in tardily filing his income tax returns. Held, upon the facts, the delinquency penalties were properly imposed. Bernhard Knollenberg, Esq., and R. E. Lee, Esq., for the petitioner. Arthur Clark, Esq., for the respondent. LEECH747 OPINION. LEECH: Petitioner is a New York corporation now in dissolution. The petition herein was filed through Mabel E. Pearsall and Arthur R. Pearsall, its trustees in dissolution. Chapter 787 of the 1923 Corporation Law of New York State provides that a corporation in dissolution shall remain in existence for the purpose of suing and being sued in winding up its affairs. Its directors are trustees in charge of its liquidation. Deficiencies were determined for years and in amounts as follows 1925$962.92192656.52192744.32192894.85These deficiencies in tax the respondent has increased by 25 percent delinquency penalties, computed upon1483 petitioner's entire tax, as follows: 1925$377.781926475.991927261.291928289.70Petitioner does not contest the correctness of the tax deficiencies asserted in the total amount of $1,158.61, but questions the delinquency penalties in the total of $1,404.76. Petitioner was organized in 1899 and was operated, prior to the taxable years here in question, by Clarence A. Pearsall, husband of 748 Mabel E. Pearsall and father of Arthur R. Pearsall. Arthur R. Pearsall, shortly prior to the calendar year 1924, was elected secretary of petitioner. This action was taken for the reason that his father, Clarence A. Pearsall had, shortly prior to that time, suffered a stroke of paralysis and feared that in case of a second stroke there would be no one to sign checks for payrolls and other expenses, which would have to be met without delay. Arthur R. Pearsall, at the time of his election as secretary, Knew nothing about the business and took no part in the management. Petitioner's business was that of pile driving, while Arthur R. Pearsall was employed by a separate stevedoring business, operated by his father. In this latter business Arthur R. Pearsall1484 operated a coal hoist and looked after certain of the other stevedoring equipment. On February 12, 1925, Clarence A. Pearsall, the father, suffered another stroke of paralysis following which, except for an interval of a few days in July of that year, he was unconscious until his death in the following November. On February 12, 1925, Arthur R. Pearsall took charge of petitioner's business. He was without business training or experience and lacked knowledge of petitioner's affairs. These had been handled by his father, as the business was small and did not employ a bookkeeper nor the services of an accountant. Arthur R. Pearsall carried on the business of petitioner, his time being spent in an endeavor to keep up the work and to continue his services with the stevedoring business. Such books as petitioner maintained were kept by him and from these he determined that petitioner, after paying expenses of operation, showed no profit for the years 1925, 1926, 1927, and 1928, and under such conditions it was his belief that income tax returns were not required. In 1929 petitioner received a request from its bank to supply a list of its officers and a copy of the resolution1485 authorizing signature to its banking paper. Pearsall then realized that action was necessary toward regularly electing new officers for petitioner as nothing had been done in this respect since his father's death. No meetings of stockholders had been held and no formal corporate action taken after that death. During this period Pearsall had merely carried on the work as best he could. Pearsall thereupon consulted a firm of attorneys and upon looking into the matter this firm advised him that petitioner had been dissolved in 1926 by formal state action and since that time he had been acting technically as a trustee in liquidation and that it would be necessary to determine the stock ownership and get the affairs of petitioner upon some definite basis for the completion of the liquidation. 749 Pearsall was further informed by these attorneys that income tax returns should have been filed by petitioner for the four preceding years and the services of an accountant were at once secured. The latter, upon making an audit of petitioner's accounts, reported a net taxable income to have been received for each of the preceding four years and income tax returns were thereupon1486 prepared and filed and the tax shown, with interest thereon, was paid Upon audit of the returns, above referred to, respondent determined the deficiencies above listed and increased these amounts by 25 percent delinquency penalties under section 1103 of the Revenue Act of 1926 and section 291 of the Revenue Act of 1928, which provide that in case of any failure to make and file a return or list within the time prescribed by law the Commissioner shall add to the tax 25 per centum of its amount, "except that when a return is filed after such time and it is shown that the failure to file it was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax." The total amount of the deficiencies and penalties was thereupon collected by respondent under jeopardy assessments. We think the facts amply support petitioner's contention that the failure to file returns for the years in question was not due to willful neglect. We think this is clearly shown by the fact that Pearsall was ignorant of the requirements, but, upon learning of petitioner's duty to file these returns, took action at once to prepare and file them, when there was no evidence that1487 respondent had knowledge of its failure to act. But the proposed penalty is avoided only when, in addition to the absence of willful neglect, the tardy filing is the result of reasonable cause. . "Reasonable cause", in the quoted applicable statutory provision, means such a cause as would prompt an ordinarily intelligent and prudent business man to have so acted under similar circumstances. Cf. . The respondent has so construed the term in article 446 of Regulations 69 and article 1211 of Regulations 74, which provide: "If the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return in prescribed time, then the delay is due to reasonable cause." Therefore, although the present facts are unusual, we can scarcely say that the petitioner's delinquency in filing these returns for four consecutive years was the result of reasonable cause. The penalty was properly imposed. ; 1488 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/4625867/	C. F. Smith Company v. Commissioner.C. F. Smith Co. v. CommissionerDocket No. 32973.United States Tax CourtT.C. Memo 1954-86; 1954 Tax Ct. Memo LEXIS 157; 13 T.C.M. (CCH) 607; T.C.M. (RIA) 54191; June 30, 1954, Filed 157 1. Petitioner manufactured and sold shirts and leather goods. Its articles of incorporation recited that it was formed to "foster and promote Christian, religious, charitable and educational enterprises" and that it did not "contemplate pecuniary gain or profit to the members thereof and shall have no capital stock." The articles made no provision for the disposition of earnings or assets. The by-laws, which could be amended or repealed by the directors, provided that a substantial portion of each year's earnings would be retained by petitioner, and that in the event of petitioner's dissolution, the net assets would be distributed as contributions to specified organizations. Petitioner reported that in 1946 and 1947, it made charitable contributions to a large number of donees, but did not identify or describe the donees other than by listing their names. Held, on the facts, petitioner did not make any contributions in 1946 or 1947 to organizations exempt from taxation under section 101(6) of the Internal Revenue Code. Held, further, petitioner was not organized and operated exclusively for religious or charitable purposes, and was not exempt from taxation158 under section 101(6) of the Code. 2. Held, on the facts, that premiums paid by petitioner on life insurance policies insuring the life of its president did not constitute compensation to the president for services rendered, and were not deductible by petitioner under section 23(a)(1)(A) of the Code as ordinary and necessary business expenses. 3. Held, on the facts, that petitioner acquired and commenced operating its shirt business no later than January 10, 1946, and that no part of the income reported in petitioner's return for 1946 was produced by the operations of its predecessor. 4. Held, on the facts, that Hollywood Sportogs, a corporation, acquired substantially all of petitioner's properties in exchange for Hollywood Sportogs stock, and that the transaction constituted an exchange within the meaning of section 112(b)(4) of the Code pursuant to a reorganization as defined in section 112(g)(1)(C). C. C. Legerton, Esq., and V. Robert Antablin, Esq., for the petitioner. George E. Constable, Esq., for the respondent. HARRON Memorandum Findings of Fact and Opinion HARRON, Judge: The Commissioner determined deficiencies in income tax for the years 1947 and 1949, and he added to the tax for 1947 a 25 per cent penalty under section 291(a) of the Code as follows: YearDeficiencySec. 291(a)1947$1,167.79$291.9519491,963.05NoneAlthough 1947 and 1949 are the only years before us, it is necessary to consider questions involving 1946 and 1948 because of an alleged net operating loss of $96,372.66 in 1948 which the petitioner wants to carryback under the provisions of sections 23(s) and 122 of the Code. Petitioner at first took the view that it was a nontaxable charitable corporation under section 101(6)160 of the Code and elected not to file income tax returns for the years 1946, 1947, and 1948. However, it filed timely a return for 1949 and it belatedly filed returns for 1946, 1947, and 1948. A net operating loss was reported in the return for 1948. This loss was carried back to wipe out all income for 1946 and 1947, and the late returns for these two years reported no taxable income. 1. The chief question is whether petitioner comes within the scope of section 101(6) of the Code. If it is held that petitioner is not exempt from income tax under section 101(6), the following questions must be decided: 2. Whether premiums paid by petitioner in 1946, 1947, and 1948 on life insurance policies covering the life of its president were properly deductible as ordinary and necessary expenses of its business. 3. Whether petitioner transacted business prior to April 1, 1946, or whether such business was conducted by its predecessor. 4. Whether the transaction by which petitioner disposed of its assets constituted an exchange within the meaning of section 112(b)(4) of the Code, pursuant to a reorganization as defined in section 112 (g)(1)(C). Findings of Fact The petitioner is a corporation161 organized under the laws of the State of California, with its principal place of business in Los Angeles, California. Petitioner's accounting records were maintained for calendar years on an accrual basis. For several years the petitioner believed it was a charitable or religious corporation exempt from income tax under the provisions of section 101(6) of the Internal Revenue Code, and did not file Federal income tax returns. Belatedly and untimely, on June 29, 1949, it filed returns for 1946, 1947, and 1948. Petitioner's return for 1949 was timely filed. The returns were filed with the collector for the sixth district of California. Issue I - Status of Petitioner Under Section 101(6) Petitioner is a corporation organized by Clifford F. Smith. Its Articles of Incorporation were filed in the office of the Secretary of State of the State of California on January 10, 1946. They were signed by Clifford F. Smith, Beryl D. Smith, and Marjorie Harding, on December 27, 1945. Prior to 1946, Smith operated a sole proprietorship under the name of C. F. Smith Co., or C. F. Smith Company. The proprietorship manufactured and sold shirts. Smith was devoted to the162 principles of evangelism and was active in and a substantial contributor to organizations and activities which embodied these principles. The petitioner was organized as the successor to the sole proprietorship. Smith and his wife, Beryl D. Smith, conveyed the proprietorship assets to petitioner. Petitioner's Articles of Incorporation provide that one of the purposes for which it was formed was to "foster and promote Christian, religious, charitable and educational enterprises." Article IV of the Articles contains a sixparagraph statement of religious beliefs, and belief in this "doctrinal statement" is asserted to be the foundation upon which petitioner is based. Eligibility to serve as a director of the petitioner was conditioned upon the filing at specified times of a statement subscribing to the religious tenets adopted in the Articles. Article II further provides that the petitioner "does not contemplate pecuniary gain or profit to the members thereof and shall have no capital stock." Petitioner issued no stock and had no "members" other than its directors. Petitioner's Articles of Incorporation provide that Smith and his wife, Beryl D. Smith, are to be directors with163 life tenure. All other directors are given two-year terms. Smith was also petitioner's president, with a salary of $1,000 per month, or 10 per cent of petitioner's net earnings, whichever is greater. The other two director-officers were J. Grady Parrott, treasurer, and Marjorie Harding, secretary. Parrott worked in petitioner's office as an accountant and Harding was Smith's secretary. Their salaries were $100 per week and $75 per week, respectively. The Articles of Incorporation contain no provision for the disposition of earnings or assets other than stating that petitioner was formed to foster and promote charitable enterprises and that pecuniary gain or profit to the members was not contemplated. The by-laws, however, which could be amended or repealed by the directors, contain the following provision relating to earnings: "It is hereby declared to be the policy of this corporation, in accordance with its non-profit character, that insofar as possible this corporation shall distribute for the general purposes set out in its Articles of Incorporation no portion of the original assets contributed to this corporation by Clifford F. Smith and beryl [Beryl] D. Smith, his wife, 164 nor any portion of any other assets which may hereafter be contributed to this corporation by any donor, but on the contrary the corporation shall make expenditures for the purposes set out in the Articles of Incorporation only from the net earnings of the commercial business operations the corporation; and that for the purposes of building and expanding the corporation's business enterprises (all for the furtherance of the purposes set out in the Articles of Incorporation) in each calendar year a substantial portion of that year's net earnings shall be retained to increase the assets of this corporation." Originally, no provision was made for the disposition of petitioner's assets. On May 20, 1947, however, the directors adopted a resolution which provided that in the event of a dissolution of the corporation, the net assets should be distributed equally, as contributions, to eight specified organizations. On May 16, 1946, petitioner acquired the assets of an unincorporated leather goods manufacturing business theretofore owned and operated by E. F. Hillegas. These assets were used for the manufacture and sale of leather goods to the public. Petitioner's gross receipts in 1946165 and 1947 from the manufacture and sale of shirts and leather goods amounted to $573,872.06 and $320,066.30, respectively, and its income before deduction for net operating loss carry-back was $87,478.82 and $7,397.45. In petitioner's returns for 1946 and 1947, it was reported that the corporation had made charitable contributions of $14,752.36 and $7,567.38, respectively. However, deductions were not taken for such contributions, inasmuch as the corporation claimed net operating loss carry-backs. Petitioner's tax return and ledger accounts for 1946 list the following as recipients of charitable contributions in 1946: "Gospel Foundation"; "Words of Life, Inc."; "Evangelical Release time"; "Christian Business Mens Committee of L.A."; "National Assoc. of Evangelicals"; "Church of the Open Door L.A." "International Evangelistic Ass'n. Inc."; "Pacific Rural Mission"; "Child Evangelism Fellowship"; "Missionary Aviation Fellowship"; "Bible Crusaders"; "Christian Business Mens Committee, Glendale"; "Christ for America"; "Saturday Nite Jubilee"; "Miscellaneous Religious & Charitable"; "Max Zimmerman"; "Don Rood-Travel Exp."; "Western Air Lines-Winona Lake"; "Homer Britton"; "Dr. H.J.A."; "C. 166 O.D. - purch of organ D. Hillis"; "Calif. Hotel-Contribution to Mrs. Appellman"; "So. Pacific Ry. - Ticket for Sarah Jepson"; and "To Elizabeth White - For Sanitarium Expenses Allen Dean." A schedule accompanying the return for 1947 lists the following donees: "American Tract Society"; "Child Evangelism Fellowship, Inc."; "Church of the Open Door, L.A."; "Church press-Donation"; "Christian Business Mens Committee, Glendale" and "L.A."; "Gospel Foundation"; "International Evangelistic Assoc. Inc."; "Lincoln Heights Evangelistic Assoc."; "Methodist Challenge"; "Rev. Lawrence D. Powell"; "Sand business Exchange"; "Union Rescue Mission Inc"; "Rev. Norman Vernon"; "Youth for Christ"; and "Manufactured goods given to various religious workers." In 1946 and 1947, petitioner did not make any contributions to organizations exempt from taxation under section 101(6) of the Internal Revenue Code. The distribution of any of petitioner's earnings or assets to charitable organizations was a matter within the discretion of petitioner's directors. Charitable organizations obtained no indefeasible interests in petitioner's earnings or assets, and there was no reasonable certainty167 that any earnings or assets would be distributed to charitable organizations in the future. Petitioner did not operate or conduct any religious or charitable enterprises, and was not organized and operated exclusively for religious, charitable, scientific, literary or educational purposes. Issue II - Deductibility of Premiums on Policies Insuring Life of Petitioner's President At some time not disclosed by the record, six policies upon the life of C. F. Smith, petitioner's president, were issued by three insurance companies in the total face amount of $60,000, as follows: Metropolitan Life Insurance Company issued one policy in the face amount of $25,000; another policy for $15,000; and a third policy for $5,000. Bankers National Insurance Company issued two policies in the face amount of $5,000 each. London Guaranty and Accident Insurance Company issued one policy for $5,000. At the first meeting of petitioner's board of directors, on July 25, 1946, a resolution was adopted authorizing the payment of the premiums on each of the above-described insurance policies, which were then in effect. It was stated in the resolution that the premiums were to be paid by the corporation168 as "an expense of the business operations of this corporation." It was also stated in the resolution that " * * the reason therefore being the fact that it is hereby recognized and declared that the perpetuation of the earning power of this corporation is dependent upon the continuance of the life of the said Clifford F. Smith and that the contributions of him and his wife form the principal basis of the earning power of this corporation." Pursuant to the above regulation, the petitioner paid premiums on the abovedescribed life insurance policies in 1946, 1947, and 1948, in the total amounts of $1,194, $2,238.80, and $3,575.73, respectively. In its returns for each of the years 1946, 1947, and 1948, the amounts of the insurance premium payments were deducted as insurance expense. The payments were not deducted as either officer's compensation or salary expense. C. F. Smith did not include the amounts of the payments for insurance premiums in his returns for any of the above years as part of his earnings or in any other way. The directors of the petitioner at no time authorized or designated the amounts of insurance premiums (whatever the amounts might be) as compensation for169 the services to petitioner of C. F. Smith. All that the resolutions of the directors of the petitioner show with respect to the compensation to be paid to C. F. Smith for his services is that his salary, beginning January 1, 1946, would be either $1,000 per month or 10 per cent of the net earnings of petitioner, whichever might be greater. The resolution authorizing the above compensation of C. F. Smith, as president, was adopted at the same meeting as the resolution which authorized the payment of life insurance premiums by petitioner, and neither of the resolutions which were adopted at the meeting of the directors in July of 1946 stated, in any way, that the payments of the insurance premiums would constitute part of the compensation to be paid C. F. Smith for his services to the petitioner. The payments of insurance premiums by petitioner were neither authorized nor intended to be compensation to Smith for services rendered, and they did not constitute compensation for Smith's services. The payments of the insurance premiums in 1946, 1947, and 1948 did not constitute ordinary and necessary business expenses paid or incurred in carrying on petitioner's business in any of those170 years. Issue III - Beginning Date of Petitioner's First Accounting Period The first meeting of petitioner's incorporators was held on July 25, 1946. At the first meeting of petitioner's Board of Directors, which also was held on July 25, 1946, the following occurred and was recorded in the minutes of the meeting: "Mr. Smith presented and read to the Board the Articles of Incorporation of this corporation and stated that they had been filed in the office of the Secretary of State at Sacramento, California, on January 10, 1946. He further stated that between January 1st and January 10th, 1946, the business which prior to January 1st, 1946, had been conducted and operated under the name of C. F. Smith Co., an unincorporated business belonging to Clifford F. Smith personally, was in anticipation of the completion of the proceedings of the organization of this corporation, operated for this corporation and, that from and after the 10th of January, 1946, the said business had actually been owned and operated by this corporation, to which all said assets had been theretofore under date of December 31, 1945, transferred. He further stated that in the above mentioned interim period from171 January 1st to January 10th those persons who are named in the Articles of Incorporation as the officers had conducted the said business for the benefit of this corporation and had acted as such officers, in anticipation of the receipt of its Charter subsequently dated January 10, 1946. Mr. Smith also then presented to the Board an assignment and Bill of Sale executed by himself and his wife, Beryl D. Smith, under date of December 31, 1945, which is filed with these minutes, transferring to this corporation all the physical assets therein listed and innumerated, being particularly the assets and equipment of his garment manufacturing business, and stated that for the purpose of establishing this nonprofit corporation he and his wife had made said transfer and had subsequently transferred Lots 3 and 4 of the Eulalia Tract in Glendale, California, to this corporation without consideration and without hope of monetary reward or compensation in any form or manner whatsoever - all in order to accomplish the purposes set out in the Articles of Incorporation of this corporation." Upon motion of Miss Harding, duly seconded and unanimously carried the following resolution was adopted: 172 "RESOLVED: That there be and hereby are approved as the acts of this corporation all acts and things done and performed by Clifford F. Smith and Beryl D. Smith and Marjorie Harding, the Directors, and by Clifford F. Smith and Marjorie Harding, the President and Secretary respectively of the de facto corporation organized on the 27th day of December, 1945, under the name of C. F. Smith Co., whose Charter was thereafter received from the Secretary of State at Sacramento, California following filing thereof in the office of the Secretary of State on January 10, 1946; and that all such acts be and are hereby confirmed as the acts of this corporation." * * The petitioner's ledger contains entries recording transactions on January 1, 1946, and on other dates during the first three months of 1946. Petitioner's return for 1946 lists January 1, 1946 as the date of petitioner's incorporation. The depreciation schedule accompanying the return reports that certain office furniture and equipment, factory equipment and delivery equipment were acquired on January 1, 1946, and contains the following notation: "Acquired from predecessor Company, C. F. Smith Co., a sole proprietorship; cost173 shown is that of predecessor." Depreciation was computed and deducted for the entire twelve months of 1946, and no proration for a period of less than twelve months was made for any other item appearing on the return. Petitioner acquired and commenced operating the shirt business not later than January 10, 1946. No part of the income reported in petitioner's return for 1946 was produced by the operations of its predecessor. Issue IV - Applicability of Section 112(g)(1)(C) to the Disposition of Petitioner's Assets Hollywood Sportogs, a corporation, (hereinafter referred to as Sportogs) was organized in 1948 under the laws of California. Its charter authorized the issuance of one class of stock having voting rights and a par value of one dollar a share. In September 1949, the directors and stockholders of petitioner and of Sportogs approved a plan of reorganization under which all of the assets of petitioner were to be exchanged solely for stock of Sportogs. On January 10, 1950, petitioner conveyed all of its assets (including a certificate for 58,000 shares of stock of Sportogs) to Sportogs for 109,680 shares of voting stock of Sportogs. After the transfer of its assets, 174 petitioner's only asset was stock of Sportogs. The exchange of all of petitioner's assets for voting stock of Sportogs constituted an exchange within the meaning of section 112(b)(4) of the Code pursuant to a reorganization within the provisions of section 112(g)(1)(C). Opinion Issue I - Status of Petitioner Under Section 101(6)In order to come within the provisions of section 101(6), petitioner must establish that it was "organized and operated exclusively for religious, charitable, scientific, literary or educational purposes." Petitioner took over Clifford F. Smith's shirt manufacturing business. One of the primary purposes for which petitioner was organized was to manufacture shirts for sale to the public. Shortly after petitioner's formation it acquired and operated a plant where leather goods were manufactured for sale to the public. Petitioner itself did not operate any religious or charitable enterprises. Cf. Trinidad v. Sagrada Orden de Predicadores, 263 U.S. 578">263 U.S. 578. However, it claims to have satisfied the requirement that it be "organized and operated exclusively" 175 for religious purposes because its income, regardless of source, inured to the benefit of exempt organizations. Petitioner thereby seeks to come within the "destination of income" principle, which is illustrated by the holdings of the Courts of Appeals in Roche's Beach, Inc. v. Commissioner, 96 Fed. (2d) 776, reversing 35 B.T.A. 1087">35 B.T.A. 1087, and C. F. Mueller Co. v. Commissioner, 190 Fed. (2d) 120, reversing 14 T.C. 922">14 T.C. 922. Petitioner has failed to establish its premise, namely, that the donees to whom it made contributions were in fact exempt organizations under the Internal Revenue Code. Petitioner is required to establish that its donees were organized and operated exclusively for charitable purposes, that no part of their net earnings inured to the benefit of a private shareholder or individual, and that no substantial part of their activities consisted of carrying on propaganda or otherwise attempting to influence legislation. Section 101(6). The only evidence pertaining to the alleged donees consists of lists of their names set forth in petitioner's returns for 1946 and 1947, and in an account labeled "Contributions" in petitioner's176 ledger accounts for 1946. These names are set forth in our Findings of Fact. The parties could not stipulate that any of the donees were exempt from tax under Section 101(6) and petitioner failed to explain the identity of the listed individuals or to prove that any of the organizations were organized and operated exclusively for religious or charitable purposes. Furthermore, petitioner has failed to prove that the earnings of the listed organizations did not inure to private shareholders or individuals, and that the organizations did not participate in the proscribed activities relating to legislation. It is held that petitioner has failed to establish that any of its donees was exempt from tax under section 101(6) of the Code. It follows that the contributions in question are not deductible as contributions to exempt organizations. We need not advert to the merits of the "destination of income" rule. But see, Joseph B. Eastman Corporation, 16 T.C. 1502">16 T.C. 1502; Donor Realty Corporation, 17 T.C. 899">17 T.C. 899. On brief, petitioner states that its failure of proof was caused by reliance on statements by opposing counsel to the effect that the exempt status of the alleged177 donees was not in issue. This contention is without merit. Counsel for respondent expressly refused to stipulate that the alleged donees were tax-exempt. Petitioner has reference to remarks of opposing counsel which relate to a group of organizations other than the alleged donees in question under this issue. In addition to petitioner's failure to establish that it made any contributions to exempt donees, we observe other facts which distinguish the case from C. F. Mueller Co. v. Commissioner, supra, and Roche's Beach, Inc. v. Commissioner, supra. The cases, Roche's Beach, supra, and Mueller, supra, involved taxpayers whose assets and net income were either committed exclusively to charitable purposes by the terms of a testamentary trust or by a certificate of incorporation which could not be amended. In the instant case, the disposition of both earnings and assets was subject to the discretion of petitioner's Board of Directors, on which Smith and his wife held life tenure. Petitioner's Articles of Incorporation made no provision for the disposition of either income or assets, and the by-laws, which could be amended or revoked178 by the Board of Directors, required that "in each calendar year a substantial portion of that year's net earnings shall be retained to increase the assets of this corporation." Thus, in 1946, petitioner reported income of $87,478.82 before a net operating loss carry-back, whereas it listed contributions of only $14,752.36. In addition, the directors' resolution providing for the disposition of petitioner's assets was not enacted until May 20, 1947; it was never incorporated into the Articles of Incorporation; and it was rescindable. We accordingly have found that exempt organizations obtained no indefeasible interests in petitioner's earnings or assets, and that there was no reasonable certainty, at any time, that any earnings or assets would be distributed to charitable organizations in the future. It is held that petitioner was not exempt from tax within the provisions of section 101(6) of the Code. Issue II - Deductibility of Premiums on Policies Insuring Petitioner's President's Life Respondent disallowed deductions for premiums paid by petitioner in 1946, 1947, and 1948, on six policies of life insurance insuring the life of Clifford F. SMith, petitioner's president. Petitioner179 contends that the premium payments are deductible under section 23(a)(1)(A) of the Internal Revenue Code as additional compensation to Smith for personal services. Petitioner has the burden of proof under this issue. To come within the scope of section 23(a)(1)(A), it must establish that the premiums were in fact paid as additional compensation to Smith for personal services actually rendered, and that Smith's total compensation, including the premiums, was reasonable in amount. In addition, petitioner must also establish that the payments do not fall within the scope of section 24(a)(4), which specifically prohibits the deduction of premiums " * * paid on any life insurance policy covering the life of any officer or employee, * * * when the taxpayer is directly or indirectly a beneficiary under such policy;" See: Arthur R. Womrath, Inc., 22 B.T.A. 335">22 B.T.A. 335; L. Hyman & Co., Inc., 21 B.T.A. 159">21 B.T.A. 159; G.C.M. 8432, IX-2 C.B. 114; Twin City Tile & Marble Co., 6 B.T.A. 1238">6 B.T.A. 1238, 1247, affirmed 32 Fed. (2d) 229; and180 Atlas Heating & Ventilating Co., 18 B.T.A. 391">18 B.T.A. 391 [389], where officers of a corporation did not regard amounts expended for insurance premiums by the corporation as additional compensation. The evidence does not support petitioner's assertion that the premiums were paid as compensation for services. The minutes of petitioner's Board of Directors' meeting of July 25, 1946 clearly fix Smith's salary at the greater of $1,000 per month or 10 per cent of petitioner's earnings; the separate resolution passed at the same meeting authorizing the premium payments characterizes the payments only as "an expense of the business operations of this corporation" and does not refer to compensation; the payments were not reported by the petitioner as deductions for salary expense or as officers' compensation; Smith did not report the premiums in his personal returns as part of his income. Under the evidence before us, we can conclude only that the premium payments constituted gratuitous payments by petitioner. It is held, and we have so found, that the payments did not constitute compensation to Smith for services rendered. Respondent did not err in disallowing the deductions. In181 view of the above holding, it is unnecessary to consider respondent's contentions concerning failure of proof by petitioner under section 23(a)(1)(A), on the question of the reasonableness of Smith's compensation, and under section 24(a)(4), on the identification of the beneficiaries of the policies. Issue III - Beginning Date of Petitioner's First Accounting Period Petitioner's return for 1946 reported income from operations commencing January 1, 1946. Petitioner's pleadings, however, allege that it began business on April 1, 1946, and that the income reported for 1946 should be reduced to exclude income representing operations in January, February, and March, 1946. Petitioner contends that the income for these three months is chargeable to a predecessor sole proprietorship operated by Smith. The evidence adduced on this issue is in conflict. Petitioner relies on evidence indicating that it did not have a bank account until May 23, 1946, and that the social security tax return for the quarter ending March 31, 1946, was made out in the proprietorship's name. Petitioner also relies on the testimony of Smith, who stated that prior to April 1, 1946, all purchases were paid from182 and all sales proceeds were deposited to the proprietorship's bank account, and that petitioner had no employees and performed no corporate acts during the period. Petitioner admits that its Articles of Incorporation were filed on January 10, 1946, and it does not seek to impugn the contents of the minutes of the first Board of Directors meeting of July 25, 1946. These minutes commence with Smith's report that he and his wife conveyed the proprietorship's assets to petitioner by bill of sale and assignment dated December 31, 1945, that the officers named in the Articles of Incorporation operated the business for petitioner from January 1 to January 10, 1946, and that "from and after the 10th of January, 1946, the said business had actually been owned and operated by this corporation, to which all said assets had been theretofore under date of December 31, 1945, transferred." The return filed by petitioner for 1946 lists January 1, 1946, as the date of incorporation and is otherwise consonant with the minutes of the directors' first meeting. The return reflects deductions for all expenses incurred in 1946, including depreciation, without proration for any period of less than 12183 months. Petitioner did not introduce its journal. The ledger sheets which were introduced in evidence contain entries commencing with January 1, 1946. Petitioner relies upon testimony to the effect that some of the entries were in fact recorded subsequent to April 1946. However, the question under this issue must be decided upon the entire evidence. Petitioner's theory is inconsistent with the minutes of the first directors' meeting, and with its return for 1946. A preponderance of the evidence establishes that petitioner commenced its business not later than January 10, 1946, the date on which its Articles of Incorporation were filed and its corporate existence began. California Civil Code sections 292, 596.6, 1941 ed. Cf. Ajax Engineering Corporation, 17 T.C. 87">17 T.C. 87, affd. 196 Fed. (2d) 727. Petitioner introduced no evidence to establish an amount, if any, by which the income it reported for 1946 should be reduced to reflect any proprietorship earnings during the period of January 1 to January 9, 1946, inclusive. The record affords no basis upon which we can determine whether the proprietorship had any earnings in this period. We accordingly have found184 that no part of the income reported in petitioner's 1946 return was produced by the operations of its predecessor. Issue IV - Applicability of Section 112(g)(1)(C) to the Disposition of Petitioner's Assets The question under this issue is whether the transfer of petitioner's assets to Sportogs in return for Sportogs stock constituted a tax-free exchange under section 112(b)(4) of the Code pursuant to a reorganization as defined by section 112(g)(1)(C). Respondent's position is that the transaction did not satisfy the requirement that Sportogs acquire "substantially all the properties" of petitioner. Section 112(g)(1)(C). He questions whether Sportogs acquired petitioner's 58,000 shares of Sportogs stock as part of the exchange. This is a question of fact. We have considered the evidence and conclude that the 58,000 shares were acquired by Sportogs in the exchange. Respondent's other arguments under this issue are without merit. The transaction constituted an exchange under section 112(b)(4) pursuant to a reorganization as defined by section 112(g)(1)(C). Petitioner has not contested the addition to tax determined under section 291(a) with respect to its failure to file a185 timely return for 1947. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625868/	Leon Turnipseed, Petitioner, v. Commissioner of Internal Revenue, RespondentTurnipseed v. CommissionerDocket No. 61365United States Tax Court27 T.C. 758; 1957 U.S. Tax Ct. LEXIS 266; February 8, 1957, Filed 266 Decision will be entered under Rule 50. Petitioner, a single man, claimed as a dependent a married and undivorced woman with whom he lived as man and wife during the entire taxable year 1954, in violation of the criminal laws of the State where he maintained his abode. Held, that an individual living in unlawful intimacy with a taxpayer is not a dependent within the meaning of section 152 (a) (9), I. R. C. 1954. Erle Pettus, Jr., Esq., for the petitioner.Homer F. Benson, Esq., for the respondent. LeMire, Judge. Tietjens, J., concurs in the result. Mulroney, J., dissents. Withey, J., concurring. LEMIRE 759 This proceeding involves a deficiency in income tax of the petitioner for the267 taxable year 1954 in the amount of $ 620.37.The sole issue presented is whether petitioner, a single man, is entitled to a dependency exemption for Tina Johnson, a married woman, with whom he lived as husband and wife during the year 1954. Other issues have been disposed of by stipulation.FINDINGS OF FACT.The stipulated facts are found accordingly.Petitioner is a resident of Bessemer, Alabama. He filed his individual income tax return for the calendar year 1954 with the district director of internal revenue for the district of Alabama.In 1954 petitioner was unmarried. In 1947 Tina Johnson married David Johnson, from whom she separated in 1949. Except for the sum of $ 52 in 1950, Tina has received no support or funds from her husband. Tina and her husband have not been divorced. In the years 1950, 1951, and 1952, and until sometime in 1953, Tina was employed and supported her two children.Sometime during 1953 Tina moved into the home of petitioner, and during the entire taxable year 1954 they lived openly together as man and wife. In April 1954 Tina gave birth to a child.During the taxable year 1954 Tina had no income of her own and received her entire support from petitioner. 268 In his individual income tax return for the year 1954 petitioner claimed a dependency exemption for Tina, which was disallowed by the respondent.During the taxable year 1954 Tina Johnson was not a dependent of petitioner within the purview of sections 151 (e) (1) and 152 (a) (9) of the Internal Revenue Code of 1954.OPINION.The question presented involves the propriety of respondent's disallowance of petitioner's claim for a dependency exemption for Tina Johnson.Section 151 (e) (1) of the Internal Revenue Code of 1954 provides for a dependency exemption for each dependent as defined in 760 section 152 (a). 1 Petitioner contends that he is entitled to a dependency exemption since each requirement of section 152 (a) (9) is met.269 The uncontroverted facts disclose that petitioner in the taxable year in question was living in adulterous cohabitation with Tina Johnson, the undivorced wife of David Johnson. The support which petitioner furnished Tina was voluntarily assumed and not legally imposed.The question presented is one of first impression. Is the language used in section 152 (a) (9) to be construed literally so as to embrace an individual living in illicit intimacy with a taxpayer?The 1954 Code retains the eight provisions of the 1939 Code, all of which are based on relationship by blood or marriage, and to which have been added two new classifications. Paragraph (9) of section 152 (a), with which we are concerned, permits greater flexibility in that it provides a new concept to the tests for dependency in which no such relationship is required.The legislative history furnishes little assistance as to the congressional intent in enacting paragraph (9). The Senate Committee Report 2 sets forth the following example of its application:For example, under paragraph (9) the taxpayer will be entitled to claim a foster child (who is not legally adopted) as a dependent (assuming the support and earnings270 tests are met) provided the foster child is a member of the taxpayer's household and lives in the taxpayer's home for the entire taxable year, except for vacations or time away at school.A similar example is incorporated in the proposed Treasury regulations under the 1954 Code, sec. 1.152-1 (b).We think little will be added by reviewing definitions given by the courts and lexicographers as to the meaning of the terms "member" and "household." They mean different things depending on whether they are used in a broad or narrow sense.In our opinion Congress never intended the specific paragraph in question to be construed so literally as to permit a dependency exemption for an individual whom the taxpayer is maintaining in an illicit relationship in conscious violation of the criminal law of the jurisdiction of his abode.We are of the opinion that to so construe the statute would in effect ascribe to the Congress an intent to countenance, if not to aid and encourage, 271 761 a condition not only universally regarded as against good public morals, but also constituting a continuing, willful, open, and deliberate violation of the laws of the State of Alabama. Ala. Code tit. 14, sec. 16 (1940). 3 This we are unable to do.In so interpreting paragraph (9) we do not intend to hold272 that its purpose is to be limited to cases falling within the example set forth in the Committee Report, but are here applying the well settled rule that statutes should receive a sensible construction, so as to effectuate the legislative intention and, if possible, avoid an absurd conclusion. United States v. Kirby, 74 U.S. 482">74 U.S. 482; Sorrells v. United States, 287 U.S. 435">287 U.S. 435; Robert S. Bassett, 26 T.C. 619">26 T. C. 619.We hold, therefore, that the respondent did not err in disallowing petitioner a dependency exemption for Tina Johnson in the taxable year 1954.Decision will be entered under Rule 50. WITHEYWithey, J., concurring: I concur in the result here reached, but upon grounds other than public policy which it seems to me are, in essence, those upon which decision in the majority opinion has been founded.In my view Tina was not a dependent within the meaning of section 152 (a) (9) because petitioner has failed to establish that his expenditures for her living costs during 1954 constitute "support" as that word is used in section 152 (a).There certainly was no legal duty on petitioner's273 part to support Tina and it seems obvious there was no moral reason for him to do so. It would seem to follow therefore that such living expenditures as he made for her are properly to be regarded as remuneration for the services she rendered to him as a member of his household. That being true it seems only reasonable to conclude that his payment of her living expenses is to be regarded only as wages such as are normally paid a domestic for housekeeping services. Viewed in that light petitioner furnished Tina no support whatsoever, she, by her labor, furnished her own support. Footnotes1. SEC. 152. DEPENDENT DEFINED.(a) General Definition. -- For purposes of this subtitle, the term "dependent" means any of the following individuals over half of whose support, for the calendar year in which the taxable year of the taxpayer begins, was received from the taxpayer (or is treated under subsection (c) as received from the taxpayer): * * (9) An individual who, for the taxable year of the taxpayer, has as his principal place of abode the home of the taxpayer and is a member of the taxpayer's household, or↩2. S. Rept. No. 1622, 83d Cong., 2d Sess. (1954), p. 194.↩3. Sec. 16. * * Living in adultery or fornication. -- If any man and woman live together in adultery or fornication, each of them shall, on the first conviction of the offense, be fined not less than one hundred dollars, and may also be imprisoned in the county jail, or sentenced to hard labor for the county, for not more than six months; on the second conviction for the offense, with the same person, the offender shall be fined not less than three hundred dollars, and may be imprisoned in the county jail, or sentenced to hard labor for the county, for not more than twelve months; and, on a third, or any subsequent conviction, with the same person, shall be imprisoned in the penitentiary for two years.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625870/	Catherine F. Dinkins, et al., 1 Petitioners, v. Commissioner of Internal Revenue, RespondentDinkins v. CommissionerDocket Nos. 3450-62, 3451-62, 3452-62, 3453-62, 3454-62, 4693-62, 4694-62, 4695-62, 4696-62, 4697-62, 958-63, 3998-63United States Tax Court45 T.C. 593; 1966 U.S. Tax Ct. LEXIS 125; 25 Oil & Gas Rep. 822; March 30, 1966, Filed 125 Decisions will be entered under Rule 50. Rental (a subchapter S corporation) was engaged in the business of leasing or renting construction equipment. It was required, in its highly competitive business, to have modern types of equipment available and it was also necessary to keep available the kinds of equipment currently in demand. Since its inception in 1945 Rental regularly sold its rental equipment at a time when it had substantial resale value. Held, useful lives of categories of equipment and salvage values for purposes of depreciation should be determined from Rental's past experience with respect to holding periods and resale prices. Held, further, rental is entitled to depreciation deductions on its rental equipment in the year when such equipment is sold, even though the sales price exceeds the adjusted basis of the equipment. Fribourg Navigation Co. v. Commissioner, 383 U.S. 272">383 U.S. 272. Don O. Russell and William A. Ens, for the petitioners.Glenn L. Strong and Gerald S. Walsh, for the respondent. Mulroney, Judge. MULRONEY 593 Respondent determined the following deficiencies in income tax:DocketPetitionerYearIncome taxNo.deficiency3450-62Catherine F. Dinkins1958$ 499.6619593,607.654693-62Catherine F. Dinkins19608,287.233451-62Agnes Fabick1958119.0219594,517.114694-62Agnes Fabick196010,695.853452-62Francis J. Fabick and Mildred Fabick195810,982.26195914,580.004695-62Francis J. Fabick and Mildred Fabick196017,306.133453-62John Fabick and Elaine Fabick195812,027.26195917,992.894696-62John Fabick and Elaine Fabick196020,668.023454-62Joseph G. Fabick and Gloria Fabick19581,007.98195911,602.194697-62Joseph G. Fabick and Gloria Fabick19609,931.64958-63Gilbert E. McNeill and Loretta F. McNeill1958400.7019593,461.833998-63Gilbert E. McNeill and Loretta F. McNeill19608,297.39126 The issues are (1) whether Rental Equipment Co. used the proper useful lives and salvage values for its numerous units of equipment in determining a reasonable allowance for depreciation of such equipment during the years here involved, and (2) the amount of depreciation allowable on a unit of equipment in the year that unit was sold.594 FINDINGS OF FACTSome of the facts were stipulated and they are so found.Thomas A. and Catherine F. Dinkins, husband and wife, are residents of St. Louis, Mo. They filed joint Federal income tax returns for 1958, 1959, and 1960 with the district director of internal revenue, St. Louis, Mo. Thomas A. Dinkins is not a party to these proceedings. Agnes Fabick is a resident of St. Louis, Mo., and she filed her individual Federal income tax returns for 1958, 1959, and 1960 with the district director of internal revenue, St. Louis, Mo. Francis J. and Mildred Fabick, husband and wife, are residents of Clayton, Mo., and they filed their joint Federal income tax returns for 1958, 1959, and 1960 with the district director of internal revenue, St. Louis, Mo. John and Elaine Fabick, husband and wife, are residents of Fenton, Mo., and they filed their joint Federal 127 income tax returns for 1958, 1959, and 1960 with the district director of internal revenue, St. Louis, Mo. Joseph G. and Gloria Fabick, husband and wife, are residents of St. Louis, Mo., and they filed their joint Federal income tax returns for 1958, 1959, and 1960 with the district director of internal revenue, St. Louis, Mo. Gilbert E. and Loretta F. McNeill, husband and wife, are residents of Lake Charles, La., and they filed their joint Federal income tax returns for 1958, 1959, and 1960 with the district director of internal revenue, New Orleans, La.Rental Equipment Co., hereinafter called Rental, is a corporation which was organized on May 1, 1945, under the laws of the State of Missouri as the Equipment Rental Co., which name was subsequently changed to Rental Equipment Co. Rental's principal place of business is located in St. Louis, Mo. Rental keeps its books and records and files its Federal income tax returns on an accrual method of accounting with a fiscal year ending January 31. Since its incorporation, Rental had 3,234 shares of stock outstanding, with 462 shares held by each of the following persons: Catherine F. Dinkins, Agnes Fabick, Francis J. Fabick, John Fabick, 128 Joseph G. Fabick, Loretta F. McNeill, and Maurice L. Fabick. With the exception of Maurice L. Fabick, all of the stockholders in Rental are petitioners in the cases before us.During the years in issue the officers of Rental were as follows: John Fabick, president; Francis J. Fabick, vice president and secretary; William F. Schroer, treasurer; Edward F. Kreutz, assistant treasurer; and V. E. Gruenenfelder, assistant secretary.The seven stockholders of Rental are also controlling stockholders of the John Fabick Tractor Co., which in turn owns all of the stock of four subsidiary corporations. The John Fabick Tractor Co. is principally engaged in the business of selling new Caterpillar equipment and used equipment, as well as selling parts and servicing equipment.595 Pursuant to section 1372 of the Internal Revenue Code of 1954, 2 Rental, a small business corporation as defined by section 1371, elected on November 29, 1958, with the unanimous consent of its stockholders, to be taxed as a subchapter S corporation. Rental filed a U.S. Small Business Corporation Return of Income (Form 1120-S) for each of its taxable years ended January 31, 1959 through 1961, with the district director of 129 internal revenue, St. Louis, Mo.With the exception of the construction equipment it acquired at the time of its incorporation in 1945, Rental acquired most of its construction equipment during the taxable years ended January 31, 1959 through 1961, and at all times previous thereto, from the John Fabick Tractor Co. After the various types of construction equipment were used by Rental in its business, such equipment, with few exceptions, was sold to John Fabick Tractor Co. or one of its subsidiary corporations. Thereafter the John Fabick Tractor Co., or one of its subsidiaries, sold such construction equipment to third parties.Rental's facilities consist of approximately 2 1/2 acres of land with improvements which consist of a frame office building, a corrugated metal shop building, a loading dock for heavy equipment, a railroad siding, and an equipment storage yard. Since its incorporation, one of Rental's principal business activities has been the leasing and renting of construction equipment, including tractors, traxcavators, motor graders, scrapers, bulldozers, angledozers, cranes, 130 compressors, rollers, buckets, and smaller miscellaneous units. The equipment was leased or rented primarily to contractors and to industrial plants. Rental maintained an average of 50 major units of equipment, such as tractors, cranes, and air compressors.The equipment rentals were on a daily, weekly, or monthly basis, with no recapture provisions or purchase options. Operators for the rented equipment were furnished by the customers, who were also expected to supply such preventive maintenance as adjusting clutches, oiling and greasing, and other necessary adjustments. Since the rental equipment business was highly competitive, it was necessary for Rental to make constant repairs on its equipment between rentals in order to keep it in demand. Rental's employees repaired and maintained the equipment not only in its own shop but also on the jobsites.Generally, it was necessary in the rental equipment business to have the more modern types of equipment available, and it would also be necessary to keep available the kind of equipment currently in demand. By 1958 the Caterpillar Tractor Co. had introduced a torque converter (a semiautomatic shift mechanism) on its equipment and 131 in the latter 596 part of 1959 introduced a power shift, which was a fully automatic transmission, on its equipment. Rental acquired these new models of Caterpillar equipment to replace the older models.In computing the depreciation deductions on its construction equipment for the taxable years ended January 31, 1959 through 1961, Rental applied a salvage value of 12 1/2 percent on all of its construction equipment, except buckets and smaller miscellaneous units, and used useful lives of 6 years on its various items of machinery (tractors, traxcavators, motor graders, scrapers, bulldozers, angledozers, cranes, and rollers), 8 years on its compressors, and 3 or 4 years on its buckets and smaller units. In its taxable year ended January 31, 1959, and for several taxable years prior thereto, Rental used the double declining balance method for computing depreciation on its rental equipment until the adjusted basis of the particular asset was reduced to approximately 50 percent of cost. After 50 percent of the asset was recovered through depreciation, Rental used the straight-line method of computing depreciation. For its taxable years ended January 31, 1960 and 1961, Rental used the straight-line 132 method of computing depreciation on its construction equipment with the exception of two specific assets which were depreciated on the double declining balance method.Rental claimed deductions for depreciation on construction equipment in its returns of income for the taxable years ended January 31, 1959 through 1961, in the amounts of $ 219,345.06, $ 177,984.69, and $ 157,811.58, respectively.Rental's returns for the taxable years ended January 31, 1953 through 1961, show equipment sales as follows:Cost ofPercentageTaxable year ended Jan. 31 --Total sellingequipmentof sellingpricesoldprice to cost1953$ 55,932.00$ 58,257.18961954132,615.96157,391.36841955453,591.05613,736.08741956225,042.91292,504.55771957127,333.28162,913.92781958191,095.00202,165.589519591 125,954.201 194,444.54651960133,109.16174,048.397619612 286,775.002 437,940.7965Rental's returns for the taxable years ended January 31, 1959, 1960, and 1961, show capital gains realized from the sales of equipment in the respective amounts of $ 49,704.95, $ 34,662.39, and $ 105,165.43.Rental reported receipts from rentals and other sources 133 in the taxable years ended January 31, 1959 through 1961, in the amounts of $ 404,208.03, $ 412,184.31, and $ 276,923.38. Rental's returns of income for the taxable years ended January 31, 1959 through 1961, show taxable 597 income in the respective amounts of $ 23,702.17, $ 24,835.09, and $ 21,767.07. No portion of this taxable income represented ordinary income.Respondent, in the statutory notices of deficiency, determined that Rental's allowance for depreciation for each of the taxable years ended January 31, 1959 through 1961, should take into consideration a salvage value of 60 percent of cost of the various types of construction equipment, or the undepreciated cost at February 1, 1958, whichever was lesser. Respondent also determined that the useful life in Rental's trade or business for the various types of construction equipment was as follows: 5 years for tractors, traxcavators, motor graders, scrapers, bulldozers, angledozers, cranes, and rollers; 7 years for compressors; and 3 years for buckets and miscellaneous smaller units. Respondent further adjusted Rental's claimed deduction for depreciation in the year a particular unit of equipment was sold to eliminate any depreciation 134 deduction which would reduce the adjusted basis of said unit to an amount below selling price.Respondent's disallowances of depreciation deductions claimed by Rental may be summarized as follows:DepreciationDepreciationTaxable yearDepreciationdisallowed duedisallowed inTotalended Jan. 31 --allowedto revision ofyear equipmentdepreciationsalvage valuewas solddisallowedor useful life1959$ 152,242.37$ 62,671.61$ 4,431.16$ 67,102.77196051,768.47122,448.593,767.69126,216.2819611 48,234.16104,057.125,520.501 109,577.62Since under the statutory scheme both the distributed and undistributed taxable income (as defined in sec. 1373) of a subchapter S corporation is included in the gross income of the stockholders, the various adjustments made by respondent to Rental's taxable income also caused adjustments to be made in the income of the stockholder-petitioners for the years 1958, 1959, and 1960.OPINIONThe first issue is whether respondent correctly determined the useful lives and salvage values of the construction equipment used by Rental in its leasing business. Most of the depreciation disallowed by respondent 135 in the taxable years ended January 31, 1959, 1960, and 1961, is due to the revisions made by respondent in the salvage values and useful lives of the equipment. The remainder of the depreciation disallowance results from respondent's determination that, in the years when equipment was sold, no depreciation was allowable which would reduce the adjusted basis of the equipment to an amount below selling price.598 A meaningful computation of the depreciation allowance under section 167 requires an accurate estimate of both the useful life of the depreciable asset and its salvage value at the end of such useful life. In Fribourg Navigation Co. v. Commissioner, 383 U.S. 272">383 U.S. 272, the Supreme Court noted that "It is, of course, undisputed that the Commissioner may require redetermination of useful life or salvage value when it becomes apparent that either of these factors has been miscalculated." In Massey Motors v. United States, 364 U.S. 92">364 U.S. 92, the Supreme Court held that, for depreciation purposes, the useful life of the asset must be "related to the period for which it may reasonably be expected to be employed in the taxpayer's business" and that "salvage value must include estimated resale or 136 second-hand value."It is abundantly clear from the testimony of petitioners' witnesses, as well as from the arguments made in petitioners' opening brief, that Rental's estimates of the useful lives of its numerous items of construction equipment were based on the economic or physical life of the equipment, with no apparent attempt to relate such estimates to the actual duration of use of such equipment in Rental's business. In their reply brief petitioners now accept respondent's determination that the useful life of Rental's "heavy construction equipment" was 5 years and, for compressors, 7 years. On the basis of the concession by petitioners, and in view of the absence in the record of any evidence to show the incorrectness of respondent's determinations of useful life as to any of the categories of construction equipment, we sustain respondent's determinations that the useful life in Rental's business was 5 years for tractors, traxcavators, motor graders, scrapers, bulldozers, angledozers, cranes, and rollers; 7 years for compressors; and 3 years for buckets and miscellaneous smaller units.After accepting respondent's determinations on the useful lives of the equipment as noted 137 above, petitioners then continued on brief as follows: "It follows that the decrease in life in accordance with such determination would be reflected in direct proportion by an increase in salvage value. Using an appropriate mathematical formula, this would result in a salvage value equal to fifteen per cent * * of the original cost." Petitioners argue that this salvage value is substantiated by the testimony of H. D. Anderson (who had been in the heavy construction business for many years as a distributor and who also had handled rental equipment) that if a tractor is worked down to the point of falling apart the salvage value would be junk value of 7 or 8 percent, but if the equipment is in workable condition, but no longer profitable as a rental unit, then a proper salvage value would be in the range of from 15 to 20 percent.We need not dwell on the shortcomings of these contentions. It would appear that petitioners are still ignoring the explicit holding of the Massey case that salvage value, for depreciation purposes, must 599 include resale value or second-hand value at the end of the useful life of the asset in taxpayer's business. Salvage value is not some abstract concept 138 which, as petitioners seem to indicate, can be mathematically determined without any reference to Rental's actual experience. Nor can petitioners ignore Rental's own experience and practice over the years and base the salvage value of its construction equipment on the experience of someone else who happens to be in a similar line of business. As we stated in Engineers Limited Pipeline Co., 44 T.C. 226">44 T.C. 226, 231, although industry experience is a factor to be considered, "it is the petitioner's own experience in its own business that is more important." See also Massey Motors v. United States, supra.Since its incorporation in 1945, Rental has consistently sold much of its construction equipment for amounts which represented a large percentage of its cost basis in the equipment and, at times, for amounts in excess of such cost basis. A schedule showing the approximately 195 pieces of equipment sold by Rental through its taxable year ended January 31, 1958, indicates that, in most instances, the percentage of selling price to the cost of the equipment exceeded by a comfortable margin the 60-percent salvage value figure determined by respondent. 3 Rental's returns show that the percentages 139 of selling price to cost of the equipment sold in each of the taxable years ended January 31, 1953 through 1958, range from 74 to 96 percent. Rental sold about 85 pieces of construction equipment during the taxable years ending January 31, 1959 through 1961. Rental's returns for the taxable years ended January 31, 1959 through 1961, show that the percentages of the selling price to cost of the equipment sold during this period were 65 percent, 76 percent, and 65 percent, respectively. In other words, Rental's own experience over the years amply supports the respondent's determination that an accurate salvage value for Rental's construction equipment, for the purpose of computing a meaningful allowance for the depreciation of such equipment over the period here relevant, was 60 percent of the cost of the various types of such equipment. 4140 We sustain the respondent on this issue.The next issue is whether, in a fiscal year in which a unit of equipment was sold by Rental, the depreciation deduction for that unit should be limited to that amount (if any) by which Rental's adjusted 600 basis at the beginning of the fiscal year exceeded the sale price of the unit. 5 In Fribourg Navigation Co. v. Commissioner, supra, the Supreme Court held that depreciation could be taken on a depreciable asset in the year of profitable sale of that asset and rejected respondent's position that the deduction 141 for depreciation in the year of sale of a depreciable asset is limited to the amount by which the adjusted basis of the asset at the beginning of the year exceeds the amount realized from the sale. The Supreme Court's holding in the Fribourg case is dispositive of the issue before us. We sustain the petitioners on this issue.Decisions will be entered under Rule 50. Footnotes1. The following proceedings are consolidated herewith: Agnes Fabick, an Individual, docket No. 3451-62; Francis J. Fabick and Mildred Fabick, docket Nos. 3452-62 and 4695-62; John Fabick and Elaine Fabick, docket Nos. 3453-62 and 4696-62; Joseph G. Fabick and Gloria Fabick, docket Nos. 3454-62 and 4697-62; Catherine Dinkins, docket No. 4693-62; Agnes Fabick, docket No. 4694-62; and Gilbert E. McNeill and Loretta F. McNeill, docket Nos. 958-63 and 3998-63.↩2. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise noted.↩1. Automobile, which was sold for $ 1,150, omitted.↩2. Truck, which was sold for $ 300, omitted.↩1. Additional depreciation in the amount of $ 132.13 was allowed on nonrental assets.↩3. The schedule clearly reveals the utter unreality of the 12 1/2-percent salvage value figure used by Rental. Out of the approximately 195 pieces of equipment sold by Rental through its fiscal year ended Jan. 31, 1958, only about five units were sold at a price less than 35 percent of the original cost.↩4. In Commissioner v. Evans, 364 U.S. 92">364 U.S. 92 (decided together with the Massey Motors case), the issue involved the useful lives and salvage values of automobiles used in a car rental business. Cars used in the short-term rental phase of the business were sold after being used for about 15 months. It appears that in 1950 the average cost of the cars sold in that year was $ 1,650 and they were sold for an average sales price of $ 1,380. The Tax Court (reversed by the Court of Appeals for the Ninth Circuit in 264 F. 2d 502↩, which was in turn reversed by the Supreme Court) found that the cars in question had a useful life of 15 months and a salvage value of $ 1,375, or over 80 percent of cost.5. The depreciation deduction disallowed under this issue are as follows:↩Depreciation disallowed onDepreciationFiscal year ended Jan. 31 --the ground that sales pricelimited toexceeded adjusted basis atsales pricebeginning of fiscal year1959$ 4,431.1619601,804.21$ 1,963.4819611,075.984,444.52	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625852/	Edward V. Lane and Katherine R. Lane, Petitioners, v. Commissioner of Internal Revenue, RespondentLane v. CommissionerDocket No. 79061United States Tax Court37 T.C. 188; 1961 U.S. Tax Ct. LEXIS 36; November 14, 1961, Filed 1961 U.S. Tax Ct. LEXIS 36">36 Decision will be entered for the respondent. Held, that the principal petitioner, a contractor who computed profit on a long-term construction contract on the completed contract basis, must take into account the salvage value of depreciable and amortizable assets used in performing the contract, in computing his deductions for depreciation and amortization; held, further, that petitioner's assets of such character actually had a salvage value at the time the long-term construction contract was completed; and held, further, that the amount of such value was correctly determined by the respondent to be equal to the sale prices at which such depreciable and amortizable assets were sold by petitioner, at and shortly after completion of the contract. Fielding H. Lane, Esq., and George E. Link, Esq., for the petitioners.Cyrus A. Johnson, Esq., and Edward H. Boyle, Esq., for the respondent. Pierce, Judge. PIERCE 37 T.C. 188">189 Respondent determined a deficiency in income tax against the petitioners for the calendar year 1953 in the amount of $ 142,307.78. For the succeeding year 1954, he determined an overassessment in petitioners' income tax in the amount1961 U.S. Tax Ct. LEXIS 36">37 of $ 11,248.07.The issues presented for decision are:(1) Whether in computing (on the so-called completed contract basis) the profit realized on a long-term construction contract performed by the principal petitioner's sole proprietorship, said petitioner correctly deducted as depreciation and amortization, the entire cost of certain equipment, furniture and fixtures, and camp and plant facilities which were used in performing the contract, without taking into account any amount for salvage value with respect to the mentioned items -- which items were actually sold by said petitioner at and shortly after completion of the contract, to his wholly owned corporation at about one-half of their cost.(2) Whether, if the entire cost of the above-mentioned equipment, furniture and fixtures, and camp and plant facilities was properly included in the costs and expenses of performing the contract (so as to give the petitioner a zero basis for such items), the gain realized by the principal petitioner upon the sale of such items to his wholly owned corporation is fully taxable as ordinary income, by reason of the provisions of section 117(o) of the Internal Revenue Code of 1939, rather than1961 U.S. Tax Ct. LEXIS 36">38 as long-term capital gain as returned by the petitioner. (This isssue will be reached for decision only if petitioner prevails in whole or in part on the first issue.)FINDINGS OF FACT.Some of the facts were stipulated. The stipulation of facts and the exhibits identified therein are incorporated herein by reference.Petitioners Edward V. and Katherine R. Lane were, during the years 1953 and 1954, husband and wife, with residence in Palo Alto, California. They filed a joint Federal income tax return for each of the calendar years 1953 and 1954 with the district director of internal revenue at San Francisco, California. The husband, Edward V. Lane, will hereinafter be referred to as the petitioner.37 T.C. 188">190 Petitioner has been engaged in the engineering and construction business, either as a partner, sole proprietor, corporate officer, or employee ever since his graduation from engineering school in 1932. From 1948 to 1954, he conducted his business operations principally as a sole proprietor, under the name of E. V. Lane Company (hereinafter called the proprietorship). During the years 1952 and 1953, this proprietorship was engaged in handling a long-term construction contract; 1961 U.S. Tax Ct. LEXIS 36">39 but it then completed such contract, and shortly thereafter ceased to operate. In February 1952, petitioner and his wife organized a corporation under the laws of the Republic of Panama, which was called Laneco, Inc.; and they have, at all times since incorporation, owned all of the issued and outstanding shares of the capital stock of said corporation. 1 Laneco, Inc., has performed all of its work during and after the taxable years in areas outside the United States and its possessions.Petitioner confined his proprietorship's operations to the performance of contracts for the installation of petroleum1961 U.S. Tax Ct. LEXIS 36">40 pipelines and for the erection of refineries and chemical plants. In September 1951, petitioner (acting as sole proprietor of the proprietorship) submitted a bid on a construction contract for the United States Government, to be awarded by the Okinawa Engineer District of the Far East Command of the Department of the Army, covering certain work on the island of Okinawa in the Ryukyu Islands. Shortly thereafter, on October 16, 1951, the proprietorship's bid was accepted; and it was awarded contract No. DA-92-320-FEC-107 (hereinafter, for convenience, called contract 107).Briefly described, contract 107 called for the building of steel oil-storage tanks and the installation of these tanks underground; the laying of oil pipeline from the storage tanks to pumping stations; the erecting of pumping stations; the laying of distribution lines from the pumping stations to an airfield and certain other areas; and the building of certain roads and bridges alongside the above-mentioned pipelines. The total estimated price bid by the proprietorship for the performance of contract 107 was $ 4,603,893.71. The contract was to be completed within 600 calendar days subject, however, to extensions1961 U.S. Tax Ct. LEXIS 36">41 of time for performance) after receipt by the proprietorship of notice to proceed thereunder. The proprietorship commenced work on contract 107 on November 10, 1951.In order to carry on its work under contract 107, the proprietorship constructed certain plant facilities on the island of Okinawa, such as warehouses, and an office building, and it purchased automotive 37 T.C. 188">191 and construction equipment (such as trucks, mobile cranes, and bulldozers), as well as certain office furniture and fixtures and certain fixtures and equipment for its plant buildings. In addition to the foregoing items, the proprietorship also erected on land under the control of the United States Government (located within the boundaries of one of the United States Army's military camps) certain concrete-block buildings which served as a camp or living quarters for American personnel brought by the proprietorship to Okinawa for work on contract 107. In connection with its camp, the proprietorship also purchased furniture and fixtures for use therein.Contract 107 provided, with respect to the disposition of the buildings erected for the proprietorship's camp and plant, that the same would be removed at 1961 U.S. Tax Ct. LEXIS 36">42 the petitioner's expense upon completion of the work. However, the contract contained the further provision, that with the Government's written consent, the buildings would not have to be removed.The following table shows the cost to the petitioner's proprietorship of the equipment, furniture, fixtures, and camp and plant facilities above mentioned:Automotive and construction equipment, office furniture andfixtures, plant fixtures, and equipment$ 240,312.09Camp and plant facilities140,227.11Total380,539.20The parties have stipulated that all of the above items represented property used in petitioner's trade or business.The weather and operating conditions under which the proprietorship's equipment was to be employed on contract 107 were conducive to more than normal deterioration thereof. The atmosphere on Okinawa is very humid and has a high salt content, due to the heavy rainfall and the island's location in the Pacific Ocean. These atmospheric conditions would tend to cause a greater rust problem than would be encountered at a contract site in a more temperate weather zone. Moreover, petitioner anticipated that it would be necessary to operate 1961 U.S. Tax Ct. LEXIS 36">43 the automotive and construction equipment 9-10 hours per day 6 days per week, in order to complete the contract within the specified time. Also, natives of Okinawa were to be employed to operate the equipment; and they were unskilled and unfamiliar with the equipment, and therefore were expected to cause damage to the equipment. In the light of the foregoing factors and in the light of the further factor that petitioner, at the time he commenced work on contract 107, anticipated that there would be no market for any of the equipment, furniture, and fixtures, and camp and plant facilities at the time when the job was completed, he determined to write off the entire cost of said assets (without making any allowance for 37 T.C. 188">192 salvage value therefor) as part of the costs and expenses of performing said contract.The proprietorship completed approximately 98 percent of the work on contract 107 by May 1953. Then or shortly thereafter, it was granted an extension of time, and it entirely completed performance of the contract in November 1953, when the Government accepted the work. Despite the adverse weather and operating conditions above described, petitioner was able to keep the1961 U.S. Tax Ct. LEXIS 36">44 proprietorship's equipment in serviceable operating condition, by reason of a thorough repair and maintenance program. The result was that in May 1953, when contract 107 was 98 percent completed, said equipment was not entirely worn out, as petitioner had anticipated that it would be. And further, as will presently be shown, petitioner found a market for the sale of such equipment, as well as the furniture and fixtures, and camp and plant facilities, again contrary to his original expectations.As hereinabove found as a fact, petitioner and his wife formed Laneco, Inc., in February 1952. Laneco, Inc., performed subcontract work for the proprietorship on contract 107, in the amount of $ 847,730; and in addition, in 1952, said corporation received contracts for its own account from the United States Air Force for the erection of quonset huts at an airbase located on Okinawa. In May 1953, petitioner submitted on behalf of Laneco, Inc., a bid with respect to the construction of facilities of the same type as that which had been covered by the proprietorship's contract 107. Laneco, Inc., was the successful bidder; and it was awarded a contract therefor on May 27, 1953. This contract, 1961 U.S. Tax Ct. LEXIS 36">45 which will be designated herein as contract 142, was for approximately $ 1,700,000.In order to perform contract 142, Laneco, Inc., purchased substantially all of the equipment, furniture, fixtures, and camp and plant facilities which the proprietorship had acquired or erected and used on its contract 107. Purchases of said items were made by Laneco, Inc., at various times during 4 months of 1953; and the final purchase was made on February 1, 1954. The following table shows the amount purchased by Laneco in each of the 4 months of 1953, and on February 1, 1954:1953June$ 4,175.00July1 79,500.00August1,337.50October26,600.00Total purchased in 1953$ 111,612.50Purchased on Feb. 1, 195475,710.00 Grand total of Laneco's purchases from the E. V. Lane Co.proprietorship187,322.5037 T.C. 188">193 As hereinabove found as a fact, the original cost of the assets sold to Laneco, Inc., was $ 380,539.20.The sales prices of the aforementioned equipment, furniture, fixtures, and camp and plant facilities were established by supervisory employees1961 U.S. Tax Ct. LEXIS 36">46 of the proprietorship. Independent appraisals by employees of the Army's district engineer, and by certain other individuals who were familiar with such equipment were sought by the proprietorship; and these appraisers concurred in the prices fixed by the proprietorship employees with respect to 12 trucks sold to Laneco in October 1953, as well as in the prices fixed for the sundry items of automotive and construction equipment and plant fixtures and equipment, which were sold on February 1, 1954. The appraisers were not asked to appraise any of the items of property sold to Laneco, Inc., in the months of June, July, and August 1953.Laneco, Inc., continued to use the camp and plant facilities purchased from the proprietorship until sometime late in 1955 or early in 1956, at which time they were torn down. The record does not reveal for how long Laneco, Inc., used the equipment, furniture, and fixtures which it bought, or what disposition it has made thereof.Petitioner, in the joint return which he filed with his wife for the year 1953, reported the profit which he had derived from his proprietorship from contract 107 on the so-called completed contract basis. On such basis, 1961 U.S. Tax Ct. LEXIS 36">47 he reported the entire amount received from the Government under the contract during the years 1951, 1952, and 1953; and he deducted from such receipts all of the costs and expenses claimed to have been incurred during said years in the performance thereof. Among such costs and expenses were depreciation of equipment, furniture, and fixtures and amortization of camp and plant facilities -- in the total amount of $ 380,341.13. The last-mentioned amount represented the entire cost of the said items (with the exception of $ 198.07 2). Petitioner did not take into account any salvage value for the above-mentioned assets in computing his deductions for depreciation and amortization. Also, on his 1953 return, petitioner reported the $ 111,612.50 received from Laneco, Inc., and he treated such amount as a long-term capital gain, against which he applied a zero basis. Similarly, in the 1954 return filed by petitioner and his wife, he reported the $ 75,710 received from Laneco, Inc., in that year; and he treated the same as a long-term capital gain, against which he applied a zero basis.1961 U.S. Tax Ct. LEXIS 36">48 The respondent, in his statutory notice of deficiency, determined that the deduction claimed for depreciation and amortization was excessive 37 T.C. 188">194 to the extent of $ 187,124.43. The respondent explained his action as follows:Included in the computation of costs and expenses applicable to the contract [i.e., contract 107] there is included the actual cost of equipment and facilities on hand January 1, 1953 plus the cost of acquisition of additional equipment (excepting $ 198.07) in 1953. Thus, in computing the costs and expenses applicable to the completed contract in 1953, no consideration was given to the salvage value of the equipment or plant facilities.The salvage value of the equipment and plant facilities based on sales of salvable items of Laneco Inc., a foreign corporation, in which the total outstanding shares are owned by you is $ 187,322.50. The sales were made at appraised values determined by your employees and independent appraisers.Respondent made a complementary adjustment for 1953, by which he eliminated from income the long-term capital gain reported by the petitioner on the sale of equipment and facilities to Laneco, Inc., in 1953, in the amount of $ 1961 U.S. Tax Ct. LEXIS 36">49 55,707.22. Respondent explained this complementary adjustment as follows:(c) * * It is held that the sale of equipment and plant facilities represents recovery of salvage value and no capital gain resulted from such sale. If any portion of the sale was held to be a sale made in excess of the salvage value determined under item (a) above, the gain would be considered ordinary income under the provisions of section 117(o) of the 1939 Internal Revenue Code.OPINION.The first issue presented for decision in the instant case concerns the amount of depreciation and amortization properly deductible by the petitioner in computing the profit realized by his proprietorship from the performance of contract 107. Petitioner elected to use the completed contract basis for computing that profit; and he deducted, as depreciation and amortization, substantially all of the cost which he had incurred in acquiring and constructing the assets so depreciated and amortized. The case is before us because, in computing said deductions, petitioner did not assign any salvage value to the depreciable and amortizable property; whereas the respondent determined that the property did have a salvage value, 1961 U.S. Tax Ct. LEXIS 36">50 that the amount thereof was equal to the price at which petitioner sold the depreciable and amortizable property, and that the depreciation and amortization deductions should be reduced by the amount of the salvage value.Section 23(l) of the here controlling Internal Revenue Code of 1939, allows a deduction for depreciation of a "reasonable allowance for the exhaustion, wear and tear * * * of property used in the trade or business." The proper allowance for such depreciation is "that amount which should be set aside for the taxable year * * * whereby the aggregate of the amounts so set aside, plus the salvage value, will, 37 T.C. 188">195 at the end of the useful life of the depreciable property, equal the cost or other basis of the property." (Emphasis supplied.) Regs. 118, sec. 39.23(l)-1. The language quoted from the regulations represents practically a verbatim adoption by the Internal Revenue Service of the language used by Justice Brandeis in the Supreme Court's opinion in the leading case of United States v. Ludey, 274 U.S. 295">274 U.S. 295. That the taking into account of an accurate and correct salvage value is of critical importance in the computation1961 U.S. Tax Ct. LEXIS 36">51 of a "reasonable allowance" for depreciation, is the clear teaching of the recent Supreme Court case of Massey Motors, Inc. v. United States, 364 U.S. 92">364 U.S. 92. The Court there pointed out that recognition of salvage value was necessary if income is to be correctly reflected; for, otherwise, the depreciation deduction would be overstated, and income consequently understated. Further, the Court pointed out that the use of a zero salvage value for property sold after its useful life in a taxpayer's business, could lead to a result not contemplated by Congress, viz, the reaping of profits (taxable at more favorable capital gains rates) as the result of the use of excessive depreciation deductions which lower the income taxable at ordinary income rates. Thus, there can be no doubt that salvage value must be recognized.Petitioner seeks to avoid the application of this proposition in the instant case by two contentions. First, he asserts as a factual proposition that the equipment, furniture, and fixtures actually were fully exhausted through use in performing contract 107. And, as regards the camp and plant facilities, he urges that they were situated 1961 U.S. Tax Ct. LEXIS 36">52 on land controlled by the Government which (under the terms of contract 107) could order them dismantled and removed after the completion of the contract, and, therefore, that they had no value. Based upon these premises, the petitioner argues that he correctly charged off the entire cost of these assets. We conclude that his premises are faulty. The record demonstrates that the equipment, furniture, and fixtures were still in operating condition, due to the fact that petitioner had used good maintenance practices thereon; and that these items continued to be used by Laneco, Inc., in its work on contract 142. The record further establishes that the Government practice was to allow buildings such as the camp and plant facilities, to continue to be used so long as there was a need therefor. And Laneco, Inc., did continue to use the camp and plant facilities until late 1955 or early 1956, when it completed its work for the Government, at which time said facilities were torn down.As further evidence that the assets here involved were not in fact fully depreciated, there is the fact that petitioner was able to sell the same at an amount equal to approximately one-half of their cost1961 U.S. Tax Ct. LEXIS 36">53 -- and 37 T.C. 188">196 this at the very moment when petitioner claims they were fully spent and useless. The reasonableness of the sales price of much of the assets is attested by the fact that independent appraisers concurred in the prices set thereon by the petitioner.We must reject petitioner's first contention above stated.The second string to petitioner's bow is a legal one. In essence, the contention is this: The estimate of zero salvage value, which petitioner anticipated (at the commencement of operations on contract 107) that the property would have at the completion of said contract, is controlling; and it makes no difference if in fact the property did actually have a salvage value at the completion of the contract. Even if we assume that his anticipations were reasonable (a matter by no means certain on this record), we must still reject his second contention.Laying to one side, for the moment, the fact that petitioner elected to compute his profit on contract 107 on the completed contract basis, petitioner's argument is unsound even as applied to a taxpayer who computes depreciation, with respect to assets used in his business, on a year-to-year basis. This Court1961 U.S. Tax Ct. LEXIS 36">54 stated in Wier Long Leaf Lumber Co., 9 T.C. 990">9 T.C. 990, 9 T.C. 990">998, reversed on another issue 173 F.2d 549 (C.A. 5): It has long been the rule that depreciation deductions are to be corrected in any year when it is apparent that the factor involving the extent of useful life is erroneous [n2] (see e.g., Washburn Wire Co. v. Commissioner (C.C.A., 1st Cir.), 67 Fed. (2d) 658), and that the reasonableness of a deduction for depreciation is to be determined upon conditions known to exist at the end of the period for which the return is made. Regulations 111, sec. 29.23 (l)-5. See Commissioner v. Mutual Fertilizer Co. (C.C.A., 5th Cir.), 159 Fed. (2d) 470. An adjustment to correct for mistaken salvage value is no different from an adjustment of a mistaken estimate of years of use. In this manner depreciation can be kept to an accurate provision for the return of petitioner's capital investment in the property. This is what the law contemplates. See Helvering v. Virginian Hotel Corporation, 319 U.S. 523">319 U.S. 523. [Footnote omitted.]And, in 1961 U.S. Tax Ct. LEXIS 36">55 the more recent case of Cohn v. United States, 259 F.2d 371 (C.A. 6), the Sixth Circuit defined the issue to be "whether salvage value can be adjusted at or near the end of the useful life of the asset when it is shown by an actual sale of the asset that there is a substantial difference between what was estimated and what it actually is"; and the court further stated the taxpayer's "fundamental contention [to be] that salvage value, having been determined at the time of acquisition, can not be redetermined at any time thereafter." The court then proceeded to resolve the stated issue, against the taxpayer, in the following language:On the basis of the settled principles hereinabove referred to, we do not agree with appellants' contention. Depreciation involves a combination of useful life 37 T.C. 188">197 and salvage value, both estimated. If, under certain circumstances, depreciation can be reconsidered through a redetermination of useful life, it would seem logical to permit at least at the same time, a reconsideration and redetermination of salvage value. * * * [Citing Wier Long Leaf Lumber Co., 9 T.C. 990">9 T.C. 990.]The foregoing1961 U.S. Tax Ct. LEXIS 36">56 authorities involved taxpayers who were actually faced with the necessity of estimating a salvage value of depreciable assets at the time of acquiring the same. In the instant case, however, the petitioner faced no such necessity. He elected to compute his profit, as we have said, on the completed contract basis. Depreciation, under that method, is an amount equal to cost of the assets, less the salvage value thereof. And depreciation is not taken, under said method, pro rata over the years during which the contract is performed; but, rather, it is taken as one lump sum, in the year when the contract is completed. Therefore, salvage value of depreciable assets need not be fixed at the commencement of the contract; it must be found, and deducted from cost, when the contract is completed. It is thus seen to be totally immaterial and irrevelant, what petitioner's anticipation of salvage values were when these assets were acquired.There remains the question, under this issue, of whether the sales prices of the assets to Laneco, Inc., represented salvage value. The Supreme Court, in 364 U.S. 92">Massey Motors, supra, indicates that resale value is an accurate 1961 U.S. Tax Ct. LEXIS 36">57 measure of salvage value. And, we think, the Sixth Circuit approved actual sales price as an accurate yardstick for measuring salvage value. In the instant case, most of the property involved was actually sold prior to completion of the contract in November; and all of it had been sold prior to the time when petitioner filed his 1953 return. In such circumstances, we think it was correct, and fair and reasonable, for the respondent to use, as he did, the actual sales prices as the measure of salvage values.We sustain the respondent on this issue.We do not reach the second issue framed in our preliminary statement. That issue is whether, if the petitioner's basis for the assets sold to Laneco, Inc., were less than the sales price, the resultant gain would be taxable to him as ordinary income (rather than long-term capital gain), under the provisions of section 117(o) of the 1939 Code. Our holding under the first issue in the instant case, has the effect of equating petitioner's basis for the assets, with the sales price thereof. See section 113(a) and (b)(1)(B)(i) of the 1939 Code. Hence there was no gain on the sale to be taxed.Decision will be entered for the respondent1961 U.S. Tax Ct. LEXIS 36">*58 . Footnotes1. At or about the same time that Laneco, Inc., was organized, petitioner and his wife organized another corporation, of which they were the sole stockholders, called E. V. Lane Corporation. The latter corporation was organized under the laws of the State of Nevada, and was utilized for the performance of construction contracts within the continental United States. Its operations are not involved in the instant case.↩1. $ 76,000 of this amount represents the purchase price of all of the camp and plant facilities.↩2. For reasons not explained in the record, petitioner did not fully depreciate three pickup trucks. Rather, he depreciated all except $ 198.07 of the cost of said trucks. Such trucks were the only items of equipment not fully depreciated by petitioner.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625837/	PAUL A. TAYLOR AND SUSAN A. TAYLOR, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentTaylor v. CommissionerDocket Nos. 27217-89, 27218-89, 27221-89.United States Tax CourtT.C. Memo 1992-219; 1992 Tax Ct. Memo LEXIS 233; 63 T.C.M. 2755; April 13, 1992, Filed 1992 Tax Ct. Memo LEXIS 233">233 Decisions will be entered under Rule 155. David M. Monypeny and Mark D. Talley, for petitioners. Paul M. Kohlhoff, for respondent. SHIELDSSHIELDSMEMORANDUM OPINION SHIELDS, Judge: In these consolidated cases, respondent on August 11, 1989, mailed to petitioners a separate deficiency notice for each of the taxable years 1981, 1982, and 1984 in which she determined additions to petitioners' Federal income taxes as follows: Additions to taxYearSec. 6653(a)(1)Sec. 6653(a)(2)Sec. 66591981$ 54.451$ 326.701982137.951827.701984186.7011,120.20Unless otherwise, indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. After concessions the only issue is whether respondent's determination of additions to tax under sections 6653(a)(1) and1992 Tax Ct. Memo LEXIS 233">234 (2) and section 6659 are invalid because the underlying deficiencies previously assessed pursuant to section 6225(c) are invalid since respondent failed to mail to petitioners copies of the notice of the beginning of administrative proceeding (NBAP) and of the notice of final partnership administrative adjustment (FPAA) with respect to returns filed by a partnership in which petitioners have an indirect interest. These cases were submitted fully stipulated under Rule 122. The stipulation of facts and the exhibits attached thereto are incorporated herein but to the extent pertinent the facts are summarized below. Petitioners resided in Tennessee at the time they filed their petitions. In 1984, they purchased a 3.3-percent interest in a general partnership known as West Coast Group (West Coast). At that time and during all relevant periods, West Coast held a 36.52-percent limited partnership interest in a partnership known as International Ordinance, Ltd. (International). International is subject to the partnership audit and litigation procedures of subchapter C of chapter 63 of the Internal Revenue Code. It was formed in 1984 by Donald R. Bacot (Bacot) purportedly to develop, 1992 Tax Ct. Memo LEXIS 233">235 produce, and sell an automatic weapon known as the Phantom SM-90 submachine gun (SM-90). At all relevant times, the partners in International consisted of Bacot, a general partner and also International's tax matters partner (TMP), and three limited partners, West Coast, Northwest Group, Ltd., and Far North Group, Ltd.On its partnership return for 1984 International claimed an ordinary loss and an investment tax credit. On its partnership return for 1984, West Coast reported an ordinary loss as well as an investment tax credit attributable to West Coast's limited partnership interest in International. On their joint income tax return for 1984, petitioners claimed a loss and an investment tax credit for the portion of West Coast's loss and investment tax credit attributable to their general partnership interest in West Coast. For 1984, petitioners also filed a Form 1045 on which they claimed a tentative carryback to their returns for 1981 and 1982 of an unused portion of their investment tax credit for 1984 attributable to their interest in West Coast. On April 28, 1986, respondent commenced an examination of International's partnership return for 1984 and mailed copies of an1992 Tax Ct. Memo LEXIS 233">236 NBAP to Bacot and to each of International's limited partners, i.e., West Coast, Northwest Group, Ltd., and Far North Group, Ltd. On August 13, 1987, the scope of respondent's examination was expanded to include International's 1985 partnership return. During the examination, respondent determined that the patent for the SM-90 was held by a company other than International, that the production rights for the SM-90 had a de minimis value, and that the principal purpose of the partnership was to provide tax sheltering advantages to its investors. Accordingly, respondent disallowed the ordinary loss and investment tax credit claimed by International on its 1984 partnership return. On March 14, 1988, respondent mailed copies of an FPAA regarding among other things International's partnership return for 1984 to Bacot and to each of International's limited partners, including West Coast. Respondent did not mail copies of the NBAP and the FPAA to petitioners. Neither Bacot, the TMP, nor any other partner of International filed a petition with this Court for a readjustment with respect to the FPAA. Consequently, respondent computed the deficiencies in income tax of petitioners for 1992 Tax Ct. Memo LEXIS 233">237 1981, 1982, and 1984, which were attributable to the flowthrough of the disallowed loss and investment credit claimed by International for 1984, and on August 10, 1989, assessed such deficiencies against petitioners pursuant to section 6225. On August 11, 1989, respondent mailed to petitioners pursuant to section 6230(a)(2) a separate notice of deficiency for each of the years 1981, 1982, and 1984 in which she determined additions to tax for such years under section 6653(a)(1) and (2) and section 6659. Petitioners timely filed a separate petition from each notice. In their petitions, as amended, petitioners seek redeterminations that the additions to tax determined by respondent are invalid because the additions are determined by reference to underlying deficiencies which in turn are invalid because respondent failed to mail petitioners copies of the NBAP and the FPAA mailed to International. Petitioners were never direct partners in International; rather, they were partners in West Coast which was a "pass-thru" partner in International. Partners in a "pass-thru" partnership are not generally entitled to receive copies of the NBAP and FPAA from respondent, sec. 6223(a), unless1992 Tax Ct. Memo LEXIS 233">238 the name, address, and profits interest of a partner in the "pass-thru" partner is shown on the partnership return in issue or such information has been furnished to respondent in accordance with applicable regulations. Sec. 6223(c). 1 Petitioners were not identified as partners pursuant to section 6223(c). Since petitioners were not so identified, respondent was not required to mail copies of the NBAP and FPAA to them. Under these circumstances, section 6223(h) requires the tax matters partner of the "pass-thru" partnership (West Coast) to forward copies of the NBAP and FPAA to partners of the "pass-thru" partnership. Section 6230(f) provides that the failure of the tax matters partner to forward copies of the NBAP and FPAA to a partner in the "pass-thru" entity does not affect the applicability of partnership proceedings to such partner. The deficiencies previously assessed against petitioners under section 6225(c) are thus attributable to partnership items, specifically, the disallowance of a flowthrough loss and an investment tax credit from the partnership, International, whether or not petitioners received timely notice of the NBAP and FPAA from the tax matters partner1992 Tax Ct. Memo LEXIS 233">239 of West Coast. Therefore, the additions to tax determinations by respondent under section 6653(a)(1) and (2) and section 6659 are sustained. The parties have stipulated that the correct amounts of (1) the addition to tax under section 6653(a)(1) and (2) is zero in each year and (2) the additions to tax under section 6659 are $ 163.35, $ 413.85, and $ 560.10 for 1981, 1982, and 1984, respectively. Although increased interest under section 6621(c) was not determined by respondent in the deficiency notices or asserted by respondent in the answers, we note that the parties have also stipulated that the deficiencies in tax assessed by respondent for 1981, 1982, and 1984, in the amounts of $ 1,089, $ 2,759, and $ 3.734, respectively, are substantial underpayments attributable to tax-motivated1992 Tax Ct. Memo LEXIS 233">240 transactions for the purpose of computing the interest payable with respect to such deficiencies under section 6621(c). Decisions will be entered under Rule 155. Footnotes1. 50 percent of the interest due on $ 1,089, $ 2,759, and $ 3,734 for 1981, 1982, and 1984, respectively.↩1. Respondent's failure to satisfy the notice requirements prior to the conclusion of the partnership proceeding will result in the partnership items of a partner who was not given notice to be treated as nonpartnership items. Sec. 6223(e).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625838/	VANADIUM METALS CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. J. ROGERS FLANNERY & CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. FLANNERY BOLT CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Vanadium Metals Co. v. CommissionerDocket Nos. 14983, 14984, 17190.United States Board of Tax Appeals14 B.T.A. 937; 1928 BTA LEXIS 2882; December 27, 1928, Promulgated 1928 BTA LEXIS 2882">2882 The petitioners were not affiliated with each other or with any other corporations during the tax years involved. Kenneth N. Parkinson, Esq., j. Rogers Flannery, Esq., and John K. Hulse, C.P.A., for the petitioners. Eugene Meacham, Esq., and C. W. Lowry, Esq., for the respondent. SMITH 14 B.T.A. 937">937 These proceedings, consolidated for the purpose of hearing and decision, are for the redetermination of deficiencies in income and profits tax as follows: Vanadium Metals Co., Docket No. 17190, for the calendar year1917 and for the fiscal period January 1 to September 30, 1918,and for the year ended September 30, 1919$5,128.65J. Rogers Flannery & Co., Docket No. 14983, for the calendaryear 19191,301.03Flannery Bolt Co., Docket No. 14984, for the calendar year 192010,545.99Most of the issues involved were settled by stipulation of the parties at the hearing. The question of an allowance of $40,109.09 for amortization or exhaustion in 1919 of the cost to the Flannery Bolt Co. of the selling contract purchased by it from J. Rogers Flannery & Co. for $112,500 is to be held in abeyance pending decision of the Board1928 BTA LEXIS 2882">2883 upon the question of affiliation of a group of companies at which time it will be covered in the redetermination submitted under Rule 50 of the rules of the Board. The issue submitted to the 14 B.T.A. 937">938 Board for determination at this time is the affiliation of the following companies for all the years involved: Flannery Bolt Co.J. Rogers Flannery & Co.Vanadium Metals Co.Electro Vanadium Reduction Co.American Vanadium Co.Keystone Nut Lock Mfg. Co.Vanadium Chemical Co.Collier Land Co.The petitioners submit that all of these companies were affiliated during the taxable periods involved; the respondent denies that any one of these companies was affiliated with any other. FINDINGS OF FACT. 1. On February 13, 1904, a small group of friends and business associates presided over by James J. Flannery and Joseph M. Flannery, brothers, and J. Rogers Flannery, son of James J. Flannery, organized the Flannery Bolt Co. under the laws of Pennsylvania, for the purpose of acquiring from one John B. Tate his patent rights to the Tate Staybolt and for the purpose of manufacturing and selling the bolt. This group of men had long been associated in various enterprises and1928 BTA LEXIS 2882">2884 were particularly interested in the development of new enterprises holding forth prospects of ultimate financial success. 2. The Staybolt was designed and patented to relieve a need in the locomotive industry in that theretofore the bolt or brace supporting or holding the upper and lower portions of the water compartment of a locomotive was rigid, with the result that expansion and contraction resulting from the heating process frequently either broke the bolt or pulled it from its socket, cracking the boiler plate and thus damaging the boiler materially, necessitating frequent inspections and repairs. 3. The Flannery Bolt Co. at first had others do its manufacturing. In 1904, however, it acquired a factory site at Bridgeville, Pa., at a point approximately 12 miles from Pittsburgh, and erected suitable buildings thereon. 4. In order to insure a widespread interest among locomotive manufacturers and railroad companies, certain key men in those and allied industries, friends of the Flannerys widely scattered throughout the country, were invited to and did become stockholders, each individual being permitted to acquire but a few shares of stock and only upon the personal1928 BTA LEXIS 2882">2885 invitation or solicitation of one of the Flannerys. In some instances the stock was sold for cash; in others for services rendered. The purpose in the mind of the Flannerys in permitting these key men to become stockholders was to obtain their cooperation in furthering the widespread use of the Staybolt. 14 B.T.A. 937">939 5. A block of stock was also set aside for the principal employees of the Flannery Bolt Co. upon preferential terms, thus stimulating their interest, the selection thereof and financial arrangements therefor being handled by James J. Flannery, who was elected president of the company. Others of the original group served as officers and directors. 6. From the beginning of this Company, James J. Flannery was looked upon as the guiding genius. He was the most important man in the organization up to the date of his death March 6, 1920. While consulting his associates freely, he nevertheless determined every policy of the company. Directors' meetings were held regularly but consisted mostly of ratifying the acts and recommendations of James J. Flannery. 7. In the selection of employees to occupy principal positions, etc., James J. Flannery consulted no one1928 BTA LEXIS 2882">2886 and these employees reported to and received their instructions from him alone. Written contracts for the erection of buildings, etc., were considered by him unnecessary, such work in all instances being placed in the hands of his friend, C. H. Kerr, a contractor in whom James J. Flannery had absolute confidence. Flannery determined and supervised every policy and act of the company from the beginning until his death, receiving always the complete support of his associates and stockholders. 8. With but minor exceptions, stockholders never attended the annual meetings, but returned proxies to James J. Flannery or some one designated by him, such proxies being prepared by him or under his direction, designating in advance the substitute, and never was an exception taken thereto. No reports of any nature or description were ever submitted to stockholders. 9. In 1905 the Flannery group which founded the Flannery Bolt Co. became interested in and acquired vanadium properties in Peru, and, on February 15, 1906, organized the American Vandium Co. under the laws of New Jersey for the purpose of mining and smelting vandium, which is an alloy for mixture with steel and other metals. 1928 BTA LEXIS 2882">2887 10. The officers and directors of the Flannery Bolt Co. became the officers and directors of the American Vanadium Co., with James J. Flannery as president. A factory was erected at Bridgeville, Pa., adjoining the plant of the Flannery Bolt Co., and on the property of the Flannery Bolt Co., thus enabling the joint use of facilities, men, and equipment. The offices of the companies were maintained together, using joint space, equipment, and men. 11. The stockholders of the Flannery Bolt Co. were invited by the Flannerys to become stockholders in the American Vanadium Co.14 B.T.A. 937">940 and practically without exception took advantage of the opportunity. In addition, individuals occupying key positions in the locomotive and steel industries who had been unable to acquire stock in the Flannery Bolt Co., were invited to and did become stockholders, either in their own names or in the names of members of their immediate families, in the American Vanadium Co., with the same restriction as to amount, etc. 12. In each instance the Flannerys represented to prospective stockholders, invited to become such by them, that the Flannerys were in the market for their stock if in any case1928 BTA LEXIS 2882">2888 they should become dissatisfied and wish to dispose of it. As a result of this policy shares of stock of the American Vanadium Co. and of the Flannery Bolt Co., and of companies later to be mentioned, were never sold in the open market. 13. The same policy as to the management and conduct of affairs as in the Flannery Bolt Co. was pursued by James J. Flannery in the American Vanadium Co., and with equal force and effect. 14. With the formation of the Flannery Bolt Co. and the American Vanadium Co., the dominating group set out on a program of expansion. From these two companies all other companies mentioned hereinafter were organized, with the object either of fostering the greater use and development of vanadium and of/or fostering some line of development closely allied to the Staybolt or of increasing the sales of either or both. 15. Always in the development of these later organizations James J. Flannery, Joseph M. Flannery, or J. Rogers Flannery stood out as the moving or controlling factor, but over all stood out the personality and leadership of James J. Flannery. 16. The remaining companies were organized in manner and form as follows: (a) The Keystone Nut1928 BTA LEXIS 2882">2889 Lock Manufacturing Co. was organized February 13, 1907, under the laws of New Jersey, by the same group which founded the Flannery Bolt and American Vanadium Cos., for the purpose of manufacturing and selling nut locks for use on locomotives, with an authorized capital stock of $200,000, divided into 2,000 shares of $100 par value. The manufacturing of this nut lock was done by and in the Flannery Bolt Co. plant. Sales were handled through J. Rogers Flannery & Co. This company proved unsuccessful, and since 1908 has been in effect nothing more than a holding company. (b) From 1906 to 1908 J. Rogers Flannery served in the capacity of sales manager of the Flannery Bolt Co. In 1908 he secured from that company an exclusive selling contract for the life of the Tate Bolt Patents on the basis of a set commission per bolt, irrespective 14 B.T.A. 937">941 of the selling price thereof. Upon the receipt of this contract he incorporated the J. Rogers Flannery Co., and to it assigned his selling contract, in consideration of its capital stock. A portion of this stock he issued to employees of the company without consideration, in order to stimulate their selling activities. A portion likewise1928 BTA LEXIS 2882">2890 was presented as a gift to his father and his wife. The balance he retained in his own name. J. Rogers Flannery was the president of this company. His vice president was also vice president and general manager of the Flannery Bolt Co. Advertising, etc., was prepared and distributed by the Flannery Bolt Co. at the expense of J. Rogers Flannery & Co. Contracts for the purchase of bolts were secured by representatives of this company in the name of the Flannery Bolt Co. (c) The Vanadium Metals Co. was organized on October 7, 1909, under the laws of New Jersey, with an authorized capital stock of $300,000, divided into 2,000 shares of common and 1,000 shares of preferred stock, each of $100 par value, and both having equal voting rights. This company was formed to manufacture bronze products, using vanadium as an alloy with other metals. The moving spirit behind the organization of this company was J. Rogers Flannery. Upon its formation this company purchased the secret processes for incorporating vanadium into composition metals owned by the Victor Metals Co., of East Braintree, Mass., and the small foundry in which the latter was operated. This company made a long-term contract, 1928 BTA LEXIS 2882">2891 which is still in existence, with the New London Ship & Engine Co., a subsidiary of the Electric Boat Co., and the Submarine Boat Corporation, which built submarines at Groton, Conn. Under the terms of this contract a large foundry was built by the Vanadium Metals Co. on the leased property of the New London Ship & Engine Co., to and for the requirements of the latter company, and the small foundry at East Braintree, Mass., was disposed of. The executive, selling, accounting, and purchasing offices of this company were located in the general offices of the Flannery interests. The location of the plant in Groton, Conn., rather than in Bridgeville, Pa., with the other Flannery plants, was due to the enormous requirements of the New London Ship & Engine Co. for the product of this company and to the necessity of being in close proximity to that company's plant. As in the other companies, the same small group of men who founded the Flannery Bolt and American Vanadium Companies were the dominant factors. Again the same stockholders of the Flannery Bolt Co. and the American Vanadium Co., together with other "key men," were invited to, and most of them did, become stockholders in the1928 BTA LEXIS 2882">2892 new company. Since the very purpose of the organization of this company was to expand the use of vanadium, all of its vanadium was purchased from the American Vanadium Co.14 B.T.A. 937">942 (d) The Vanadium Chemical Co. was organized on March 15, 1910, under the laws of Delaware, with an authorized capital stock of $500,000, consisting of 5,000 shares of a par value of $100 per share. This company was organized for the purpose of manufacturing and selling certain vanadium compounds for medicinal and pharmaceutical purposes, the American rights to which had been acquired by Joseph M. Flannery from the French discoverer thereof. This company also acquired from James J. and Joseph M. Flannery certain hotel properties located at Cambridge Springs, Pa., which hotel was operated as a sanatorium in connection with the use of curative vanadium compounds. Its capital stock was owned by those invited to become such, the same as was the case in the prior companies organized. (e) The Collier Land Co. was organized on April 12, 1910, under the laws of Pennsylvania, with an authorized capital stock of $500,000, divided into 10,000 shares of $50 each. This company was organized as a holding1928 BTA LEXIS 2882">2893 company of the real estate of all of the different corporations comprising the Flannery interests, and for the further purpose of erecting an office building into which all of the companies might maintain their offices, etc. In addition it erected houses adjacent to the Flannery Bolt and the American Vanadium Co. plants for sale or rent to the employees of these or other of the Flannery companies. Most of its capital stock was owned by the Flannery Bolt and the American Vanadium Cos. during the years in question, and in almost equal proportions. The outstanding capital stock during the years 1917 to 1920, inclusive, was $405,300, and consisted of 8,106 shares held as follows: StockholdersSharesJames J. Flannery2Joseph M. Flannery2J. C. Gray2American Vanadium Co4,000Flannery Bolt Co4,100The surplus account of the Collier Land Co., as shown on its books, was as follows: Dec. 31, 1916$110,446.64Dec. 31, 1917126,638.19Dec. 31, 1918136,792.02Dec. 31, 1919143,795.76Dec. 31, 1920155,029.30The Collier Land Co. paid no dividends at any time. (f) The Electro Vanadium Reduction Co. was organized in July, 1914, 1928 BTA LEXIS 2882">2894 under the laws of Delaware, for the purpose of using vanadium in babbitt and other bearing metals. It had an authorized capital stock of $100,000, divided into 1,000 shares of $100 par value per 14 B.T.A. 937">943 share. The operations of this company were carried on in the factory of the Flannery Bolt Co. and financed by the Vanadium Metals Co. 17. The stockholdings of the companies at December 31, 1917, are shown in percentages by the following table. There is no material difference in the percentages of these groups from December 31, 1916, to December 31, 1920, inclusive, except in the case of the American Vanadium Co., where the percentage owned by the Flannery family, officers, directors, and incorporators increased from 67.65 per cent at December 31, 1917, to 68.52 per cent at December 31, 1918; to 74.28 per cent at December 31, 1919; and to 79.87 per cent at December 31, 1920, and in the case of J. Rogers Flannery & Co., where the percentage owned by the same group increased from 91.33 per cent at December 31, 1917, to 100 per cent at December 31, 1918, and remained at that percentage thereafter. The first column shows the stockholdings by the Flannery family, officers, directors, 1928 BTA LEXIS 2882">2895 and incorporators. This group consists of stock held in the name of 77 individuals. The second column shows stockholdings by employees of the various corporations and consists of stock held in the name of 58 individuals. The third column, called by the petitioners "Investing Associates," shows stockholdings of key men in different industries invited to become stockholders by the Flannerys and persons receiving stock for patents, formulae, etc. Stock held by this group was held by 178 different individuals. The fourth column shows stockholdings by different companies of the total group claiming affiliation. The fifth column shows stock held in the name of 18 different individuals who have not been identified as members of any other group. FlanneryUniden-family,"Invest-Inter-tifiedofficers,Em-ing asso-companydirectors,ployeesciates"and incor-poratorsPer centPer centPer centPer centPer centFlannery Bolt Co49.9410.0837.450.971.56American Vanadium Co67.6525.42.95Keystone Nut Lock Manufacture 45.40.501.3552.75J. Rogers Flannery & Co91.338.67Vanadium Metals Co69.093.0326.831.05Collier Land Co.0799.93Vanadium Chemical Co48.181.4534.2014.181.99Electro Vanadium Reduction Co1001928 BTA LEXIS 2882">2896 The Flannery Bolt Co. owned 52.75 per cent of the capital stock of the Keystone Nut Lock Manufacturing Co. at the end of each of the years 1917 to 1920, inclusive. The Flannery Bolt Co. owned 49.34 per cent and the American Vanadium Co. 50.59 per cent of the capital stock of the Collier Land Co. at December 31, of each of the years 1917 to 1920, inclusive. 14 B.T.A. 937">944 18. Intercompany relationships were as follows: (a) Prior to the erection of the Flannery Building in 1912, all of the companies composing the Flannery group occupied joint offices in the Frick Building, Pittsburgh. Subsequent to the erection of the Flannery Building by the Collier Land Co., all the companies occupied joint offices on the third floor of that building, such an arrangement serving to facilitate convenience and at the same time making the common usage of employees and office facilities. Office rentals were determined and arbitrarily fixed by James J. Flannery, as president of the Collier Land Co. All companies used a common switchboard for telephones and common telegraph instruments, contributing a flat amount to regular service as determined by James J. Flannery. Messenger service was common1928 BTA LEXIS 2882">2897 to all companies. (b) The plant of the Flannery Bolt Co. was erected and in operation at the time the American Vanadium Co. was formed. Upon the organization of the latter company a factory was erected by, virtually extending that of, the Flannery Bolt Co. and upon the land of the Flannery Bolt Co. In 1914, the demands of the American Vanadium Co. having increased, a new plant was erected within a distance of a few hundred feet on land owned by the Collier Land Co. The Flannery Bolt Co. extended its operations to include the old plant of the American Vanadium Co. Both plants used common dining facilities, trackage, power, labor and laboratory facilities, etc. The respective plant superintendents conferred daily and frequently the Flannery Bolt Co. superintendents served as superintendents of both plants. The products of the Keystone Nut Lock Manufacturing Co. and those of the Electro Vanadium Reduction Co. were manufactured by the Flannery Bolt Co. and all companies availed themselves of the laboratory facilities of the American Vanadium Co.(c) Upon the acquisition of the real estate of the companies the Collier Land Co. laid out a townsite adjacent to the plants of the1928 BTA LEXIS 2882">2898 Bolt and the American Vanadium Companies and erected thereon company houses either for rent or sale to employees of these companies. The plans were drawn and streets named for officials of the Flannery Bolt and American Vanadium Companies. All this was done at the instigation and under the direction of James J. Flannery. (d) Virtually all banking and financing of all companies was done at the Oakland Savings & Trust Co., which occupied the first floor of the Flannery Building, owned by the Collier Land Co. James J. Flannery was president of the Trust Co. from its organization until his death in 1920, and controlled its policies. The companies involved herein did no borrowing but were heavy depositors. Employees desiring to avail themselves of the opportunity to purchase 14 B.T.A. 937">945 stock were financed by the Trust Co. at the direction of James J. Flannery, who likewise was consulted on all private loans made to employees. (e) The companies named as parties to these proceedings made certain loans and advances to each other on open account without interest and without security. The extent of this financing was, however, unimportant. (f) The office employees, such as accountants, 1928 BTA LEXIS 2882">2899 etc., were located in the Flannery Building, generally being assigned to space without consideration to the company with whom they were officially connected and subject to call and rendering service to any and all within the group and without charge therefor except to the company or companies officially employing them. (g) All companies purchased supplies through a common purchasing agent appointed by and responsible to James J. Flannery. Stationery, supplies, and general office equipment were used by each company and without cost other than to the American Vanadium Co. and the Flannery Bolt Co. All other supplies were charged to the consumer on a basis of consumption. (h) Substantially the same individuals served on the various boards of directors from the beginning of the companies to and throughout the years in question, resulting in uniform control and management and the utmost informality. Directors' meetings served to ratify acts already performed or determined under the direction of James J. Flannery. Stockholders' meetings were also informal and served primarily to satisfy legal requirements and to reelect the same individuals as officers and directors. But few stockholders1928 BTA LEXIS 2882">2900 ever attended and they were content to rely on the judgment of the Flannerys. The remaining stockholders took no active part whatever, being content to receive their dividend checks, and, like the others, rely on the judgment of the Flannerys. No reports of any kind were submitted to or requested by stockholders. The utmost harmony prevailed, no dissension of any kind ever having asserted itself. OPINION. SMITH: The petitioners claim that from January 1, 1917, to December 31, 1920, they were members of an affiliated group consisting of Flannery Bolt Co., American Vanadium Co., J. Rogers Flannery & Co., Keystone Nut Lock Manufacturing Co., Vanadium Metals Co., Vanadium Chemical Co., Electro Vanadium Reduction Co., and the Collier Land Co. Each of the petitioners has been held by the respondent to be nonaffiliated with any other company. 14 B.T.A. 937">946 The applicable provisions of the Revenue Acts controlling this situation are section 1331 of the Revenue Act of 1921, and section 240 of the Revenue Act of 1918, the pertinent portions of which read as follows: SEC. 1331. (b) For the purpose of this section a corporation or partnership was affiliated with one or more corporations1928 BTA LEXIS 2882">2901 or partnerships (1) when such corporation or partnership owned directly or controlled through closely affiliated interests or by a nominee or nominees all or substantially all the stock of the other or others, or (2) when substantially all the stock of two or more corporations or the business of two or more partnerships was owned by the same interests: Provided, That such corporations or partnerships were engaged in the same or a closely related business, or one corporation or partnership bought from or sold to another corporation or partnership products or services at prices above or below the current market, thus effecting an artificial distribution of profits, or one corporation or partnership in any way so arranged its financial relationships with another corporation or partnership as to assign to it a disproportionate share of net income or invested capital. * * * (c) The provisions of this section are declaratory of the provisions of Title II of the Revenue Act of 1917. SEC. 240. (b) For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests1928 BTA LEXIS 2882">2902 or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests. With respect to the year 1917, controlled by section 1331 of the Revenue Act of 1921, the respondent contends that substantially all the stock of two or more of the companies was not owned by the same interests for the reasons (1) that the companies were not engaged in the same or a closely related business; (2) that there was no artificial distribution of profits through the buying or selling of products or services (as between the companies) at prices above or below the current market; and (3) that there was no assignment from one company to the other of a disproportionate share of net income or invested capital through arrangements of financial relationships. The respondent further contends that for the years 1918, 1919, and 1920 the companies were not affiliated, since substantially all of the stock of two or more of the companies was not owned or controlled by the same interests. For all of the years 1917 to 1920, inclusive, it is manifest that two or more corporations can not1928 BTA LEXIS 2882">2903 be considered as affiliated unless "one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the others" or unless "substantially all the stock of two or more corporations is owned or controlled by the same interests." In , we said: The "control" referred to by section 240 of the statute is of "substantially all of the stock," not simply corporate control of the conduct of the business or 14 B.T.A. 937">947 policy pursued. Cooperation in or consent to corporate control or policy, by the giving of proxies or otherwise, does not necessarily mean control or ownership of substantially all of the stock. * * In interpreting the statute and its kindred provision of the Revenue Act of 1918, it has been held that there must be full and complete control of substantially all the stock and that this control must be a genuine one actually exercised. ; 1928 BTA LEXIS 2882">2904 ; . Control of the business of a corporation is not control of its stock, within the meaning of the statute, and where there is control of a corporation's business, but there are quiescent stockholders present, representing a sizeable minority, such business control does not amount to the control of substantially all of the stock. . The Board has also held "the control, however, referred to in the statute, whether it be legal or otherwise, means control of the voting rights of the stock." ; ;. In , we said: * * The facts that stockholders would have given proxies to the majority to vote their stock, had such request been made; that the minority stockholders were friendly to the majority; that at the time the minority purchased their stock, there was some sort1928 BTA LEXIS 2882">2905 of oral understanding that the majority would be given an opportunity to buy stock which the minority might desire to sell, and other similar circumstances are not sufficient to convince us that the control of the voting rights of stock contemplated by the statute existed in this case. In , we said: * * The mere fact of relationship by blood or affinity does not of itself constitute proof of control, and the same may be said of friendship. * * * In , we said: * * * The fact of intercompany relations, or the absence of them, without the necessary stock ownership or control as provided in the statute, is not sufficient to permit or require affiliation. * * * In the instant proceedings the petitioners seek to make out a case of affiliation, not so much on the theory that the stock of what may be called minority interests was controlled by the majority or dominant interests, but rather on the theory that the stockholders of the various companies as a whole constituted the same interests. Counsel for petitioners in their opening statement outlined their1928 BTA LEXIS 2882">2906 theory with regard to affiliation in respect of the present petitioners as follows: * * It is virtually a one-man layout, but we are not claiming that the one man, by virtue of his stockholdings, dominated and controlled these corporations, but we are claiming that he did so as the representative of common interests; in other words, these stockholders were all of the same interests. * * * Counsel 14 B.T.A. 937">948 also further stated: * * But, taken as a whole, as we expect to prove, I would say that over 95 per cent of the stockholders were invited by the Flannerys or this group, this basic group, to join these companies. Upon that basis rests our affiliation, that it is one group that was controlled by the executive, James J. Flannery, * * * The petitioners have sought to divide the stockholders into four groups as follows: (1) The Flannery family, officers, incorporators, and directors in the various companies involved. (2) Employees of the Flannery interests. (3) Flannery investing associates. (4) Miscellaneous holdings. The respondent has denied that these several groups constituted the "same interests" within the meaning of the statute and further that the1928 BTA LEXIS 2882">2907 members of the several groups do not constitute the "same interests." Thus, it is contended that the members of the first group are not necessarily the "same interests," even if it be considered that the members of the Flannery family constitute the same interests. It is pointed out that some of the officers and incorporators of one company are not the same interests with officers and incorporators of some of the other companies. For instance, it is shown that practically 100 per cent of the stock of J. Rogers Flannery & Co. was owned by J. Rogers Flannery and other members of the Flannery family. It is also shown that 100 per cent of the stockholders of the Electro Vanadium Reduction Co. are also classed in group (1). The respondent points out, however, that only 55 per cent of the stock of this company was owned by members of the Flannery family, most of the balance being owned by certain individuals who owned no stock in J. Rogers Flannery & Co., and that there is no showing that the interests of the latter are the same as the interests of members of the Flannery family. The respondent further contends that the Flannery family owned only the following percentages of the stock1928 BTA LEXIS 2882">2908 of the several companies: CompanyPer cent1. Flannery Bolt Co55.92. American Vanadium Co33.63. Keystone Nut Lock Co45.14. J. Rogers Flannery Co. (J. Rogers Flannery and wife)99.55. Vanadium Metals Co55.16. Collier Land Co. (99.9 per cent held by companies 1 and 2 and not susceptible of allocation)7. Vanadium Chemical Co30.98. Electro Vanadium Reduction Co55.0It is contended that these percentages do not represent "substantially all of the stock" of the companies and that in the absence of any showing that the Flannerys controlled the remaining stock it can not be said that the so-called "Flannery interests" owned or controlled substantially all of the stock of these companies. 14 B.T.A. 937">949 Assuming, however, for the sake of argument, that the Flannery family, officers, directors, and incorporators of the several corporations claiming to be affiliated constitute the "same interests," we find the percentages of the total stock represented by this group at December 31, 1917, to be as follows: CompanyPer centFlannery Bolt Co49.94American Vanadium Co67.65Keystone Nut Lock Manufacturing Co45.40J. Rogers Flannery & Co91.33Vanadium Metals Co69.09Collier Land Co.07Vanadium Chemical Co48.18Electro Vanadium Reduction Co100.001928 BTA LEXIS 2882">2909 The evidence clearly shows that all of the stockholders of the several corporations held their stock absolutely. They were free to sell it whenever and to whomsoever they wished. They were under no obligation to give proxies upon this stock to the Flannerys at any time. Many of the stockholders testified that there were no "strings" attached to their ownership of their stock. An analysis of the stockholdings by the group "employees" and by the group "investing associates" or "key men" and by the miscellaneous group of stockholders shows that in only a few instances did the individuals hold stock in more than two of the companies. The interests of the stockholders classed as "investing associates" in the Vanadium Metals Co. and in the Keystone Nut Lock Manufacturing Co. do not appear to be the same as the interests of the stockholders of the Flannery Bolt Co. The profits of one company did not necessarily mean profits for the other companies. There is nothing to show that the stockholders of the Vanadium Metals Co., who apparently were interested in that company only for the purpose of profits or dividends from that company, were particularly interested in the profits which1928 BTA LEXIS 2882">2910 might be made by the Flannery Bolt Co., since such profits would not accrue directly to them. The only ground for contending that they were the "same interests" appears to be that they had a personal friendship for the Flannerys and were interested in having them succeed in all their undertakings. We are of the opinion, however, that this is not enough to constitute them the "same interests" within the meaning of the taxing statute. Although the record indicates that there were some intercorporate relationships, it does not show that the profits of any one corporation were profits of any other corporation. The charging of overhead costs to the various corporations was left to James J. Flannery and there is nothing to indicate that he did not properly allocate such costs to the several corporations. 14 B.T.A. 937">950 Even if it be considered that the Flannery family, the officers, directors, and incorporators of the several corporations constituted the "same interests," we can not find that substantially all of the stock of any of these corporations was owned by the same group except in the case of J. Rogers Flannery & Co. and of the Electro Vanadium Reduction Co., and, for reasons1928 BTA LEXIS 2882">*2911 above stated, we are of the opinion that the stockholders of the Electro Vanadium Reduction Co., aside from members of the Flannery family (owning 55 per cent of the stock) were not the same interests with the stockholders of J. Rogers Flannery & Co. Upon the record as made the determination of the respondent that no one of these corporations was affiliated with any other is sustained. Judgments will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625840/	KAMINSKY, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.Kaminsky, Inc. v. CommissionerDocket No. 17214-88United States Tax CourtT.C. Memo 1990-491; 1990 Tax Ct. Memo LEXIS 543; 60 T.C.M. 740; T.C.M. (RIA) 90491; September 12, 1990, Filed 1990 Tax Ct. Memo LEXIS 543">543 Decision will be entered for the petitioner. Kevin M. Hinkel and Joseph P. Alexander, for the petitioner. Jack E. Prestrud, for the respondent. JACOBS, Judge. JACOBSMEMORANDUM FINDINGS OF FACT AND OPINION Respondent determined a deficiency of $ 93,965 in petitioner's Federal income tax for 1982. The issue for decision is whether petitioner is liable for the accumulated earnings tax imposed by section 531. 1FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and accompanying exhibits are incorporated herein by this reference. Petitioner1990 Tax Ct. Memo LEXIS 543">546 is an Ohio corporation whose principal place of business at all relevant times, including the date its petition was filed, was Brunswick, Ohio. It was incorporated in December 1979, as part of a plan to consolidate three then-existing Ohio corporations -- Kaminsky Brunswick, Inc., Kaminsky Medina, Inc., and Kaminsky Strongsville, Inc., each of which operated a McDonald's franchise restaurant (sometimes referred to as restaurants or stores). Paul Kaminsky is petitioner's controlling shareholder, owning approximately 79 percent of its stock. The remaining 21 percent of petitioner's stock is owned equally by his wife, Betty Kaminsky, and son, Michael Kaminsky. Michael Kaminsky has at all relevant times been responsible for the day-to-day operations of petitioner's restaurants. In 1982, petitioner operated the following four McDonald's franchise restaurants: LocationOpenedBrunswick, Ohio1969Medina, Ohio1974Strongsville, Ohio1975North Royalton, Ohio1980Kaminsky Management Company (Management) is an Ohio corporation incorporated in 1975; its stock is owned by Paul Kaminsky, his wife and son. It provides management, financial, accounting, administration, 1990 Tax Ct. Memo LEXIS 543">547 personnel, and other business services to petitioner (including providing managers for the day-to-day handling of petitioner's stores) under a written agreement; as compensation for services rendered, Management receives a percentage of petitioner's gross receipts, plus reimbursement for the salaries it pays to the stores' managers. On February 5, 1987, respondent notified petitioner, pursuant to section 534(b), that it proposed to issue a notice of deficiency based upon the imposition of the accumulated earnings tax for 1982. By letter dated April 3, 1987, petitioner submitted a statement (pursuant to section 534(c)) of the grounds on which it relied to establish that no part of its earnings was accumulated beyond the reasonable needs of its business with respect to 1982. The statement identified the following three grounds as a basis for the accumulation: (1) expansion of petitioner's business operations through the acquisition of new franchises; (2) expansion of business operations through the purchase of existing franchises; and (3) renovation and upgrades of existing restaurants. In a motion filed February 6, 1989, petitioner requested a ruling on the burden of proof under1990 Tax Ct. Memo LEXIS 543">548 section 534(a)(2). We granted petitioner's motion and determined that respondent has the burden of proof with respect to the first and third grounds. We further determined that petitioner has the burden of proof with respect to the second ground. Expansion PlansIn 1978-1979, Paul and Michael Kaminsky "envisioned a six store plan." By expanding to six restaurants, they believed petitioner could achieve efficiency of size, establish separate maintenance and training departments, and keep their store managers motivated by the potential for advancement. In this regard, in 1978, they negotiated and attempted to purchase an existing franchise for a McDonald's restaurant in Wadsworth, Ohio, from Jack Schoaf; the negotiated purchase price was $ 380,000. Mr. Schoaf, however, sold the Wadsworth restaurant to Joe Bendon. In 1979, the Kaminskys targeted a site at the intersection of Interstate 71 and Route 18 as a potential expansion location. However, a McDonald's franchise for such location was awarded to Mr. Bendon. (McDonald's Corporation had determined that Mr. Bendon was in a better position for expansion because he had kept his restaurants more physically up to date than1990 Tax Ct. Memo LEXIS 543">549 petitioner's predecessors.) The loss of a McDonald's franchise at the Interstate 71/Route 18 location resulted in petitioner's losing three managers who had been promised reassignment to the anticipated new restaurant. Disappointed over losing the interstate 71/Route 18 location, Paul Kaminsky became determined not to lose another potential location. He realized that from McDonald's viewpoint reinvestment in the physical facilities of existing restaurants was critical to future expansion considerations. Petitioner then identified the intersection of Interstate 71 and Route 303 (which is approximately 2-1/2 miles from petitioner's Brunswick store) as a possible location for a new restaurant. In 1980 or 1981, Paul Kaminsky and Thomas Fewster, McDonald's regional manager for the Cleveland, Ohio region, discussed expansion of petitioner's operations to the Interstate 71/Route 303 site and viewed potential sites at that location. Following such discussions, Kaminsky believed that petitioner had a good chance of being awarded the location. To avoid luring customers away from the existing Brunswick store, petitioner determined that it would construct a highway store at the location1990 Tax Ct. Memo LEXIS 543">550 because McDonald's had determined that highway stores typically derive approximately 65 percent of their business from highway traffic. (A McDonald's highway restaurant is usually one-third larger than the typical McDonald's restaurant and has larger restrooms and more landscaping.) Consequently, petitioner decided to concentrate on highway site locations to discourage Brunswick residents from leaving the Brunswick store. In 1982, petitioner projected construction costs for a highway store to be approximately $ 500,000. (In 1982, the average cost for the construction of a new nonhighway McDonald's restaurant was approximately $ 360,000.) Petitioner determined that there were two available sites at the Interstate 71/Route 303 location which would support a highway store: the Dravo-Marks property and the K-Mart property. As any location which petitioner selected would require McDonald's approval, and since petitioner did not know which site would be acceptable to McDonald's, petitioner decided to acquire both sites. Although there was no guarantee that petitioner would be awarded a McDonald's franchise at either location, the Kaminskys decided to accept the risk involved from such1990 Tax Ct. Memo LEXIS 543">551 an aggressive undertaking in order to gain a competitive edge over other potential franchisees. The Dravo-Marks property consisted of 6.5 acres and the K-Mart property was 10.6 acres. Petitioner, based upon land prices in the immediate vicinity, believed that the sites under consideration would cost $ 30,000-$ 35,000 per acre. Although McDonald's would purchase only 4 acres if the site were selected for a new restaurant, the Kaminskys anticipated that petitioner would have to acquire the parcels in their entirety in order to induce a sale from the owners. Because of its easier access and better frontage on Route 303, petitioner preferred the Dravo-Marks property and purchased it for $ 196,380 in 1983. Nevertheless, McDonald's rejected the site as a potential location. In March 1985, petitioner acquired the K-Mart property for approximately $ 219,000 in cash, which location was subsequently approved by McDonald's. Petitioner began construction at the purchased site but encountered problems in obtaining a necessary access easement and zoning variances as well as litigation, all of which delayed construction of the restaurant. The construction of the restaurant was nearing completion1990 Tax Ct. Memo LEXIS 543">552 as of the date of trial (April 1989). In 1981, the owner of a McDonald's restaurant at the intersection of Routes 8 and 82 approached Paul Kaminsky and requested that he make an offer to purchase the restaurant. Paul and Michael Kaminsky visited the restaurant several times and determined that it was within an acceptable distance (as measured by driving time) from their existing locations. Thereafter, Paul Kaminsky contacted Tom Doran, a McDonald's regional manager, concerning petitioner's interest in the Routes 8/82 location. Mr. Doran advised the Kaminskys to cease their pursuit of the acquisition. Prior to 1982, Paul Kaminsky discussed the purchase of the restaurant at the intersection of Interstate 71 and Route 18 with Mr. Bendon, its owner. He made an offer to buy it for $ 1 million, but the offer was rejected. The Kaminskys were aware that the purchase price of an existing McDonald's restaurant was customarily based upon a percentage of that restaurant's trailing 12-month gross sales volume. During 1982, the percentages applicable in petitioner's region ranged from 50 percent to 80 percent. Thus, in 1982, petitioner projected an expenditure of between $ 500,000 to1990 Tax Ct. Memo LEXIS 543">553 $ 1,000,000 for the purchase of an existing franchise. Renovations and Upgrades - In GeneralMcDonald's established a policy that its franchisees were to renovate seating and decor every five to seven years. Through reinvestment, a franchisee would be able to fulfill the McDonald's philosophy of having state of the art restaurants. Such reinvestment would be evaluated favorably not only for purposes of renewal of the existing franchise location, but also for expansion purposes. In addition to seating and decor, equipment changes and upgrades and menu changes proved to be a recurring expense for franchisees. In 1982, petitioner projected a cost of $ 30,000 per store to meet the need for changes in equipment and menu. RenovationsIn 1980, Paul Kaminsky and Mr. Fewster discussed the fact that the Brunswick store (built in 1969) was in need of renovation. Shortly after it was built, the Brunswick store had $ 400,000 in sales volume. By 1980, sales had exceeded $ 1 million. Petitioner estimated that the renovation would cost $ 550,000 given the extensive work that had to be done. Following several delays, construction was completed in July 1986, at a cost of approximately1990 Tax Ct. Memo LEXIS 543">554 $ 580,000. Upon completion, all that remained of the original building was the front wall and window. In the early 1980's, petitioner planned to expand the seating capacity at its Strongsville restaurant by constructing an atrium. The restaurant was also in need of an updated decor. Petitioner estimated the cost of these upgrades to be $ 300,000. The construction for the renovation was completed in July 1984, at a cost of $ 289,235. Upgrade: PlaylandsMcDonald's sponsors annual conventions. McDonald's often introduces at these conventions new concepts for franchisees to adopt. In 1980 or 1981, Michael Kaminsky attended a convention at which McDonald's promoted the playland concept. The playland concept involved setting aside an area of a restaurant and equipping it with slides, tunnels, and other amusements to attract customers with young children. Petitioner determined that, consistent with McDonald's philosophy, a playland would be a good way of differentiating its restaurants from those of its competitors. Although it was decided to install playlands at all four restaurants, petitioner was not content with the existing design; consequently, Paul and Michael Kaminsky1990 Tax Ct. Memo LEXIS 543">555 and a McDonald's field representative travelled to Columbus, Ohio, to examine playlands that were in actual use. It was estimated that playlands would cost between $ 35,000 and $ 40,000 per store. In 1982, petitioner was informed that city authorization for the Strongsville restaurant playland would be denied. Due to zoning problems in 1983, the plans to install a playland at the Brunswick restaurant were rejected. Playlands were installed at the Medina and North Royalton locations in 1983 at a total cost of $ 54,189 and $ 64,856, respectively. Upgrade: Computer RegistersDuring the late 1970's, petitioner recognized the need to install computerized cash registers and installed a test register at one restaurant. The test register proved to be a failure. During 1982, McDonald's was working with Panasonic to develop a reliable register for use in its restaurants. Following a successful test of the Panasonic register, in 1982, petitioner decided to purchase computerized registers for each of its four locations. The estimated cost was $ 25,000 to $ 30,000 per store. In 1983, petitioner acquired computerized registers for its Brunswick, Medina, North Royalton, and Strongsville1990 Tax Ct. Memo LEXIS 543">556 stores at the respective costs of $ 26,989, $ 23,024, $ 17,789, and $ 23,220. Upgrade: Cash BoothsA typical McDonald's restaurant derives 45 percent to 48 percent of its business from drive-through window sales. Petitioner's restaurants exceeded this percentage, deriving between 50 percent to 52 percent of its business from such sales. Prior to 1980, a typical McDonald's restaurant would collect money and deliver food at the same drive-through window. Michael Kaminsky learned that McDonald's was promoting the concept of cash booths for its restaurants at a convention he attended in the early 1980's. A cash booth is a separate window (situated before the drive-through food window) where the money is collected from customers. Petitioner decided to install cash booths at its four restaurants but wanted to improve on the basic design by installing a walkway between the cash booth and the food window. Petitioner estimated its cost to be $ 25,000 to $ 40,000 per restaurant. The year of installation of the cash booths and actual installation costs were: LocationYear of InstallationCostNorth Royalton1984$ 14,848Medina1985$ 40,239Strongsville1985$ 25,5731990 Tax Ct. Memo LEXIS 543">557 Land AcquisitionMcDonald's Corporation has had a long standing recommendation to its franchisees that they acquire real estate adjoining their restaurants to provide for future parking needs. In 1981, Michael Kaminsky met with the mayor of Strongsville to discuss the prospects of rezoning three residential houses located next to the Strongsville restaurant in the event petitioner was able to purchase the homes. As a result of the meeting, Michael Kaminsky believed that the rezoning to commercial use could be accomplished. Based upon sales prices in the area, petitioner estimated that the three homes could be acquired for $ 60,000 each. Petitioner was able to acquire one of the homes in June 1983 for $ 66,000. Shortly after this purchase, Michael Kaminsky attended a financial seminar sponsored by McDonald's. At the seminar, franchisees were advised to have assets in their management companies. As a result of the seminar, in December 1983, petitioner transferred the house to Management at a price of $ 66,000. In September 1987, Management purchased the second of the three homes originally targeted for purchase at a price of $ 51,000. Prior to 1983, the Brunswick and1990 Tax Ct. Memo LEXIS 543">558 North Royalton restaurants were also in need of land for expanded parking. Petitioner planned to acquire approximately one acre behind the Brunswick store for $ 10,000 and to purchase the lot next to the North Royalton restaurant. After discussions with the mayor of North Royalton, petitioner estimated that the lot would cost $ 1,200 per front foot, resulting in a total price of $ 100,000. Sometime after 1982, petitioner acquired the land behind the Brunswick store. Paul and Betty Kaminsky purchased the lot next to the North Royalton restaurant in February 1986 for approximately $ 120,000. InvestmentsIn 1978, petitioner (through a predecessor corporation) acquired a 50-percent general partnership interest in Golden Villas Ltd. (Golden Villas), an Ohio limited partnership. Petitioner initially invested $ 102,000 and from 1979 through 1981 made additional investments totaling $ 285,000. The total investment in Golden Villas was $ 387,000. Melvin Gerspacher, a local real estate developer with whom the Kaminskys had previously made several other personal investments, promoted the Golden Villas project, an apartment complex catering to the needs of retiree tenants. The1990 Tax Ct. Memo LEXIS 543">559 apartment complex was in close proximity to one of petitioner's restaurants. During the early 1980's, Michael Kaminsky negotiated with Mr. Gerspacher for the sale of petitioner's partnership interest in Golden Villas. Petitioner eventually sold its partnership in Golden Villas to Mr. Gerspacher in March 1983 for $ 398,225 in cash. After providing for a reserve for taxes and a loan payoff, petitioner distributed the net proceeds from the sale ($ 226,000) as a cash dividend in April 1983. Financial InformationPetitioner's operations, including those of its predecessor corporations, have been quite profitable. From 1979 through 1982, its reported taxable income was: 1979$ 301,2161980$ 387,8641981$ 397,1711982$ 546,709As of December 31, 1980, petitioner's accumulated earnings and profits were $ 1,588,823; however, it declared and paid minimal dividends: 1979$ 1,0001980$ 10,0001981$ 1001982$ 25,000As of December 31, 1982, petitioner's net current assets were $ 1,460,972 (petitioner posits its net current assets should not include the value of its partnership interest in Golden Villas; thus, according1990 Tax Ct. Memo LEXIS 543">560 to petitioner, its net current assets as of December 31, 1982 were $ 1,073,972). ULTIMATE FINDINGS OF FACT 1. During 1982, petitioner did not permit its earnings and profits to accumulate beyond the reasonable needs, including reasonably anticipated needs, of its business. 2. Under section 535(c)(1), petitioner is entitled to an accumulated earnings credit for 1982 equal to its undistributed taxable income for that year. OPINION A corporation formed or availed of for the purpose of avoiding the income tax with respect to its shareholders, by permitting earnings and profits to accumulate instead of being divided or distributed, is subject to the accumulated earnings tax imposed by section 531. Sec. 532(a). The accumulated earnings tax is a means of discouraging the accumulation of corporate earnings not needed in the conduct of a business. Ivan Allen Co. v. United States, 422 U.S. 617">422 U.S. 617, 422 U.S. 617">624 (1975). The tax, considered a penalty, is strictly construed. 422 U.S. 617">Ivan Allen Co. v. United States, supra at 626. 1990 Tax Ct. Memo LEXIS 543">561 For the accumulated earnings tax to apply, tax avoidance need not be the sole or even the dominant purpose for the accumulation. Shareholder tax avoidance may be only one of several purposes. United States v. Donruss Co., 393 U.S. 297">393 U.S. 297, 393 U.S. 297">307-309 (1969). The subjective inquiry, i.e., whether the corporation was formed or availed of for the proscribed purpose, is made with respect to the state of mind of those who control the corporation. Helvering v. National Grocery Co., 304 U.S. 282">304 U.S. 282, 304 U.S. 282">292-294 (1938); Bahan Textile Machinery Co. v. United States, 453 F.2d 1100">453 F.2d 1100, 453 F.2d 1100">1101 (4th Cir. 1972). Section 533(a) establishes the presumption that a corporation with earnings and profits accumulated beyond the reasonable needs of its business was formed or availed of for the proscribed purpose. The presumption is rebuttable, however, if the corporation proves, by the preponderance of the evidence, to the contrary. Snow Manufacturing Co. v. Commissioner, 86 T.C. 260">86 T.C. 260, 86 T.C. 260">269 (1986); Bremerton Sun Publishing Co. v. Commissioner, 44 T.C. 566">44 T.C. 566, 44 T.C. 566">580 (1965).1990 Tax Ct. Memo LEXIS 543">562 The Commissioner bears the burden of proof as to whether an accumulation of earnings and profits is unreasonable if the taxpayer submits a statement of the grounds on which he relies and sufficient facts to support such grounds to establish that all or any part of the earnings and profits have not been allowed to accumulate beyond the reasonable needs of the business. Sec. 534(a) and (c). (On April 3, 1987, petitioner submitted a statement to respondent pursuant to section 534(c). In an Order dated March 23, 1989, we found that petitioner's statement sufficiently set forth facts which, if proven, would support the alleged business needs for petitioner's accumulation of earnings and profits with respect to (1) expansion of its business operations through the acquisition of new franchises, and (2) renovations and upgrading of existing restaurants. Thus, respondent bears the burden of proof with respect to these grounds.) The accumulated earnings tax is not imposed where a corporation has accumulated1990 Tax Ct. Memo LEXIS 543">563 its earnings beyond the reasonable needs of its business but lacks the proscribed purpose. Snow Manufacturing Co. v. Commissioner, 86 T.C. 260">86 T.C. 269; Pelton Steel Casting Co. v. Commissioner, 28 T.C. 153">28 T.C. 153, 28 T.C. 153">173 (1957), affd. 251 F.2d 278">251 F.2d 278 (7th Cir. 1958). Furthermore, if it is determined that the corporation was formed or availed of for the proscribed purpose, the tax is applied only to that portion of the corporation's earnings and profits which exceeds the corporation's reasonable needs. Sec. 535(a) and (c). Bremerton Sun Publishing Co. v. Commissioner, 44 T.C. 566">44 T.C. 580-581; John P. Scripps Newspapers v. Commissioner, 44 T.C. 453">44 T.C. 453, 44 T.C. 453">465 (1965). Whether a corporation has permitted its earnings and profits to accumulate beyond its reasonable business needs and whether the corporation was availed of for tax avoidance purposes are both questions of fact. 304 U.S. 282">Helvering v. National Grocery Co., supra; Bremerton Sun Publishing Co. v. Commissioner, 44 T.C. 566">44 T.C. 582. We are reluctant1990 Tax Ct. Memo LEXIS 543">564 to substitute our business judgment for that of the corporate officers and directors who usually determine the reasonable needs of a business. Snow Manufacturing Co. v. Commissioner, 86 T.C. 260">86 T.C. 269; Atlantic Properties, Inc. v. Commissioner, 62 T.C. 644">62 T.C. 644, 62 T.C. 644">656 (1974), affd. 519 F.2d 1233">519 F.2d 1233 (1st Cir. 1975); Faber Cement Block Co. v. Commissioner, 50 T.C. 317">50 T.C. 317, 50 T.C. 317">329 (1968). In cases such as this one, where accumulated earnings and profits exceed net liquid or current assets, in determining whether earnings and profits have accumulated beyond the reasonable needs of the business, the critical factor for examination is the corporation's liquid position and the relation of that position to current and anticipated needs. Hughes, Inc. v. Commissioner, 90 T.C. 1">90 T.C. 1, 90 T.C. 1">19-20 (1988); 50 T.C. 317">Faber Cement Block Co. v. Commissioner, supra at 329. The parties do not dispute that in determining whether petitioner accumulated its earnings and profits beyond the reasonable needs of its business, the net liquid assets of petitioner must be compared to its business needs. The parties, however, disagree (1) 1990 Tax Ct. Memo LEXIS 543">565 with respect to the classification of the Golden Villas partnership interest as a liquid asset, and (2) with respect to the reasonable needs of the business. Petitioner argues that its net liquid assets are $ 1,073,972 and respondent claims the figure should be $ 1,460,972, based upon the inclusion of the Golden Villas partnership interest at its original cost. Petitioner contends that such partnership interest should be excluded from treatment as a liquid asset because it was related to its business and was not readily marketable. In our opinion, the nexus between the partnership interest and petitioner's business is too tenuous to properly treat such interest as a business asset. We therefore find that the investment in Golden Villas, though illiquid, was not held for business purposes. Accordingly, in deciding whether petitioner accumulated its earnings and profits beyond the reasonable needs of the business, we will compare those needs against a net liquid assets figure of $ 1,460,972. We now consider petitioner's reasonable business needs. The reasonable needs of a business1990 Tax Ct. Memo LEXIS 543">566 include reasonably anticipated needs. Sec. 537(a)(1). Petitioner was in need of funds to expand its business operations. Accumulating earnings for bona fide business expansion is recognized as a reasonable business need. Snow Manufacturing Co. v. Commissioner, 86 T.C. 260">86 T.C. 273; sec. 1.537-2(b)(1), Income Tax Regs.In furtherance of its expansion plans, petitioner sought out the award of the Interstate 71/Route 303 location. Believing that it had a good chance of obtaining that location, petitioner embarked on an aggressive course of action, identifying two available parcels (the Dravo-Marks property and the K-Mart property) at such location and retaining funds for their eventual purchase. Although we are mindful that petitioner had no way of knowing which, if any, of the two locations McDonald's would find acceptable, we conclude that petitioner had a reasonable need to accumulate funds for the purchase of one parcel. Since petitioner believed the Dravo-Marks property was the preferable location and acquired it first, it was reasonable to accumulate $ 227,500 (6.5 acres X $ 35,000 per acre) for such purchase. Moreover, we are satisfied1990 Tax Ct. Memo LEXIS 543">567 that it was reasonable for petitioner to accumulate $ 500,000 for the construction of the restaurant at the Interstate 71/Route 303 location. The record here amply demonstrates that such restaurant was planned to be a highway store which is larger than a typical McDonald's restaurant and is more costly to build. Consequently, respondent has failed to meet his burden of proof as to these items under our section 534(c) order. In addition to maintaining expansion plans through the acquisition of new locations, petitioner planned to expand through the acquisition of existing locations. We are persuaded that petitioner planned for both methods of expansion in order to achieve its goal of a six store operation. Petitioner identified three specific instances of negotiations for the acquisition of existing restaurants. It was well aware that existing restaurants were selling for 50 to 80 percent of the trailing twelve months sales volume. The fact that the purchase of an existing restaurant did not occur is not determinative with respect to the existence of such plans. Sec. 1.537-1(b)(2), Income Tax Regs. Paul Kaminsky, whose testimony we found credible, 1990 Tax Ct. Memo LEXIS 543">568 anticipated that an acquisition by purchase of an existing restaurant would be in the $ 500,000 to $ 1,000,000 range. Accordingly, we hold that petitioner has met its burden of proof in showing an accumulation within such range to be a reasonable business need. We now examine petitioner's plans to maintain and upgrade its existing stores, bearing in mind that respondent bears the burden of proof with respect to these items. Petitioner was keenly aware of McDonald's philosophy of modernization to achieve state of the art in facility design and equipment. The Brunswick store, petitioner's oldest, was in need of major renovation. Its sales volume more than doubled from its original level in 1969. We find it a reasonable need of petitioner's business to accumulate $ 550,000 for the renovation. Although petitioner experienced construction delays which were beyond its control, it did in fact implement the renovation as previously planned. In 1982, petitioner had plans to update the decor and expand the seating capacity at its Strongsville location. We conclude that it was reasonable to accumulate $ 300,000 for such purpose. In July 1984, the renovation at the Strongsville restaurant1990 Tax Ct. Memo LEXIS 543">569 was completed at a cost of $ 289,235. At the end of 1982, petitioner planned to install Panasonic computer cash registers at its four locations. The estimated cost per store was $ 30,000. Accordingly, we find that it was reasonable for petitioner to accumulate $ 120,000 (4 stores X $ 30,000) to meet its business needs. In 1983, such registers were actually purchased for each store at a total cost of $ 91,000. After its officers attended a McDonald's convention and traveled to Columbus, Ohio, petitioner determined that it would install playlands at its restaurants; however, sometime prior to the end of 1982, petitioner was aware that it could not have a playland at its Strongsville restaurant. The estimated cost of installing a playland was $ 40,000 per store. We conclude that it was a reasonable need of petitioner's business to accumulate $ 120,000 in 1982 (3 stores X $ 40,000) for the installation of playlands at three of its four restaurants. During the early 1980's, McDonald's introduced the cash booth concept as a way of increasing sales volume by reducing the waiting time at the drive-through window. Because at least 50 percent of petitioner's sales were derived from1990 Tax Ct. Memo LEXIS 543">570 the drive-through, it planned to install cash booths at its four locations at an estimated cost of $ 25,000 to $ 40,000 per store. We believe that petitioner had a reasonable business need to accumulate earnings in 1982 for the installation of cash booths at its restaurants. We further believe that the cost of one cash booth has already been reflected in the accumulation for the Brunswick store renovation. Therefore, to avoid double counting, we find that the amount of the accumulation for cash booths is $ 75,000 to $ 120,000 (3 stores X $ 25,000 to $ 40,000). Cash booths were actually constructed at three of petitioner's stores during 1984-1985. For completeness, we note that petitioner has shown the existence of additional reasonable and reasonably anticipated needs; however, while petitioner has justified the need for accumulating further amounts, we find it unnecessary to go on in order to avoid "running up the score." Respondent argues that petitioner's accumulations were beyond its reasonable needs because it did not have specific, definite, and feasible plans for the accumulations as required by section 1.537-1(b)(1), Income Tax Regs. If the1990 Tax Ct. Memo LEXIS 543">571 test was solely whether formal plans were documented in the corporate minute book, we would agree with respondent. However, such is not the test and closely held corporations, such as petitioner, have not been held to the same strict standards as publicly held corporations. Doug-Long, Inc. v. Commissioner, 72 T.C. 158">72 T.C. 158, 72 T.C. 158">171 (1979); John P. Scripps Newspapers v. Commissioner, 44 T.C. 453">44 T.C. 469. Based on the record as a whole, we conclude that the absence of specific statements in its corporate minutes is not fatal to petitioner. We believe petitioner was firmly committed to a planned course of action which was manifested by action within a reasonable period of time. In view of the fact that petitioner's reasonable business needs exceeded its net current assets, we hold that petitioner did not accumulate its earnings beyond the reasonable needs of its business. Because the credit provided for in section 535(c)(1) would be equal to the full amount of retained earnings, the accumulated taxable income, on which the section 531 tax is imposed, would be zero and petitioner would owe no section 531 tax. Such being the case, we need not consider whether1990 Tax Ct. Memo LEXIS 543">572 the proscribed purpose of avoiding income tax may have existed. Magic Mart, Inc. v. Commissioner, 51 T.C. 775">51 T.C. 775, 51 T.C. 775">799 (1969). Decision will be entered for the petitioner. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect for the year in issue.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625841/	JACK D. CARR AND LOUISE G. CARR, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentCarr v. CommissionerDocket No. 607-81.United States Tax CourtT.C. Memo 1985-19; 1985 Tax Ct. Memo LEXIS 616; 49 T.C.M. 507; T.C.M. (RIA) 85019; January 10, 1985. James M. Tingle,James P. O'Neal, for the petitioners. Robert W. West, for the respondent. SHIELDS MEMORANDUM FINDINGS OF FACT AND OPINION SHIELDS, Judge: Respondent determined a deficiency of $21,708.45 in the Federal gift tax of each petitioner for the calendar quarter ending December 31, 1976. The issue is the value of certain stock in a closely held corporation. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation and attached exhibits are incorporated herein by reference. Petitioners, Jack D. Carr and Louise G. Carr, 1985 Tax Ct. Memo LEXIS 616">617 husband and wife, resided in Montgomery, Alabama, when they filed their petition. The gifts involved in this case occurred on December 20, 1976, when Louise G. Carr gave each of the two children of petitioners 12 shares of common stock in an Alabama corporation known as Warwick Development Company (Warwick). For the calendar quarter ending on December 31, 1976 each petitioner filed with respondent a gift tax return on which they reported the gifts of the stock at $3,000 per share and elected to utilize the gift-splitting provisions of section 2513. 1 In his notice of deficiency respondent determined that the stock had a value of $13,623.50 per share. Warwick was organized in 1939 by C. H. Grayson, the father of Louise G. Carr, and at the time of the gifts all of its 100 shares of stock were owned by his wife, children and grandchildren. Over the years between its organization and the date of the gifts, Warwick's principal business1985 Tax Ct. Memo LEXIS 616">618 activity consisted of purchasing undeveloped land, subdividing it into lots, installing streets, utilities, and other improvements, and selling the lots either as such or with homes constructed by Warwick. During its entire existence Warwick has never paid a dividend and has been under the control of the Grayson family, primarily C. H. Grayson in the early years and his son, James M. Grayson, Sr., from about 1972. For the five-year period ending on December 31, 1976, Warwick had average annual earnings per share after taxes of $594.51 and average annual weighted earnings per share of $672.59 computed as follows: YearNet IncomeWeight FactorWeighted Earnings1972$ 41,9611$ 41,961197352,2342104,468197447,4093142,227197558,0404232,160197697,6135488,065Total$297,257$1,008,881Average$ 59,451$ 67,259AverageAverage WeightedEarnings Per Share$594.51Earnings Per Share$672.59The balance sheet of Warwick as of December 31, 1976 can be condensed as follows: Assets other than land$ 239,344Land1,467,556TOTAL ASSETS$1,706,900Liabilities1,086,908Deferred Income20,670Stockholders' Equity599,322TOTAL LIABILITIES &SHAREHOLDERS' EQUITY$1,706,9001985 Tax Ct. Memo LEXIS 616">619 The stockholders' equity shown on the above balance sheet, as well as the average earnings of Warwick for the five years ending on December 31, 1976, are distorted to some extent by the fact that over the years members of the Grayson family have from time to time advanced funds to Warwick at favorable interest rates and have served as officers of the company at no, or at very low, salaries. The value of the stock shown on the gift tax returns of petitioners of $3,000 per share is approximately 50 percent of the book value of such stock as of December 31, 1976. Respondent determined the value of the stock to be $13,623.50 per share by (1) adjusting Warwick's balance sheet of December 31, 1976 so as to reflect what respondent determined to be the total net asset value of the company and (2) reducing the net asset value per share as thus determined by a 25-percent discount for the fact that the market would be unable to absorb all of the company's assets at market value and the fact that the shares being valued represented a minority interest in the company. Respondent's computation is as follows: Fair market value of Warwick real estate2 $2,548,848.00Less: Book value of real estate3 1,331,702.801,217,145.20Add: Shareholders' equity 12/31/76599,322.00Net asset value of company1,816,467.20Net asset value per share (100 shares)18,164.67Less: 25 percent discount4,541.17Net asset value per share$ 13,623.501985 Tax Ct. Memo LEXIS 616">620 At trial, the parties were able to agree as to the value of four of the parcels of real property owned by Warwick on the gift date but these parcels had a total value of only $2,550. They disagreed as to the value of 176 parcels, being three tracts of undeveloped land containing approximately 437 acres plus 173 developed lots. At trial respondent contended that the total value of the unagreed properties was $2,326,100 4 on the date of the gifts and petitioners contended that the total value was only $1,329,578 for a difference of $996,522. All of the properties in dispute are in Grayson Valley Estates or Grandview Estates, 5 two subdivisions which Warwick and under development in December of 1976. 1985 Tax Ct. Memo LEXIS 616">621 In Grayson Valley Estates, Warwick owned 378 acres of undeveloped land of which 136 acres were leased to Grayson Valley Golf and Country Club, Inc. The lease, dated July 14, 1976, was for a 25 year term commencing on April 1, 1976, at an annual rental of $17,250, with the lessee having an option to purchase the 136 acres at any time during the lease for $2,500 per acre. The balance of the acreage, about 242 acres, adjoined the 136 acres leased to the country club and in 1976 was undeveloped except for 110 lots which had been platted along the golf course. These lots were subject to an agreement between Warwick and C. H. Grayson under which the sum of $5,000 per lot was payable to Mr. Grayson upon their sale. Warwick also owned 93 developed lots in Grayson Valley Estates. Thirty four of the lots were located in the area of the country club and 18 of these were subject to the agreement requiring a payment of $5,000 per lot to C. H. Grayson on their sale. The other 59 lots were located in the Highland Section of Grayson Valley Estates. At the date of the gifts this section had only been open for a short time. The section did not adjoin the country club property and1985 Tax Ct. Memo LEXIS 616">622 none of the lots were subject to the agreement in favor of C. H. Grayson. In Gardenview Estates, Warwick owned 59.5 acres of rough undeveloped land and 82 developed lots. Near the date of the gifts Warwick and sold approximately four acres of additional undeveloped land in the same area for $100 per acre. The acres sold had no street or road acress and were sold to an adjoining lot owner who did have such access.The 59.5 acres had been listed for sale by Warwick at $100 per acre for some time prior to the valuation date. Twenty one of the developed lots were located in Sectors Five and Six of Grandview Estates. The other 61 were located in Sector Seven. All 82 of the lots were listed for sale by Warwick on the valuation date. At trial both parties introduced expert testimony and appraisal reports as to the value of the disputed properties. A comparison of the two appraisals appears in the following schedule: Respondent'sPetitioner'sItemAppraisalAppraisalDifferenceGrayson Valley EstatesUndeveloped Land - 378 acres +/-136 acres leased to Country Club$ 341,500$ 112,778$228,722242 acres972,000494,400477,600Developed Lots34 lots - near club59 lots - Highland Section499,000399,20099,800TOTAL FOR GRAYSON VALLEY$1,812,500$1,006,378$806,122Grandview EstatesUndeveloped Land59.5 acres$ 93,6006 $ 5,950$ 87,650Developed Lots2165,95061* $ 420,000251,300102,750TOTAL FOR GRANDVIEW$ 513,600$ 323,200$190,400GRAND TOTAL$2,326,100$1,329,578996,5221985 Tax Ct. Memo LEXIS 616">623 The principal differences in the appraisals made with respect to the properties located in Grayson Valley Estates are as follows: (1) Petitioners' expert first appraised the property leased to the country club at $2,500 per acre, the price at which the club could buy the property, but he then reduced this value for the low rental return of only four percent on the assumption that the lessee would not exercise the option to purchase until the end of the lease because of the very favorable rent. Respondent's expert ignored the lease and appraised the property as if the lease did not exist except for its option price of $2,5001985 Tax Ct. Memo LEXIS 616">624 per acre which he adopted as the value of the property. (2) With respect to the 242 acres of undeveloped land, respondent's expert did not reduce his total value for the 110 lots which had been platted along the golf course, each of which was subject to a $5,000 payment upon sale. Petitioners' appraiser took the $5,000 payments into consideration and reduced his total appraisal accordingly. (3) Respondent's expert recognized the $5,000 due with respect to seven of the 34 lots located near the club but failed to do so with respect to the other 11 lots which were admittedly subject to similar payments. (4) Respondent's expert used a 30-percent discount for bulk sale of all of the 93 7 lots in Grayson Valley while petitioners' expert discounted each lot by 30 percent to 45 percent for market absorption. The principal differences in the appraisals made with respect to the properties located in Grandview Estates are as follows: (1) With respect to the 59.5 acres of undeveloped land, petitioners' expert used $100 per acre for a total of $5,950, 1985 Tax Ct. Memo LEXIS 616">625 the amount at which the acreage was listed for sale by Warwick at the valuation date. Respondent's expert ignored the list price and by using what he considered as comparable sales arrived at a total value of $93,600, for a difference of $87,650. 8(2) With respect to the 82 developed lots, petitioners' expert started with Warwick's list price for each lot as of the valuation date and discounted the price for market absorption. The discount used varied from lot to lot with a low of 40 percent to a high of 45 percent, depending upon the size, location, grade, accessibility or any other factor which, in the opinion of the appraiser, affected the disposition of the lot. Here again, respondent's expert ignored the list prices and determined the value from sales he deemed comparable after adjustments. He then applied a discount of 25 percent for a bulk sale or market absorption. Respondent's expert concluded that the 82 lots had a total value of $420,000 while the total value reached by petitioners' expert was $317,250, for a difference of $102,750. 1985 Tax Ct. Memo LEXIS 616">626 If the stipulated value of the agreed properties and the appraisal of petitioners' expert of the unagreed properties, are substituted for the book value of Warwick's land as of December 31, 1976, the net asset value per share of Warwick's stock would be $4,639. If, as contended by petitioners, such net asset value is then discounted by one third for the minority interest represented by the gifts the fair market value of the stock would be $3,093 9 per share. By using the same method but substituting the appraisal1985 Tax Ct. Memo LEXIS 616">627 of respondent's expert for the unagreed properties the net asset value would be $14,604 per share. 10 If, as now contended by respondent, no discount is allowable for the minority interest, the fair market value of the stock would be the same, $14,604 per share. OPINION We are again asked to resolve a dispute over the fair market value of property, a process which has been described as "weighing evidence of expert guesswork." Andrews v. Commissioner,T.C. Memo. 1976-106. Prior to and1985 Tax Ct. Memo LEXIS 616">628 during trial we admonished counsel that a factual issue of this nature is clearly more properly suited to the give and take of the settlement process than adjudication. As stated in Buffalo Tool & Die Mfg. Co. v. Commissioner,74 T.C. 441">74 T.C. 441, 74 T.C. 441">452 (1980): We are convinced that the valuation issue is capable of resolution by the parties themselves through an agreement which will reflect a compromise Solomon-like adjustment, thereby saving the expenditure of time, effort, and money by the parties and the Court--a process not likely to produce a better result. Indeed, each of the parties should keep in mind that, in the final analysis, the Court may find the evidence of valuation by one of the parties sufficiently more convincing than that of the other party, so that the final result will produce a significant financial defeat for one or the other, rather than a middle-of-the-road compromise which we suspect each of the parties expects the Court to reach. The parties, therefore, are well aware of the fact that we may, in an appropriate case, refuse to reach a compromise where one or more of the valuations submitted to us are the result of overzealous advocacy that1985 Tax Ct. Memo LEXIS 616">629 ignores common sense. We cannot, however, abdicate our responsibility to determine a factual dispute, including fair market value, where as in this case the parties have failed or refused to do so by agreement. To determine the fair market value of property, the standard to be applied is the price at which the property would change hand 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. Secs. 20.2031-1(b), 25.2512-1, Estate and Gift Tax Regs.; McShain v. Commissioner,71 T.C. 998">71 T.C. 998, 71 T.C. 998">1004 (1979); Estate of Heckscher v. Commissioner,63 T.C. 485">63 T.C. 485, 63 T.C. 485">490 (1975). With respect to value, petitioners have the burden of proof. Rule 142(a); Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933). The issue is a factual one to be resolved from all of the relevant evidence. It is also a question of judgment rather than mathematics. Hamm v. Commissioner,325 F.2d 934">325 F.2d 934, 325 F.2d 934">940 (8th Cir. 1963), affg. a Memorandum Opinion of this Court; 1985 Tax Ct. Memo LEXIS 616">630 Duncan Industries, Inc. v. Commissioner,73 T.C. 266">73 T.C. 266 (1979). Therefore, by its very nature, valuation is an approximation derived from all the evidence. Halvering v. Safe Deposit Co.,316 U.S. 56">316 U.S. 56 (1942); Silverman v. Commissioner,538 F.2d 927">538 F.2d 927, 538 F.2d 927">933 (2d Cir. 1976), affg. a Memorandum Opinion of this Court. See Palmer v. Commissioner,523 F.2d 1308">523 F.2d 1308 (8th Cir. 1975), affg. 62 T.C. 684">62 T.C. 684 (1974); Anderson v. Commissioner,250 F.2d 242">250 F.2d 242 (5th Cir. 1957), affg. a Memorandum Opinion of this Court. Furthermore, while the entire record must be considered, we have broad discretion to determine that facts are most important in reaching a determination because "finding market value is, after all, something for judgment, experience, and reason on the part of the trier, and does not lend itself to dissection and separate evaluation." Colonial Fabrics v. Commissioner,202 F.2d 105">202 F.2d 105, 202 F.2d 105">107 (2d Cir. 1953), affg. a Memorandum Opinion of this Court. In making our determination we1985 Tax Ct. Memo LEXIS 616">631 have the right, of course, to rely upon the opinion of experts. Estate of O'Connell v. Commissioner,640 F.2d 249">640 F.2d 249 (9th Cir. 1981), affg. in part and revg. and remanding in part a Memorandum Opinion of this Court; 523 F.2d 1308">Palmer v. Commissioner,supra;Estate of Piper v. Commissioner,72 T.C. 1062">72 T.C. 1062 (1979). Opinion evidence, however, must be weighed in the light of the expert's qualifications and with regard to all other relevant evidence. 250 F.2d 242">Anderson v. Commissioner,supra.In doing so, we may embrace or reject expert testimony if, in our best judgment, such action is proper. Helvering v. National Grocery Co.,304 U.S. 282">304 U.S. 282 (1938); 538 F.2d 927">Silverman v. Commissioner, supra at 933; 523 F.2d 1308">Palmer v. Commissioner,supra at 1310. If warranted, we may choose the opinion in toto of one expert at the expense of another or others. However, if we are satisfied that a significant error exists in the expert testimony we find most persuasive, an appropriate adjustment should and will be made. 74 T.C. 441">Buffalo Tool & Die Mfg. Co. v. Commissioner,supra. After1985 Tax Ct. Memo LEXIS 616">632 observing the expert witnesses and carefully reviewing their valuation reports and exhibits, we find, in the case before us, that petitioners' valuation of the real estate without regard to discounts is fair and reasonable. We are satisfied, however, that the discounts used by petitioners for both market absorption at the corporate level and the minority interest factor at the stockholder level are somewhat excessive. Valuation of PropertiesWe agree with respondent that the initial step in the valuation of the stock in Warwick is to value its underlying assets. 11 Petitioners apparently also agree because they have stipulated as to the correct value of all of the assets of Warwick except certain land and lots in Grayson Valley Estates and Gardenview Estates with respect to which both parties have submitted expert testimony and reports. 1985 Tax Ct. Memo LEXIS 616">633 With regard to Grayson Valley Estates, the appraisal of petitioners' expert, Thomas E. Young, of the 136 acres leased to the country club is based primarily upon the 25 year lease. Under the lease the lessee had an option at the date of the gifts to purchase the land for $2,500 per acre at any time during the 25-year term. The lessee, however, also had the right to continue the lease for the same 25 years at an annual rental of $17,250. The annual rental represented a return of only about 4 percent on the total option price. A rate of 4 percent was considerably below the average rate of return of about 12 percent which was in effect at the valuation date. Therefore, Mr. Young concluded that based upon the low rent the value of the acreage subject to the lease was only $112,778. Under the circumstances we conclude that Mr. Young's approach and conclusion are fair and reasonably correct. At the valuation date the highest possible value for the acreage would have been the option price. In fact, the option price determined its highest value to Warwick for the next 25 years. Nevertheless, the lessee had the further right to possession of the property during the 25 years1985 Tax Ct. Memo LEXIS 616">634 at a rental rate which indicated a value of only $112,778. Respondent's expert ignored the low rate of return for the 25 years and without any reasonable explanation concluded that the acreage had a value equal to the option price. Mr. Young appraised the other 242 acres of undeveloped land in Grayson Valley Estates at a total of $494,000 after taking into consideration the $550,000 which was due and payable on sale with respect to the 110 platted lots along the golf course under the agreement by Warwick with C. H. Grayson. This acreage was appraised at a total of $972,000 by respondent's expert, Gene Dilmore. However, Mr. Dilmore did not consider the payments due Mr. Grayson on the sale of the 110 lots. 12 From the record as a whole we have found that the 110 lots were subject to the agreement between Warwick and Mr. Grayson and consequently Mr. Young's appraisal of this item is also fair and reasonable. 1985 Tax Ct. Memo LEXIS 616">635 With respect to the developed lots in Grayson Valley Estates the only substantial difference between the two appraisals is the failure of Mr. Dilmore to consider 11 of the 18 lots which were subject to the $5,000 payment due Mr. Grayson. This accounts for $55,000 of the total difference of $99,800. The remaining difference is due to the fact that petitioners' expert applied a discount for market absorption which ranged from 30 percent to 45 percent while the discount used by respondent's expert was limited to 30 percent. With respect to both the undeveloped land and the developed lots in Gardenview Estates, we are at a loss to understand why respondent's expert elected to ignore the prices at which these properties were listed for sale by Warwick and to determine a value before discount by using what he considered as comparable sales with the usual adjustments for differences in time, size, and location. Petitioners' expert started with the verified list prices which were further corroborated by some actual sales and proceeded to apply his discount for market absorption to arrive at appraised value. It appears that the only logical explanation for respondent's failure1985 Tax Ct. Memo LEXIS 616">636 to refer to list prices would be that due to the failure of the parties to cooperate in the preparation for trial, the list prices were not available to respondent's expert at the time he prepared his report. In any event, we are unable to find that the beginning point in determining the fair market value of the property is in excess of the price at which the owner had it listed for sale to the public. Consequently, we agree with Mr. Young that the list price is a fair and reasonable value before any discount for market absorption. Discount For Market AbsorptionPetitioners' expert used a 30-percent to 45-percent discount with respect to each of the developed lots in Grayson Valley for market absorption. He used a 40-percent to 45-percent discount for each of the lots in Grandview. His percentage varied from lot to lot because of differences in the size, location, and other factors affecting disposition of the property. We agree with petitioners that a discount of this nature is necessary in order to reflect the absence of time within which to make an orderly disposition of the property.It is apparent that all of the lots owned by Warwick in December of 1976, if valued1985 Tax Ct. Memo LEXIS 616">637 as a whole, would have a different value than if the value of the individual lots were totalled. The disposition of all of the lots at once or within a short period of time would result in the different lots (or their subdivisions) being in direct competition with each other. Such an abrupt increase in supply with demand remaining constant would reduce the total price for which the lots would sell. This element of competition is a price depressant which is not present in valuing the parcels individually. Consequently, a discount of some amount for absorption is appropriate with respect to all of the lots. See Estate of Grootemaat v. Commissioner,T.C. Memo. 1979-49. Respondent's expert admits that such a discount is proper. In fact he discounted the lots in Grayson Valley by 30 percent and those in Grandview by 25 percent. From the record as a whole we believe that 30 percent is a fair and reasonable discount for all of the developed lots. Discount for Minority InterestThe subject of each of the gifts involved in this case represents a relatively1985 Tax Ct. Memo LEXIS 616">638 minor interest in Warwick. At the date of the gifts and since the organization of the corporation the balance of the stock was owned by other members of the Grayson family. Petitioners contend that under these circumstances the net asset value of the gifted stock should be discounted by one-third not only because it represents a minority interest but also because the past history of the corporation clearly indicated to any prospective purchaser of the stock that the corporation did not pay dividends and that it was under the exclusive control of the senior members of the Grayson family. In support of their contention petitioners called Mr. Frank W. Whitehead, Warwick's certified public accountant, who testified that from his many years of experience in practicing accounting which included numerous evaluation problems in Alabama he was of the opinion that a discount of one-third for the minority interest would be reasonable in this case because of the lack of any control over the corporation's affairs by the minority interest and the near absence of any market for a minority interest in such a small closed corporation. At trial and on brief respondent contended that1985 Tax Ct. Memo LEXIS 616">639 no discount for the minority interest is appropriate in this case. We, however, are cognizant of the difficulties that can arise in the valuation of stock in a small closely held corporation, especially where as here, all or almost all of the assets consist of undeveloped real estate. In such cases the rate of development of the land, the sales policy of the company, and its marketing techniques will obviously affect the rate at which the potential income from the property will be realized. Moreover all of these variables will affect the amount a purchaser would be willing to pay for stock in the company and if the stock being purchased represents only a minority interest the purchaser will be subject to, if not at the mercy of, the desires of the majority in ownership. The inability to influence management would mean that the holder of the minority interest could not realize any gain until it suited the majority's purpose. Furthermore, in view of Warwick's history with respect to dividends a potential purchaser of a minority interest could not reasonably anticipate any return on his investment until the corporation was liquidated. Control of the company would continue1985 Tax Ct. Memo LEXIS 616">640 to be in the members of one family who have other financial interests and other means of support. Given the nature of the business and the inability of a minority interest to influence the direction of the corporation it is obvious that the market, if any, for a minority interest of this nature would be substantially limited. We agree with petitioners, therefore, that a discount for the minority interest is justified in this case. From the record as a whole and using our best judgment we conclude that the discount for the minority interest in this case is limited to 25 percent of the net asset value of the stock. Decision will be entered under Rule 155.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the year in issue, unless otherwise indicated. All rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise provided.↩2. At trial respondent adjusted this figure downward to $2,326,100, the value found by his appraiser. ↩3. The record contains no explanation for the difference between this figure and the book value of $1,467,556 of the land as shown on the balance sheet.↩4. On brief respondent conceded that this figure should be further reduced to $2,275,000 after adjustments for properties included in his appraisal which were not owned by Warwick on the gift date. ↩5. From time to time both parties referred to this subdivision as Gardendale or Gardendale Estates.↩6. At trial respondent moved to strike the testimony and report of petitioners' expert with respect to this property on the ground that the expert had appraised the wrong property. Ruling was reserved on the motion to strike but after examining the transcript we are satisfied that the question arose because the witness was momentarily confused during cross-examination and the matter was cleared up on re-direct. Therefore, the motion to strike is denied.↩. Respondent incorrectly used 80 lots at $5,250 to arrive at his total value of $420,000. ↩7. Respondent's expert erroneously used a total of 94 lots which accounts for part of the difference in the appraisals.↩8. A small part of the difference is attributable to the fact that respondent's expert erroneously used 62.5 acres in his computation.↩9. The computation is as follows: Stipulated Value of Agreed PropertiesPetitioners' computation failed to include this item. Its inclusion adds only $25 to the net asset value per share and only $8 to the fair market value.↩ $ 2,550 Petitioners' Appraisal of UnagreedProperties1,329,578 Total Value of Properties$1,332,128 Less Book Value of Properties (12/31/76)1,467,556 Adjustment(135,428)Add Shareholders' Equity (12/31/76)599,322 Net Asset Value (100 Shares)463,894 Net Asset Value Per Share4,639 Less Discount for Minority Interest (1/3)1,546 Fair Market Value Per Share3,093 10. The computation is as follows: Stipulated Value of Agreed Properties$ 2,550Respondent's Appraisal of UnagreedPropertiesOn brief respondent conceded that this figure should be further reduced to $2,275,000 after adjustments for properties included in his appraisal which were not owned by Warwick on the gift date.*↩ 2,326,100Total Value of Properties$2,328,650Less Book Value of Properties (12/31/76)1,467,556Adjustment861,094Add Stockholders' Equity (12/31/76)599,322Net Asset Value (100 Shares)1,460,416Net Asset Value Per Share14,604Less Discount for Minority InterestFair Market Value Per Share14,60411. In support of their respective computations both parties submitted expert testimony and reports in which attempts were made to arrived at a value for Warwick's stock by comparing it to publicly held companies. In this respect, respondent on brief renewed his objection to the testimony and report of petitioners' expert on this point because a copy of the expert's report had not been furnished to respondent or the Court in accordance with the rules. The testimony and report were admitted and considered, however, because neither party had complied with the rules by furnishing the Court with copies of their appraisal reports at least 15 days before trial. Furthermore, respondent later submitted similar testimony by his agent without complying with the rules. In any event the question is considered moot because we are unable to find that any one of the public companies selected by either party is comparable to Warwick.↩12. Respondent's treatment of the $5,000 payments is inconsistent. He recognized such payments in full with respect to 7 of the 34 developed lots near the golf course but without any explanation refused to recognize such payments on another 11 lots which he stipuated were subject to such payments.He also refused to recognize the payments on the 110 platted lots.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625843/	Max R. Casciani and Mildred M. Casciani v. Commissioner.Casciani v. CommissionerDocket No. 4823-63.United States Tax CourtT.C. Memo 1967-203; 1967 Tax Ct. Memo LEXIS 59; 26 T.C.M. 997; T.C.M. (RIA) 67203; October 16, 19671967 Tax Ct. Memo LEXIS 59">59 Upon the facts, held: (1) That the assessment and collection of a deficiency for each taxable year 1950 through 1955 are not barred by the statute of limitations, because for each year the petitioners filed a false and fraudulent return with intent to evade tax. (2) The petitioners realized a substantial amount of income in each of the 6 taxable years which they failed to report. With the exception of several adjustments by the Court, respondent's determinations that petitioners realized but failed to report income for each year are sustained. (3) Part of the deficiencies were due to fraud with intent to evade tax; therefore, the 50 percent penalties under sections 293(b), 1954 Code, and 6653(b), 1954 Code are sustained. (4) The additions to tax for 1950 and 1951 under section 294(d)(1)(A), 1939 Code, are sustained. (5) The additions to taxes for 1952, 1953, and 1954 under section 294(d)(2), 1939 Code, are not sustained. L. Robert Leisner, Rand Bldg., Buffalo, N. Y., for the petitioners. Paul H. Frankel and Richard J. Grassgreen, for the respondent. HARRON Memorandum Findings of Fact and Opinion HARRON, Judge: For the years 1950 through 1955, the respondent determined income tax 1967 Tax Ct. Memo LEXIS 59">60 deficiencies, and additions to the taxes and the deficiencies under sections 293(b), 294(d)(1)(A), and 294(d)(2) of the 1939 Code, and section 6653(b) of the 1954 Code, as follows: Sec. 293(b)SectionSectionYearDeficiencySec. 6653(b)294(d)(1)(A)294(d)(2)1950$2,142.10$1,071.05$207.6219511,159.33579.67109.1219522,408.181,204.09$150.7419533,906.211,953.11223.2419543,142.611,571.31187.4519552,035.221,017.61The questions are: (1) Whether petitioners filed false or fraudulent returns with intent to evade taxes for each of the taxable years, so that there is no bar of the statute of limitations to the assessment and collection of the deficiencies. (2) Related to the above is the question whether petitioners received income, which they failed to report on their returns, in the following amounts (or in lesser amounts) of $11,098.34 in 1950; $6,008.21 in 1951; $10,232.06 in 1952; $14,804.55 in 1953; $13,474.45 in 1954; and $8,664.83 in 1955. (3) Whether part of the deficiency for each year, if any, is due to fraud with intent to evade tax, so that a 50 percent addition to each deficiency shall be imposed for fraud under section 293(b), 1939 Code, and section 6653(b), 1954 Code. (4) Whether petitioners 1967 Tax Ct. Memo LEXIS 59">61 are liable for additions to the taxes for 1950 and 1951 under section 294(d)(1)(A). (5) Whether the petitioners are liable for additions to the taxes for 1952, 1953, and 1954 under section 294(d)(2), 1939 Code. Findings of Fact The stipulated facts are found as stipulated; the stipulations of facts are incorporated herein by reference. Petitioners are residents of Buffalo. They filed joint returns for each of the taxable years with the district director of internal revenue in Buffalo, New York. The returns were filed on the cash and calendar year basis. Petitioners are referred to hereinafter as Max and Mildred. Max, who was born in Italy on January 3, 1902, came to the United States in 1921. From 1921 to 1935, he was employed by various firms in Detroit, and he worked at metal finishing and cement finishing. He had some bank accounts in Detroit. He moved to the area of Buffalo after 1935 and worked for various firms there until 1948 doing metal finishing and cement finishing. He has always had bank accounts in Buffalo. Mildred was born on September 15, 1911, in Oakfield, New York, and attended Cortland Normal School. She received a teacher's certificate from that school in 1935, and 1967 Tax Ct. Memo LEXIS 59">62 from 1935 to 1939 she was employed as a school teacher in Pembrook, New York. The petitioners were married in 1938, and have 2 children; John, who was born in 1940; and Bonnie, who born in 1945. During World War II, Mildred worked at a Chevrolet plant in Buffalo. During 1946, she operated a business known as "Mildred's Variety Shop" at 2236 Fillmore Avenue, Buffalo. This business was not successful and was discontinued. Max's wages before 1948 were about $1.60 an hour. When he worked in Detroit, his earnings were less. Prior to his marriage, he continuously sent his extra money to his parents in Italy. Mildred's wages at the Chevrolet plant were $1.10 an hour. After their marriage, Max continued to send money to his parents on holidays, but he did not send money as often as he had done before his marriage because he needed most of his earnings for the living expenses of his family. In 1945, Max and Mildred bought the property at 2236 Fillmore Avenue, Buffalo, and lived there. In 1948 and thereafter, Max worked exclusively in his own cement finishing business in Buffalo, which he conducted under the name of Casciani Concrete Construction. This business was a sole proprietorship; it 1967 Tax Ct. Memo LEXIS 59">63 consisted principally of the construction of concrete flat work, such as sidewalks, driveways, and cellars. Max carried on his business through the year 1955. During the busy season of the business, April through October, during the years 1950 through 1955, Max employed 3 or 4 men each year on various jobs. All of the record keeping for Max's business was done by Mildred. During the years 1950 through 1955, she kept single entry records in a notebook for the Casciani concrete business. Each year, during the winter, Mildred prepared tablet sheets listing items of income and expenses of the Casciani concrete business for the previous year. She gave these tablet sheets to Carl L. Bauer, a public accountant, who used the data thereon in preparing the petitioners' income tax returns for each of the years 1950 through 1955. Bauer did not make an audit of the petitioners' books and records, or of any records of the Casciani concrete business, during any of those years. Bauer is now deceased; he died before the trial of this case. The returns filed by the petitioners for the years 1950 through 1955 reported total receipts, and purchases of materials and supplies for the Casciani concrete business, 1967 Tax Ct. Memo LEXIS 59">64 as follows: Per Tax Re-Per Tax Re-turns, Totalturns, MaterialsYearReceiptsand Supplies1950$20,977.58$8,916.00195117,156.856,405.45195219,242.907,281.14195318,299.426,378.92195419,802.636,924.79195525,142.588,413.35In 1955, a revenue agent, Edward J. Widzinski, was assigned the petitioners' 1954 return for a field examination, and in December, 1955, he telephoned Max and told him that the 1954 return was being audited. At one time, Mildred kept accurate and complete records in notebooks of all of the receipts of the Casciani concrete business, and of all of the expenditures for materials and expenses. She maintained these notebooks of the complete and accurate records of the business for each of the years 1950 through 1955. In February, 1956, Mildred destroyed the "accurate" notebook of records for 1953, 1954, and 1955, which was soon after Widzinski had notified Max that their 1954 return was being audited, and just before Mildred entered a hospital. She and Max were questioned later, by revenue agents, Murray and Widzinski, on November 30, 1956, and later, in December, 1957, by another revenue agent, George Montz. Mildred destroyed the above "accurate" records of the business because 1967 Tax Ct. Memo LEXIS 59">65 she feared that it would be found out that all of the business income had not been reported in their tax returns. At some time, Mildred also destroyed the "accurate" notebook containing the records of the business receipts, costs, and expenses for 1950, 1951, and 1952. Widzinski began his audit of petitioners' 1954 return, following his field examination, in April 1956, and in April he met with Carl Bauer, the accountant, who then submitted a notebook, which he had received from Mildred, containing records of business receipts and expenses for 1953, 1954, and 1955, of the Casciani concrete business. Bauer had not seen that notebook before April, 1956. When Widzinski compared the figures in this notebook with the figures on petitioners' returns for 1953 through 1955, he found both sets of figures substantially the same. Bauer also submitted to Widzinski the tablet work sheets which he had used in preparing the returns for the years involved here. Being temporarily satisfied that the amount of the income reported by the petitioners for 1954 was correct since the reported amount of income was supported by the notebook, Widzinski then began checking the deductions taken on the 1954 return. 1967 Tax Ct. Memo LEXIS 59">66 Except for the concrete purchases, the deductions seemed to be substantially correct, as reported. Widzinski then inspected the records of Max's suppliers to verify the amounts reported in the return as the purported costs of the purchases of concrete. The records of the suppliers revealed that the actual purchases of concrete were much higher than the amounts shown in the tax returns. The amounts shown on the petitioners' returns for 1950 through 1955, as the purchases of concrete and materials, supra, and the amounts of the actual purchases, discovered by Widzinski, were as follows: Actual Pur-Purchaseschases PerYearsPer ReturnsWidzinskiDifference1950$8,916.00$14,000.00$5,084.0019516,405.4514,000.007,594.5519527,281.1415,000.007,718.8619536,378.9220,138.9313,760.0119546,924.7916,027.769,102.9719558,413.3516,838.818,425.46Having ascertained that Max had claimed deductions in lower amounts than apparently he was entitled to deduct, Widzinski then obtained from the records of the suppliers the invoices for the purchases. The concrete used by Max was ordered in ready mixed form and was delivered directly to each job location by the supplier. Due to this procedure of the suppliers, Widzinski 1967 Tax Ct. Memo LEXIS 59">67 was able to get the addresses, to which the deliveries of concrete had been made, from the invoices of the suppliers. He then contacted the owners of the properties at those addresses; he learned that Max had done work for them; and that they had paid Max for the work. Widzinski then compared this data with the submitted notebook (which is exhibit AA), and found that all of the receipts from customers were not shown in the notebook. Widzinski made an analysis of the ratio of the cost of the concrete purchased by Max, to the payments Max had received from his customers; and Widzinski then ascertained that payments received were about 3 times as much as the cost of concrete. In July 1956, a special agent, Robert H. Murray, was assigned to work with Widzinski. On November 30, 1956, Max and Mildred were questioned, under oath, by Murray and Widzinski. Max admitted that he did not always make an invoice or written contract for each construction job. He estimated that the largest amount of his cash on hand during the prior 5 or 6 years, back to December 31, 1950, was $17,000 or $18,000, including $15,000 which he claimed he had brought back from Italy during 1950, as his share of his deceased 1967 Tax Ct. Memo LEXIS 59">68 father's estate. He told the agents that he and his family had only 3 savings accounts. In Mildred's statements to the agents, she estimated that the family's annual living expenses were about $3,000 per year; and she told the agents that the most of their cash on hand during the last 5 years had been about $15,000 or $16,000, including $15,000 brought back from Italy, and what was in the box in her bedroom. She admitted that she must have destroyed the notebook record for 1950, 1951, and 1952; and she stated that the notebook for 1953, 1954, and 1955, submitted by Bauer (exhibit AA), was the record she had kept for the concrete business. In December 1956, Max told Widzinski that he, Max, knew his income was considerably higher than had been reported. The investigation of petitioners' income tax returns was extended to cover the years 1950 through 1955. On December 2, 1957, Max and Mildred met with George C. Montz, Murray's supervisor, and with Murray. Max and Mildred, each, were placed under oath, were advised of their Constitutional rights, and were told that criminal prosecution was contemplated. Max told Montz and Murray that he, Max, knew his earnings were greater than reported 1967 Tax Ct. Memo LEXIS 59">69 on his returns. Mildred admitted that she knew that all of their receipts were not recorded in the notebook record (exhibit AA in this case) which she had given to the agents, and, also, that she knew that all of their receipts had not been reported on their returns. Mildred also admitted that she had kept a separate record showing the complete details of their receipts and of all the purchases for 1953, 1954, and 1955, and that she had destroyed this accurate notebook because she was afraid that somebody would find out they had not reported all of their receipts. Mildred said she did not report all of their income because she needed the money for her children and for her household. On February 3, 1960, Max and Mildred were indicted in the United States District Court for the Western District of New York in Buffalo on charges of willfully and knowingly attempting to evade and defeat a large part of their income taxes for 1953, 1954, and 1955. On March 30, 1962, Max and Mildred, each, pleaded guilty to Count II of the indictment relating to 1954, in which they were charged, as follows: That on or about the 8th day of April 1955, in the Western District of New York, the defendants Max 1967 Tax Ct. Memo LEXIS 59">70 R. Casciani and Mildred M. Casciani, who during the calendar year 1954 were married, did willfully and knowingly attempt to evade and defeat a large part of the income tax due and owing by them for the calendar year 1954 by filing and causing to be filed with the District Director of Internal Revenue for the Buffalo District, a false and fraudulent joint income tax return on behalf of themselves, wherein it was stated that their taxable income for said calendar year was the sum of $526.38 and that the amount of tax due and owing thereon was the sum of $105.28, whereas, as they then and there well knew their joint taxable income for said calendar year was the sum of $13,695.71, upon which said taxable income there was owing to the United States of America an income tax of $3,228.72; in violation of Section 7201, Internal Revenue Code; 26 U.S.C. Section 7201. On April 10, 1962, Mildred was fined $1,000, and Max was fined $1,000; Max was given a suspended sentence of 18 months in prison and placed on probation for 18 months. The fines were paid; the time for appeal has expired. Respondent, by statutory notice of deficiencies, mailed July 17, 1963, determined that deficiencies in income 1967 Tax Ct. Memo LEXIS 59">71 tax, and additions to the deficiencies and to the taxes were due from the petitioners in the amounts hereinabove set forth. Respondent determined that the petitioners realized additional adjusted gross income, which they failed to report, for each year under the net worth plus personal expenditures method in the amounts of $11,098.34 for 1950, $6,008.21 for 1951, and $10,232.06 for 1952. The Commissioner's determinations of additional unreported income for 1950, 1951, and 1952, were based upon the net worth plus expenditures method because the petitioners' records for those years were not adequate and complete. The net worth plus expenditures schedule of the respondent is as follows: Net Worth Increases Plus Expenditures1949195019511952Cash on hand not in banks0$15,000.0000Cash in banks$14,985.3522,521.12$25,774.28$18,907.12U.S. Savings bonds937.503,187.503,187.503,187.50Personal residence0014,071.5825,021.42Furniture0005,721.51Land - residence002,318.982,318.98Rental real estate8,000.008,350.008,900.008,900.00Less: Reserve for depreciation(378.00)(504.00)(655.67)(1,031.17)Business equipment$ 1,673.50$ 3,246.17$ 3,246.17$ 3,246.17Less: Reserve for depreciation(414.58)(319.03)(889.70)(1,470.37)Subdivision Lots 640 and 642001,440.001,440.00Subdivision Lot 6410001,846.85Total Assets$24,803.77$51,481.76$57,393.14$68,088.01Total Liabilities0000Net Worth$24,803.77$51,481.76$57,393.14$68,088.01Net Worth January 124,803.7751,481.7657,393.14Increase in net worth$26,677.99$ 5,911.38$10,694.87Estimated living expenses3,000.003,000.003,000.00Federal Income Taxes Paid151.00166.00196.07Total Net Worth increase plus nondeductible ex-penditures$29,828.99$ 9,077.38$13,890.94Less: Nontaxable inheritance15,000.0000Adjusted Gross Income$14,828.99$ 9,077.38$13,890.94Adjusted Gross Income per returns3,730.653,069.173,658.88Unreported Income$11,098.34$ 6,008.21$10,232.061967 Tax Ct. Memo LEXIS 59">72 The additional adjusted gross income determined for 1953, 1954, and 1955 amounts to $14,804.55, $13,474.45, and $8,664.83, respectively. These determinations were based on the specific item of income method. Respondent determined that petitioners had received, but failed to report on their returns the following items: Unreported IncomeBusinessInterestCapitalRentalYearIncomeIncomeGainIncomeTotal1953$14,054.59$749.9600$14,804.55195411,379.48456.74$1,638.23013,474.4519557,840.32820.680$3.838,664.83Respondent used the net worth and expenditures method to determine the petitioners' unreported income for 1950, 1951, and 1952 because no adequate and complete records had been furnished by the petitioners for those years; because their suppliers' records were not as complete for those years as they were for 1953-1955; and because many of Max's customers during 1950-1952 could not be contacted by the agents. The respondent used the specific items of income method of reconstructing their income for 1953, 1954, and 1955 because adequate records of suppliers and others were available to the examining agents, and because that method most correctly reflected their correct income. The unreported income 1967 Tax Ct. Memo LEXIS 59">73 for 1953, 1954, and 1955 is substantially corroborated by a schedule made by the respondent based on the increase in net worth plus personal expenditures method for those years. The following assets and liabilities in respondent's net worth schedule for 1949-1952 have been stipulated to be correct by the petitioners: 12/31/4912/31/5012/31/5112/31/52U.S. Postal Savings Acct. 55504$ 2,500.00$ 2,500.00$ 2,500.00$ 2,500.00U.S. Postal Savings Acct. 6103902,500.002,500.002,500.00Erie County Savings Bank, Acct. 6477542,822.003,824.493,901.553,990.06Erie County Savings, Acct. 72741001,815.221,851.801,893.80Liberty Bank Acct. 7006415.672,614.825,647.09786.73Liberty Bank Cking. Acct. Max1,145.491,200.051,206.12586.37Manufacturers & Traders Tr. Co. #55280002,807.75Marine Tr. Co. Thrift Acct. Max5,061.464,995.345,057.992,819.29Marine Tr. Co. Thrift Acct. Mildred3,040.733,071.203,109.731,023.12Total Cash in Banks$14,985.35$22,521.12$25,774.28$18,907.12Residence, Eggertsville00$14,071.58$25,021.42Land, 3/19/51, Eggertsville002,318.982,318.98Rental real estate owned$ 8,000.00$ 8,350.00$ 8,900.00$ 8,900.00Less: Reserve for depreciation(378.00)(504.00)(655.67)(1,031.17)Business equipment & vehicles1,673.503,246.173,246.173,246.17Less: Reserve for depreciation(414.58)(319.03)(889.70)(1,470.37)Lots Nos. 640, 642 acquired 4/17/51, Am-herst001,440.001,440.00Lot No. 641, acquired 3/13/52, Amherst0001,846.85Liabilities0000Federal income taxes paid0$ 151.00$ 166.00$ 196.07Nontaxable inheritance0$15,000.00001967 Tax Ct. Memo LEXIS 59">74 The only items in respondent's net worth-plus-expenditures schedule for 1949-1952, supra, with which petitioners do not agree are as follows: savings bonds in the amount of $3,187.50 in 1950, 1951, and 1952; and living expenses of $3,000 in each year. Petitioners claim that they had a hoard of cash, not in banks, of $23,200 at the end of 1949; that the savings bonds purchased with their own funds were in a smaller total amount than respondent determined; that their living expenses were in a smaller amount in each year; and that their furniture and belongings in their home at the end of 1949 and 1950 cost $5,000, which respondent did not include in the net worth schedule. In 1950, the petitioners and their 2 children went to Italy. They were there about 3 months. They traveled by ship, tourist class. The cost of the round-trip passage for petitioners and the children was about $1,350. They lived with relatives, not in hotels, while in Italy. The parties have stipulated that during 1952 the petitioners paid $5,721.51 to a store in Buffalo for furniture for their home. Respondent included that item in his net worth schedule. Prior to 1948, Max's earnings were only $1.60 an hour, and 1967 Tax Ct. Memo LEXIS 59">75 before his marriage he earned less. Mildred's earnings during World War II were only $1.10 an hour. Their two children were born in 1940, and 1945. The business which Mildred attempted to operate during 1946 was a financial failure. The respondent's records of Assessments and Payments of taxes for the years 1941 through 1955 show that very small amounts of taxes were paid prior to 1950, and that refunds were made in the years 1944-1947. It is stipulated that the petitioners received an inheritance of $15,000 in 1950, in Italy, which they brought back to the United States. Respondent included this amount in his net worth statement for 1949-1952, as nontaxable income. Ultimate Findings, A; Taxable Years 1950-1952 1. The petitioners had cash on hand, not in banks, in the amount of $5,000, at the end of 1949; $18,333, including the inheritance of $15,000, at the end of 1950; $1,667 at the end of 1951, and none at the end of 1952. 2. The petitioners had on hand, at the end of 1949, 1950, 1951, and 1952, United States Savings Bonds, for which they paid the cost out of their own funds, which had a cost of $937.50, $2,437.50, $2,437.50, and $2,437.50, respectively. 3. The petitioners had 1967 Tax Ct. Memo LEXIS 59">76 furniture, at the end of each of the years 1949 through 1951, which cost $5,000. They bought furniture in 1952 at a cost of $5,721.51, and the furniture on hand at the end of 1952 had a total cost of $10,721.51. 4. The cash expenditures of the petitioners for living and personal expenses amounted to the following: $2,800 in 1950; $2,000 in 1951; and $2,200 in 1952. 5. The corrected statement, as made by this Court, of the petitioners' net worth at the end of each year, 1949-1952; of their increases in net worth plus personal expenditures through 1952; and of their unreported income for the years 1950, 1951, and 1952, is set forth hereinafter. The petitioners' realized, but failed to report, taxable income as follows: $8,481.34 for 1950; $3,342.21 for 1951; and $7,765.06 for 1952, as shown in the following corrected net worth statement: Adjusted Net Worth Increases Plus Expenditures1949195019511952Cash on hand not in banks$ 5,000.00$18,333.00$ 1,667.000Cash in banks14,985.3522,521.1225,774.28$18,907.12U.S. Savings Bonds937.502,437.502,437.502,437.50Personal residence0014,071.5825,021.42Furniture5,000.005,000.005,000.0010,721.51Land - residence002,318.982,318.98Rental real estate8,000.008,350.008,900.008,900.00Less: Reserve for depreciation(378.00)(504.00)(655.67)(1,031.17)Business equipment1,673.503,246.173,246.173,246.17Less: Reserve for depreciation(414.58)(319.03)(889.70)(1,470.37)Subdivision Lots 640 and 642001,440.001,440.00Subdivision Lot 6410001,846.85Total Assets$34,803.77$59,064.76$63,310.14$72,338.01Total Liabilities0000Net Worth$34,803.77$59,064.76$63,310.14$72,338.01Net Worth January 134,803.7759,064.7663,310.14Increase in net worth$24,260.99$ 4,245.38$ 9,027.87Estimated living expenses2,800.002,000.002,200.00Federal Income Taxes paid151.00166.00196.07Total net worth increase plus nondeductibleexpenses$27,211.99$ 6,411.38$11,423.94Less: Nontaxable inheritance15,000.0000Adjusted Gross Income as corrected$12,211.99$ 6,411.38$11,423.94Adjusted Gross Income per returns3,730.653,069.173,658.88Understatement of Adjusted Gross Income$ 8,481.34$ 3,342.21$ 7,765.061967 Tax Ct. Memo LEXIS 59">77 1953, 1954, and 1955 The general investigation procedures of agent Widzinski have been set forth above, but are restated here, for clarity, because respondent made his determinations for the years 1953, 1954, and 1955 by using the specific items method. The business records of the firms who sold ready-mixed concrete and materials to Max for the jobs done in his business, the "suppliers", constitute a "record" of the business of the Casciani Concrete Construction firm during the years 1953, 1954, and 1955, and are evidence of the sales of materials used at the jobs. The suppliers delivered the materials to the addresses of the customers of Max. The business records of the suppliers included the names and addresses of the customers of Max. The respondent's agents actually interviewed, personally, a large percentage of those customers. Those individuals, who were interviewed, provided the agents with information about the amount each one had paid Max Casciani's firm for a particular job which had been contracted. The investigation was made, and Max's customers were interviewed by the agents, in 1957. On the basis of these personal interviews and the examination of written items in the 1967 Tax Ct. Memo LEXIS 59">78 possession of customers, such as the cancelled checks of the customers and their receipts for their payments, in cash or by check, to Max, the respondent determined that the total amount of the gross income of the Casciani business was $46,631.59, in 1953; $40,670.05, in 1954; and $41,374.35 in 1955. In preparation for the trial of this case, the petitioners and the respondent entered into lengthy, detailed stipulations, consisting of 24 typed pages, in which there are listed according to years (1953, 1954, and 1955) the names and addresses of Max's customers, the amount paid to Max by each one, the date of each payment, and the method of each payment, either by check or by cash. These stipulations are paragraphs 16 through 21 of the original stipulation of facts; and paragraphs 24 through 26 of the supplemental stipulation of facts. All of those stipulations are incorporated herein by this reference. The petitioners, by entering into those stipulations of facts, admitted that the Casciani business (Max) had received gross income in each year, 1953-1955, in the total sum shown by the stipulations. Thereby, they admitted, also, that in the tax return for each year, 1953-1955, the gross 1967 Tax Ct. Memo LEXIS 59">79 amount of business income had been understated and underreported by a substantial sum for each year. The stipulations described above, however, did not include all of the customers of Max during 1953-1955, and the respondent called upon 8 individuals to testify at the trial of this case, or to produce evidence of payments to Max. With respect to the expenses of the business in each year, for materials, labor, and other expenses including commissions paid by Max to others for assisting him in getting new business, the respondent's agents, in auditing the returns filed for the years involved, accepted as correct some of the business expenses reported on each return, as follows: Respondent accepted the reported labor costs as correct and allowed them as deductions for each year; he accepted as correct most of the "other expenses" of the business but he determined and allowed additional amounts as other expenses for 1953 ($517.57 more); for 1954 ($384.92 more); and he reduced by $34.01 the other expenses for 1955. The costs of materials constituted the larger part of business expenses each year. Respondent's agents ascertained from the business records of the suppliers the actual, total 1967 Tax Ct. Memo LEXIS 59">80 cost of materials purchased by Max in each year. Petitioners have stipulated with respondent, without conceding a fraudulent intent, the total cost of materials for each year, as follows: $20,138.93, in 1953; $16,027.76, in 1954; and $16,838.81 in 1955. These amounts are more than twice the amount of the cost of materials reported in each tax return for these years, as has been shown herein, before. The petitioners, therefore, have admitted that they substantially understated in each tax return the expense of materials used in the business in each year. The costs each year of materials, stipulated by the parties, are the same total amount for each year that agent Widzinski ascertained in his investigation. The respondent determined that the petitioners received in each year other income (apart from the income of the concrete business), consisting of interest each year on bank deposits in 12 savings accounts, mortgage interest, and taxable long-term capital gain in 1954 from the sale of 3 lots which they did not report in their tax returns. Without conceding a fraudulent intent, the petitioners have stipulated with the respondent the annual amounts of the unreported interest income, 1967 Tax Ct. Memo LEXIS 59">81 and of the capital gain in 1954, and thereby they have admitted that they failed to report such income. The stipulated, unreported, interest income was $749.96 in 1953; $456.74 in 1954; and $820.68 in 1955. The unreported long-term capital gain in 1954 was $3,276.47, of which 50 percent, $1,638.23, is taxable income. The above amounts are the same as respondent's agents ascertained through their investigation, and as determined by the respondent in the notice of deficiency. In addition, the respondent determined that petitioners failed to report in their 1955 tax return $3.83, rental income. The petitioners did not agree to this item in any stipulation. The petitioners did not attempt to prove at the trial that this determination was incorrect. There has been set forth herein before a schedule containing all of the above items of unreported income. The following schedules set forth respondent's reconstruction of petitioners' taxable income for the years 1953-1955 on the basis of the specific items method, and they represent respondent's determinations in the deficiency notice: 1953, Taxable Income Per Respondent Corrected business income: Gross receipts$46,631.59All expenses29,714.46Net business income$16,917.13Less reported business income2,862.54Unreported business income$14,054.59Interest749.96Total unreported income$14,804.551967 Tax Ct. Memo LEXIS 59">82 1954, Taxable Income Per Respondent Corrected business income: Gross receipts$40,670.05All expenses26,329.61Net business income$14,340.44Less reported business income2,960.96Unreported business income$11,379.48Interest456.74Capital gain1,638.23Total unreported income$13,474.451955, Taxable Income Per Respondent Corrected business income: Gross receipts$41,374.35All expenses27,084.69Net business income$14,289.66Less reported business income6,449.34Unreported business income$ 7,840.32Interest820.68Rent3.83Total unreported income$ 8,664.83The petitioners understated in their returns the main expense of the Casciani concrete business, costs of materials. The following schedules cover the details: Costs of MaterialsResp.'s Deter-mination andPerUnder-StipulationsReturnsstatement1953$20,138.93$ 6,378.92$13,760.01195416,027.766,924.799,102.97195516,838.818,413.358,425.46All Business Expenses1953$29,714.46$15,436.88$14,277.58195426,329.6116,841.699,487.92195527,084.6918,693.248,391.45 For the 3 years, petitioners reported as the gross receipts of the business a total sum of $63,244.63; respondent determined (in both the investigation and deficiency notices) gross receipts of the business of 1967 Tax Ct. Memo LEXIS 59">83 $128,675.99; and according to respondent's determinations the petitioners failed to report in their returns total gross receipts of $65,431.36: Resp.'s Deter-PerNotminationsReturnsReported1953$ 46,631.59$18,299.42$28,332.17195440,670.0519,802.6320,867.42195541,374.3525,142.5818,231.77Total$128,675.99$63,244.63$65,431.36For the 3 years, the petitioners, on their returns, reported as the net, taxable, business income the total sum of $12,272.84; the respondent determined such amount to be $45,547.23, and that petitioners understated such net income by the total sum of $33,274.39: Net Business IncomeResp.'s Deter-PerNotminationsReturnsReported1953$16,917.13$ 2,862.54$14,054.59195414,340.442,960.9611,379.48195514,289.666,449.347,840.32Totals$45,547.23$12,272.84$33,274.39Before the trial, the respondent undertook to obtain stipulations of the petitioners about the correct amount of the gross receipts of the business in each year. As stated above, petitioners (without conceding an intent to file false returns) agreed with the respondent that most of his determinations of the amounts of the gross, business receipts were correct, but petitioners would not agree to the full amount determined 1967 Tax Ct. Memo LEXIS 59">84 for each year. At the trial, respondent then proved that petitioners received additional amounts of gross receipts in each year, in addition to the stipulation. However, between the time of respondent's investigation in 1957 and the subsequent trial of this case, some of the customers of Max, whom the agents had interviewed in 1957, had died or become unavailable for their personal confirmation at the trial of the amounts they had paid Max, the information they had given the agents in 1957. Therefore, at the trial respondent could not confirm a part of his determination of the amount of the gross receipts for 1953 and 1954. He could not at the trial confirm $88 of the receipts he had determined for 1953, and $766.99 of the amount determined for 1954; but he confirmed 100 percent of the amount he had determined as gross receipts for 1955, plus an additional $143.50, for which additional amount he has not claimed an increase in the deficiency for 1955. The following schedule shows the above details: Gross Receipts of Business1.2.3.4.5. AdditionalTotalDeterminedStipulatedAt TrialAt TrialDifference 1967 Tax Ct. Memo LEXIS 59">85 1953$ 46,631.59$ 44,022.47$2,521.12$ 46,543.59$ (88.00)195440,670.0539,233.06670.0039,903.06(766.99)195541,374.3541,130.85387.0041,517.85143.50$128,675.99$124,386.38$3,578.12$127,964.50[711.49)The gross receipts of the concrete business for the years 1953-1955 amounted to $46,543.59 for 1953; $39,903.06 for 1954; and $41,374.35 for 1955 (as determined by respondent in the deficiency notice since respondent has not made a claim for an increased deficiency for 1955). On the basis of the above amounts of gross business receipts, the unreported net income from the business was $13,966.59 for 1953; $10,612.49 for 1954; and $7,840.32 for 1955 (as shown in a prior schedule, supra). The total amount of petitioners' unreported income for each year was $14,716.55 for 1953; $12,707.46 for 1954; and $8,664.83 for 1955 (as shown in a prior schedule, supra). The following schedule shows the Court's determinations of the above amounts of total unreported income for 1967 Tax Ct. Memo LEXIS 59">86 1953 and 1954: 1953, Taxable Income Determined.Corrected business income: Gross receipts$46,543.59All expenses29,714.46Net business income$16,829.13Less reported business income2,862.54Unreported business income$13,966.59Interest749.96Total unreported income$14,716.551954, Taxable Income Determined.Corrected business income: Gross receipts$39,903.06All expenses26,329.61Net business income$13,573.45Less reported business income2,960.96Unreported business income$10,612.49Interest and capital gain2,094.97Total unreported income$12,707.46 Section 294(d)(2), 1939 Code, for 1952, 1953, and 1954: On the basis of the facts shown on the petitioners' returns filed for each preceding year, i.e., 1951, for the 1952 return; 1952, for the 1953 return; and 1953, for the 1954 return, the petitioners filed timely a declaration of estimated tax for 1952, for 1953, and for 1954. The petitioners made timely payments of the estimated tax for 1952, 1953, and 1954 in an amount equal to or greater than the tax shown on the tax return for the preceding year, in each instance. The petitioners are not liable for an addition to tax under section 294(d)(2), 1939 Code, for 1952, 1953, and 1954. Section 294(d)(1)(A), 1967 Tax Ct. Memo LEXIS 59">87 1939 Code, for 1950 and 1951: Petitioners failed to file a declaration of estimated tax for 1950 and 1951. The petitioners failed to prove that they were not required to file a declaration of estimated tax for 1950 and 1951 under the provisions of section 58, 1939 Code. The petitioners' tax returns for 1950 and 1951 were not filed on or before January 15, 1951, and January 15, 1952, respectively; the provisions of section 58(d)(3) do not apply; and the returns filed for 1950 and 1951 cannot be treated as the declarations of estimated tax for 1950 and 1951. The petitioners are liable for the addition to tax for 1950 and 1951 under section 294(d)(1)(A). Ultimate Findings, B, 1953, 1954, and 1955; 1950-1952 1. The petitioners filed false and fraudulent returns with intent to evade taxes for each of the years 1950-1955, inclusive. Therefore, the assessment and collection of the tax for each of those years are not barred by the statute of limitations; section 276(a), 1939 Code, and section 6501(c), 1954 Code. 2. The petitioners realized but failed to report taxable income for each of the years 1953, 1954, and 1955 in the following respective amounts: $14,716.55 for 1953; $12,707.46 for 1967 Tax Ct. Memo LEXIS 59">88 1954; and $8,664.83 for 1955. 3. At least part of the deficiency for each of the 6 years 1950 through 1955 was due to fraud with intent to evade tax. Therefore the petitioners are liable for an addition of 50 percent of the deficiency for each of the 6 years 1950 through 1955, under section 293(b), 1939 Code, and section 6653(b), 1954 Code. Opinion One issue is whether there is a bar of the statute of limitations to the assessment and collection of tax deficiencies for any or each of the 6 years, 1950 through 1955. That bar does not apply if a false or fraudulent return with intent to evade tax was filed for any or each of the years. Section 276(a), 1939 Code (which applies to 1950-1953), and section 6501(c)(1) 1954 Code (which applies to 1954 and 1955). Respondent had the burden of proving fraud, by clear and convincing evidence, for the purpose of the above sections of the Codes, as well as for the purpose of section 293(b), 1939 Code, and section 6653(b), 1954 Code. See Rule 32 of this Court's Rules of Practice; section 1112, 1939 Code; section 7454(a), 1954 Code; Arlette Coat Co., 14 T.C. 751">14 T.C. 751; Cefalu v. Commissioner, 276 F.2d 122 (C.A. 5, 1960), affirming a Memorandum Opinion 1967 Tax Ct. Memo LEXIS 59">89 of this Court; Merritt v. Commissioner, 301 F.2d 484 (C.A. 5, 1962), affirming a Memorandum Opinion of this Court; and Schwarzkopf v. Commissioner, 246 F.2d 731 (C.A. 3, 1957), affirming on this point and modifying a Memorandum Opinion of this Court. Related to the above issue is the question whether the petitioners, for any or each of the years involved, realized but failed to report income, and, if so, whether they filed a false or fraudulent return with intent to evade tax and, therefore, are liable for a 50 percent addition to a deficiency under sections 293(b) and 6653(b) of the 1939 and 1954 Codes, respectively. The findings dispose of both of the above general issues in respondent's favor. With respect to the year 1954, there is the additional factor of collateral estoppel on the issue of fraud derived from the criminal conviction of Max and Mildred for willfully and knowingly attempting to evade and defeat a large part of their income taxes for 1954, in violation of section 7201, 1954 Code. See Arctic Ice Cream Co., 43 T.C. 68">43 T.C. 68, 43 T.C. 68">74, 43 T.C. 68">75; John W. Amos, 43 T.C. 50">43 T.C. 50, affirmed 360 F.2d 358 (C.A. 4, 1965); Moore v. United States, 360 F.2d 353 (C.A. 4, 1966); Tomlinson v. Lefkowitz, 334 F.2d 2621967 Tax Ct. Memo LEXIS 59">90 (C.A. 5, 1964), cert. denied 379 U.S. 962">379 U.S. 962. It has been established that a conviction for filing a false and fraudulent tax return for the purpose of evading income tax, even though based on a plea of guilty, makes effective the doctrine of collateral estoppel as to the fraud there involved. Max and Mildred, each, pleaded guilty to the charge of having willfully and knowingly attempted to evade and defeat a large part of the income tax due for 1954 by filing a false and fraudulent joint return for 1954, with intent to evade tax. The same omissions of income from the 1954 return are involved here. Both petitioners were found guilty, were fined, and were given suspended sentences. This sustains respondent's burden of proof as to fraud for 1954. See 43 T.C. 50">John W. Amos, supra, and the related cases cited. However, with respect to 1954, the respondent introduced ample and sufficient evidence to prove fraud for 1954 without applying the doctrine of collateral estoppel. The petitioners had the burden of proving errors in the determinations of the amounts of the deficiencies despite the burden upon the respondent to prove fraud to prevent the bar of the statute of limitations. Jacob D. Farber, 43 T.C. 407">43 T.C. 407, 43 T.C. 407">428; 1967 Tax Ct. Memo LEXIS 59">91 Max Cohen, 9 T.C. 1156">9 T.C. 1156, 9 T.C. 1156">1163, aff'd 176 F.2d 394. For the most part, petitioners failed to carry their burden of proof with respect to each year. We turn now to discussion of all of the evidence and conclusions based thereon. The respondent determined that the petitioners received taxable income in the 3 years 1950, 1951, and 1952, which was substantially in excess of the income reported for those years, by using the increase in net worth and expenditures formula. He used that method of reconstructing petitioners' taxable income because of the lack of sufficient and adequate records of the petitioners, and because the suppliers' records of the materials sold to Max in his business were not complete for those years, and many of the customers of Max during those years could not be contacted when his investigation was conducted. Respondent's determinations of additional, taxable income for the last 3 years, 1953, 1954, and 1955 were made and based upon, at all times, the specific items method of determining taxable income. The respondent may, and often does, reconstruct the taxable income of a taxpayer for each year in a series of several years by the use of one method for some of 1967 Tax Ct. Memo LEXIS 59">92 the years, and the use of another method for the other years, depending upon the particular facts and circumstances. See 2 Mertens, Law of Federal Income Taxation, Ch. 47, sec. 12.12, p. 47. See also, Blatchford v. Commissioner, 337 F.2d 1010 (C.A. 6, 1964), affirming this Court's Memorandum Opinion, 1963-83, where the respondent applied one method of reconstruction of income for one series of years, and another method for another series of years. The record here does not show that it was not justified or was not proper for respondent to employ the two different methods in making his respective determinations. Respondent's determinations for 1953-1955 were based upon the specific items method; they were not based upon a preliminary net worth statement of respondent's agent for the years 1953-1955, which was used as a "test". There is no merit in petitioners' argument that respondent erred in not using the net worth and expenditures method in making his final determinations for 1953-1955. The respondent introduced clear, convincing, and overwhelming proof that for each of the 6 years, 1950 through 1955, the petitioners realized but failed to report on each year's return a substantial 1967 Tax Ct. Memo LEXIS 59">93 amount of income. For the 6 years, they reported an aggregate amount of adjusted gross income of $24,409.54, as follows: $3,730.65 for 1950; $3,069.17 for 1951; $3,658.88 for 1952; $3,261.12 for 1953; $3,647.80 for 1954; and $7,041.92 for 1955. The respondent has proved and this Court has found that for the 6 years, petitioners' total taxable income and their unreported income were as follows: TaxableUnreportedYearIncome Income1950$12,211.99$ 8,481.3419516,411.383,342.21195211,423.947,765.06195317,977.6714,716.55195416,355.2612,707.46195515,706.758,664.83$80,086.99 $55,677.45Direct proof of a fraudulent intent to evade taxes is seldom possible. Usually such intent must be gleaned from particular transactions and the entire pattern of a taxpayer's conduct in reporting income and in failing to do so. M. Rea Gano, 19 B.T.A. 518">19 B.T.A. 518. It has been held in many cases that known discrepancies between actual income and reported income for a period of several years constitute sufficiently clear and convincing evidence of a fraudulent intent to evade taxes. Kurnick v. Commissioner, 232 F.2d 678, 681 (C.A. 6, 1956); Schwarzkopf v. Commisisoner, supra; 1967 Tax Ct. Memo LEXIS 59">94 Holland v. United States, 348 U.S. 121">348 U.S. 121, 348 U.S. 121">139. In Schwarzkopf, supra, the court observed (p. 734) that "the consistent failure to report substantial amounts of income over a period of years, standing alone, is effective evidence of fraudulent intent". The taxpayers here failed to report, over a period of 6 years, income in the amount of $55,677.45. The failure of petitioners to report a substantial amount of income for each of the 6 taxable years does not stand alone in this case. We are convinced, upon the evidence, that Mildred kept 2 sets of bookkeeping records for all of the taxable years of the Casciani Concrete Construction business; (1) accurate records of the receipts and expenses of the business, which were destroyed after Max was notified that their tax return for 1954 was being examined by revenue agents; and (2) false records of the receipts and expenses of the business which corresponded with what was reported in each tax return. In Nathan Goldsmith, 31 T.C. 56">31 T.C. 56, 31 T.C. 56">64, this Court stated that "the destruction of all records relating to the unrecorded sales is strong and persuasive [evidence of a fraudulent intent to evade taxes]". In Masters v. Commissioner, 243 F.2d 335, 337, 1967 Tax Ct. Memo LEXIS 59">95 the court said: "There is hardly a more routine badge of income tax fraud than a double set of records". Additional proof of intent to not report large amounts of business income is found in petitioners' failure to deduct the large amounts of purchases of ready-mixed concrete and materials, in at least 1953, 1954, and 1955. The failure to claim deductions in a return is indicative of a taxpayer's scheme to cover up his unreported income so that on its face the tax return will not arouse suspicion. Clark v. United States, 211 F.2d 100, 103, cert. denied 348 U.S. 911">348 U.S. 911. Respondent's agents were successful in finding out, from the suppliers, large amounts of business expenses which had not been reported and deducted in the returns for the years 1953-1955. The same sources revealed large amounts of business income that was received by the petitioners in the same years. With respect to unreported interest income, Max falsely stated during the investigation that he and his family had only 3 savings accounts, whereas they had at least 9 separate savings accounts in 4 different banks, and 2 postal savings accounts. Attempts by taxpayers to deceive and thereby impede the investigation of 1967 Tax Ct. Memo LEXIS 59">96 tax returns are "cogent evidence of fraud." 43 T.C. 407">Jacob D. Farber, supra, p. 420. On the other hand, Max and Mildred, each, admitted during the investigation of the 1954 return that they knew that their income was more than had been reported. Upon the entire record, we are fully convinced that the petitioners, willfully and with fraudulent intent to evade taxes, filed false and fraudulent tax returns for each of the years 1950 through 1955. It is concluded that respondent sustained his burden of proof in that respect, as well as with respect to the deficiency for each year. We are fully convinced that at least part of the deficiency for each year, 1950 through 1955, was due to fraud with intent to evade tax. We are also satisfied that both Max and Mildred had a fraudulent intent to evade tax and to file a false and fraudulent return for each year. The assessment and collection of the deficiencies are not barred for any of the taxable years by the statute of limitations. Since at least part of the deficiency for each year was due to a fraudulent intent to evade tax, the imposition of the penalty of 50 percent of the deficiency for each year is sustained. Consideration has been given to the 1967 Tax Ct. Memo LEXIS 59">97 contentions of the petitioners to the effect that although they failed to report all of their taxable income for each year, their failures were due to extenuating circumstances rather than to a fraudulent intent to evade taxes, but we cannot accept as true petitioners' protestations of a lack of fraudulent intent to evade taxes. Isolated instances of discrepancies or occasional lapses from the rigid accountability required by the law might conceivably be overlooked; but where the whole fabric of a taxpayer's tax accounting is permeated with gross error, where artifice is employed, and where the evidence establishes a consistent pattern of underreporting income and, also, business expenses, and where all tend to accomplish a reduction in apparent tax liability, the situation goes far beyond mere fortuitous and unintentional error. 19 B.T.A. 518">M. Rea Gano, supra, p. 533. The evidence in this case is clear and convincing that the petitioners had the intent of fraudulently failing to report all of their taxable income, and of filing a false and fraudulent return for each year. See 31 T.C. 56">Nathan Goldsmith, supra; Clark v. United States, supra; and Schwarzkopf v. Commissioner, supra. The petitioners' 1967 Tax Ct. Memo LEXIS 59">98 chief attack on respondent's reconstruction of taxable income, under the net worth and expenditures schedule, for the years 1950, 1951, and 1952, consists of their claim that at the end of 1949, they had a hoard of cash, not deposited in banks, of $23,200; that their cash expenditures for living and personal expenses were less than respondent determined; and that other adjustments should have been made in their favor in the net worth schedule for the period 1949 through 1952. All of these claims of petitioners have been carefully considered. On the basis of the record here, we have made a few adjustments in petitioners' favor and have revised to some extent the respondent's net worth schedule, as has been set forth in the findings. We have found that petitioners had some undeposited cash on hand, namely, $5,000 at the end of 1949; $3,333 at the end of 1950, in addition to the legacy of $15,000; and $1,667 at the end of 1951. We have found that the expenditures for living expenses in each year, 1950-1952, were less than respondent determined; and we have found that at the end of 1949 and each year thereafter petitioners had furniture at the cost of $5,000. But we are unable to find 1967 Tax Ct. Memo LEXIS 59">99 that petitioners had a hoard of cash at the end of 1949 in excess of $5,000, and as large as $23,200. Their story about and their claim that a cash hoard in the latter amount existed at the end of 1949 is not corroborated, is based on unsubstantiated, self-serving testimony, and is incredible and unworthy of belief. Petitioners offered almost no proof with respect to the deficiencies for 1953, 1954, and 1955. In fact, they entered into stipulations with the respondent agreeing to his determinations of amounts of unreported interest, capital gain, and almost all of the gross receipts of the business, and the cost of most of the materials purchased for the business. Petitioners have made claims for allowances of some additional business expenses, but they were not able to prove that such additional expenditures were made in each year, in the business, or the dollar amounts thereof. Therefore, it cannot be found as a fact that such additional business expenses were incurred and paid in each of the years 1953, 1954, and 1955. There is, however, one factor which is favorable to the petitioners. At the trial of this case, the respondent undertook to substantiate his determinations in the 1967 Tax Ct. Memo LEXIS 59">100 deficiency notice of the amounts of the gross business receipts in each year, but he was unable to do so entirely. His evidence about the gross business receipts was less than he determined in the notice of deficiency to the extent of $88 for 1953, and $766.99 for 1954. Our findings, therefore, are that the gross business receipts were $46,543.59 for 1953, and $39,903.06 for 1954. Those findings are favorable to the petitioners. Upon the entire record, further adjustments in petitioners' favor are not justified and must be disallowed because of petitioners' failure of proof in regard to the respective amount of each deficiency. Further discussion of the Court's findings and conclusions is unnecessary because of the detailed and self-explanatory findings. The Court's determinations of the amount of the unreported income for each year, 1950-1955, inclusive, are set forth in the schedule above. Those amounts are less than the respondent determined for the years 1950-1952, inclusive, and for 1953 and 1954, but are the same for 1955. Section 294(d)(1)(A), 1939 Code, provides for an addition to the tax for failure to file a declaration of estimated tax within the time prescribed, unless 1967 Tax Ct. Memo LEXIS 59">101 such failure is due to reasonable cause and not to willful neglect. The petitioners failed to file declarations of estimated tax for 1950 and 1951. They have not established that their failure was due to reasonable cause and was not due to willful neglect. They had the burden of proving that the imposition of this penalty was erroneous. They failed to meet their burden of proof. See Andre Picard, 28 T.C. 955">28 T.C. 955, 28 T.C. 955">960; Howard M. Fischer, 25 T.C. 102">25 T.C. 102, 25 T.C. 102">104; and sections 58(a) and 58(d)(3), 1939 Code. The return for 1950, dated February 15, 1951, was received in the collector's office on February 28, 1951. The 1951 return, dated February 18, 1952, was received by the collector on March 10, 1952. In the 1950 return, net income from the concrete business was reported to be $3,058.17, and income from other sources, rents, $672.48. In the 1951 return there were reported net business income of $2,625.60 and income from rents, $443.57. The 1950 return and 1951 return, each, was filed too late to constitute in itself a declaration of estimated tax under section 58(d)(3). Section 58(a)(2) requires an individual to file a declaration of estimated tax "if his gross income from sources other than wages 1967 Tax Ct. Memo LEXIS 59">102 * * can reasonably be expected to exceed $100 for the taxable year and his gross income to be $600 or more." With respect to 1950 and 1951, the evidence shows that during 1950 and at least the two preceding years Max was actively engaged in the operation of a business for profit. The petitioners failed to prove that under the provisions of section 58(a) they were not required to file a declaration for 1950 and 1951. The petitioners are liable for an addition to the tax for 1950 and 1951 under section 294(d)(1)(A). The amounts thereof will be recomputed under Rule 50. The respondent determined additions to the tax, under section 294(d)(2), for 3 years, 1952, 1953, and 1954. The provisions of section 294(d)(2) impose a penalty for a substantial underestimation of estimated tax, but the section provides an exception from the penalty for those years in which there has been a timely payment of estimated tax in an amount at least as great as it was "on the basis of the facts shown on his return for the preceding taxable year." Petitioners made timely payments of estimated tax as follows:$82 for 1952; $201.00 for 1953; and $104.59 for 1954. Each of the payments was in an amount as great, 1967 Tax Ct. Memo LEXIS 59">103 or greater, as though computed on the basis of the facts shown on the return for each preceding taxable year, 1951, 1952, and 1953. The respondent, in the deficiency notice, credited the petitioners with the payment of estimated tax of $82 for 1952, $201 for 1953, and $104.59 for 1954. In Schwarzkopf, supra, p. 734, the court interpreted the pertinent statutory provision to mean that no penalty for underestimation of tax may be imposed where the payment was based on the preceding year's return even though that return was fraudulent. See Herbert Schellenbarg, 31 T.C. 1269">31 T.C. 1269, 31 T.C. 1269">1279, reversed on other grounds 283 F.2d 871; and 8A Mertens, Law of Federal Income Taxation, Ch. 47A, sec. 47A. 29, p. 148. If the Congress had intended, for purposes of section 294(d)(2), to compare the estimated tax with the tax based on reconstructed or unreported income, it would have provided to that effect, but it did not do so. It is concluded, therefore, that the addition to the tax for 1952, 1953, and 1954, under section 294(d)(2), was erroneously determined by the respondent. Those penalties are not sustained. Decision will be entered under Rule 50. Footnotes. Column 4 is the total of columns 2 and 3. Column 5 is the difference between columns 1 and 4. In column 4, for 1955, $41,517.85 is $143.50 more for 1955 than respondent determined, $41,374.35. For the 3 years, respondent at the trial established the gross receipts were $127,964.50, which is $711.49, net, less than he had determined, $128,675.99. Figures in parenthesis mean less than determined by respondent in the deficiency notice.*. Includes rents which petitioners reported.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625845/	HENRY A. CLELAND ESTATE COMPANY, LTD., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Henry A. Cleland Estate Co. v. CommissionerDocket Nos. 33585, 40890, 51197.United States Board of Tax Appeals29 B.T.A. 436; 1933 BTA LEXIS 942; November 24, 1933, Promulgated 1933 BTA LEXIS 942">942 1. Under the provisions of a will and under the laws of Michigan the interests of certain remaindermen were vested and they acquired the property devised to them as of the date of the death of the testator. 2. The fair market value of certain real estate determined as of March 1, 1913. 3. The proper basis for determination of gain or loss on the sale of property devised subject to a life estate is the fair market value of the property as of the testator's death. Huggett v. Burnet, 64 Fed.(2d) 705, followed. 4. Evidence as to the value of a building based solely on a computation, in which the number of cubic feet in a building is multiplied by a factor supposed to represent the value of a cubic foot, is not sufficient to overcome the Commissioner's determination as to value. J. H. Amick, C.P.A., for the petitioner. James K. Polk, Esq., for the respondent. MARQUETTE 29 B.T.A. 436">437 These proceedings have been consolidated and involve the redetermination of the following deficiencies in income tax for the following years: 1925$2,230.481926649.711927260.4819287,367.21The errors alleged are, 1933 BTA LEXIS 942">943 that the respondent has determined that the basis for the computation of gain arising from the sale of certain realty in 1925 and of a loss arising from the demolition of a building in 1927 were the respective fair market values of the properties on March 1, 1913, rather than their fair market value on August 14, 1921, the date of their acquisition, and also that he has erred in his determination of such value as of March 1, 1913. The petitioner further alleges that he is entitled to deduct from gross income for 1928 a net loss incurred in 1927. The respondent on brief asserts that while he has not asked for an increase in any of the deficiencies, they should not be decreased if the Board determines greater value as of March 1, 1913; in that the proper basis for the computation of gain or loss is the respective fair market values of remainder interests on the basic date rather than the fair market value of respective properties on that date. FINDINGS OF FACT. The petitioner is a corporation organized under the laws of Michigan, with its principal office at Detroit. Henry A. Cleland died testate July 19, 1911. His will was admitted to probate by the Probate Court of Wayne1933 BTA LEXIS 942">944 County, Michigan. By his will he devised and bequeathed all his property to his executors and trustees in trust to pay the net income to his sister, Hannah Maria Cleland, during her life. By the third subdivision of his will be provided: Upon the death of my said sister, Hannah Maria Cleland, the trust hereby created shall cease and terminate, and I give, devise and bequeath all the rest and residue of my estate then remaining, and any increase thereof, in manner following, to-wit: 29 B.T.A. 436">438 The will also contains the following pertinent provisions: K. To the children of Charles W. Restrick and Jane Cowie Restrick, to-wit, ROBERT C. RESTRICK, EDNA H. RESTRICK, WILLIAM C. RESTRICK and HELEN C. RESTRICK, the sum of Ten Thousand Dollars ($10,000.00), to be divided equally between them, share and share alike. In case of the death of any of said children before such distribution without issue, then the share of such child shall belong to the survisors equally, and in case of such death of any of said children leaving issue, such issue shall represent and take such deceased parent's share. L. TO GEORGE B. DUFFIELD, HENRY C. DUFFIELD and FREDERICK H. DUFFIELD, children1933 BTA LEXIS 942">945 of George and Clara C. Duffield, the sum of Seven Thousand Five Hundred Dollars ($7,500.00), to be divided equally between them. In case of the death of any of said children before such distribution without issue, then the share of such deceased child shall be and belong to the survivors or survivor equally, and in case of such death leaving issue, such issue shall represent and take such deceased parent's share. M. TO AGNES A. CLELAND, daughter of my brother, James Cleland, the sum of Eight Thousand Dollars ($8,000.00). N. TO HENRY CLELAND, WILLIAM CLELAND, MARY Y. LOCKHART, FANNY AUGUSTINE and HANNAH M. WELCH, children of my brother, James Cleland, the sum of Fifteen Thousand Dollars ($15,000.00), to be divided equally between them, share and share alike. In case of the death of any of said children without issue before such distribution, then the share of such deceased child shall be and belong to the survivors equally, and in case of such death leaving issue, such issue shall represent and take the share of the parent so dying. FOURTH: In case there shall be any further surplus or residue after the payment of all the foregoing bequests in this Will contained, 1933 BTA LEXIS 942">946 then such surplus and residue shall belong to and be distributed among the same persons as are named and mentioned in paragraphs K, L, M, and N of Section or Sub-division Third of this Will, pro rata, that is to say, in the proportion that the specific legacy given to each bears to the total sum of such specific legacies, viz., Forty Thousand Five Hundred Dollars ($40,500.00). * * SIXTH: I hereby expressly give to my said Executors and Trustees hereinafter named, or the survivor of them, both as Executors and as Trustees, full power to sell, mortgage, lease, exchange and convey any portion of my estate as may be proper and requisite to carry out the terms of this Will, and as they may deem advisable and requisite for the best interests of my estate and the trust herein created, provided that my residence property on Canfield Avenue West in the City of Detroit shall not be sold during the life of my said sister, Hannah M. Cleland, without her consent. SEVENTH: I hereby appoint WILLIAM CLELAND and WILLIAM A. LIVINGSTONE, both of Detroit, Michigan, as TRUSTEES of my estate, and as EXECUTORS of this my last Will and Testament, and expressly request that no bond shall be required1933 BTA LEXIS 942">947 to them as such Executors or Trustees. Hannah Maria Cleland died August 14, 1921. Shortly after her death the estate was distributed pursuant to the third subdivision of the will. The individuals to whom distribution was made under paragraphs K, L, M, and N of subdivision Third forthwith caused the petitioner to be organized and transferred to it their respective interests in and to the property received by them under the will in 29 B.T.A. 436">439 exchange for its capital stock, each taking stock in proportion to his interest in the property transferred. Among the properties thus acquired by the petitioner were (1) the westerly 28 feet of lots 9 and 10 and the southerly 25 feet 6 inches of the easterly 95 feet 5 inches of lot 10 of park lots 84, 85, and 86 of the city of Detroit, commonly known as the Woodward Avenue and Columbia Street property; and (2) a parcel of real estate on Parsons Street, Detroit, upon which was located an apartment house known as Cynthia Apartments. Parcel (1) is "T" shaped with a base on Woodward Avenue of 25 feet 6 inches, beginning 51.12 feet north of Columbia Street and extending easterly about 95 feet to meet the top bar of the "T", which in turn fronts1933 BTA LEXIS 942">948 28 feet on Columbia Street and extends back inward over 90 feet to an alley. These lots inclose a corner lot of 51.12 feet front on Woodward Avenue by a depth of 95 1/2 feet on Columbia Street. The improvements on the properties had the following fair market values on March 1, 1913: Woodward Avenue property, $15,000; Columbia Street property, $1,500. The fair market value of the land in both lots was $64,000 on March 1, 1913. The fair market value of the above tracts of land and improvements thereon on August 14, 1921, was, land, $188,600; buildings, $11,640. In 1925 the petitioner sold the above properties for $252,500, payable $52,500 in 1925, $15,000 in 1926, $15,750 in 1927, and $169,250 in 1928. Payments were made when due. The petitioner returned its income from the sale on the installment method. The respondent has computed the petitioner's taxable gain on this sale for 1925 as follows: Gross sale price$252,500.00March 1, 1913 value, shown in depreciation schedule:Woodward Avenue property$59,783.27Columbia Avenue property8,825.15Total$68,608.42Less:Depreciation, 1922$764.50Depreciation, 1923834.00Depreciation, 1924597.83$2,196.3366,412.09Gross profit$186,087.91Percentage, gross profit to sale price73.7%Cash received during 192552,500.00Taxable income $52,500.00 X 73.7%38,692.50Taxable income reported on sale22,396.50Additional income16,296.001933 BTA LEXIS 942">949 29 B.T.A. 436">440 The respondent has included the gain from such sale for subsequent years as follows: 1926$11,054.75192711,576.251928124,398.75Hannah Maria Cleland on March 1, 1913, had a life expectancy of 7.77 years. In 1927 the petitioner demolished the building known as Cynthia Apartments, which was a four-story brick building with eight apartments and a janitor apartment. The petitioner claimed a loss on this transaction of $20,020.50 and the respondent has determined a loss of $11,743.13, based on the March 1, 1913, value adjusted for accrued depreciation at 3 percent to December 31, 1927. OPINION. MARQUETTE: The petitioner concedes that the basis for the computation of gain on the sale made in 1925 and of the loss suffered in 1927 is the same as if the gain or loss had been made or suffered by the beneficiaries under the will of Henry A. Cleland. Section 202(c)(3) of the Revenue Act of 1921, section 203(b)(4) and (i), and 204(a)(8) of the Revenue Act of 1926. The respondent has determined that the basis in this case is the fair market values of the petitioner's properties on March 1, 1913. See section 204(a)(5) and (b) of the Revenue Act1933 BTA LEXIS 942">950 of 1926. The petitioner contends that the proper basis is the fair market values of the properties as of August 14, 1921, the date of the death of Hannah Maria Cleland. The question for decision is when these beneficiaries "acquired" these properties. If the interests of the beneficiaries were vested as of the date of the death of the testator the respondent must be affirmed on this point. , and cases cited. Whether these interests were vested or contingent must be determined under the laws of Michigan, where the testator resided, his will was probated, and the real estate was located. ; ;. For this reason, among others, , on which the petitioner relies is not in point. That proceeding was decided under the laws of Wisconsin. Further, the deed there involved differs in many of its provisions from the will of Henry A. Cleland. Among the differences is the fact that the gift to the remaindermen made by the deed is found in1933 BTA LEXIS 942">951 the provision that after the termination of the life estate the trustees should convey the property to the remaindermen. Here the testator in disposing of the remainder interests uses the words "I give, devise and bequeath." There is nothing in the will which 29 B.T.A. 436">441 indicates an intention on the part of the testator that the vesting of the remainder estates should be postponed. Only the right to possession was postponed. The devises and bequests were to named individuals. The rule of pay or divide has no application. Cf. Section 11531 of the Compiled Laws of Michigan (1916) provides: Further estates are either vested or contingent: They are vested when there is a person in being who would have an immediate right to the possession of the lands, upon the ceasing of the intermediate or precedent estate; They are contingent whilst the person to whom, or the event upon which they are limited to take effect, remains uncertain. The named remaindermen under Cleland's will were persons in being who would have had an immediate right to the possession of the land on the ceasing of the estate of Hannah Maria Cleland. 1933 BTA LEXIS 942">952 These remainder interests were therefore vested as of the date of the testator's death. Subdivision Fourth of the will contains no words importing a contingency, but, assuming that any or all these interests might have been divested by death before thf expiration of the life estate, yet the fact remains that these interests were vested as of the testator's death, and, not having been divested, the remaindermen acquired the properties devised as of July 19, 1911, the date of the testator's death. This conclusion is in harmony with the decision in ; . There the testator devised a farm to his wife for life, remainder to his daughter, and upon the death of the latter to a grandchild should she survive the daughter; if she did not survive the daughter, then to others. The court held that the granddaughter took a vested interest subject to be divested in case of her death before the death of the daughter. On the question of the fair market value as of March 1, 1913, of the property sold in 1925 each party introduced two witnesses. All were real estate operators in Detroit and well qualified to express opinions1933 BTA LEXIS 942">953 as to such value. Their valuations differ widely. The petitioner's two witnesses placed such value at $100,000 and $103,600, respectively, while the respondent's two witnesses placed this value at $44,046 and $61,900. The witnesses testify as to many sales, but often do not state whether the property was or was not improved. From their testimony it appears that there was in this locality a gradual increase in value prior to 1913 and that business was approaching this section from the south, so that southerly lots would possess greater values than those farther north. Woodward Avenue was a more important thoroughfare than Columbia Street. In this mass of testimony we find two sales which we think have an important 29 B.T.A. 436">442 bearing on the then fair market value of the petitioner's property. One of these sales was of a lot fronting 26 feet on the west side of Woodward Avenue by a depth of 116 feet to an alley. This lot was 24 feet south of the north corner of the same block on which the petitioner's property was located. This property was sold on April 16, 1913, for $65,000, of which $5,000 represented the value of the improvements. The other sale, made April 5, 1912, was1933 BTA LEXIS 942">954 of the corner lot, which had a front of 51.12 feet on Woodward Avenue at a depth of 95 1/2 feet and was bounded on the north and west by the petitioner's property. The sale was for $125,000, of which $18,000 to $20,000 represented the cost of improvements. Although the petitioner's property was not a corner lot it possessed elements of corner value. It fronted on the two streets. It had the advantage of the alley. It had potential value in that it cut off access to the alley from the corner lot. In our opinion the so-called two lots should be treated as a single tract. As such they were sold. After careful consideration of the evidence we have arrived at the fair market values set forth in our findings. Having arrived at a greater value than that determined by the respondent, we are met by his contention that we should use as a basis not the fair market value of the property on March 1, 1913, but the then fair market value of the remaindermen's interests. This contention is denied on the authority of . The only evidence as to the fair market value of the building known as the Cynthia Apartments was the testimony of1933 BTA LEXIS 942">955 two witnesses introduced by the petitioner. These witnesses valued this building as of March 1, 1913, at $23,909 and $25,000, respectively, and as of March 4, 1921, at $19,636 and $19,921. They based these valuations solely on computations in which the cubic contents of the building were multiplied by a factor representing the then value of a cubic foot. The witnesses did not agree on the values to be attributed to each cubic foot. One used a factor of 28 cents a cubic foot for 1913 value and of 31 cents for 1921 value, while the other used factors for the same years of 27 cents and 34 cents. Both deducted depreciation from the year 1896 at the arte of 2 1/2 percent. Section 204(b) of the Revenue Act of 1926 calls for proof of "fair market value," that is, what a willing buyer would give and a willing seller would accept. This is quite a different thing from cost () and, of course, from reproduction cost, even after deducting accrued depreciation. We are not informed as to the physical condition of the building on the basic dates or its rent rolls. Obsolescence is a factor. We are not even given the independent judgment1933 BTA LEXIS 942">956 of the witnesses as to what 29 B.T.A. 436">*443 in their opinion was the then fair market value of the building. All that we have before us is the application of a hard and fast rule of thumb. Such evidence is not sufficient to overcome the determination of the respondent. ; ; affd., ; ; affd., ; ; . The respondent's determinations both as to value and as to the rate of depreciation on this building are sustained. The petitioner's right to deduct from gross income for 1928 a net loss of 1927 will be determined upon final computation. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625846/	HANNAH D. STRATTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Stratton v. CommissionerDocket No. 7841.United States Board of Tax Appeals5 B.T.A. 1025; 1927 BTA LEXIS 3683; January 10, 1927, Promulgated 1927 BTA LEXIS 3683">3683 A widow maintaining a residence for herself and her daughter, who is an adult and not dependent on her mother for support, is not entitled to the exemption granted the head of a family by section 216(c), Revenue Act of 1921, though she in fact contributes to the support of her daughter. Hannah D. Stratton pro se. Brice Toole, Esq., for the respondent. MILLIKEN 5 B.T.A. 1025">1025 This proceeding results from the determination by respondent of a deficiency in income tax for the calendar year 1921, in the amount of $80. The deficiency is due to the reduction of the personal exemption of petitioner from $2,000 to $1,000. The proceeding was submitted upon a stipulation of facts. 5 B.T.A. 1025">1026 FINDINGS OF FACT. Petitioner is a widow residing at Moylan, Pa., and maintains a residence for herself and unmarried daughter. The unmarried daughter is not a minor and is not dependent upon petitioner for support, although petitioner does contribute to her support. OPINION. MILLIKEN: Section 216 of the Revenue Act of 1921 provides that certain credits shall be allowed individuals for the purpose of computing the normal tax: (c) In case of a single person, 1927 BTA LEXIS 3683">3684 a personal exemption of $1,000; or in the case of the head of family or a married person living with husband or wife, a personal exemption of $2,500, unless the net income is in excess of $5,000, in which case the personal exemption shall be $2,000. * * * The question to be decided is whether petitioner is entitled to an exemption as the head of a family in the amount of $2,000 or to an exemption of only $1,000. Petitioner contends that she is entitled to the credit allowed the head of a family, for the reason that she maintains a home, her daughter lives with her, and she contributes to her support. The daughter is not a minor, nor does it appear that she depended for her chief support upon her mother. Apparently, she has income of her own sufficient in itself to constitute her chief support. In the absence of the daughter being in any material or legal degree dependent upon her mother for support, the petitioner does not support and maintain a dependent so that she may be classed as the head of a family within the purview of section 216(c) of the Revenue Act of 1921. Judgment will be entered for the Commissioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625847/	Edwin M. Dezendorf and Florence L. Dezendorf v. Commissioner.Dezendorf v. CommissionerDocket No. 66283.United States Tax CourtT.C. Memo 1961-280; 1961 Tax Ct. Memo LEXIS 66; 20 T.C.M. 1480; T.C.M. (RIA) 61280; October 9, 19611961 Tax Ct. Memo LEXIS 66">66 David L. Tisinger, Esq., 1210 Capital Nat'l Bank Bldg., Austin, Tex., for the petitioners. Harold L. Cook, Esq., for the respondent. WITHEYMemorandum Findings of Fact and Opinion WITHEY, Judge: The respondent has determined deficiencies in the income tax of the petitioners and additions to tax for the indicated years as follows: Additions to tax I.R.C. 1939YearDeficiencySec. 294Sec. 294(d)(1)(A)(d)(2)1952$9,617.54$1,514.16$1,009.4419537,814.94799.70468.90Issues presented by the pleadings are the correctness of the respondent's action (1) in disallowing a deduction of $15,128 taken for 1952 as a loss on abandonment of quarries, (2) in disallowing $2,259.45 of a deduction taken for 1952 for depreciation, (3) in disallowing a deduction of $1,300 taken from gross rents for 1953 as depreciation of an automobile, (4) in increasing the taxable income of the petitioners for 1953 by $33,949.08 as representing their income from Dezendorf Marble Company for that year, (5) in reducing the taxable income of the petitioners for 1953 by the amount of $19,200 which they reported as interest received during that year1961 Tax Ct. Memo LEXIS 66">67 from Dezendorf Marble Company, (6) in determining an addition to tax for 1952 under section 294(d)(1)(A) of the Internal Revenue Code of 1939 for failure to file a declaration of estimated tax, (7) in determining an addition to tax for 1953 under section 294(d)(1)(A) for failure to file a timely declaration of estimated tax, and (8) in determining additions to tax for 1952 and 1953 under section 294(d)(2) for substantial underestimation of tax. General Findings of Fact Some of the facts have been stipulated and are found accordingly. The petitioners, Edwin M. Dezendorf, also known as E. M. Dezendorf, sometimes hereinafter referred to as the petitioner, and Florence L. Dezendorf, are husband and wife residing in Austin, Travis County, Texas. They kept their books and prepared their income tax returns on a calendar year basis. They filed their joint Federal income tax returns for 1952 and 1953 with the director in Austin, Texas. Samuel C. Bilbrough, sometimes hereinafter referred to as Bilbrough, and Irene D. Bilbrough are husband and wife and are son-in-law and daughter of petitioners. They were married in 1929, reside in Austin, Texas, and filed their joint Federal income tax1961 Tax Ct. Memo LEXIS 66">68 return for 1953 with the director in that city. For many years prior to the taxable years involved herein the petitioner owned and operated a sole proprietorship d.b.a. Dezendorf Marble Company with his principal office and place of business in Austin, Texas. The proprietorship was engaged in the business of manufacturing and selling terrazzo marble chips and marble, feldspar, and dolomite chips for terrazzo flooring and for roofing, and in the business of leasing lands for mining and preparing for sale and selling various colors of marble and granite prepared in aggregate or chip form. The proprietorship had acquired by lease or purchase various lands, buildings, machinery, and improvements necessary or useful in the operation of the business. Bilbrough entered the employment of the proprietorship in November 1942 and continued in its employment until entering the Army sometime in 1943. After returning from the Army he entered the employment of the proprietorship about June 1946 as manager. By the first of 1947 he was in complete charge of operating the proprietorship and thereafter continued so. In January 1950, the petitioner was injured in an automobile accident and thereafter, 1961 Tax Ct. Memo LEXIS 66">69 in that year, Bilbrough, as manager of the proprietorship, was given authority to borrow money for the operation of the proprietorship business. Issue 1. Loss on Abandonment of Quarries Findings of Fact In Schedule C of their income tax return for 1952 the petitioners took a deduction of $15,128 for "Other business expenses" which they explained merely as "Marble Quarries now Exhausted & abandoned" without further explanation or description. In determining the deficiency here involved for 1952 the respondent disallowed the deduction on the ground that petitioners had failed to show that the quarries were in fact abandoned in 1952 or, if there were an abandonment, that any loss was sustained with respect thereto. The quarries with respect to which the above-mentioned deduction was taken were the Western Electric Quarry at Bluffton, Texas, the Scholte Quarry near Llano, Texas, Rausch Ranch Quarry in Gillespie County, Texas, the Rickerson Ranch Quarry near Llano, Texas, and the Black Quarry in Marble Falls, Texas. The land on which all of the foregoing quarries were operated was held by petitioner under lease except the Black Quarry which was operated on land owned by petitioner. 1961 Tax Ct. Memo LEXIS 66">70 The Black Quarry was opened by petitioner about 1940 or 1941, but petitioner does not know whether he discontinued removal of mineral from the quarry in 1952 or in 1950 or 1951. The land on which the quarry was operated was transferred to Bilbrough subsequent to 1952 in a sale to him by petitioner of the Dezendorf Marble Company business and the assets used therein and connected therewith. Thereafter Bilbrough, employing the assets so acquired, conducted the same kind of business as petitioner had conducted. The petitioner acquired the lease on the land on which the Western Electric Quarry was situated in 1945. At the time petitioner acquired the lease there was a lake near the land. Because of water in the quarry the petitioner never removed any mineral from the Western Electric Quarry. However, the petitioner removed minerals from each of the other above-mentioned quarries, took the minerals to Austin, Texas, and crushed them. The petitioner does not know when he obtained the leases on the land on which the Scholte, Rausch Ranch, and Rickerson Ranch quarries were operated nor does he know when he abandoned or disposed of the lease on the land on which the Rickerson Ranch Quarry1961 Tax Ct. Memo LEXIS 66">71 was operated. The leases on the lands on which the Scholte and Rausch Ranch quarries were operated were abandoned or disposed of by petitioner in 1950. The lease on the land on which the Western Electric Quarry was situated was abandoned in 1950 or 1951. The petitioner does not have any records as to the costs he may have incurred in 1952 and prior years in acquiring or developing any of the above-mentioned mining leases or in developing the Black Quarry on land which he owned. Nor does the record disclose whether the costs the petitioner may have incurred were capitalized and recovered by way of depletion allowances or were currently deducted as business operating expenses. Opinion Losses resulting from abandonment are sustained during the year of abandoned and, if deductible at all, are deductible for the taxable year in which the abandonment occurs. Ordinarily there must be an intention to abandon, evidenced by some act, and such intention and act are to be ascertained from the facts and surrounding circumstances. Non-use alone is not sufficient. Minneapolis, St. Paul & Sault Ste. Marie Ry. Co., 34 B.T.A. 177">34 B.T.A. 177 (1936), and W. B. Davis & Son, Inc., 5 T.C. 1195">5 T.C. 1195 (1945).1961 Tax Ct. Memo LEXIS 66">72 It has been held, however, that an act of abandonment alone is sufficient. Mine Hill and Schuylkill Haven R. Co. v. Smith, 184 F.2d 422 (C.A. 3, 1950), certiorari denied 340 U.S. 932">340 U.S. 932 (1951). From a consideration of the situation here presented in the light of the foregoing we are unable to find that any of the quarries here involved were abandoned during 1952, the year for which the deduction for abandonment was taken. While petitioner testified that he did not know whether he discontinued removal of mineral from the Black Quarry in 1952 or in 1950 or 1951, the record shows that petitioner sold the land on which the quarry was operated to Bilbrough in a year subsequent to 1952 and indicates that Bilbrough thereafter used it in the conduct of the same kind of business as petitioner conducted as a sole proprietorship. If it be conceded that petitioner ceased removal of mineral from the quarry in either of the years 1950, 1951, or 1952, the petitioner would not be aided since non-use alone is not sufficient to establish abandonment. As to the other quarries the evidence shows that petitioner either did not know the year in which the leases involved were disposed1961 Tax Ct. Memo LEXIS 66">73 of or abandoned or that the leases were disposed of or abandoned in some year other than 1952. Further, if we were able to find that all or any of the quarries in question were abandoned in 1952, we would be unable to determine that the petitioner thereby sustained any deductible loss because of the lack of evidence as to petitioner's cost or other basis of the quarries and his subsequent treatment of such cost. On the record presented we sustain the respondent's action as to this issue. Issue 2. Deduction for Depreciation Findings of Fact In Schedule C of their income tax return for 1952 the petitioners took a deduction of $16,053.70 for depreciation of the various depreciable assets used in the petitioner's sole proprietorship business. In determining the deficiency for 1952 the respondent determined that depreciation in the amount of only $13,794.25 was properly deductible and disallowed $2,259.45 of the deduction taken on the ground that the petitioners did not take into consideration salvage value of the assets in computing the deduction taken. The depreciation deduction taken in the return of the petitioners was computed on a straight line method by which the cost1961 Tax Ct. Memo LEXIS 66">74 of the respective assets was divided by the estimated number of years of the life of the respective assets and the quotient was used as the amount of depreciation per taxable year. The computation of depreciation by such a method did not give any effect to any salvage value that any asset might have at the end of the estimated life thereof. Opinion The petitioner testified that he did not know how the depreciation schedule of his return was prepared. However, Bilbrough who stated that he prepared the schedule also stated that he thought he took salvage value into account in preparing the schedule by reducing the cost of the respective assets by the amount of estimated salvage of the respective assets at the end of the estimated life thereof. A comparison of the stipulated cost of the respective assets with the cost thereof shown in the depreciation schedule shows that was not done. Since we are unable to find from the record that the assets in question will be completely worn out or valueless at the end of their estimated lives and will have no salvage value, we are of the opinion that consideration must be given to salvage value in determining allowable deprecation. Massey Motors, Inc. v. United States, 364 U.S. 92">364 U.S. 92 (1960);1961 Tax Ct. Memo LEXIS 66">75 Cohn v. United States, 259 F.2d 371 (C.A. 6, 1958); Regulations 118, sec. 39.23(1)-1. Inasmuch as the record fails to show error in the respondent's determination that depreciation in the amount of only $13,794.25 was properly deductible for 1952 when consideration is given to the salvage value of the assets in question, the respondent's determination is sustained. Issue 3. Disallowance of Deduction Taken From Gross Rents for 1953 for Depreciation of an Automobile. In his reply brief the petitioner concedes the correctness of the respondent's action as to this issue. Issue 4. Increasing Taxable Income of Petitioners for 1953 by $33,949.08 as Representing Their Income From Dezendorf Marble Company. Issue 5. Reducing Taxable Income of Petitioners for 1953 by $19,200 Which They Reported as Interest Received During That Year From Dezendorf Marble Company. Findings of Fact In November 1952, Bilbrough became dissatisfied with the salary he was receiving for his services as manager of the Dezendorf Marble Company, the petitioner's sole proprietorship, and the fact that he had not received an interest in the business, which he felt he was entitled to. As a result1961 Tax Ct. Memo LEXIS 66">76 of a disagreement between Bilbrough and the petitioner, the petitioner submitted to Bilbrough two written instruments, one being a proposed agreement for the sale of the business and assets to Bilbrough and the other being a proposed agreement for the continuation of Bilbrough's services as manager of the business. Neither of the instruments was executed since neither of the proposed agreements was acceptable to Bilbrough. Subsequently Bilbrough and the petitioner further discussed the situation. Bilbrough was concerned about the amount of the down payment that petitioner would require in the event of the sale of the business and, being unable to make a down payment of any specified amount, informed the petitioner to that effect. The discussion resulted in petitioner in December 1952 proposing to sell the business to Bilbrough stating with respect to such proposed sale "that he would make an agreement of some kind that would be satisfactory" to Bilbrough. At that time it was agreed that Bilbrough would continue in charge of operating the business during 1953 and after the end of that year he could make a down payment toward the purchase price of the business of such amount as he then1961 Tax Ct. Memo LEXIS 66">77 would be able to make. Also, at or about that time the petitioner paid Bilbrough a bonus of $1,500 for his services during 1952. During 1953 Bilbrough continued in charge of operating the business and drew a salary on which income tax and social security tax were withheld by the Marble Company. During that year the petitioner made cash withdrawals from the business totaling $35,000. On some occasions the withdrawals desired by petitioner were, upon petitioner's request, handed to him by Bilbrough and on other occasions the amounts desired by petitioner were merely taken by petitioner without request being made on Bilbrough. The withdrawals were used by the petitioner to pay personal expenses and to make investments in corporate stock. During 1953 no notice was given the insurance companies which wrote business insurance for the Marble Company that the business had been sold to the Bilbroughs. Nor were titles to the business vehicles of the company changed to reflect a sale of the business to the Bilbroughs. During 1953 no instruments were signed by the petitioners and the Bilbroughs reflecting a sale of the Marble Company. Because of "the squabble going on and changing this and1961 Tax Ct. Memo LEXIS 66">78 that" an agreement for the sale of the Marble Company business and assets acceptable to Bilbrough and his wife was not reached by Bilbrough and petitioner until January 4, 1954. Thereafter, on January 15, 1954, the petitioner sold to the Bilbroughs the Marble Company business and assets used therein and connected therewith for $320,000. On the same day the petitioners and the Bilbroughs executed a bill of sale and a mortgage agreement respecting the company's business and assets used therein and connected therewith. The mortgage agreement contained the following provisions, among others: 1. This agreement shall be effective as of January 1, 1953, and all transactions herein referred to shall, for all legal purposes, be treated as though they occurred January 1, 1953. 2. Mortgagors [Bilbroughs] have purchased from mortgagees [petitioners], the Dezendorf Marble Company, and the assets thereof, and connected therewith, more particularly described on Exhibit "A" attached hereto and made a part hereof. 3. As part of the consideration of such purchase, mortgagors agree to pay to mortgagees the sum of Three Hundred Thousand & No/100 ($300,000.00) Dollars on January 1, 1973, with1961 Tax Ct. Memo LEXIS 66">79 interest at six (6%) per annum from January 1, 1953, such interest being payable in monthly installments beginning January 31, 1953, and continuing on the last day of each calendar month thereafter, such interest to be calculated on the unpaid principal balance on each monthly payment date. * * 5. Mortgagees hereby acknowledge receipt of all interest for the year 1953, and hereby further acknowledge receipt of an additional Twenty Thousand & No/100 ($20,000.00) Dollars (paid in part with cash and in part with securities); such Twenty Thousand & No/100 ($20,000.00) Dollars being the only other consideration for the purchase besides the Three Hundred Thousand & No/100 ($300,000.00) Dollar obligation hereinabove mentioned, it being expressly agreed and understood that the total purchase price was and is Three Hundred and Twenty Thousand & No/100 ($320,000.00) Dollars. In other words, from and after the date of execution hereof, mortgagors shall not be obligated to mortgagees except to pay Three Hundred Thousand & No/100 ($300,000.00) Dollars plus interest, as above stated, and otherwise to keep and perform the covenants set forth in this instrument. 6. It is expressly agreed1961 Tax Ct. Memo LEXIS 66">80 and understood that all profits for the year 1953 of the Dezendorf Marble Company are the property of mortgagors, and that both legal and equitable title to the said Dezendorf Marble Company and all property described on the attached Exhibit "A" shall be deemed to have passed to and vested in mortgagors January 1, 1953. 7. Mortgagors covenant that until one-half (1/2) of the principal indebtedness is paid, that the name Dezendorf Marble Company shall not be changed, but it is expressly agreed and understood that mortgagors shall file the required assumed name certificate with the County Clerk showing that Dezendorf Marble Company is owned by mortgagors. * * 9. It is expressly agreed and understood that mortgagees shall have the option of foreclosing the lien herein granted, however in the event that mortgagors should sell the business to any person, firm or corporation not approved of in writing by mortgagees, or either of the mortgagees. 10. Contemporaneous with the execution hereof, mortgagees have executed appropriate warranty deeds and an appropriate bill of sale covering the properties involved, and mortgagors have executed an appropriate assumed name certificate. 1961 Tax Ct. Memo LEXIS 66">81 This instrument and such deeds, bill of sale and assumed name certificate, constitute all of the writings documenting the agreement of the parties, and no other understanding or agreement except that shown in the writings shall be enforceable. * * The eight tracts of real estate which constituted part of the assets involved in the sale were transferred by petitioners to the Bilbroughs by warranty deeds executed by petitioners on January 15, 1954. On or about January 4, 1954, Bilbrough borrowed some money from a bank which he paid to petitioners as part of the down payment of $20,000 referred to in paragraph 5 of the mortgage agreement. On January 19, 1954, the petitioners filed with the County Court of Travis County, Texas, a Withdrawal of Assumed Name Certificate with respect to the Marble Company which revoked an Assumed Name Certificate filed by petitioner on January 13, 1934. On January 19, 1954, Bilbrough and his wife filed with the County Court of Travis County, Texas, an Assumed Name Certificate for the Marble Company. On October 16, 1946, the petitioner filed with the Austin National Bank, Austin, Texas, a signature card which authorized the bank to honor checks1961 Tax Ct. Memo LEXIS 66">82 signed by either of the petitioners or by Bilbrough drawn on the Marble Companys' account with the bank. On September 22, 1950, the bank was also authorized to honor checks signed by I. D. Bilbrough drawn on the account. In a letter to the bank dated February 1, 1954, the petitioners requested the bank to remove their names from its signature card authorizing them to sign checks for the Marble Company since they had sold the company to the Bilbroughs. In January 1954, and prior to the execution of the bill of sale and mortgage agreement on January 15 of that year, petitioner allocated the cash withdrawals, totaling $35,000, which he had made during 1953 from the Marble Company business as follows: $19,200 to interest as representing interest on the $320,000 sale price of the business and the remainder, $15,800, to the down payment on the sale price. In their income tax return for 1953 the Bilbroughs reported the receipt of a salary of $6,000 from Dezendorf Marble Company and that $1,146 had been withheld as tax thereon. In Schedule C "Profit (Or Loss) From Business Or Profession" the business name was shown as "Dezendorf Marble Co." and that the business in 1953 became the successor1961 Tax Ct. Memo LEXIS 66">83 of a sole proprietorship the name of which was "Dezendorf Marble Co. (E. M. Dezendorf)." A net income of $16,255.23 for 1953 was shown in Schedule C and was included as income in computing their tax liability for 1953. Another schedule dated March 12, 1954, signed by each of the Bilbroughs and attached to their return contains the following: Purchase of DEZENDORF MARBLE COMPANYDate: January 15, 1954 AS OF January 1, 1953 STATEMENT OF SALE TOTAL PRICE$320,000.00Cash on Hand$ 3,076.00Accounts receivable30,500.00Merchandise: chips, rock,new bags45,000.00Machinery, trucks, plants,buildings, as shown ondepreciation schedule144,000.00Land in Austin50,000.00Land in Burnet, Llano,and Marble Falls, Tex.5,000.00Good Will & Patent39,000.00$320,000.00In their income tax return for 1953 the petitioners did not report the sale of Dezendorf Marble Company nor any income from the conduct of that business during that year. However, in their return they reported the receipt of income from interest in the amount of $19,200 from that company. In determining the deficiency for 1953 the respondent determined that petitioners did1961 Tax Ct. Memo LEXIS 66">84 not sell the Marble Company during 1953, that they realized taxable income of $33,949.08 from the business operations of the company in 1953 and increased the taxable income of the petitioners accordingly. The respondent further determined that since the petitioners did not sell the Marble Company prior to the end of 1953, there was no amount due in 1953 on the sales price thereof and that therefore they realized no interest income in that year respecting the sale transaction and accordingly reduced the petitioner's taxable income as reported for 1953 by the amount of $19,200 which they had reported as interest received during 1953 from the company. Opinion The petitioners have asked that we find that the sale of the Dezendorf Marble Company business and the assets used therein and connected therewith occurred as of midnight December 31, 1952, or January 1, 1953, and that beginning January 1, 1953, the Bilbroughs became and were the owners and operators of the company. They contend that the mortgage agreement executed January 15, 1954, shows that the sale was to be effective on January 1, 1953, and that the deeds and mortgages involved show that the parties could not have "hatched1961 Tax Ct. Memo LEXIS 66">85 up" the sale during the first few days of 1954. The respondent contends that the sale in question did not occur until January 15, 1954, and that his determination with respect to the issues here under consideration should be sustained. A question presented in Commissioner v. Segall, 114 F.2d 706 (C.A. 6, 1940), certiorari denied 313 U.S. 562">313 U.S. 562 (1941) was when a sale involved therein occurred. There it was said: There are no hard and fast rules of thumb that can be used in determining, for taxation purposes, when a sale was consummated, and no single factor is controlling; the transaction must be viewed as a whole and in the light of realism and practicality Passage of title is perhaps the most conclusive circumstance. Brown Lumber Co. v. Commissioner, 59 App. D.C. 110">59 App. D.C. 110, 35 F.2d 880. Transfer of possession is also significant. Helvering v. Nibley-Mimnaugh Lumber Co., 63 App. D.C. 181">63 App. D.C. 181, 70 F.2d 843; Commissioner v. Union Pac. R. Co., 2 Cir., 86 F.2d 637; Brunton v. Commissioner, 9 Cir., 42 F.2d 81. A factor often considered is whether there has been such substantial performance of conditions precedent1961 Tax Ct. Memo LEXIS 66">86 as imposes upon the purchaser an unconditional duty to pay. Commissioner v. North Jersey Title Ins. Co., 3 Cir., 79 F.2d 492; Brunton v. Commissioner, supra; Case v. Commissioner, 9 Cir., 103 F.2d 283; United States v. Utah-Idaho Sugar Co., 10 Cir. 96 F.2d 756. * * * The testimony of Bilbrough shows that during his discussion with the petitioner in December 1952, which was after the petitioner had submitted to Bilbrough a proposed sales agreement which was unacceptable to Bilbrough, the petitioner again proposed to sell Bilbrough the Marble Company business and assets, stating "that he [petitioner] would make an agreement of some kind that would be satisfactory" to Bilbrough. The petitioner's testimony shows that such an agreement was not reached until January 4, 1954. Thereafter, on January 15, 1954, the sale was consummated and title to the business and assets transferred to the Bilbroughs by execution by petitioners of the bill of sale and the deeds to the real estate involved in the transaction. It is true that during 1953 Bilbrough was in charge of operating the Marble Company. However, he was acting in the capacity1961 Tax Ct. Memo LEXIS 66">87 of an employee and for his services in that capacity he received a salary which was reported as such by him in his income tax return for 1953. The petitioners point us to nothing in the record nor do we find anything therein which indicates that at any time prior to January 1954 Bilbrough or Bilbrough and his wife became unconditionally liable to pay the petitioners the purchase price of $320,000 or any other amount. As we view the situation presented, negotiations for the sale continued during the period from December 1952 until January 4, 1954, when a sales agreement which was acceptable to the Bilbroughs was reached. Prior to the latter date there was no firm agreement obligating the petitioner to sell or Bilbrough to buy. As was said by the Supreme Court in Helvering v. Hammel, 311 U.S. 504">311 U.S. 504 (1941), the term "sale" may have many meanings, depending on the context. In Betty Rogers, 37 B.T.A. 897">37 B.T.A. 897 (1938), affd. 103 F.2d 790 (C.A. 9, 1939), certiorari denied 308 U.S. 580">308 U.S. 580 (1939), the question involved was whether there had been a sale of a capital asset with a resulting capital loss. In holding in the affirmative, we concluded that1961 Tax Ct. Memo LEXIS 66">88 in construing the term "sale" it should be given its ordinary meaning and there adopted and applied the following meaning given the term by the Supreme Court in Iowa v. McFarland, 110 U.S. 471">110 U.S. 471, 110 U.S. 471">478 (1884): "A sale, in the ordinary sense of the word, is a transfer of property for a fixed price in money or its equivalent." Similarly, in Ralph A. Boatman, 32 T.C. 1188">32 T.C. 1188 (1959), and Charles A. Linehan, 35 T.C. 533">35 T.C. 533 (1960), on appeal (C.A. 1, March 24, 1961), involving the question of whether certain sums constituted capital gain or ordinary income, we adopted and applied the foregoing meaning set out in Iowa v. McFarland. We find nothing in the instant case which requires that the term should be given a different meaning here. From a consideration of the entire portion of the record bearing on the question of the sale in the light of what has been said above, we are of the opinion that the sale of the Marble Company business and assets used therein and connected therewith occurred on January 15, 1954. Accordingly the respondent is sustained as to this issue. Since the sale of the Marble Company business and assets did not occur until 1954, we are1961 Tax Ct. Memo LEXIS 66">89 of the opinion that respondent, having included the income therefrom for 1953 in the income of the petitioners for that year, properly eliminated from the income of the petitioners for 1953 the $19,200 reported by them as interest received in that year on the sale price of the business and property. The respondent is sustained on this issue. Issue 6. Addition to Tax Under Section 294(d)(1)(A) for 1952 for Failure to File Declaration of Estimated Tax. Issue 7. Addition to Tax Under Section 294(d)(1)(A) for 1953 for Failure to File Timely Declaration of Estimated Tax. Findings of Fact The petitioners did not file a declaration of estimated tax for 1952. On April 10, 1953, the petitioner filed with the director in Austin, Texas, a joint declaration of estimated tax for 1953. The respondent determined that for 1952 and 1953 the petitioners are liable for the addition to tax imposed by section 294(d)(1) (A) of the Internal Revenue Code of 1939. Opinion Section 294(d)(1)(A) of the Code imposes an addition to tax in case of failure to make and file a declaration of estimated tax within the time prescribed, unless such failure is shown to be due to reasonable cause and not to willful1961 Tax Ct. Memo LEXIS 66">90 neglect. Section 58(d)(1)(A) of the Code requires that the declaration of estimated tax shall be filed on or before March 15 of the taxable year, with certain exceptions not shown to be applicable here. The petitioners have the burden as to these issues. The petitioners point us to nothing in the record nor do we find anything therein to indicate that their failure to file a declaration of estimated tax for 1952 and to file a declaration of estimated tax for 1953 within the time required was due to reasonable cause and not willful neglect. The respondent's action as to these issues must be sustained. Issue 8. Addition to Tax Under Section 294(d)(2) for 1952 and 1953 for Substantial Underestimation of Tax. Findings of Fact In the joint declaration of estimated tax for 1953 filed by petitioners on April 10, 1953, the petitioner showed an estimated tax for 1953 of $4,000, making a payment therewith of $1,000. Thereafter, in June and September 1953, the petitioner made additional payments of $1,000 each. The joint income tax return of the petitioners for 1953 was filed on January 14, 1954, showed a tax liability of $5,545, payments made on declaration of estimated tax totaling $3,000, 1961 Tax Ct. Memo LEXIS 66">91 and a balance of income tax due of $2,545. In determining the deficiency in tax here involved for 1953 the respondent determined under section 294(d)(2) an addition to tax of $468.90 for that year computed as follows: Income tax liability$13,359.94Less payments on estimated tax5,545.00Difference7,814.94Total addition to tax sec. 294(d)(2) (6% of $7,814.94)468.90Opinion The respondent determined under section 294(d)(2) of the Code an addition to tax of $1,009.44 for 1952. However, on brief, he concedes that his action in so doing was in error. Accordingly we hold that petitioner was not liable under section 294(d)(2) for an addition to tax for 1952. The petitioners in their petition assigned error as to the respondent's determination of an addition to tax for 1953 for substantial underestimation of income tax for that year and in their allegation of facts in the petition alleged that they would show that they did not substantially underestimate their income tax for the year. Both the assignment of error and the allegation of facts were denied by the respondent in his answer. Section 294(d)(2) of the Code imposes an addition to tax for a substantial1961 Tax Ct. Memo LEXIS 66">92 underestimation of tax. The petitioners have the burden as to this issue. The petitioners point us to nothing in the record nor do we find anything therein to indicate error in the respondent's determination that the petitioners were liable under section 294(d)(2) for an addition to tax for 1953 for substantial underestimation of tax for that year. Accordingly the respondent is sustained as to this issue. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625848/	Antoinette K. Brown v. Commissioner.Brown v. CommissionerDocket No. 109377.United States Tax Court1944 Tax Ct. Memo LEXIS 368; 3 T.C.M. 148; T.C.M. (RIA) 44044; February 21, 19441944 Tax Ct. Memo LEXIS 368">368 S. Leo Ruslander, Esq., First Nat. Bank Bldg., Pittsburgh, Pa., for the petitioner. William P. Harris, Esq., for the respondent. MELLOTTMemorandum Findings of Fact and Opinion MELLOTT, Judge: The Commissioner determined deficiencies in gift tax as follows: 1934$ 52.511935272.1319373,215.9919382,588.4819393,918.9019404,893.44The principal issue is whether the distributions of the income of a trust, by trustees, in accordance with the terms of an indenture executed by petitioner, constituted gifts by petitioner. Another issue, being one of fact as well as of law, arises in connection with the year 1939. Petitioner denies that any distribution of income was made to a beneficiary under the trust in that year. The basic facts, particularly those applicable to the first issue, are not in dispute. The trust instrument has been before the Circuit Court of Appeals for the Third Circuit and before this tribunal twice. (Commissioner v. Brown, 122 Fed. (2d) 800, reversing Antoinette K. Brown, 42 B.T.A. 693">42 B.T.A. 693 and Brown v. Commissioner, 131 Fed. (2d) 640, certiorari denied1944 Tax Ct. Memo LEXIS 368">369 318 U.S. 717">318 U.S. 717, affirming Antoinette K. Brown, 46 B.T.A. 782">46 B.T.A. 782.) It is unnecessary to repeat the facts shown in those opinions. Briefly, it has been judicially determined that the trust income is not includible in petitioner's gross income under sections 166 or 167 of the applicable revenue acts and the code but that it is includible in her gross income under section 22 (a). We find the facts to be as stipulated, including those set out in the opinions referred to above. The findings hereinafter made are based partially upon the facts so shown and partially upon evidence adduced at the hearing. Findings of Fact Petitioner is the grantor of a trust dated January 1, 1927, amended in writing on August 10, 1936, and again on November 13, 1937. Copies of the three instruments are attached to the petition. Joseph P. Knapp was appointed trustee of the trust on the date it was created and accepted the trust. Additional securities were later added to the trust corpus. The income was originally payable $35 a month to a retired servant and the residue to Josephine Ballard, a friend of petitioner. Josephine Ballard died in 1937. On August1944 Tax Ct. Memo LEXIS 368">370 10, 1936 petitioner, by indenture, substituted her husband, Paul G. Brown as trustee in place of Joseph P. Knapp and he accepted the trust. After the death of Josephine Ballard petitioner modified the trust in writing on November 13, 1937, directing the distribution of income as follows: - $35 per month to the retired servant and the residue to her husband, Paul G. Brown. No other modifications of the trust by instruments in writing were made during the years 1932 to and including 1940. Margaret Kane, the retired servant, died in 1938. The trust income was distributed in the years and amounts and to the persons shown below: YearTotalMargaret KaneJosephine BallardPaul G. Brown1932$14,764.55$420.00$14,344.55193325,014.78420.0024,594.78193421,113.26420.0020,693.26193522,847.42420.0022,427.42193636,449.73420.0036,029.73193741,697.40420.0027,777.40$13,500.00193825,877.8625,877.86193934,736.46(Recipient in issue. See later findings)194038,890.8638,890.86No gift tax returns were filed by petitioner for the years 1932 to and including 1940, except for the year 1936, until March 24, 1941, when gift1944 Tax Ct. Memo LEXIS 368">371 tax returns on Form 709 for each of the years, except 1936, were filed. Attached to each return was a rider, reading substantially as follows: "This return is made under protest and solely for the purpose of preventing the imposition of penalties. The transfer of property by gift and any duty to file a gift tax return is denied. "Briefly the facts are that Antoinette K. Brown established an irrevocable trust in the year 1927 reserving the power to change beneficiaries. In the year 1939 income from said trust in the amount of $34,736.46 was distributed to Paul G. Brown. The Commissioner of Internal Revenue is now for the first time in the year 1941 asserting that the income from the trust was in the year for which this return is filed the property of Antoinette K. Brown and its transfer to designated beneficiaries 'transfers by gift' subjecting her to gift tax liability. It is denied that income of the Antoinette K. Brown Trust is the property of said Antoinette K. Brown or that its distribution to designated beneficiaries is a transfer by her. "Gift tax returns are required only in the case of 'transfers by gift.' Since the question here is whether or not there were in fact 'transfers1944 Tax Ct. Memo LEXIS 368">372 by gift.' it is denied that a return must be filed. However, this return containing information as to trust income distributions is filed in order to safeguard the donor of the trust from the imposition of any penalties." The statement in the gift tax return for the year 1939 that the income of the trust for that year, in the amount of $34,736.46, was distributed to Paul G. Brown is erroneous. The income of the trust for that year was all distributed to the settlor of the trust, petitioner herein, under circumstances which will be referred to in more detail in our opinion. Opinion The audit made by the department covered all years from 1932 to 1940 inclusive. No deficiencies in tax were determined for the years 1932 and 1933, although the Commissioner found that gifts in the respective amounts of $14,344.55 and $24,594.78 had been made by petitioner. The exclusions (sec. 504 (b) Revenue Act of 1932) and deductions (sec. 505 Revenue Act of 1932), allowed by the Commissioner equalled the amount distributed to the beneficiaries. The statute of limitations (sec. 517 Revenue Act of 1932; sec. 1016 I.R.C.) prevented the Commissioner from determining a deficiency for 1936, a return having1944 Tax Ct. Memo LEXIS 368">373 been filed for that year reporting gifts not presently in controversy; but the payments made to the beneficiaries in that year have been included in determining, for subsequent years, the net gifts for preceding years. Since no returns had been filed for the other years until shortly before the deficiencies were determined, the bar of the statute is not raised nor applicable as to them. As indicated at the outset, the principal issue is whether the distributions of the trust income to the beneficiaries of the trust are taxable as gifts made by petitioner. Under this issue we consider only the payments made in 1934, 1935, 1937, 1938 and 1940. Petitioner places her chief reliance upon Estate of Giles W. Mead, 41 B.T.A. 424">41 B.T.A. 424 in connection with which the Commissioner noted his nonacquiescence and instituted an appeal, which was subsequently dismissed (116 Fed. (2d) 279). Cf. Jack L. Warner, 42 B.T.A. 954">42 B.T.A. 954, reversed 127 Fed. (2d) 913. Following reversal of the Warner case further consideration was given to the question involved in the Mead case and conclusion was1944 Tax Ct. Memo LEXIS 368">374 reached that the "retained control [by the grantor] over the income - the right to apportion it among the beneficiaries in any manner he should see fit, to exclude any of the beneficiaries, and to divest his wife of the right to receive it simply by directing that it be paid to others - made the recipient subject to petitioner's bounty from year to year and the payment of the income by the trust * * constituted gifts by petitioner in the year paid by the trust * * " Leonard A. Yerkes, 47 B.T.A. 431">47 B.T.A. 431, 47 B.T.A. 431">433. Affirmed by Order C.C.A. 3, April 19, 1943. The Yerkes case represents the present view of this tribunal. Cf. Evelyn N. Moore, 1 T.C. 14">1 T.C. 14, 1 T.C. 14">16 (on appeal 2 C.C.A.); Chas. F. Roeser, 2 T.C. 298">2 T.C. 298, 2 T.C. 298">303. On the authority of the cited cases the deficiencies in tax for the years 1934, 1935, 1937, 1938 and 1940 are approved inasmuch as petitioner reserved substantially the same rights to dispose of the trust income. (For a full statement of the reserved rights see 42 B.T.A. 693">42 B.T.A. 693et seq. and 122 Fed. (2d) 800et seq.) The remaining1944 Tax Ct. Memo LEXIS 368">375 issue, as stated above, is one of fact and of law. It involves the income of the trust for 1939 aggregating $34,736.46. We have determined that it was all distributed to the settlor, petitioner herein, from which it seems to follow that the deficiency in gift tax, determined by the respondent for that year, should be set aside. Such is our holding, for reasons which will now be stated. During the years after the creation of the trust and preceding the year 1939 petitioner (and an accountant employed by her and her husband) presumed that the income of the trust was not to be included in her gross income. The department ruled otherwise, which culminated in the controversy decided by us in Docket No. 97743. (42 B.T.A. 693">42 B.T.A. 693.)After the determination of the deficiency in issue in that proceeding and before hearing and decision, petitioner and her husband, the latter then being the trustee, decided that inasmuch as the government was insisting that the income of the trust was her money, it should be paid over to her. Accordingly, on December 18, 1939, the husband, Paul G. Brown, as Trustee, drew a check on the Bankers Trust Co. of New York for $26,066.66 payable 1944 Tax Ct. Memo LEXIS 368">376 to petitioner, and the proceeds of the check were deposited in her personal account on or about December 20, 1939. On December 27, 1939, a similar check in the amount of $8,669.80 payable to petitioner, was drawn, and the proceeds were deposited in her personal account on or about December 28, 1939. Respondent argues that the evidence is insufficient to support the conclusion which we have reached, insisting that since neither petitioner nor her husband testified we can "know nothing of what Mr. Brown thought he was doing" and "the natural presumption of fact would be that he had regard for his trust and complied with its terms." He therefore urges that we should conclude he accepted the gifts of the income in December of 1939 and immediately gave the same amount to his wife. The sole witness called by either party was an accountant, who had been employed by Brown and petitioner for a number of years. He testified that he had discussed the whole situation with Brown and "we said that as long as the government says it was her money we paid it over to her." "We had filed an appeal with the Board of Tax Appeals and that was pending." The accountant, who with his assistant kept the books1944 Tax Ct. Memo LEXIS 368">377 of the trust, wrote out the two checks, caused them to be signed by the trustee, and stated he had advised petitioner and the trustee that since "it was her money" she should "keep it." While the quantum of proof is not all that might be desired we believe it is sufficient to support the conclusion which has been reached that petitioner and her husband decided she should have the income since she was to be taxed upon it. This comports with the fact that the two checks were actually delivered to petitioner and the proceeds were deposited in her personal account. Respondent points out that there is no showing petitioner directed, in writing, any change in the beneficiaries of the trust; and, since the return states that the income for 1939 was distributed to Brown and since the trust indenture as then constituted provided it should be paid to him, that we should conclude he paid the money to himself "and then paid it to Mrs. Brown in contravention to the trust agreement." The argument is not wholly without substance; but we believe we are justified in concluding that the interested parties were simply taking a very practical view of an existing situation. The government, through its1944 Tax Ct. Memo LEXIS 368">378 responsible officers was saying, in effect: Despite the fact that petitioner had created a trust to which she had transferred valuable securities with directions that the income be paid to named beneficiaries and notwithstanding the fact that the income was so paid, all of it actually belonged to her - a view which was subsequently sustained by the courts. In that posture it is not unreasonable to conclude that the interested parties - and apparently petitioner and her husband were the only ones then having the slightest interest in the income and corpus - should decide to ignore the trust and allow the income to go to the one who would be required to pay the tax upon it. We have accordingly found as a fact that the 1939 income was all distributed to petitioner. It follows that she made no gift of the income for that year. We recognize that the statement made in the 1939 return militates somewhat against petitioner and no doubt justified the Commissioner in treating the income for that year as the income for the other years had been treated, thereby casting upon petitioner the burden of proving that his determination was erroneous. The explanation of this circumstance given at the1944 Tax Ct. Memo LEXIS 368">379 hearing, however, is convincing. Petitioner's counsel, when it became evident the representatives of the treasury department were claiming she had made taxable gifts in the years in issue, advisedly decided to file the several returns in 1941 for the purpose of avoiding imposition of a penalty in the event it should be held that a tax was due. He therefore secured from the accountant a statement of the income for each year and what purported to be a statement showing the recipients of it. Subsequent checking of the statement disclosed that it was wrong in one respect, i.e. as to the recipient of the 1939 income. The returns had then been filed and the instant proceeding was pending. The Commissioner chose not to set aside his determination when the situation was belatedly explained to him. But we now have all of the facts and believe that the statement was erroneous and unwittingly made. We have concluded and now hold that respondent erred in determining the deficiency in tax for the year 1939. Appropriate adjustment, occasioned by this holding, may be made in the deficiency for 1940. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625849/	Jack M. Gamble and Rose Gamble v. Commissioner.Gamble v. CommissionerDocket No. 78294.United States Tax CourtT.C. Memo 1960-238; 1960 Tax Ct. Memo LEXIS 52; 19 T.C.M. 1343; T.C.M. (RIA) 60238; November 8, 1960Charles H. Haines, Jr., Esq., Equitable Building, Denver, Colo., for the petitioners. Emory L. Langdon, Esq., for the respondent. MURDOCK Memorandum Findings of Fact and Opinion The Commissioner determined a deficiency of $5,197.47 in the income tax of the petitioners for 1955. The only issue for decision is whether an admitted loss is deductible in full or is limited to short-term capital loss treatment as a nonbusiness bad debt. Findings of Fact The petitioners, husband and wife, filed a joint Federal income tax return for 1955 with the district director of internal revenue at Denver, Colorado. Jack worked with his father in the maintenance and repair of large pieces of machinery before graduating from high school, and thereafter for 2 years he engaged in land plowing and leveling as a sole proprietor. 1960 Tax Ct. Memo LEXIS 52">53 He obtained, used and maintained his own caterpillar tractors and plows in this business. He employed a tractor driver who also assisted him with the repairs. He then moved to California where he worked as a driver and mechanic for a trucker, operating and doing all of the repair on heavy diesel trucks. He bought a truck terminal in San Francisco in the latter part of 1935 and operated 5 trucks on a transportation route. He leased space in the terminal to other truck lines, sold them fuel and did most of their maintenance work himself. He sold this sole proprietorship in January 1937 at a profit of about $17,000. He later became superintendent in charge of maintenance of a fleet of over 500 trucks used by an oil company. He left this employment in December 1941 and went with the Pacific Naval Air Base as a master mechanic. His work was in Samoa where he was in charge of the maintenance of trucks, shovels, draglines and rock crushers used in the construction of air bases and roads. He had about 200 people working under him. There was always a shortage of parts and he repaired and rebuilt equipment by the use of parts from other abandoned equipment. He returned to California and operated1960 Tax Ct. Memo LEXIS 52">54 a small shop in Los Angeles in partnership with another man for about 2 months, repairing and rebuilding heavy duty trucks. Thereafter he went to Honduras as a truck foreman and later master mechanic for a firm building the Pan American highway, supervising all of the maintenance of heavy duty trucks, shovels and scrapers. He returned to his partnership repair shop in Los Angeles in 1944. There was a scarcity of equipment and the partners were forced to improvise and build up equipment for various hauling companies. Sometimes they had to fabricate the necessary parts. The partnership was discontinued 4 or 5 months later, and Jack, who had known Jenkins, opened a Phoenix, Arizona, branch for J. T. Jenkins Company, distributors of Kenworth trucks. Jack had a building constructed, he organized and installed a shop with a crew and had a parts department. He sold and serviced heavy duty motor trucks. The success of salesmen in this field depends upon their knowledge of the capacity and function of the heavy duty equipment in construction and highway work. Jack advised his customers on purchases and on maintenance which he supervised. This arrangement continued for about 4 years until1960 Tax Ct. Memo LEXIS 52">55 he left and with some friends organized the Gamble Equipment Company and bought the assets of the Kenworth truck distributors in Denver. Jack owned one-half of the 5,000 shares of stock which had a cost of $1 per share. The business was commenced on January 1, 1949 and continued until 1953 when, because of the difficulty of financing a rapidly expanding inventory, Jack decided to dissolve and liquidate the corporation. He had an automobile accident in December 1952 which incapacitated him for about 6 months. Kenworth agreed early in 1953 to buy all of the new assets of Gamble Equipment Company and to operate the business as a company branch. The Kenworth franchise was surrendered in May 1953, at which time the stockholders received $32 per share. Jack took over the used truck inventory and the accounts receivable and liquidated them. Heavy duty diesel transportation equipment had not been accepted in the Denver area. Some truck lines hesitated to pay the high prices for it or could not finance it, so Jack organized Equipment Leasing Company in 1951 in order to demonstrate the economic worth of the large diesel equipment by taking the economic risk of ownership and leasing the trucks. 1960 Tax Ct. Memo LEXIS 52">56 The stockholders of Gamble Equipment Company also became stockholders of this company. Maintenance and repair service was a major factor in the economic operation of such equipment. Jack made studies for potential customers of Gamble Equipment Company and Equipment Leasing Company to show the estimated cost of fuel, maintenance and depreciation. Such studies aided in making leases and sales. Equipment Leasing Company was liquidated in 1954 at a substantial profit to its stockholders. Gamble Equipment Company made a number of truck sales prior to May 1953 as the result of this operation. Jack returned to Phoenix shortly after leaving the hospital in 1953 and was engaged by the New Mexico Timber Company. They were buying a number of Kenworth trucks and trailers and Jack supervised the equipment and had an agreement that he was to have an equity interest in the trucks and trailers when the purchase price had been paid. He also received a salary for his services. He was able to make a worthwhile reduction in the cost of operating the equipment, but this operation terminated after about 3 months because the company could not obtain a renewal of its stumpage agreement. Jack interested1960 Tax Ct. Memo LEXIS 52">57 a number of contractors in the Phoenix area in 1953 in a plan to construct air bases in Spain through a joint venture. He spent considerable time making studies of the equipment needs, and he made 2 trips to Washington on behalf of the proposed joint venture, but it was concluded in 1954 that the job was too large for the group and no contracts were secured. W. E. Orr, Sr., and W. E. Orr, Jr., partners, asked Jack in June 1953 to join them in a highway construction job in Arizona. They were engaged in the heavy construction business. Jack agreed and advanced $25,000 in cash to the partnership shortly after which it was decided to form a corporation, and Orr and Orr Construction Company was incorporated in June 1953. Jack was to receive 45 per cent of the stock but the only stock ever issued consisted of 3 qualifying shares, one of which was received by Jack. The three men became officers of the corporation. There was no provision for a salary for Jack and he never received any compensation from the corporation. The corporation applied for a $456,686.50 performance bond from Employers' Liability Assurance Corporation, Ltd., in order to obtain from the Arizona Highway Department1960 Tax Ct. Memo LEXIS 52">58 a contract to construct a highway near Sholow at an estimated contract price of $417,000. The bonding company required Jack's personal signature on the agreement. The corporation purchased 2 Kenworth trucks in August 1953 for $45,849.82, payable in two installments, and gave a chattel mortgage and its promissory note to Kenworth Truck Company. Kenworth required Jack to endorse and guarantee the payment of the note. Jack owned a substantial amount of heavy equipment which he leased. Part of it was leased to Orr and Orr Construction Company on the aforesaid job. Jack devoted 50 or 60 per cent of his time to the road building contract in 1953 and a larger portion thereafter. W. E. Orr, Jr., was a close friend of Jack's and lived in Jack's home. They had an understanding first that Orr would name the partnership as beneficiary of his life insurance and later that the corporation would be named as beneficiary. This was in order to protect Jack and Orr' father. Orr, Jr., was married in May 1954 and was killed in an automobile accident on June 7, 1954. It developed that he had changed the beneficiary of the insurance to his wife without disclosing this fact. It was discovered after his1960 Tax Ct. Memo LEXIS 52">59 death that he had substantially overestimated the amount of work completed on the road construction at Sholow and the corporation was insolvent. The bonding company terminated the connection of the corporation with the road contract in June 1954 and requested Jack to finish the work. He completed the work in October 1954. He did this, without receiving any salary or any rental for his own equipment used on the job, in order to reduce his liability on the indemnity bond and to complete the job for his own business reputation. Jack made a trip abroad in the latter part of 1954 where in partnership with an Egyptian engineer he investigated and bid on construction projects. These activities were abandoned in the spring of 1955 due to political circumstances. Jack on that trip met the manufacturer of the Yumbo Shovel and other movement equipment then widely used in Europe. He had a pilot model of the shovel sent to him and he studied it with the idea of converting it to American manufacture. He formed a corporation in December 1955 to promote this project. Jack had an opportunity in April 1955 to acquire a distributorship of the Diamond T truck, and he decided to have Gamble Equipment1960 Tax Ct. Memo LEXIS 52">60 Company use it. The other stockholders of that company were bought out and Jack became its sole stockholder. It was important in this connection that he settle his obligations to the bonding company and to Kenworth incurred in connection with the Arizona road construction work. Jack settled his liability with the bonding company on May 26, 1955, by the payment of $25,000 for the release of all claims against him under the indemnity agreement. Orr and Orr Construction Company did not pay in full for the 2 Kenworth trucks, and Jack settled the claim against him for their purchase price by the payment of $10,000. The actual money or credit for the $35,000 which Jack paid in 1955 was obtained by him through Gamble Equipment Company which charged these amounts to his account. Jack had income from Gamble Equipment Company and Equipment Leasing Company in 1954 and 1955. The Commissioner, in determining the deficiency, held that the $35,000 which Jack paid and deducted on his return as an ordinary loss "constitutes a nonbusiness bad debt, deductible as a short-term capital loss. Accordingly, income is increased by $35,000.00." The $35,000 was a business bad debt. All stipulated facts1960 Tax Ct. Memo LEXIS 52">61 are incorporated herein by this reference. Opinion MURDOCK, Judge: The decision in this case turns upon whether or not the losses in question were proximately related to a business conducted by the petitioner or whether they were nonbusiness bad debts. Putnam v. Commissioner, 352 U.S. 82">352 U.S. 82; section 166, Internal Revenue Code of 1954. The Commissioner contends that the petitioner was not engaged in the business of lending money and was not engaged in the business of financing corporations. The petitioner does not contend to the contrary and does not claim the deduction on either basis. The petitioner has described briefly at least 17 activities in which he participated from the time of his graduation from high school (apparently about 1930) through 1955. Each had to do with the sale, rental, repair, use, or some combination thereof, of heavy earth-moving or transportation equipment. He used his funds and credit as they were needed in the organization and operation of these businesses and he devoted his personal abilities, experience, initiative, energy and services to them. He was by no means a mere "passive investor" in these enterprises but1960 Tax Ct. Memo LEXIS 52">62 he personally was a most important factor in each. He investigated a number of possibilities in this general field into which he never actually entered. He sometimes operated as a proprietor, sometimes as a partner and sometimes as an officer and stockholder. Some of the enterprises were interrelated. His activities were extensive, continuous and regular in this field to which he devoted his life and from which he gained his livelihood. There may be difficulty or difference of opinion in giving a proper definition of his business, but a reasonably consistent pattern of his business is discernible. Cf. Henry E. Sage, 15 T.C. 299">15 T.C. 299. The use and preservation of his personal credit were important parts of his business, and the losses in question were not only proximately but directly related to that business. The loss is not to be regarded as a nonbusiness bad debt merely because a corporation was involved in the particular work in which the losses were sustained. The petitioner was approached by the Orrs, father and son, who were partners and wanted to engage in the construction of roads in Arizona. The petitioner advanced $25,000 in cash to the partnership and agreed to1960 Tax Ct. Memo LEXIS 52">63 participate in the undertaking. No loss is claimed here on that $25,000 investment. The petitioner deyoted a substantial part of his time to the undertaking during the next 2 years without any arrangement for salary. He also put a substantial amount of his equipment into the operation for which he was to receive rental but actually never received any because of the default which occurred in June 1954. A corporation was organized but the work was carried on without following the usual corporate formalities. Jack was to receive, but never received, 45 per cent of the stock. Only 3 qualifying shares were issued. The work on one contract resulted in the insolvency of the corporation in June 1954 and the bonding company had the petitioner finish the work as an individual. He took over and finished that work personally in order to mitigate his losses and to preserve his good reputation and credit in the heavy equipment field. $25,000 of the loss resulted because the bonding company had required the petitioner to go on the indemnity bond to cover the work contract. It is obvious that the petitioner had a large personal stake in these road construction contracts entirely aside from his temporary1960 Tax Ct. Memo LEXIS 52">64 interest in the Orr and Orr Construction Company. He suited his precise form of activity to the current opportunities. Those activities are distinguishable as a business from the business of that particular corporation, and it is not too difficult to hold, under the Code and the decisions, that the losses of $35,000 which he sustained as the result of his two guaranties were business rather than nonbusiness bad debts. No close factual parallel is to be found in any cited case, and this case is decided upon its own particular facts for the petitioner. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625873/	HOTEL PATTEN CO., WATTERSON HOTEL CO., UCITA INVESTMENT CO., AND J. B. POUND HOTEL CO., PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hotel Patten Co. v. CommissionerDocket No. 5792.United States Board of Tax Appeals13 B.T.A. 943; 1928 BTA LEXIS 3124; October 12, 1928, Promulgated 3124 1. Value of property for invested capital purposes determined. 2. Value of leases determined. Sam E. Whitaker, Esq., for the petitioners. John D. Foley, Esq., for the respondent. VAN FOSSAN 943 This proceeding is brought to redetermine the income and profits tax of four affiliated companies - Hotel Patten Co., Watterson Hotel Co., Ucita Investment Co., and J. B. Pound Hotel Co. - for the years 1918 and 1919. The petitioners allege generally that the respondent erred in refusing to allow their claim in abatement for the year 1918 to the extent of $45,130.06 and in asserting a deficiency of $10,787.25 for the year 1919. The respondent challenges the jurisdiction of the Board over the redetermination f the income tax for the year 1918. Errors are specified by petitioners as follows: (1) No sum was allowed for invested capital by virtue of a lease on a hotel building acquired by the Hotel Patten Co. from its assignor, the Patten Hotel Co., in exchange for $50,000 of the capital stock of the Hotel Patten Co.(2) No allowance was made to cover the amortization of the lease obtained from the Patten Hotel Co.(3) No allowance was3125 made as invested capital for the sum of $36,000, representing the excess value of the assets acquired by the 944 Hotel Patten Co. on January 1, 1918, from the Chattanooga Hotel Co. over the amount of $100,000 in stock issued therefor. (4) The respondent refused to allow the sum of $51,000 as paid-in surplus representing the excess value of a lease on the Hotel Seminole property acquired by the Ucita Investment Co. in 1907 over the amount of $99,000 of capital stock issued by the Ucita Investment Co. in payment for the said lease. (5) No allowance was made for the amortization or exhaustion of the lease on the Hotel Seminole property. (6) Insufficient depreciation was allowed on the Hotel Seminole building owned by the Ucita Investment Co. (7) The respondent refused to allow any sum as invested capital on account of a lease on the Hotel Savannah acquired by the J. E. Pound Hotel Co. in exchange for $25,000 of its capital stock. (8) No allowance was made for the amortization of the lease on the Hotel Savannah. (9) The respondent refused to allow as invested capital the sum of $40,000 representing the excess value of a lease on the Watterson Hotel over the $60,0003126 in the capital stock of the Watterson Hotel Co. paid by it for the said lease. (10) No allowance was made covering the annual depreciation or amortization of the above leasehold on a basis exceeding $60,000. (11) The respondent refused to allow the Watterson Hotel Co. as deductions from its income for 1918 and 1919 the sum of $910 expended by it in securing good roads in the vicinity of Louisville and also the sum of $2,200 expended by it in 1918 for the purpose of obtaining the location of Camp Taylor near Louisville. (12) The respondent reduced the petitioners' invested capital by the amount of income and profits taxes shown to be due on the returns filed for 1918 and 1919 and also by the amount of additional income and profits taxes found by him to be due. FINDINGS OF FACT. On January 21, 1924, the respondent notified the petitioners that an additional tax for 1918 was due from them in the amount of $57,248.51, with the usual provision allowing protest thereof within 30 days. Of February 28, 1924, the petitioners protested against the action of the respondent and requested a hearing. The hearing was granted and the date thereof fixed as April 22, 1924, but later, 3127 at the petitioners' request, was postponed until May 6, 1924. In March, 1924, the taxes were assessed. On May 21, 1924, the petitioners received from the collector of internal revenue a notice and demand for the payment of the tax, and on May 27, 1924, filed a claim for abatement of the entire tax. By a certificate of overassessment bearing the date June 27, 1925, the petitioners were notified that the 945 respondent had allowed $14,236.28 of the claim, leaving a balance of $43,012.23 as the correct tax liability. No part of the said balance was paid prior to June 3, 1924. The appeal to the Board was filed July 25, 1925, and was pending on February 26, 1926. The Hotel Patten Co. is a corporation organized under the laws of Tennessee and operated the Hotel Patten in Chattanooga, Tenn. The Ucita Investment Co. is a corporation organized under the laws of Florida and operated the Hotel Seminole in Jacksonville, Fla. The J. B. Pound Hotel Co. is a corporation organized under the laws of Georgia and operated the Hotel Savannah in Savannah, Ga. The Watterson Hotel Co. is a corporation organized under the laws of Tennessee and operated the Watterson Hotel in Louisville, 3128 Ky. J. B. Pound owned more than a controlling interest in all the above corporations. In 1906 the Stone Fort Land Co. erected the Hotel Patten in Chattanooga, Tenn., and leased it to the Chattanooga Hotel Co., the owner of the furniture and fixtures of the hotel. In 1910 the Chattanooga Hotel Co. assigned the lease on the Hotel Patten building to J. B. Pound and also executed a lease covering the furniture and fixtures owned by it. Pound organized the Patten Hotel Co. (not petitioner herein) and assigned the lease to that corporation in exchange for $50,000 of its capital stock, of which, however, only a portion was actually issued. The unexpired term opf the lease at that time was about 18 years. The petitioner, the Hotel Patten Co., was organized about January 1, 1918, and on that date acquired all the assets of the Patten Hotel Co. and the Chattanooga Hotel Co. in exchange for the capital stock issued by the Hotel Patten Co. to the stockholders of the two other corporations. The assets of the Chattanooga Hotel Co., valued at $136,000, were transferred in exchange for $100,000 in the preferred stock of the Hotel Patten Co., while the leases on the hotel building and3129 the furniture and fixtures were assigned by thePatten Hotel Co. in exchange for $100,000 of the common stock of the Hotel Patten. At the time Pound secured the leases on the Hotel Patten and its furniture and fixtures that hotel was under a contract with one Charles T. Alexander, which provided that the said Alexander should act as its manager for a period of about three and one-half years thereafter. Alexander proved to be an unsatisfactory manager, but refused to terminate his contract as the hotel's manager. To obtain such termination Pound personally paid Alexander $5,000. He also assumed certain obligations incident to the operation of the hotel, including a yearly rental of $8,400 under the lease of the furniture and fixtures and the endorsement of $50,000 of obligations of the Chattanooga Hotel Co. The Ucita Investment Co. was organized in 1907. In that year it obtained a lease on a lot 105 by 105 feet at the corner of Hogan 946 and Forsythe Streets in the business section of Jacksonville, Fla. This lease prvided for an annual rent of $9,000 during a term of 99 years. It was assigned to the corporation in exchange for $99,000 of its capital stock. Shortly3130 thereafter the company began to erect an office building on the site. Because of the financial situation in Jacksonville the company built as cheaply as possible. The exterior construction, consisting of steel frame, hollow tile and brick covered with concrete, was substantial, but the interior portions were constructed of an inferior grade of material, were of inadequate dimensions, and were fabricated in an unqworkmanlike manner. J. B. Pound purchased the control of the Ucita Investment Co. in 1909 before the building was completed, and the company transformed it into the Hotel Seminole. The type of construction, materials, facilities and equipment, inadequate for an office building, were much more so for hotel purposes. Shortly after the hotel was placed in operation repairs, replacements, and alterations were necessitated almost constantly. The plumbing had to be replaced entirely and expensive repairs made to the elevators. The respondent allowed a total amount of $10,113.78 as depreciation for the years 1918 and 1919. Prior to January 15, 1913, S. J. and J. A. Newcomb had acquired a lease on the Hotel Savannah in Savannah, Ga. In June, 1913, they took steps to incorporate3131 their business under the name of the Newcomb Hotel Co. The charter for this company was not granted until about April 1, 1914. During the period from June, 1913, to April, 1914, the Newcomb brothers had expended $120,000 for furniture and fixtures. On April 1, 1914, the incorporators of the Newcomb Hotel Co. met for organization and bought from J. A. and S. J. Newcomb the furniture and fixtures of the Hotel Savannah and the lease under which it was being operated, for the sum of $145,000, $25,000 of which was specified as the value of the lease. Shortly thereafter J. B. Pound purchased the entire stock of the Newcomb Hotel Co. and changed its name to the J. B. Pound Hotel Co. Pound paid $25,000 for the stock of the Newcomb Hotel Co. of the par value of $50,000 and also assumed the obligations of that corporation to the Newcomb brothers in the sum of $95,000. The ill health of J. A. Newcomb and other local reasons were assigned as the reason for the purchase of the stock of the Newcomb brothers at less than its par value. The unexpired term of the Hotel Savannah lease was about 19 years. In 1912 J. B. Pound secured a 25-year lease (with an additional 25-year option) on the3132 HotelWatterson property located near the corner of Water and Fourth Streets in the heart of the business section of Louisville, Ky. Subsequent thereto the Watterson Hotel Co. was organized and Pound assigned the lease to that corporation in exchange for all its capital stock, of the par value of $60,000, 947 the sum fixed by the respondent as invested capital. The HotelWatterson was advantageously situated and well equipped to produce a substantial return on the investment made in it. At various times prior and subsequent to the opening of the hotel Pound was offered large sums of money for the purchase of the lease. In 1918 the Watterson Hotel Co. expended the sum of $810 and in 1919 the sum of $100 as contributions to the securing of better roads leading into Louisville. In 1918 the said company also contributed $2,200 to assist in securing the location of Camp Taylor near Louisville. Camp Taylor was a training camp for enlisted men and officers. Persons in and visitors to that camp patronized the Watterson Hotel extensively. The petitioners' invested capital for 1919 was reduced by the respondent by the amount of income and profits taxes for the year 1918, 3133 as set forth in the respondent's deficiency letter dated June 4, 1925. OPINION. VAN FOSSAN: Section 283(f) of the Revenue Act of 1926, which became effective on February 26, 1926, provides: If any deficiency in any income, war-profits, or excess-profits tax imposed by the Revenue Act of 1916, the Revenue Act of 1917, the Revenue Act of 1918, or the Revenue Act of 1921, or by any such Act as amended, was assessed before June 3, 1924, but was not paid in full before that date, and if the Commissioner after June 2, 1924, but before the enactment of this Act finally determined the amount of the deficiency, and if the person liable for such tax appealed before the enactment of this Act to the Board and the appeal is pending before the Board at the time of the enactment of this Act, the Board shall have jurisdiction of the appeal. In all such cases the powers, duties, rights, and privileges of the Commissioner and of the person who has brought the Appeal, and the jurisdiction of the Board and of the courts, shall be determined, and the computation of the tax shall be made, in the same manner as provided in subdivision (e) of this section, except as provided in subdivision (j) of3134 this section and except that the person liable for the tax shall not be subject to the provisions of subdivision (d) of section 284. In the proceeding under consideration the deficiency in the income tax, war-profits and excess-profits tax arose under the Revenue Act of 1918 and related to the year 1918. Such taxes were assessed in March, 1924, and were not paid in full before June 3, 1924. On June 27, 1925, the respondent finally determined the amount of the deficiency, setting forth such conclusion in the form of a certificate of overassessment. The petitioners appealed on July 25, 1925, and their appeal was pending before the Board on February 26, 1926, the date of the enactment of the Revenue Act of 1926. Therefore, it is our opinion that this case comes squarely within the said section 948 283(f) of the Revenue Act of 1926 and that consequently we have jurisdiction of the appeal. In the computation of invested capital the respondent disallowed the value of the Hotel Patten lease transferred by J. B. Pound to the Patten Hotel Co. in 1910 in exchange for its entire capital stock issue of $50,000, on the theory that Pound had acquired the lease for nothing. This3135 fact in itself is not sufficient to assign no value to the leasehold. ; . Pound and five other competent witnesses fixed the value of the lease at from $100,000 to $200,000 at the time of its transfer to the Patten Hotel Co. All of these witnesses showed themselves to be thoroughly familiar with the hotel business in the South and East and particularly with the situation involved in the leasing and operation of the Hotel Patten, while three of them had had a special reason to ascertain the value of the lease in that they were interested in its purchase before, at or subsequent to the date Pound secured the lease. While the lease originally cost Pound nothing, he expended a considerable amount of money and much effort and lent his credit to the enterprise prior to his assignment of the lease to the corporation. These acts on his part in themselves contributed largely to the real value of the leasehold. We are of the opinion that the claim of the petitioners that the invested capital of the Hotel Patten Co. be increased by $50,000 should be sustained and that a corresponding allowance for computing3136 exhaustion of the said leasehold be made. Pound testified that the value of the assets transferred by the Chattanooga Hotel Co. to the Hotel Patten Co. in 1918 was approximately $136,000, while the amount of prefered stock received therefor was $100,00. He submitted no basis whatever for what he termed was his "opinion" of the actual cash value of those assets, and his testimony is not convincing. It is our opinion that the petitioners have not brought themselves within the requirements of section 326(a)(2) of the Revenue Act of 1918, which defines invested capital as the - Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment, but in no case to exceed the par value of the original stock or shares specifically issued therefor, unless the actual cash value of such tangible property at the time paid in is shown to the satisfaction of the Commissioner to have been clearly and substantially in excess of such par value, in which case such excess shall be treated as paid-in surplus: * * (Italics ours.) Petitioners, therefore, on the record, are not entitled to this increase of $36,000 in the invested capital3137 of the Hotel Patten Co. as of January 1, 1918. The petitioners contend that the lease covering the Hotel Seminole property was worth at least $150,000 at the time it was assigned to the Ucita Investment Co. in exchange for $99,000 of the capital stock of that corporation and introduced the testimony of various 949 real estate dealers and so-called experts to support their claim. However, in 1909 J. B. Pound, then a stranger to the enterprise, purchased at par the entire capital stock of $99,000. The company was in financial difficulties whn Pound purchased its stock. It must be borne in mind also that the Hotel Seminole building itself was not properly adapted to hotel uses and that the success of the venture was by no means assured. We approve the action of the respondent in refusing to allow the sum of $51,000 as paid-in surplus, purporting to represent the excess value of the lease over the amount of capital stock received therefor. Consequently, no increased allowance should be made in computing exhaustion of that lease. The petitioners assert that the respondent allowed depreciation on the Hotel Seminole property in the amount of $10,113.78 for the years 19183138 and 1919, whereas the sum of $12,642.22 should have been allowed for each year. No evidence was submitted to support these figures. Pound described the character of the hotel building, and asserted that it was constantly in need of repairs and stated that in his opinion the yearly depreciation for 1918, 1919, and 1920 was from $12,000 to $15,000. The witness was not certain as to what method was employed by the Ucita Investment Co. in charging repairs, replacements and expenses on its books. On the record petitioners have not proved that they are entitled to an additional allowance for depreciation. The respondent disallowed an excess value of $25,000, representing a lease on the Hotel Savannah which had been secured originally by S. J. and J. A. Newcomb and assigned by them to the Newcomb Hotel Co. The term of the lease was 21 years and the rental was based on the actual cost of the building and land. No money was expended for promotion or effecting the sale of stock or bonds and the construction bills were paid in cash, thereby resulting in unusual economy. The Hotel Savannah was exceptionally well located and at the time was the only first-class hotel in Savannah. Due3139 to the ill health of J. A. Newcomb and to other purely personal reasons, Pound purchased the capital stock of the corporation, of the par value of $50,000, for the sum of $25,000. The corporation owned the furniture and fixtures and lease. J. A. Newcomb valued the lease at at least $25,000, while Pound testified that it was worth $150,000 at the time he secured control of the Newcomb Hotel Co. We are of the opinion that the petitioners are entitled to a lease value of $25,000 as invested capital, as claimed by them and that a corresponding allowance should be made in computing exhaustion of that lease. The respondent has allowed as invested capital the sum of $60,000, representing the par value of the capital stock of the Watterson Hotel Co. received by J. B. Pound in exchange for the assignment of his lease on the Watterson Hotel property. The petitioners claim that the said lease had a value of at least $100,000 at the time of its 950 assignment, that the figure of $60,000 was merely nominal because Pound owned all of the stock except qualifying shares and that for purposes of State taxation and for other reasons the full value of the lease was not measured by the3140 amount of capital stock received by Pound himself and other competent witnesses who had made offers for the purchase of this lease prior, near, and subsequent to the time of its acquisition by the corporation, the value therefor was established as at least $100,000. The evidence submitted is convincing and uncontradicted, and we hold that the excess amount of $40,000 claimed by the petitioner as added invested capital of the Watterson Hotel Co. is properly allowable. A corresponding increase should be allowed in computing exhaustion of the leasehold. The sums expended by the Watterson Hotel Co. to assist in securing better roads for the vicinity of Louisville were for a purpose entirely too remote and unrelated to the direct business needs of the petitioner to permit their allowance as deductions from income. The sum of $2,200 contributed by the Watterson Hotel Co. in 1918 to assist in accomplishing the location of Camp Taylor was for the purpose of, and resulted in a direct and distinct business benefit to the petitioner, and is allowed as a proper deduction from income. *3141 ; . Petitioners contend that their invested capital for 1918 and 1919 should not be reduced by the amount of income taxes appearing due on the face of the returns and by additional taxes found to be due by the respondent for the immediately preceding years. Although no evidence was introduced on this point, this question was ruled adversely to petitioners in . Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625874/	APPEAL OF P. FRANK DURKIN.Durkin v. CommissionerDocket No. 3644.United States Board of Tax Appeals4 B.T.A. 743; 1926 BTA LEXIS 2218; August 4, 1926, Decided 2218 The superintendent of the Bureau of Water of the City of Syracuse is exempt from income tax upon the salary received by him as such superintendent during the years 1922 and 1923, under section 1211 of the Revenue Act of 1926. Neal Brewster, Esq., for the petitioner. Ellis W. Manning, Esq., for the Commissioner. SMITH 743 Before LITTLETON, SMITH, and TRUSSELL. This is an appeal from the determination of a deficiency in income tax for the years 1922 and 1923 in the amount of $427.36, the 744 deficiency arising from the addition to the net income reported by the taxpayer of the salary received by him as an employee of the City of Syracuse, N.Y.FINDINGS OF FACT. During the years 1922 and 1923, the taxpayer was superintendent of the Bureau of Water of the City of Syracuse, and as such superintendent received a salary for the year 1922 of $3,600, and for the year 1923 of $4,000. In his individual income-tax return for 1922 and 1923, the taxpayer failed to include in his gross income the salary received by him as such superintendent. The Commissioner has amended his income-tax returns for those years by adding to the net income2219 reported the salary received by him as superintendent, and the deficiency in tax results solely from such addition to the net income reported. Section 94 of the Second Class Cities Law of the State of New York provides that, in case a city of the second class in that State owns or operates a system of municipal water works, the Commissioner of Public Works shall appoint, to hold office during his pleasure, a superintendent of water works, who shall have, under the direction of the Commissioner, the supervision, care, management and control of the water department and water works system of the city. The above-mentioned section provides: It shall be the duty of the Commissioner of Public Works to see that the city has an abundant supply of pure and wholesome water for public and private use; to devise plans and sources of water supply; to plan and supervise construction, maintenance and extension of water system and distribution of water throughout the city; to protect it from contamination; to prescribe rules and regulations for its use, which, when ratified and approved by the common council, shall have the same force and effect as city ordinances. The water system of the2220 City of Syracuse was put in operation pursuant to the above-mentioned section of the Second Class Cities Law and was so operated during the years 1922 and 1923. Warrants for the payment of salary to the taxpayer for the years 1922 and 1923 were charged against the Bureau of Water salaries, as provided in the annual budget. These salaries were paid from funds raised by taxation. OPINION. SMITH: The taxpayer, who was superintendent of the Bureau of Water of the City of Syracuse, N.Y., during the years 1922 and 1923, did not include in the gross income shown in his income-tax returns for those years the salary received by him as such superintendent. He did not do so under the belief that he was an official or 745 employee of the City of Syracuse, and that as such official or employee he was exempt from income tax in respect of the salary received. The Commissioner disallowed the deduction under a ruling contained in Internal Revenue Bulletin No. 35, of September 1, 1924, entitled S.M. 2232. We are satisfied from the evidence in the case that the taxpayer was an employee of the City of Syracuse, N.Y., and that the amounts received by him were compensation for personal*2221 services rendered to that city during the years 1922 and 1923. Section 1211 of the Revenue Act of 1926 provides: Any taxes imposed by the Revenue Act of 1924 or prior revenue Acts upon any individual in respect or amounts received by him as compensation for personal services as an officer or employee of any State or political subdivision thereof (except to the extent that such compensation is paid by the United States Government directly or indirectly), shall, subject to the statutory period of limitations properly applicable thereto, be abated, credited, or refunded. In view of this provision of law, it must be held that the taxpayer is exempt from income tax in respect of his salary received from the City of Syracuse. Judgment for the petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625876/	CHARLES O. ANDERSON and NANCY L. ANDERSON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentAnderson v. CommissionerDocket No. 5340-73.United States Tax CourtT.C. Memo 1976-28; 1976 Tax Ct. Memo LEXIS 370; 35 T.C.M. (CCH) 101; T.C.M. (RIA) 760028; February 4, 1976, Filed Trent G. Anderson, Jr., for the petitioners. John O. Kent, for the respondent. TIETJENSMEMORANDUM FINDINGS OF FACT AND OPINION TIETJENS, Judge: The Commissioner determined deficiencies in the Federal income tax of Charles O. and Nancy L. Anderson in the amounts of $1,000.71, $11,958.07, and $7,445.20 for the calendar years 1962, 1966 and 1967, respectively. The issues in this case are: (1) Whether the Commissioner's determination for the taxable year 1962 should be sustained. (2) Whether the cost of purchasing equipment subsequently leased by petitioner should have been capitalized. (3) Whether petitioner received ordinary income from the sale of Autocycle Machine No. 2132. (4) Whether a portion of petitioner's expenses for travel and entertainment in 1965 and 1966 were personal expenses and nondeductible. (5) Whether pursuant to Code section 482 1 income should be allocated to petitioner on the sale in 1967 of Autocycle Machine No. 2117 by petitioner's related373 corporation, Autocycle Corporation. (6) Whether petitioner received constructive dividend income in 1966 from his related corporation on the corporate assumption and payment of a liability of petitioner. (7) Whether petitioner received constructive dividends from Roto-Mech, Inc. and Autocycle Corporation when the corporations paid travel and entertainment expenses, made payments for the personal auto of the petitioner and paid rent on machines already sold to unrelated third parties. (8) Whether petitioner received additional unreported interest income in 1966 on a note to Autocycle Corporation. (9) Whether gain on the sale of Autocycle Machine No. 2081 should have been reported as ordinary income in 1966. (10) Whether interest expense on a note to American Electronics, Inc. should be decreased from $1,713.60 to $476. (11) Whether sales of Autocycle Corporation stock in 1967 qualified as installment sales. (12) Whether petitioner received constructive dividend income in 1967 from his related corporation following purchase of a Warner Swasey machine. FINDINGS OF FACT 374 Petitioners, Charles O. and Nancy L. Anderson, filed joint income tax returns with the District Director of Internal Revenue in Los Angeles, California for the calendar years 1962, 1965, 1966 and 1967. Petitioners resided in Palm Desert, California at the time they filed their petition. Nancy Anderson is a party only by virtue of having filed a joint Federal income tax return with her husband. Charles O. Anderson will be referred to herein as petitioner. Petitioner, Charles O. Anderson, was the sole owner of a corporation named Roto-Mech, Inc. which was a job machine shop. Petitioner leased equipment, most of which he owned himself, to Roto-Mech, Inc. In 1964 petitioner acquired in a "bargain purchase" the assets, including the patent rights, trademark, inventory, jigs, dies and fixtures of American Electronics, Inc. The assets acquired from American Electronics, Inc. included seven Autocycle machines, Serial Numbers 2081, 2110, 2114, 2117, 2123, 3001 and 2094. Autocycles are machines which make precision metal parts. After petitioner acquired the Autocycle machines and other inventory, he began developing and organizing a method of assembling the Autocycles. Petitioner, doing375 business as Autocycle Company, was on the accrual method of accounting. On December 10, 1964, petitioner sold an Autocycle to Anderson Die Cast. Anderson Die Cast paid for the machine on December 15, 1964. However, no transactions concerning Autocycle Company were reported on petitioner's 1964 joint income tax return. On October 1, 1964, petitioner entered into a lease with his corporation, Roto-Mech, Inc. for the purpose of leasing to Roto-Mech, Inc. three Autocycles, Serial Numbers 2117, 2110 and 2081, which he had acquired from American Electronics, Inc. Roto-Mech, Inc. used the leased Autocycle machines to manufacture parts, and petitioner also used the three leased machines as demonstrators. He demonstrated the machines to prospective customers with the hope that he could sell Autocycle machines to them. In 1965 and 1966 petitioner deducted from cost of goods sold expenditures made on these same three Autocycles as section 174(a) Research and Experimental Expenditures. Petitioner's witnesses testified that the Autocycle machines when purchased were unfinished and that petitioner had difficulty getting them to work. However, no separate account for research and development376 expenses was set up by the Autocycle Company. From the date of purchase until incorporation petitioner improved the design and modernized the Autocycle machine. Petitioner attached a Schedule C to his 1965 joint income tax return reporting a net loss in the amount of $24,221.24 from the business transaction of Autocycle Company for the period ending December 31, 1965. In 1966 petitioner included the price of Autocycle Machine No. 2132 in his cost of goods sold. Petitioner listed this machine as new in 1966 on a lease between petitioner and his corporation, Roto-Mech, Inc. In August of 1966 petitioner's newly formed Autocycle Corporation sold this machine. Petitioner subsequently included this machine on a lease between himself and Roto-Mech, Inc. On his 1965 Federal income tax return petitioner deducted $2,866.76 and on his 1966 return he deducted $8,034.34 for entertainment and travel. Petitioner, doing business as Autocycle Company (hereinafter d.b.a. Autocycle Company), kept a daily calendar book on which orders were recorded as well as the names of individuals whom he and his employees took to lunch. Charge slips signed by his salesmen evidenced most of these luncheon expenditures.377 Often following these luncheons the customers and salesmen would make a decision concerning specifications for a machine. The salesman would then have a proposal typed which would contain the name of the customer and be signed by the salesman. After the Internal Revenue Service audit the bookkeeper prepared a spreadsheet correlating the name of the salesman, the entertainment bills and the proposals. On April 27, 1967, petitioner sold to Autocycle Corporation an Autocycle Machine No. 2163 for $2,159.90. On the same day Autocycle Corporation sold an Autocycle Machine No. 2117 to Compact Precision for $8,750. Prior to the sale to the corporation one of petitioner's Autocycle machines was renumbered 2163. On June 30, 1966, petitioner incorporated Autocycle Company. At the time of the incorporation the assets transferred were not identified by serial number. As part of the section 351 transfer, an Account Payable to Roto-Mech, Inc. was transferred to Autocycle Corporation. Autocycle Corporation assumed all liabilities of the Autocycle Company operated as a sole proprietorship by petitioner. The Account Payable to Roto-Mech, Inc. was carried on the Autocycle Corporation books as378 an Account Payable No. 2450. The balance in Account Payable No. 2450 in the Autocycle Corporation General Ledger carried over from June 1966 was $14,602.65. Roto-Mech, Inc. had an Account Receivable No. 1990 which recorded transactions with Autocycle Corporation. Roto-Mech, Inc. also had an Account Receivable No. 1980 which recorded transactions with Charles O. Anderson, d.b.a. Autocycle Company. Roto-Mech, Inc. also had an Account Receivable No. 1100 for C. O. Anderson, d.b.a. Autocycle Company. On June 30, 1966, the balance of Autocycle Corporation's Account Receivable No. 1990 in Roto-Mech, Inc.'s books and records was $4,775.97. The balance in Roto-Mech, Inc. Account Receivable No. 1100 from C. O. Anderson, d.b.a. Autocycle Company, on July 30, 1965, was $9,189.25. On November 5, 1965, a credit was made to the Roto-Mech, Inc. Account Receivable No. 1100 from C. O. Anderson, d.b.a. Autocycle Company, in the amount of $5,000. The balance in the Roto-Mech, Inc. Account Receivable No. 1100 from C. O. Anderson, d.b.a. Autocycle Company, on November 5, 1965, was $4,189.25. There were no further credits or debits in the Account Receivable No. 1100 from C. O. Anderson, d.b.a. Autocycle379 Company, up to and including the date June 30, 1966. Roto-Mech, Inc. Account Receivable No. 1980 from Charles O. Anderson, d.b.a. Autocycle Company, was reduced during July 1966 to $60.98 as a result of charges and payments made prior to June 30, 1966. The balance due in the Roto-Mech, Inc. Account Receivable No. 1980 was $60.98 from July 31, 1966 through November 30, 1966 when the balance was transferred by journal entry to the Autocycle Account Receivable No. 1990. On November 30, 1966, Roto-Mech, Inc. transferred by journal entry E $500.15 from the Prepaid Insurance, Account No. 1300, to the Autocycle Corporation Account Receivable No. 1990. The $500.15 transferred by journal entry E was for insurance covering the period January through June 1966. The amounts due from Autocycle Company according to the Roto-Mech, Inc. books on June 30, 1966, were as follows: Account No. 1990$4,775.97Account No. 11004,189.25Account No. 1300500.15Account No. 198060.98Total$9,526.35On November 30, 1966, Roto-Mech, Inc. transferred by journal entry E $9,189.25 from the Account Receivable C. O. Anderson, d.b.a. Autocycle Company, Account No. 1100, to the Autocycle380 Corporation Account Receivable No. 1990. The $9,189.25 transferred by journal entry E was for July 1965 labor. During the period June 30, 1966 through November 30, 1966, Autocycle Corporation made the following payments on its account, numbered 1990, with Roto-Mech, Inc.: Check DateNumberAmount10-15-66900$5,000.0011-18-6610705,000.0011-28-6611199,603.35On September 1, 1966, Roto-Mech, Inc. credited by journal entry in the amount of $4,189.25 the C. O. Anderson, d.b.a. Autocycle Company, Account No. 1100. The balance in the C. O. Anderson, d.b.a. Autocycle Company, Account No. 1100, was zero on September 1, 1966. On November 30, 1966, the journal entry of September 1, 1966, crediting the C. O. Anderson, d.b.a. Autocycle Company, Account No. 1100, in the amount of $4,189.25, was reversed. The balance in the C. O. Anderson, d.b.a. Autocycle Company, Account No. 1100, was $4,189.25 as a result of the journal entry reversal on November 30, 1966. On November 30, 1966, another journal entry credited the C. O. Anderson, d.b.a. Autocycle Company, Account No. 1100, in the amount of $9,189.25. The journal entry crediting the C. O. Anderson, 381 d.b.a. Autocycle Company, Account No. 1100, created a credit balance of $5,000 on November 30, 1966. On November 30, 1966, Roto-Mech, Inc. paid a "refund" in the amount of $5,000. The $5,000 refund resulted in a zero balance in the C. O. Anderson, d.b.a. Autocycle Company, Account No. 1100. On November 30, 1966, Roto-Mech, Inc. made out a check numbered 8976 to C. O. Anderson in the amount of $5,000. At some point prior to trial petitioner became ill and his corporations apparently ceased activity. Many of his records were imsplaced in storage and in preparation for trial. OPINION Issue 1. Whether the Commissioner's determination for the taxable year 1962 should be sustained.Petitioner's tax return for 1965 reported a loss which resulted in a net loss carryback claim to the taxable year 1962. The Commissioner determined in his statutory notice that petitioner had taxable income in the amount of $4,799.88 in 1965 based on the following adjustments. a. Overstatement of Sales. The Commissioner determined that an Autocycle machine sold to Anderson Die Cast on December 10, 1964, and paid for on December 15, 1964, was included by petitioner in his 1965 sales reported on382 Schedule C. We agree with the Commissioner's adjustment which properly reflected actual sales made during 1965. b. Decrease in purchases in 1965 totaling $3,076.35. In his statutory notice of deficiency, the Commissioner disallowed deductions for certain purchases, amounting to $3,076.35, which were purportedly made by petitioner in 1965. This adjustment had nothing to do with the sale to Anderson Die Cast. The adjustment involved disallowing purchases made in 1964 which were properly deductible in 1964. Petitioner presented no evidence with regard to this issue and has, therefore, failed to meet his burden of proof. Welch v. Helvering,290 U.S. 111">290 U.S. 111, 115 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure.c. Capitalization of improvements. The cost of making permanent improvements to machinery and equipment which has a useful life substantially beyond the taxable year is a capital expenditure. Section 263; section 1.263(a)-2(a), Income Tax Regs.The Commissioner determined that amounts expended in 1964 to make permanent383 improvements to Autocycle Machines Nos. 2081, 2110 and 2117, had been included in petitioner's 1965 cost of goods sold. Since these machines had been leased to Roto-Mech, Inc. during October 1964, the Commissioner determined that the cost of improvements should have been capitalized. Consequently he reduced cost of goods sold, capitalized the same amount and allowed petitioner additional depreciation. These machines were purchased from American Electronics, Inc. in 1964 and leased to Roto-Mech, Inc. during October 1964. According to petitioner's records, the cost of Autocycle Machines Nos. 2081, 2110 and 2117 was $7,000 each. 2384 Petitioner argues that expenditures made on Autocycle Machines Nos. 2081, 2110 and 2117 fell within section 174(a) Research and Experimental Expenditures. The petitioner's witnesses testified that the machines as purchased were unfinished and that petitioner was having trouble with the machines in getting them to work. They also testified that the machines were completed according to special order. We conclude that these facts do not meet the criteria necessary to deduct under section 174(a). 3 The Autocycle machine and process had already been patented and a trademark existed. Also, these three machines already had been leased by petitioner to a job machine shop for use by that shop in manufacturing parts as part of the ordinary course of business of the lessee. 385 Petitioner cites section 1.174-2(a)(1), Income Tax Regs., for the proposition that "improvement of already existing property" constitutes research and development expenses. Petitioner, however, is using the language out of context. Reading the regulations further we find that section 1.174-2(b)(4) specifically excludes costs of the component parts of depreciable property, the costs of labor or other elements involved in its construction and installation, or costs attributable to the acquisition or improvement of the property. Petitioner made no attempt to evidence any facts from which an intelligible allocation could be made. Furthermore, petitioner argues that he is relieved from making such an allocation since he did not depreciate the machines. Petitioner recognizes that the Code provides that research and development expenses cannot be taken when the property is depreciated. This analysis, however, denies validity to Code section 167(a) which provides for an allowance386 for the depreciation of property used in the trade or business, or held for the production of income. These machines were leased and as such were used in petitioner's trade or business as a lessor and petitioner admits the leases produced income. Petitioner's error in not depreciating these machines cannot excuse his error in not capitalizing the expenses. Issue 2. Whether the cost of purchasing equipment subsequently leased by petitioner should have been capitalized.The Commissioner decreased the cost of goods sold in 1966 because petitioner had included the price of Autocycle Machine No. 2132 in that amount. He determined that the cost of acquiring the machine which the petitioner subsequently leased was a capital expenditure. Petitioner asserts in one of his requested findings of fact that Autocycle Machine No. 2132 was assembled from parts acquired from American Electronics, Inc. in 1964. Since he offers no evidence to support this determination we accept the Commissioner's reliance on a lease between petitioner and Roto-Mech, Inc. which states that Autocycle Machine No. 2132 was new in 1966. Because petitioner has provided no proof to demonstrate that Autocycle Machine387 No. 2132 was in fact not included in his cost of goods sold computation for 1966 he has failed to meet his burden of proof. Welch v. Helvering,290 U.S. 111">290 U.S. 111, 115 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure.Issue 3. Whether petitioner received ordinary income from the sale of Autocycle Machine No. 2132.The Commissioner determined additional unreported ordinary income by petitioner from the sale of Autocycle Machine No. 2132. This machine was recorded on an invoice as sold by Autocycle Corporation on August 22, 1966. He also determined that Autocycle Machine No. 2132 had not been transferred to Autocycle Corporation. On June 30, 1966, petitioner, d.b.a. Autocycle Company, transferred assets pursuant to a section 351 exchange to Autocycle Corporation. There was no list of specific assets transferred. In a lease dated after the section 351 exchange petitioner listed this machine as one he personally leased to his corporation, Roto-Mech, Inc. We conclude that petitioner did not intend to transfer Autocycle Machine No. 2132 during the section 351 exchange. The lease after the transfer evidences his intent to retain it. Autocycle Machine388 No. 2132 was sold for $14,506.44 and the Commissioner requests that we find that it was purchased for $11,500 and that the resulting gain of $3,006.44 should be treated as ordinary income. Petitioner disputes the purchase value because the Commissioner bases it on valuations found in the lease agreements between petitioner and his corporation, Roto-Mech, Inc. He, however, offered no evidence as to its true cost; therefore, we conclude that the Commissioner's valuation is correct. Petitioner also did not offer evidence to establish that gain from the sale was reported or that the machine was held for longer than six months. Again petitioner has failed to meet his burden of proof. Welch v. Helvering,290 U.S. 111">290 U.S. 111, 115 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure.Issue 4. Whether a portion of petitioner's expenses for travel and entertainment in 1965 and 1966 were personal expenses and nondeductible.On his 1965 Federal income tax return petitioner deducted $2,866.76 and on his 1966 return he deducted $8,034.34 for entertainment and travel. The Commissioner disallowed $188.40 in 1965 and $2,113.71 in 1966 as personal and nondeductible. 389 At trial the petitioner did not present the calendar book and charge slips or the spreadsheet of customers and charges which the bookkeeper had prepared for the purpose of correlating entertainment expenses with business activity. These were inadvertently lost by petitioner and his counsel following petitioner's illness. Petitioner relied on the testimony of his bookkeeper who had prepared the spreadsheet to prove that some of the disallowed expenses were in fact deductible travel and entertainment expenses. Section 274(d) provides that entertainment expenses, gifts, and travel costs are not allowable as deductions "unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating his own statement." We conclude that petitioner maintained an adequate system delineating the elements of his various entertainment expenditures within the meaning of section 274. Joe F. Gizzi, 65 T.C. - (Nov. 4, 1975). The agent, in fact, upon examining petitioner's records allowed a large portion of his expenses, but after the audit and prior to trial the petitioner inadvertently390 lost these records. Consequently, petitioner asks the Court to accept the bookkeeper's testimony that some but not all of the disallowed deductions were business expenses. 4Under section 1.274-5(c)(5), Income Tax Regs., if the taxpayer can establish that (1) he at one time possessed adequate records and (2) that his present lack of records is due to fire, flood or other casualty beyond his control, then he is free of the normal substantiation requirements. Joe F. Gizzi,supra at 7. However, the petitioner does not argue that his records were lost due to a casualty beyond his control but instead insists that the testimony of his bookkeeper is adequate substantiation. The bookkeeper gave no information as to the specific charges disallowed except to say that in her opinion some of the disallowed expenditures were personal. She admitted under cross-examination that she was not present when the disallowed charges were made391 and therefore, would not have knowledge whether a particular expenditure was personal or business related. We conclude that the bookkeeper's testimony is not adequate to meet the requirements of section 274 and therefore do not reach any issue under section 162. Issue 5. Whether pursuant to Code section 482 income should be allocated to petitioner on the sale in 1967 of Autocycle Machine No. 2117 by petitioner's related corporation, Autocycle Corporation.On April 27, 1967, petitioner sold to Autocycle Corporation an Autocycle Machine No. 2163 for $2,159.90. On the same day Autocycle Corporation sold an Autocycle Machine No. 2117 to Compact Precision for $8,750. Prior to the sale to the corporation one of petitioner's Autocycle machines was renumbered 2163. The Commissioner, concluding that these two machines were one and the same, argues that these transactions represent income that has been artificially diverted from one member to another of a controlled group. Relying on section 482, the Commissioner allocated the income from the sale to petitioner on the grounds that petitioner did not deal at arm's length with his corporation during the sale of Autocycle Machine No. 392 2117. The petitioner on the other hand asserts that Machine No. 2122 was the one renumbered 2163. Petitioner and the Commissioner agree that petitioner sold Machine No. 2122 to the corporation for $2,160 but disagree as to whether it was the one renumbered 2163. Petitioner relies on the coincidence of the same sales price to assert that 2122 and 2163 were the same machine. At some point prior to the sale by Autocycle Corporation of Machine No. 2117 it was necessary for petitioner to transfer the machine to the corporation. We conclude that he had not transferred it during the section 351 exchange because subsequent to the section 351 exchange he leased it to Roto-Mech, Inc. Therefore, we cannot agree with petitioner that Autocycle Machine No. 2117 was transferred to Autocycle Corporation in the section 351 exchange. On the date Autocycle Corporation sold Machine No. 2117 a renumbered machine was sold by the petitioner to Autocycle Corporation. We can only assume that this was Machine No. 2117 since no facts were presented to evidence its prior transfer. Because both sales occurred on the same day for different amounts and because no evidence was introduced as to the market fluctuation393 for these machines on that day, we conclude that petitioner did not deal at arm's length with his controlled corporation, Autocycle. The best indication of the arm's length price for this machine is the price paid by Compact Precision, an independent party, to Autocycle Corporation. Section 1.482-2(e)(2), Income Tax Regs.We can only conclude that petitioner negotiated the sale to Compact Precision prior to the transfer of the machine to his controlled corporation. Based upon these facts and conclusions the Commissioner clearly has authority to allocate income to reflect the true taxable income of petitioner. Sections 1.482-1(a)(6), 1.482-1(d)(1) and (4), Income Tax Regs.; Eli Lilly & Co. v. United States,372 F.2d 990">372 F.2d 990 (Ct. Cl. 1967). As for Autocycle Machine No. 2122, the Commissioner in his statutory notice determined that petitioner had reported gain on its sale on his 1967 income tax return in the amount of its sales price. We agree with the Commissioner that the sale of Autocycle Machine No. 2122 resulted in section 1239 gain and that the gain as reported on petitioner's 1967 return should be reduced from $2,160 to $479.93. 394 Issue 6. Whether petitioner received constructive dividend income in 1966 from his related corporation on the corporate assumption and payment of a liability of petitioner's.The assumption of a liability by a corporation for the payment of a refund by another corporation to a shareholder in both corporations constitutes a dividend. Section 301(a); Lash v. Commissioner,245 F.2d 20">245 F.2d 20 (1st Cir. 1957), affg. on this point a Memorandum Opinion of this Court; Tirzah A. Cox,56 T.C. 1270">56 T.C. 1270 (1971). On June 30, 1966, Charles O. Anderson, d.b.a. Autocycle Company, was incorporated. The Commissioner determined, and it is not disputed, that the transfer of assets and liabilities was a tax-free exchange under Code section 351. One of the liabilities assumed from Charles O. Anderson, d.b.a. Autocycle Company, was an Account Payable to Roto-Mech, Inc. On July 1, 1966, the Autocycle Corporation General Ledger showed the balance due Roto-Mech, Inc. was $14,602.65. This balance overstated the true liability to Roto-Mech, Inc. The books and records of Roto-Mech, Inc. 395 carried three Accounts Receivable relating to Autocycle Corporation and Charles O. Anderson, d.b.a. Autocycle Company. The June 30, 1966 balance in the Account Receivable due from Autocycle Corporation was $4,775.97, almost $10,000 less than the amount carried on the Autocycle Corporation's books and records as a payable to Roto-Mech, Inc. The Commissioner determined that the Accounts Receivable on Roto-Mech, Inc.'s books and records as of the date of Autocycle's incorporation was actually $9,526.35. This amount is made up as follows: Autocycle CorporationAccount No. 1990$4,775.97C. O. Anderson, d.b.a.Account No. 11004,189.25Autocycle CompanyPrepaid InsuranceAccount No. 1300500.15Charles O. Anderson,Account No. 198060.98d.b.a. AutocycleCompanyTotal$9,526.35The amount of $500.15 in Account No. 1300 involved prepaid insurance for Autocycle Company for the period January through June 1966. This amount was transferred by journal entry E from the Prepaid Insurance, Account No. 1300 to the Autocycle Corporation Account Receivable No. 1990. The amount of $60.98 in Account No. 1980 involved the actual balance due from Charles O. Anderson, 396 d.b.a. Autocycle Company, on the date of incorporation, June 30, 1966. Account No. 1980 was reduced to $60.98 in July 1966 to reflect charges and payments made prior to incorporation. On November 30, 1966, Roto-Mech, Inc. transferred the balance of $60.98 from Account No. 1980 to the Autocycle Corporation Account Receivable No. 1990. On June 30, 1966, the balance in the Roto-Mech, Inc. Account Receivable No. 1100 from C. O. Anderson, d.b.a. Autocycle Company, was $4,189.25. The Account Payable for this amount was transferred by petitioner to Autocycle Corporation under Code section 351. Except for a credit entry on September 1, 1966 in the amount of $4,189.25, which was reversed on November 30, 1966, no further charges were made to Account No. 1100 after the incorporation of Autocycle. On November 30, 1966, Account No. 1100 was credited for $9,189.25 and the Autocycle Corporation Account Receivable No. 1990 was increased by $9,189.25, $4,189.25 of which was transferred as an account payable from petitioner to Autocycle under Code section 351. The effect of the November 30, 1966 journal entries was to leave a credit balance of $5,000 in Account No. 1100. The credit balance on the397 Account Receivable card from C. O. Anderson, d.b.a. Autocycle Company, Account No. 1100, was erased by a debit entry on November 30, 1966, described as "Paid Refund." The General Ledger describes the transaction as "Ref COA" (Charles O. Anderson). During October and November 1966, Autocycle Corporation reduced its Account Receivable in Roto-Mech, Inc.'s books and records by $19,603.35. On November 30, 1966, Roto-Mech, Inc. paid petitioner, Charles O. Anderson, the refund in the amount of $5,000 with check number 8976. In his statutory notice, the Commissioner determined that the refund of $5,000 to Charles O. Anderson constituted a constructive dividend. The refund paid Charles O. Anderson should have been paid to Autocycle Corporation or applied against Autocycle Corporation's debt to Roto-Mech, Inc. The rights of Autocycle Corporation to benefit from the inflated liability it assumed were ignored by petitioner. The effect of the bookkeeping entries on November 30, 1966 was to "plug" a figure by journal entry into the Account Receivable from C. O. Anderson, d.b.a. Autocycle Company, Account No. 1100, to justify the payment of a refund and to increase the liability of Autocycle398 Corporation to Roto-Mech, Inc. In doing so, Autocycle Corporation assumed a liability in consideration for the payment of a so-called refund by Roto-Mech, Inc. of $5,000 to petitioner, Charles O. Anderson. Accordingly, the evidence clearly demonstrates that Autocycle Corporation assumed a liability for the benefit of petitioner, Charles O. Anderson. Because of this assumed benefit, petitioner received additional constructive dividend income from Autocycle Corporation. Issue 7. Whether petitioner received constructive dividends from Roto-Mech, Inc. and Autocycle Corporation when the corporations paid travel and entertainment expenses, made payments for the personal auto of the petitioner and paid rent on machines already sold to unrelated third parties.Petitioner did not deal with these adjustments made by the Commissioner in his statutory notice of deficiency; therefore, we conclude that he has conceded this issue. Issue 8. Whether petitioner received additional unreported interest income in 1966 on a note to Autocycle Corporation.The petitioner did not deal with this adjustment; therefore, we conclude that he has conceded this issue. Issue 9. Whether gain on399 the sale of Autocycle Machine No. 2081 should have been reported as ordinary income in 1966.Petitioner sold Autocycle Machine No. 2081 in 1966 but did not report the income until 1967. The Commissioner, in his notice of deficiency, included the gain as ordinary income in 1966. The Commissioner conceded in his opening brief that gain received from the sale of Autocycle Machine No. 2081 is section 1231 gain subject to the recapture provisions of section 1245 rather than section 1239 gain. The Commissioner also conceded that petitioner wrongfully reported the sale of Autocycle Machine No. 2110. The petitioner is entitled to offset the sales price by its adjusted basis with the gain reportable as capital gain under Code section 1231, subject to Code section 1245 recapture, and not as ordinary income as reported by the petitioner. Issue 10. Whether interest expense on a note to American Electronics, Inc. should be decreased from $1,713.60 to $476.During trial petitioner conceded this issue. Issue 11. Whether sales of Autocycle Corporation stock in 1967 qualified as installment sales.Petitioner did not deal with this adjustment, therefore; we conclude that he400 has conceded this issue. Issue 12. Whether petitioner received constructive dividend income in 1967 from his related corporation following purchase of a Warner Swasey machine.The Commissioner in his reply brief conceded this issue. In conclusion, we feel compelled to comment that this case was poorly prepared for trial. Stipulations of fact, the backbone of trials in this Court, were missing. The taxpayer was in ill health and could not be present. Books and records, in a trial where the petitioner had the burden of proof, were lost and could not be produced. Secondary evidence was fragmentary and to a great extent, hearsay and confusing. We have done what we consider the best we could with this record. If appealed, we sympathize with the higher court; but it may be we have curable blind spots. If reversed or remanded we can only lose some more sleep. These are editorial remarks, but evidence our frustration. Decision will be entered under Rule 155.Footnotes1. All statutory references are to the Internal Revenue Code of 1954 unless otherwise stated.↩2. Petitioner argues that the Commissioner's use of machinery values taken from petitioner's leases are fallacious, erroneous and fictional. He relies on the testimony of Frederick L. Masterman as conclusive in showing the values used by the Commissioner were erroneous. Masterman was never shown the leases nor was he ever qualified as a witness to testify or asked if he had knowledge how petitioner determined the costs assigned to the Autocycle machines shown on the leases. Because of the unavailability of other records to establish basis, the cost figures placed on the leases by petitioner provided the only evidence available of basis to make adjusting entries to petitioner's cost of goods sold and in correctly computing depreciation and gain from the sales of Autocycle Machines Nos. 2081, 2110, 2117, 2122 and 2132.↩3. SEC. 174. RESEARCH AND EXPERIMENTAL EXPENDITURES. (a) Treatment as Expenses.-- (1) In general.--A taxpayer may treat research or experimental expenditures which are paid or incurred by him during the taxable year in connection with his trade or business as expenses which are not chargeable to capital account. The expenditures so treated shall be allowed as a deduction.↩4. None of petitioner's witnesses testified as to the exact amount of personal expenses which petitioner conceded in his brief.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625877/	VIKRAM H. KAJI AND ANDREA L. KAJI, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentKaji v. CommissionerDocket No. 16769-81.United States Tax CourtT.C. Memo 1985-341; 1985 Tax Ct. Memo LEXIS 287; 50 T.C.M. (CCH) 392; T.C.M. (RIA) 85341; July 15, 1985. 287 P invests in a coal tax shelter where he signs a "Mining Lease," which is actually a sublease, affording P the option of paying the $67,500 royalty specified either by cash or a nonrecourse note. P simultaneously enters into a "Contract for the Sale of Coal" with C, giving a nonrecourse note to C in exchange for funds C made available to P, which P then turned over to lessor. No coal was mined or produced under the foregoing lease during 1977. Held, minimum royalty provision in sec. 1.612-3(b)(3), Income Tax Regs., is valid following Wendland v. Commissioner,79 T.C. 355">79 T.C. 355 (1982), affd. per curiam 739 F.2d 580">739 F.2d 580 (11th Cir. 1984), affd, sub nom. Redhouse v. Commissioner,728 F.2d 1249">728 F.2d 1249 (9th Cir. 1984), and Wing v. Commissioner,81 T.C. 17">81 T.C. 17 (1983). Held further, advanced royalties petitioner "paid" in 1977 are not deductible because no coal was ever produced in 1977 and the royalties were not paid pursuant to a valid minimum royalty provision as provided in sec. 1.612-3(b)(3), Income Tax Regs.Held Further, damages are awarded under sec. 6673, I.R.C. 1954, for maintaining a groundless and frivolous claim. 288 John Patrick Kelly, for the petitioners. John O. Kent, for the respondent. GERBERMEMORANDUM FINDINGS OF FACT AND OPINION GERBER, Judge: Respondent determined a deficiency of $33,892 in petitioners' 1977 Federal income289 tax. The issues presented for consideration are: (1) Whether petitioners are entitled to deduct certain claimed "advanced minimum royalties" under section 1.612-3(b)(3), Income Tax Regs., and (2) whether damages should be awarded under section 6673. 1FINDINGS OF FACT All of the facts have been stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated by this reference. Petitioners, Vikram H. Kaji and Andrea L. Kaji, resided in Yardley, Pennsylvania, at the time they filed the petition in this case. Petitioners filed their 1977 joint Federal income tax return with the Internal Revenue Service Center in Philadelphia, Pennsylvania. On their return, petitioners described their occupations as "physician" and "nurse" and deducted royalties in the amount of $67,500 on Schedule C as lessees of a coal mine. References to petitioner in the singular will be to Vikram H. Kaji. This case presents the now-familiar coal lease shelter with a minumum annual royalty payment, most of which290 is "paid" by means of a nonrecourse note exclusively payable from mining receipts. On December 30, 1977, petitioner entered into a coal lease with Wyoming and Western Coal Reserves, Inc. (WW), which lease gave petitioner the right to mine merchantable coal at a specific location in Wyoming. In consideration for entering into the "Mining Lease," petitioner agreed to pay WW a $1,000 lease deposit and a minimum annual royalty payment of $67,500.The minimum annual royalty was to be paid out of the amount received from coal sold or mined, removed and marketed. In addition to the "Mining Lease," petitioner entered into an "Addendum to Mining Lease" with WW. Pursuant to the Addendum, petitioner, as lessee, was given the option of paying the minimum annual royalties provided in the lease either by cash or nonrecourse note. If payment by note was desired, then the Addendum provided that petitioner was to pay WW on this nonrecourse note from all coal mined from the leased premises in excess of 54,000 tons. Total balance of principal and interest was due and payable on December 31, 1997. Petitioner paid one-quarter ($16,875) of the 1977 "minimum annual royalty payment" with his own check291 dated "December 6, 1977." Petitioner then borrowed the remaining amount ($51,625, which includes the $1,000 lease deposit) from Coal & Minerals Leasing & Development Corporation (CM). In exchange for petitioner's nonrecourse promissory note, CM issued a check to petitioner, which petitioner negotiated to WW pursuant to an "Authorization to Negotiate." Petitioner simultaneously entered into a "Contract for the Sale of Coal" with CM under which petitioner agreed to sell economically recoverable coal reserves to CM. Payment under the contract was to be made on December 31, 1987. However, CM was granted the right to extend this payment date until December 31, 1997. Payments of principal and interest prior to December 31, 1987, were to be made exclusively from receipts of coal mined, removed, and marketed. The contract also provided that as additional inducement for petitioner's entering into this contract, CM agreed to lend petitioner $51,625 to be repaid under the terms of the above promissory note and further agreed to lend another $50,625 to petitioner in 1978. The transactional documents executed by petitioner, including the "Mining Lease," the "Addendum to Mining Lease," the292 "Non-Recourse Promissory Note," the "Authorization to Negotiate" and the "Contract for the Sale of Coal," appear to be part of a preprinted promotional package. No coal was mined or sold on the property petitioner leased during the year 1977. On their joint 1977 income tax return, petitioners attached a Schedule C for petitioner's coal mining business and claimed a deduction of $67,500 for 1977 as a minimum royalty with respect to the WW lease. Respondent, in his notice of deficiency, disallowed petitioner's claimed coal mining deduction in full. OPINION With the exception of the amounts "invested," the factual pattern in this case is identical to those in Oneal v. Commissioner, 84 T.C. (June 4, 1985); Ward v. Commissioner,T.C. Memo. 1984-570 (On appeal, 9th Cir., Jan. 14, 1985); Thompson v. Commissioner,T.C. Memo 1984-337">T.C. Memo. 1984-337; and Walls v. Commissioner,T.C. Memo. 1983-504. In fact, in all these prior cases and this case, similar arrangements were entered into with the same Wyoming and Western Coal Reserves, Inc., and with the same Coal & Minerals Leasing & Development Corporation. The only differences are the amounts293 involved and minor variations in some detail. The documents executed by petitioner in this case are identical to those set forth in Oneal,Ward,Thompson, and Walls, even down to the numbering of the paragraphs. We held in those cases that the deduction claimed as "advanced mineral royalties" was not allowable under the amended provisions of section 1.612-3(b)(3), Income Tax Regs., because no coal was produced in the relevant year. This Court and two circuit courts of appeal have upheld the validity of amended section 1.612-3(b)(3), Income Tax Regs.Wendland v. Commissioner,739 F.2d 580">739 F.2d 580 (11th Cir. 1984); Redhouse v. Commissioner,728 F.2d 1249">728 F.2d 1249 (9th Cir. 1984); Wing v. Commissioner,81 T.C. 17">81 T.C. 17 (1983); Wendland v. Commissioner,79 T.C. 355">79 T.C. 355 (1982), affd. 739 F.2d 580">739 F.2d 580 (11th Cir. 1984), affd. sub nom. Redhouse v. Commissioner,728 F.2d 1249">728 F.2d 1249 (9th Cir. 1984). Petitioners attack the validity of the regulations but do not present any new or different arguments.For example, petitioners argue that the doctrine of legislative reenactment invalidates the regulations.2 Second, 294 petitioners argue that the regulations are invalid because the Internal Revenue Service failed to comply with the Administrative Procedures Act and the Service's own rules by establishing an effective date and suspending two revenue rulings in a news release, by not publishing the amended regulation at least 30 days before its effective date, by abusing its discretion under section 7805 and retroactively amending the regulations and by arguing that the general provisions of section 7805 control over a more specific section, such as section 612. Petitioners argue that all of these procedural attacks invalidate the regulations or that at least one of these attacks is sufficient to invalidate the regulations. This Court, however, has on several prior occasions confronted all of petitioners' arguments and has rejected them. Wendland v. Commissioner,supra; Wing v. Commissioner,supra;Surloff v. Commissioner,81 T.C. 210">81 T.C. 210 (1983); Elkins v. Commissioner,81 T.C. 669">81 T.C. 669 (1983). Due to the extensive rationale already set forth in the above-referenced opinions, nothing would be served to restate it here. We conclude that the regulations295 are valid, relying on the cases cited above. Petitioners next argue that the royalties were paid pursuant to a minimum royalty provision as provided in section 1.612-3(b)(3), Income Tax Regs.3 Under the regulation, if no mineral product is produced during a given year, then no royalty deductions296 are allowed in that year unless royalties are paid or accrued as a result of a provision in the lease requiring that substantially uniform royalties be paid each year of the lease. In the instant case, no coal was mined or sold during 1977 on the property petitioner leased. Thus, in order for the royalty payment of $67,500 "paid" by petitioner to be deductible in 1977, the payment must have been made pursuant to a valid minimum royalty provision. 297 Respondent argues that, because petitioner was not required to make annual royalty payments in the absence of mineral production, the payment by petitioner does not satisfy the requirements set forth in section 1.612-3(b)(3), Income Tax Regs. In support of his position, respondent relies on the "Addendum to Mining Lease" which allows petitioner to make future annual royalty payments by the execution of a nonrecourse note. Under the terms of such nonrecourse note, payment would only be made from all coal mined in excess of the initial 54,000 tons. On several occasions we have addressed the question of whether a nonrecourse note constitutes payment for purposes of the minimum royalty provision under section 1.612-3(b)(3), Income Tax Regs.Wing v. Commissioner,supra;Thompson v. Commissioner,supra;Walls v. Commissioner,supra;Maddrix v. Commissioner,83 T.C. 613">83 T.C. 613, 620-626 (1984). 4 In all of these cases, the taxpayers satisfied their obligation to pay an advance minimum royalty by executing an agreement where the taxpayer transferred some cash and signed a nonrecourse promissory note in the balance298 amount payable generally in 10 years. The Government argued in these cases that the provision at issue did not constitute a "minimum royalty provision" because it allowed the taxpayer to defer the balance of the royalty for some years through the execution of a nonrecourse note, rather than requiring payment each year. See also Vastola v. Commissioner, 84 T.C. (May 21, 1985). In adopting the Government's position that the provision in question did not constitute a valid "minimum royalty provision," we stated in Wing v. Commissioner,supra at 40-41, that: To qualify for the deduction, the petitioner must meet the terms of the regulation, which299 sets out that a minimum royalty provision must require payment at least annually. That the note may in fact be paid at some later date is not sufficient to establish the existence of such a requirement. Our holdings and logic in Wing,Maddrix, and Vastola are squarely on point and clearly apply to the instant case. The "Addendum to Mining Lease" executed by the parties authorized the payment of all future annual minimum royalties for 1977 and subsequent years by means of nonrecourse notes due on December 31, 1997, with payment required only when coal in excess of the initial 54,000 tons was produced. Thus, regardless of the likelihood of the eventual satisfaction of such notes, the "Addendum to Mining Lease" permitted deferral of the minimum annual royalties provided for in the "Mining Lease" for the years 1977 and thereafter so that payment was not required to be made at least annually. Consequently, the $67,500 "payment" made by petitioner in 1977 was not made pursuant to a valid "minimum royalty provision" in accordance with valid section 1.612-3(b)(3), Income Tax Regs.The next issue we must decide is whether damages shall be awarded under section 6673. 5300 Petitioners through their counsel do not make any new arguments. Moreover, no attempt was made to factually or legally distinguish their case from the clear and established precedent in this area and with this Court. Indeed, no difference exists. This case involves the same Wyoming and Western Coal Reserves, Inc., that has been involved in several prior adjudications of this Court. Petitioners' counsel was also counsel for taxpayers in Ward v. Commissioner,supra, 6 that involved the same arrangements with WW as here. Notwithstanding counsel's familiarity with the law and cases decided and published before submission of this case for our consideration, petitioners through their counsel present the same arguments. In fact, the briefs submitted in this case are substantially identical to other briefs and memoranda filed with this Court dealing with coal shelters. 7 The similarities are too numerous to be a coincidence. Regardless of the reasons why the briefs are substantially identical, this case has unreasonably and unnecessarily consumed precious time. 301 Petitioners present the same material facts dealing with WW that this Court has previously and frequently decided. Oneal v. Commissioner,supra, Ward v. Commissioner,supra,Thompson v. Commissioner,supra, and Walls v. Commissioner,supra. In addition, petitioners repetitiously raise the same issues already decided in Wendland v. Commissioner,supra, Redhouse v. Commissioner,supra,Wing v. Commissioner,supra,Thompson v. Commissioner,supra, and Walls v. Commissioner,supra.See also Vastola v. Commissioner,supra. Petitioners, however, have not presented any new or meritorious arguments to distinguish their case from the previously litigated and existing precedent. In fact, the same prepackaged and preprinted forms employed in the prior cases were used here as well as the briefs that appear to be prepackaged. The only difference is the amount of money "invested" and, more importantly, the amount of deductions claimed. It is apparent from the facts of this case that petitioners were involved in an abusive302 tax shelter.Essentially, petitioners have claimed a 4-to-1 "leveraged" deduction based upon nonrecourse financing which is payable out of production, if any. This is tantamount to purchasing a $4 tax deduction with every dollar paid to a promoter who provides a facade of a legitimate enterprise to satisfy the form of the transaction. This type of arrangement frustrates the congressional purpose inherent in the deductions that we here disallow to petitioners. In spite of numerous Court opinions squarely on point, petitioners have forced an already overburdened Court and tax system to unnecessarily consume precious resources. Petitioners, and others who participate in specious tax strategems, must accept the consequences of their actions. The conferees in discussing damages under section 6673 stated "[t]he conferees believe that, with this amendment, the Congress has given the Tax Court sufficient tools to manage its docket, and that the responsibility for effectively managing that docket and reducing the backlog now lies with the Tax Court." H. Rept. 98-861 (Conf. Rept.) (1984), 1984-3 C.B. (Vol. 2) 1, 239. Congress also noted with approval the steps that this Court303 has taken in the tax shelter and tax protester areas and stated that this "Court should take further action in these two areas, as well as assert, without hesitancy in appropriate instances, the penalties that the Congress has provided." H. Rept. 98-861, supra at 239. We also have stated in Elliott v. Commissioner,84 T.C. 227">84 T.C. 227, 248 (1985), that "[a]t some point, the arguments in these highly leveraged tax avoidance (or evasion) schemes must be regarded as 'frivolous or groundless,'" citing section 6673. We have frequently found that cases based upon meritless contentions and stale arguments, as petitioners through their counsel raise, are burdensome both on this Court and upon society as a whole. See Abrams v. Commissioner,82 T.C. 403">82 T.C. 403 (1984). The time spent upon this case has delayed other cases of merit which could have provided new precedents to the tax system. Petitioners' brief, much like their abusive tax shelter "investment," was merely a prepackaged, pro forma presentation. Upon review of this record, we find petitioners' positions frivolous and groundless and that this proceeding was instituted and maintained primarily for delay. 304 We admonish other petitioners and their counsel not to maintain frivolous proceedings before this Court or to maintain them primarily for delay. On respondent's motion, we award damages to the United States under section 6673 in the maximum amount of $5,000. To reflect the foregoing, An appropriate order will be entered on respondent's motion for damages and a decision will be entered for respondent.Footnotes1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended and in effect for the taxable year at issue.↩2. Petitioners argue that administrative practice reflected in the regulation prior to its 1977 amendment had acquired the force of law and, by virtue of the legislative reenactment doctrine, could not be altered without congressional action. We have held, however, that the legislative reenactment doctrine does not bar respondent from amending the regulation. Wing v. Commissioner,81 T.C. 17">81 T.C. 17, 35-36 (1983); Wendland v. Commissioner,79 T.C. 355">79 T.C. 355, 383-385 (1982), affd. per curiam 739 F.2d 580">739 F.2d 580 (11th Cir. 1984), affd. sub nom. Redhouse v. Commissioner,728 F.2d 1249">728 F.2d 1249 (9th Cir. 1984); Surloff v. Commissioner,81 T.C. 210">81 T.C. 210 (1983); and several Memorandum Opinions of this Court, e.g., Gibson v. Commissioner,T.C. Memo. 1984-616, and Chidness v. Commissioner,T.C. Memo. 1984-612↩.3. Sec. 1.612-3(b)(3) provides in pertinent part: The payor shall treat the advanced royalties paid or accrued in connection with mineral property as deductions from gross income for the year the mineral product, in respect of which the advanced royalties were paid or accrued, is sold. For purposes of the preceding sentence, in the case of mineral sold before production the mineral product is considered to be sold when the mineral is produced (i.e.,↩ when a mineral product first exists). However, in the case of advanced mineral royalties paid or accrued in connection with mineral property as a result of a minimum royalty provision, the payor, at his option, may instead treat the advanced royalties as deductions from gross income for the year in which the advanced royalties are paid or accrued. See section 446 (relating to general rule for methods of accounting) and the regulations thereunder. For purposes of this paragraph, a minimum royalty provision requires that a substantially uniform amount of royalties be paid at least annually either over the life of the lease or for a period of at least 20 years, in the absence of mineral production requiring payment of aggregate royalties in a greater amount. For purposes of the preceding sentence, in the case of a lease which is subject to renewal or extension, the period for which it can be renewed or extended shall be treated as part of the term of the original lease. * * *4. This Court on numerous occasions has held that the contingent nature of nonrecourse notes does not establish an enforceable requirement that substantially uniform minimum royalties be paid annually, regardless of annual production. Wing v. Commissioner,supra;Surloff v. Commissioner,supra;Maddrix v. Commissioner,83 T.C. 613">83 T.C. 613, 620-626 (1984); Vastola v. Commissioner,↩ 84 T.C. , (May 21, 1985) (Slip Opinion at pages 11-12).5. SEC. 6673. DAMAGES ASSESSABLE FOR INSTITUTING PROCEEDINGS BEFORE THE TAX COURT PRIMARILY FOR DELAY, ETC. Whenever it appears to the Tax Court that proceedings before it have been instituted or maintained by the taxpayer primarily for delay or that the taxpayer's position in such proceedings is frivolous or groundless, damages in an amount not in excess of $5,000 shall be awarded to the United States by the Tax Court in its decision. Damages so awarded shall be assessed at the same time as the deficiency and shall be paid upon notice and demand from the Secretary and shall be collected as a part of the tax. ↩6. John Patrick Kelly is also counsel for taxpayers in several cases before this Court at this time. For example, Nichols v. Commissioner,T.C. Memo 1985-338">T.C. Memo 1985-338, Rosebrough v. Commissioner,T.C. Memo 1985-339">T.C. Memo 1985-339, and King v. Commissioner,T.C. Memo 1985-340">T.C. Memo 1985-340. Nichols and Rosebrough↩ concern the same arrangements with Wyoming and Western Coal Reserves, Inc. 7. In many tax shelters similar to this one, Joseph R. Laird, Jr., Attorney at Law, who is also President of WW, encloses a letter in the documents stating that he personally guarantees that legal representation will be provided to "investors" such as petitioners in this case in the event that the Internal Revenue Service attacks the projected tax treatment.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625878/	ESTATE OF HELEN WODELL HALBACH, DECEASED, JOHN POINIER, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEstate of Halbach v. CommissionerDocket No. 7099-76.United States Tax CourtT.C. Memo 1980-309; 1980 Tax Ct. Memo LEXIS 275; 40 T.C.M. (CCH) 952; T.C.M. (RIA) 80309; August 12, 1980, Filed 275 In an earlier opinion to which this opinion is a supplement (see 71 T.C. 141">71 T.C. 141) we found that decedent's disclaimer of an interest in a trust was a "transfer" for estate tax purposes. The issue in this supplementary opinion is whether or not this transfer was one in contemplation of death. Held: based upon all the facts and circumstances of the case the transfer was not one in contemplation of death. Wallace B. Liverance, Jr.,Geoffrey J. O'Connor,J. Frederic Taylor and Thomas C. Crane, for the petitioner. Steven I. Klein and Bernard Wishnia, for the respondent. STERRETTSUPPLEMENTAL MEMORANDUM FINDINGS OF FACT AND OPINION STERRETT, Judge: By letter dated April 30, 1976 respondent276 determined a deficiency in estate tax due from petitioner in the amount of $9,619,033.53. This deficiency was claimed on the basis that decedent Helen Wodell Halbach's "Disclaimer and Renunciation" of her remainder in the testamentary trust established by her father was (1) a transfer (2) in contemplation of death, thereby includable in her estate under the provisions of section 2035, I.R.C. 1954, as in effect on the decedent's death. On September 22, 1977, petitioner filed a motion to sever issues. This motion was based upon petitioner's claim that its petition raised three main substantive issues: (1) whether decedent's disclaimer and renunciation was a "transfer" within the meaning of section 2035, (2) if so, whether the transfer was in contemplation of death within the meaning of section 2035, and (3) if the transfer was in contemplation of death, whether the proper valuation date of a disclaimed interest for estate tax purposes was the date the disclaimer was executed or the date of decedent's death. Petitioner was of the view that the first and third issues were ones of law and the second issue one of fact. If the Court were to hold that the disclaimer was not a transfer277 for estate tax purposes, then the second and third issues would be rendered moot. Petitioner therefore moved that the transfer issue be severed from the other two issues for briefing and opinion. While this motion was opposed by respondent because of delay such severance would cause in obtaining a final determination of the case, petitioner's motion was granted by Order of the Court dated October 12, 1977. Our opinion with respect to the transfer issue was filed November 9, 1978. Estate of Helen Wodell Halbach v. Commissioner,71 T.C. 141">71 T.C. 141 (1978). In this opinion we held that decedent's disclaimer and renunciation was a "transfer" within the meaning of section 2035. On brief in this matter, petitioner has abandoned its valuation date claim. Thus we are here left with only the factual question of whether decedent's transfer was one in contemplation of death. FINDINGS OF FACT Some of the facts were stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference. Petitioner John Poinier is executor of the will of Helen Wodell Halbach. Petitioner was a resident of Gladstone, New Jersey at the278 time he filed the petition herein. Decedent Helen Wodell Halbach, petitioner's mother-in-law, was born in New Jersey on August 29, 1890 and died August 5, 1972, a resident of Short Hills, New Jersey at the age of 81. Decedent's father Parker Webster Page, died in 1937 at the age of 87. Her mother, Nellie A.H. Page, died in 1970 at the age of 100. Decedent's sister, Lois Page Cottrell, was born July 26, 1895 and is still alive. For the most part decedent lived a comfortable life. As a young girl she grew up i a large house in Summit, New Jersey. Her father was a patent attorney who provided an above-average standard of living for his children. Mrs. Halbach spent her girlhood days, during the summer, swimming and sailing at her family's cottage on the New Jersey shore at Bay Head. Her family had a pony at their home in Summit and boats at Bay Head. The habits of athleticism decedent formed as a girl were carried on throughout her life. Decedent married Ruthven A. Wodell on June 11, 1914. They had two children, Lois Page Wodell (now Poinier), born July 14, 1916, and Webster Page Wodell, born December 12, 1921. Mr. Wodell was an attorney like decedent's father. However, 279 starting in the early 1930's, Mr. Wodell was afflicted with a debilitating case of rheumatoid arthritis which rapidly incapacitated him from the practice of law. He died in January, 1945. From the early 1930's through 1948, when decedent remarried, she supported herself and her family through the operation of a garden and landscape consulting business under the name of Wodell and Cottrell. Mrs. Cotrell handled the financial side of the business, while decedent worked the designer side. Decedent had always enjoyed gardening. The Wodell and Cottrell firm rendered decedent's heretofore hobby into a paying business. This income was supplemented by gifts from her mother. While decedent's income during these years was adequate, it was insufficient to provide her children with the same life-style that she had enjoyed while growing up. It was also insufficient to maintain the Wodell home which, at least for part of the time, was rented. On various occasions during this period and in her later years decedent indicated her wish that her children could have had the same advantages that she had enjoyed as a girl. For example, she expressed the wish that her daughter could have had the280 same trips abroad that she had made. In 1941 Mrs. Page gave decedent a gift that made a deep impression upon her. In that year Mrs. Page's uncle Adolphe de Bary died leaving Mrs. Page certain trust funds. Mrs. Page, however, wrote decedent the following letter: Dear Helen, I am sending to Reynolds, Richardson + McCutcheon for filing in court papers transferring to you a one half interest in my share of the trust funds under Uncle Adolphe's will. The settlement by the trustees is coming up on December 23rd + this will be my Christmas gift to you. I never expected to share in this property, which came to me so unexpectedly through the tragic deaths of both de Bary and Leonie, within such a short time - My income is sufficient without it - + as Uncle Adolphe was so found of you I would like to have you enjoy it. Devotedly, Mother Decedent married Ernest K. Halbach in 1948. Mr. Halbach was, apparently, at the time an officer of General Dyestuff Corporation of New York (General Dyestuff). Decedent's financial condition improved markedly as a result of her second marriage. Mr. Halbach had been the majority shareholder in General Dyestuff starting in 1939. All the stock281 of General Dyestuff was, however, vested in the United States Alien Property Custodian in 1942 pursuant to the Trading With the Enemy Act. In this same year, 1942, the Alien Property Custodian seized the stock of General Aniline and Film Corporation (GAF). In 1954, after an exchange of stock, the Alien Property Custodian merged General Dyestuff into GAF. In 1965 the Attorney General sold the GAF common stock for $329,000,000. The propriety of the Alien Property Custodian seizure of General Dyestuff was the subject of a suit starting in 1962 in the Counrt of Claims. Mr. Halbach died on January 24, 1958. His successors in interest and General Dyestuff's other former shareholders or their successors in interest sued the United States for their allocable share of the GAF sales proceeds. In early December 1940 Mr. Halbach, for income and estate tax reasons, had contributed all his stock in General Dyestuff to an irrevocable trust. Mr. Halbach's first wife had a life estate in the trust with remainder over to Mr. Halbach's two daughters Mary Kemmerer and Ann Bumsted. On January 3, 1950, Mr. Halbach and his daughters entered into an agreement by which 1/8 of any potential recovery282 relating to the Alien Property Custodian seizure of Halbach's General Dyestuff stock was vested in John L. Kemmerer, Jr., Mr. Halbach's son-in-law. On December 22, 1957, just before Mr. Halbach's death, Mr. Kemmerer declared himself trustee of his 1/8 interest in any recovery for the benefit of decedent and Mr. Halbach's two daughters. Under this trust, established for valuable consideration flowing from Mr. Halbach, decedent was granted a life estate in this 1/8 interest. Throughout her life with Mr. Halbach, Mrs. Halbach was confident of the validity of his claim for a return of his stock or its value. The accuracy of Mrs. Halbach's view was borne out, as on January 26, 1970, the Court of Claims Trial Commissioner filed his report allowing recovery to the plaintiffs in their case styled Bonnar, et al. v. United States, an unreported opinion. This opinion was adopted by the Court of Claims on February 19, 1971. Bonnar, et al. v. United States,194 Ct. Cl. 103">194 Ct.Cl. 103, 438 F.2d 540">438 F.2d 540 (1971). By this decision, Halbach's daughters became entitled to a recovery of over $15,000,000. On August 4, 1971, a payment of $1,180,530 resulting from the satisfaction of the Bonnar283 judgment was made to the 1957 trust. This payment constituted 62.5 percent of the total of $1,888,848 to be paid to the trust. Mr. Halbach was a man of some means even without the General Dyestuff stock. On November 5, 1959, after Mr. Halbach's death, decedent owned common stock worth $499,274, tax exempt securities worth $109,100, corporate fixed income securities worth $38,154, and miscellaneous securities worth $5,113, for a total of $651,641. After her marriage to Mr. Halbach decedent began to make gifts to her children. In the early 1950's decedent made a series of gifts to her daughter Lois Poinier which, in the aggregate, gave the Poiniers full ownership of their residence in Short Hills. In 1958 decedent gave the Poiniers a down payment of $3,000-$5,000 for a vacation home in Rhode Island. At various times throughout her remaining years decedent made gifts to, or for the benefit of, her family. Decedent was active throughout her life. She continued her gardening activities after her marriage to Mr. Halbach and, for example, designed a garden at her home. She worked in the garden almost every day throughout her remaining years. Decedent travelled each winter, 284 from the early 1950's through 1971, from her home in New Jersey to Nokomis, Florida where she would stay from one to several months. While in Florida the decedent would sail and swim in the ocean. Decedent went to Weekapaug, Rhode Island each summer where she frequently stayed for several months. Decedent enjoyed driving a car and bought a new one in 1972, the year of her death. At the same time she kept her previous car, a 1956 Chrysler. In sum, decedent enjoyed fishing, swimming, sailing, gardening, travelling, entertaining, and driving almost until the day of her death. Indeed, the day before she died she washed her new car and then entertained friends for lunch. She intended, and expected, to live as long as her mother, Mrs. Page, who lived to be almost 101 years old. In fact, approximately 7 months prior to her disclaimer, on August 31, 1969, decedent attended her mother's 100th birthday party. To commemorate this event, the townspeople of Weekapaug held a large parade on August 29, 1969, of which decedent was an organizer. At the parade decedent asked her daughter, Mrs. Poinier, if she would give her a similar parade when she reached 100 years of age. One major285 incident marred petitioner's otherwise rather healthy life. In late 1964 decedent suffered two fainting spells ("syncopal episodes"). The problem was diagnosed as a heart valvular deficiency. On November 21, 1964, decedent had a heart operation in which her aortic valve was replaced with a prosthetic (Starr) valve. This difficult operation was attempted only because of decedent's otherwise good health and optimistic mental attitude, combined with the decedent's poor prognosis without the operation. The operation was successful. Decedent had no other syncopal episodes and the prosthetic valve functioned flawlessly until her death in 1972. Petitioner recovered well from this operation and was soon, once again, leading the sort of life described above. Decedent's long time personal physician convincingly testified to her overall improvement after the operation. While this operation was a success it did not cure all decedent's ills. Thus, there was evidence in the record that petitioner's mitral valve was not operating as efficiently as it should have. Also, after the operation decedent was required to take a variety of drugs, such as anticoagulants, a digitalis-related drug286 to improve heart efficiency, and diuretic. From October 25, 1965 to October 31, 1965 petitioner was hospitalized for treatment of a lung embolism. She was also hospitalized from July 31, 1971 through August 3, 1971, with plumonary edema. Despite these various maladies, however, decedent remained optimistic. She cared little for doctors and hospitals and preferred to focus her attention on thoughts of life and plans for the future rather than thoughts of illness. She was never told of the potential seriousness of the mitral valve deficiency from which she possibly suffered. As found decedent was financially secure after her marriage to Mr. Halbach. In 1970, a series of events occurred which provided her with, in her view, a superfluity of income. As noted, on January 26, 1970, the Court of Claims Trial Commissioner entered his decision for plaintiffs in the Bonnar case. Decedent's interest in this case was a life estate in close to $2,000,000 should the Trial Commissioner's conclusions be adopted by the Court of Claims, as Mrs. Halbach was certain would happen. On April 14, 1970 decedent's mother, Mrs. Page, died. At that time, therefore, decedent and her sister Lois287 P. Cottrell, who both survived their mother, each became entitled to possession of one-half the remainder of the corpus of the trust established by their father. At this time, however, petitioner already owned an estate that provided her with income sufficient to maintain the life-style to which she was accustomed and wished to perpetuate. During the first six months of 1970 she owned stocks with a fair market value as of March 31, 1970, of approximately $614,296.69, and bonds of various issue dates with face amounts totaling $173,000. Decedent's adjusted gross income for her taxable years 1969 through 1972, inclusive, was as follows: 1969$ 23,711197023,138197123,4711972 66,439On April 19, 1970, therefore, five days after her mother's death decedent disclaimed and, as we have found (71 T.C. 147">71 T.C. 147), thereby transferred her remainder interest in her father's trust to her children. At that time her interest in the trust had a fair market value of $10,954,717.60. At decedent's death, on August 5, 1972, these assets had a fair market value of $13,954,034.28. The Trial Commissioner's288 conclusions were adopted by the Court of Claims, as mentioned, by an opinion dated February 19, 1971. The distribution of the assets out of the Page trust to decedent's children occurred in kind in early 1971. While decedent did not receive any income from her interest in the Bonnar decision until 1972, her income roughly trebled in that year, as can be seen above. OPINION On April 19, 1970, less than three years before her death, decedent transferred her remainder interest in a trust to her children. The sole issue for our decision is whether this transfer was one in contemplation of death. Respondent argues that the transfer was one in contemplation of death because it was made as a substitute for a testamentary disposition of property, and for the purpose of avoiding estate taxes. Petitioner argues that the transfer was motivated by thoughts of life and that the primary impetus to the transfer was to provide financial security for her children, in partial repayment of the relative deprivations she believed they had suffered as children, and at a time when decedent's income, already sufficient, was about to be trebled even without the remainder interest. Whether the289 transfer before us was made in contemplation of death within the meaning of section 20351 depends upon the dominant motive impelling the transfer, which we must determine on the basis of all the facts and circumstances of the case. 2Allen v. Trust Company,326 U.S. 630">326 U.S. 630, 636 (1946); Estate of Ford v. Commissioner,53 T.C. 114">53 T.C. 114, 122 (1969), affd. per curiam 450 F.2d 878">450 F.2d 878 (2d Cir. 1971). A rebuttable presumption in respondent's favor exists under the statute. Section 2035(b). The presumption is one of law, rather than fact. Thus it is not itself evidence. Estate of Gerard v. Commissioner,57 T.C. 749">57 T.C. 749, 757 (1972). Of course, the party challenging the Commissioner's determination has the burden of proof that the gift was not one in contemplation of death. McGaughn v. Real Estate Land Title & Trust Co.,297 U.S. 606">297 U.S. 606, 607 (1936); Reeves' Estate v. Commissioner,180 F.2d 829">180 F.2d 829, 831 (2d Cir. 1950); Estate of Lynch v. Commissioner,35 T.C. 142">35 T.C. 142, 150 (1960). 290 The test is always to be found in decedent's motive. To fall within the statute's net the motive that induces the transfer must be of the sort that leads to a testamentary disposition. Death must be a definite concern giving rise to a definite motive. United States v. Wells,283 U.S. 102">283 U.S. 102, 115 (1931). The statute does not have references to that general expectation of death such as all others entertain. Section 20.2035-1(c). On the other hand a transfer may be in contemplation of death even though the transferor does not fear imminent death. See e.g. Cleveland Trust Co. v. United States,421 F.2d 475">421 F.2d 475, 478 (6th Cir. 1970); Estate of Honickman v. Commissioner,58 T.C. 132">58 T.C. 132, 135 (1972). Rather, the thought of death must be the impelling cause of the transfer. United States v. Wells,supra at 118. Thus, if the gift springs from a different, non-death motive it is not one contemplated by the statute. The Supreme Court noted at 283 U.S. at 118, in its oft-cited case of United States v. Wells, that: If it is the thought of death, as a controlling motive prompting the disposition of property, that291 affords the test, it follows that the statute does not embrace gifts intervivos which spring from a different motive. * * * It is common knowledge that a frequent inducement [to make a gift] is, not only the desire to be relieved of responsibilities, but to have children, or others who may be the appropriate objects of the donor's bounty, independently established with competencies of their own, without being compelled to await the death of the donor and without particular consideration of that event. There may be the desire to recognize special needs or exigencies or to discharge moral obligations. The gratification of such desires may be a more compelling motive than any thought of death. [United States v. Wells, at 118, 119.] Thus, we are presented with a task akin to mind-reading which is certainly not a science. To read retroactively the mind of a decedent requires a clairvoyance that borders on the supernatural; it clearly does not border on certainty. Our responsibility is to make the best possible judgment. We do so. We are taken by the testimony of those who knew the decedent well that she was a woman, while of some age, with a joie de vivre that292 kept thoughts of death from being a motivating factor. We fin it believable that she wished her children to enjoy the advantages that she had had while growing up and that she had been unable to supply during their childhood. Once her own needs were comfortably covered, she followed a normal parental instinct to transfer her newly acquired surplus assets to the natural objects of her country. Such motivations have been clearly recognized as valid bases for making a transfer not in contemplation of death. Estate of Hutchinson v. Commissioner,20 T.C. 749">20 T.C. 749, 756 (1953); Estate of Wilson v. Commissioner,13 T.C. 869">13 T.C. 869, 871 (1949); Estate of Gerard v. Commissioner,supra at 759. We certainly assume that decedent was not unaware of the income and estate tax advantages of her act. Mr. Halbach himself had made an almost identical transfer in 1940, many years before he died, as had her own mother with respect to Uncle Adolphe's gift."[Every] man making a gift knows that what he gives away today will not be included in his estate when he dies. All such gifts plainly are not made in contemplation of death in the statutory sense." 293 Allen v. Trust Co. of Georgia,326 U.S. 630">326 U.S. 630, 635 (1946). Nonetheless we do not perceive tax considerations as primarily motivating decedent's acts. Rather, the timing of the gift was in major part governed by the fact that, at the time she made the gift, decedent believed she would have more than sufficient income from the Bonnar recovery to maintain her life-style, and therefore she could "set up" her children without a noticeable cost to her. Then, and only then, did she make the gift. The parties make much of Mrs. Halbach's heart operation. We, frankly, believe that at least in this case the fact of the heart operation was neutral. Clearly a heart operation is a serious one. It denotes the presence of a serious heart ailment. On the other hand the operation was successful. We attach importance to the fact that Mrs. Halbach was never informed that her mitral valve was possibly faulty. Thus, it is distinctly possible that Mrs. Halbach believed her life would be lengthened by the operation, perhaps beyond even that of her mother whom she fully intended to equal in longevity, rather than shortened. Given Mrs. Halbach's active life-style and otherwise healthy294 body and her positive state of mind after the operation, we believe that she would most likely have taken the optimistic view. It is decedent's health and state of mind at or before the time of the transfer to which we must look. Estate of Johnson v. Commissioner, 10 T.C. 680">10 T.C. 680, 688 (1948). We believe that decedent's health was relatively good at the time of the transfer and that her mental outlook was excellent. The testimony of her long-time physician bears this out. Thus we would put this case in the same category as Blakeslee v. Smith, 110 F.2d 364">110 F.2d 364 (2d Cir. 1940). In that case the decedent was 73 years old and in good health at the time of the transfer. The decedent was vigorous, active, and expected, as did Mrs. Halbach, to live another 15 to 20 years. The decedent's parents had lived to be 87 and 91 years of age. Finally, the decedent in the Blakeslee case had no knowledge, at the time of the transfer, of the cancer that killed him and in fact did not know of the cancer until a few days before he died. The Blakeslee court held the gift not to be in contemplation of death. Respondent also makes much of the terms of decedent's295 various wills, and in particular the fact that she executed a new will in December of 1970, eight months after the transfer. Clearly the fact that decedent altered her wills, as her financial condition and that of her children changed, could be some evidence that her disclaimer was a substitute for a testamentary disposition. Accordingly, we have carefully reviewed decedent's wills. Petitioner executed a will on December 16, 1965 after her heart operation. Part Eight of this will dealt with the residue of decedent's estate should she survive her mother. Clearly this will contemplated that, if decedent should outlive her mother, she intended to take her remainder. On the other hand her next will, executed December 20, 1970 some eight months after the disclaimer, was no doubt executed with the knowledge that decedent no longer needed to dispose of the remainder. We do not believe these changes significant. We have already noted that we could concede that decedent was aware of the income and estate tax effects of the disclaimer. Her 1970 will confirms this. We do not believe that this fact necessarily warrants respondent's conclusion that the disclaimer and 1970 will were integrated296 transactions. Having made the gift decedent was not required to ignore the effect of the gift on her estate. Far from viewing the disclaimer and December 20, 1970 will as being integrated, we see the will as being merely an acknowledgment of the changed conditions wrought by the disclaimer. In the case of Estate of Amy DePuy, 9 T.C. 276">9 T.C. 276, 291 (1947), the decedent had died in 1941 at the age of 83. In 1930 she had suffered a heart attack. In 1935 she had a benign tumor removed. The decedent was of failing eyesight. In 1938, some eight years after her heart attack, decedent had made a gift. Immediately upon the completion of the 1938 gift she changed her will so as to eliminate a provision for the benefit of the 1938 donee. We found that "The record shows, however, that the trust was not a mere substitute for a testamentary disposition. Her main purpose was to achieve immediate objectives desirable to her during her lifetime * ." The facts before us are, we believe, even more favorable for petitioner than were the facts in DuPuy.The DuPuy amendment had, apparently, occurred soon after the 1938 gift in trust. Substantial temporal simultaneity would297 be a factor indicating integration of the gift in will. In our case eight months elapsed between the transfer and the new will. If decedent had died during those months, her children would have received both the majority of her estate and the disclaimed remainder. We conclude that the two transactions were not so related as to taint the disclaimer with testamentary intent. See Estate of Dinell v. Commissioner, 58 T.C. 73">58 T.C. 73, 80 (1972) and Igleheart v. Commissioner, 77 F.2d 704">77 F.2d 704, 710 (5th Cir. 1935). In any event it is clear that the motive impelling decedent's transfer at the time of the transfer, and not at some other time, must be the focus of our decision herein. Estate of Lowe v. Commissioner, 64 T.C. 663">64 T.C. 663, 676 (1975). We conclude that lifetime motives predominated and impelled the transfer before us. It follows from the foregoing that we hold that the transfer was not one made in contemplation of death. Decision will be entered under Rule 155. Footnotes*. Includes $53,455 from the 1957 Halbach trust.↩1. SEC. 2035. TRANSACTIONS IN CONTEMPLATION OF DEATH. (a) General Rule.--The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, in contemplation of his death. ↩2. For a list of relevant factors see Estate of Johnson v. Commissioner,10 T.C. 680">10 T.C. 680, 686↩ (1948).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625879/	H. H. BLUMENTHAL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Blumenthal v. CommissionerDocket No. 42374.United States Board of Tax Appeals21 B.T.A. 901; 1930 BTA LEXIS 1768; December 26, 1930, Promulgated 1768 1. Opinion testimony of the taxpayer and an accountant that stock was not readily marketable or ready collateral for loans is held insufficient to overcome respondent's determination that shares received by taxpayer in exchange for assets had a fair market value when received equal to par, since respondent's determination finds support in contemporaneous sales to taxpayer and other incorporators of six-sevenths of the entire stock for cash at par, in the worth of the assets as recognized by the incorporators in authorizing their purchase, and in the facts disclosed by the opening balance sheet, and the first year's earnings indicate that the earnings immediately in prospect at the basic date amply justified valuation at par. 2. The opinions of witnesses on questions of value are to be judged in accordance with the soundness of the reasoning which is disclosed, and the Board can not treat a valuation as authoritative merely because it is stated in the form of an opinion, even though it must give due consideration to the opinions of those whose demonstrated qualifications give their opinions weight or authority. Ewing Laporte, Esq., for the petitioner. Philip1769 A. Bayer, Esq., for the respondent. STERNHAGEN 901 The respondent determined a deficiency of $653.64 in petitioner's income tax for 1926 by adding to the income shown by his return an uncontroverted item of $60 rent and the item now in issue of $10,000 representing the value of shares of stock received by him in that year from a newly organized corporation in exchange for his assignment to it of an agency contract and a leasehold, both of which had been acquired by him shortly before without cost. The petitioner included no value for the shares in his return, and in this proceeding attacks the respondent's valuation as excessive. FINDINGS OF FACT. Petitioner is an individual residing in Pittsburgh, Pa. In September, 1926, after he had secured without cost the agency for Marmon automobiles for Western Pennsylvania and parts of Ohio and Maryland, with the understanding that a properly financed corporation would be formed, and after he had acquired without cost the lessee's rights in a leasehold of a building in which the business could be conducted, he caused the Marmon Co. of Pittsburgh to be organized. It had capital stock of $71,000 par value. At1770 the time of organization in 1926, the shares of its stock were issued, $26,000 to 902 petitioner for cash, $15,000 to petitioner's father for cash, $15,000 to Alex Wally for cash, and $5,000 to H. L. Shusler for cash, and $10,000 to petitioner for the agency contract and the leasehold and services. The fair market value of the last mentioned $10,000 par value of shares received by petitioner was $10,000 when received by him in 1926. OPINION. STERNHAGEN: The petitioner presents only an issue of fact. He undertakes to prove that the $10,000 par value of shares received as stated in the facts had no market value when received. After examining the evidence, all of which was taken by deposition, we have found as a fact that the value of the shares was $10,000 as determined by respondent. The shares were received at the time of organization. All of the corporation's shares, aggregating $71,000 par value, were issued for $61,000 cash, the lease, the agency contract and certain undescribed services. The measure of each dollar of par value of shares is 1/71,000 of the total value of the cash, property and services received. Obviously, without some evidence of clear1771 reason for it, there is no identification of the value of the $10,000 issued to petitioner separately from the rest of the shares issued to him and the other three cash subscribers. The aggregate value of all the shares is ordinarily and, in the absence of proof of special circumstances, equally and proportionately distributable among all the outstanding shares to determine the value of each. Thus, if the corporation had received nothing whatever for the particular $10,000 shares in question, they would still be worth at least 10/71 of $61,000 cash received, or $8,591.54. But the corporation had more than cash behind its shares. When the incorporators first met, on October 11, 1926, they ratified the issuance of this $10,000 of shares in a resolution expressly stating it to be "the considered, careful and unanimous judgment of the meeting that said property [the agency contract and leasehold] and services are essential to the business of the corporation, and have been and are of a full and substantial value to the corporation of not less than $10,000." The first balance sheet of the corporation showed assets of $78,505.15 against liabilities of $5,917.29, capital stock of $71,0001772 and surplus of $1,587.86, and among the assets are listed "contract and leasehold, $10,000." On the other hand, the evidence lacks facts or opinion sufficient to indicate that the contract and leasehold were worth less than they were recognized to be worth when the shares were issued and shortly thereafter and than they were determined to be worth by respondent. 903 The shares of the corporation were regarded as worth par by the only persons who bought them and who presumably then appraised the possibilities of the business. It is not persuasive for petitioner to say that Wally was willing to invest $15,000 in shares in order to get favorable consideration in automobile purchases and service, or that his father invested because petitioner was later to receive or inherit the shares. See . Actual sales are not to be regarded lightly. , affirming . Nor is the preponderance found in the opinions of petitioner and an accountant that the shares were not readily marketable or ready collateral for loans. This is often1773 true of property of undisputed value. While we have no special or independent knowledge of the value of these shares, our experience affords some basis for judging the opinions of witnesses in accordance with the soundness of the reasoning which is disclosed. We can not treat a valuation as authoritative merely because it is stated in the form of an opinion, even although we must give due and careful consideration to the opinions of those whose demonstrated qualifications give their opinions weight or authority. There is evidence tending to show that after the first year of operation the corporation had little or no earnings, and this is relied on as establishing little or no value in the shares. But the time of valuation is in 1926, when the shares were received. However speculative the business, the assets on hand and the promise of the future were regarded, by persons willing but under no compulsion to buy, as sufficient to justify investment at par. In the first year the earnings were over $20,000, after substantial salaries were paid. So even if regard may be had to subsequent earnings, those immediately in prospect at the valuation date amply justified the value at par. 1774 When, therefore, the value claimed by the petitioner is subjected to any one of several tests, there is not sufficient substantial evidence to preponderate against the respondent's determination. Whether the test be taken as contemporaneous sales, book value, so-called intrinsic value, or earnings, or all together, the respondent's determination is supported, and the countervailing opinions lack force to overcome it. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625880/	Walde W. Kane and Lourene A. Kane v. Commissioner.Kane v. CommissionerDocket No. 60765.United States Tax CourtT.C. Memo 1959-111; 1959 Tax Ct. Memo LEXIS 135; 18 T.C.M. (CCH) 492; T.C.M. (RIA) 59111; May 28, 1959135 Held: 1. Respondent was justified in making use of the net worth plus nondeductible expenditures method in reconstructing petitioners' net income for each of the years in issue under the circumstances of this case. 2. Respondent correctly determined the deficiencies for the years in issue. 3. No part of the deficiencies for any of the years in issue was shown to have been due to fraud with intent to evade tax. 4. Section 275(c), I.R.C. 1939, is not applicable to the years 1946 and 1947. 5. The deficiencies and additions to tax for the years 1946 and 1947 are barred by limitations. 6. Additions to tax under section 294(d)(2) for the years 1949 and 1950 are sustained. Roy C. LaBudde, Esq., for the petitioners. James T. Wilkes, Jr., Esq., for the respondent. BRUCE Memorandum Findings of Fact and Opinion BRUCE, Judge: Respondent determined deficiencies in the income tax of petitioners and additions to tax as follows: Addition to TaxYearDeficiencySec. 293(b)Sec. 294(d)(2)1946$2,704.19$1,352.10$ 162.2519477,245.713,622.86434.7519491,748.84814.2697.711950958.28575.5752.261951201.14100.57none The deficiencies result from respondent's determination that petitioners' taxable net income for 136 each of the years in question, computed upon the basis of increases in net worth during the taxable years with adjustments for personal and other nondeductible amounts paid, exceeded the income reported for each of such years. The additions to tax result from respondent's determination that a part of the deficiency for each of the years in issue was due to fraud with intent to evade tax, under section 293(b) of the Internal Revenue Code of 1939, and of substantial underestimate of estimated tax for each of the years 1946, 1947, 1949, and 1950, under section 294(d)(2) of said Code. Petitioners have pleaded limitations with respect to the years 1946 and 1947, under section 275(a) of the 1939 Code. Respondent, on the other hand, has affirmatively alleged the filing of false or fraudulent returns with intent to evade tax with respect to such years (section 276(a), I.R.C. 1939), and also the omission from gross income of an amount properly includible therein in excess of 25 per cent of the gross income stated in the returns (section 275(c), I.R.C. 1939), together with the execution of a series of waivers (section 276(b), I.R.C. 1939). In addition to the limitations question, petitioners 137 have alleged respondent erred in resorting to the net worth method and, alternatively, in failing to give recognition to some $42,700 alleged cash on hand as of the beginning of the net worth period, in determining living expenses and in adding 10 per cent to the cost of machinery as "cost of installation." The principal issues presented for our determination are: 1) Whether respondent properly resorted to and applied the net worth method in determining the net income of the petitioners for each of the years 1946, 1947, 1949, 1950, and 1951; 2) Whether any part of the deficiency for each of the years in issue was due to fraud with intent to evade tax; 3) Whether petitioners are liable for additions to tax, under section 294(d)(2) I.R.C. 1939, for each of the years 1946, 1947, 1949 and 1950; and 4) Whether the assessment and collection of the deficiency and additions to tax, for each of the years 1946 and 1947, are barred by limitations. Findings of Fact The stipulated facts and attached exhibits are incorporated herein by this reference. During the years in issue petitioners Walde W. Kane (hereinafter referred to as Kane) and Lourene A. Kane were husband and wife residing in Port Washington, 138 Wisconsin. For each of the years 1946, 1947, and 1949 to 1951, inclusive, petitioners timely filed a joint Federal income tax return with the then collector of internal revenue for the district of Wisconsin, and duly paid the amount of tax shown thereon. Lourene's parents, August and Anna Budahn, were married in 1896. Anna Budahn was born in Germany and came to this country as a young girl. Throughout their married life the Budahns lived in or near Marshfield, Wisconsin. They had three children, Leo, Lourene and Arthur, who were born in the years 1897, 1900, and 1906, respectively. After they were married and until about the year 1900 the Budahns lived in an apartment above one of their parents' homes. About 1900 the Budahns purchased a two-family home in Marshfield. They occupied the lower level and rented the upper. They resided at this home until 1907, when they purchased a seven-acre tract on the outskirts of Marshfield and rented approximately 55 additional acres. They erected a home on the seven-acre tract and borrowed $700 in connection with the purchase and improvement of the land. After moving to the outskirts the Budahns acquired some cattle and sold milk and other farm 139 produce. The farm was sold in 1918 for $6,000. The cattle and farm machinery were sold separately at this time at an auction. About 1905 August Budahn became street commissioner of Marshfield and held that position approximately 18 years. When the Budahns moved to the farm in 1907 they retained their residence in Marshfield and rented both apartments. After selling the farm in 1918 they moved back to the residence in Marshfield, did some remodeling and rented rooms to tourists. The prices charged for room rents ranged from one to three dollars per person, depending upon how many occupied a room. The house had about five bedrooms, and rooms were rented to tourists from 1918 to 1942. Anna Budahn made loans secured by mortgages as follows: DateMortgagorAmountAug. 11, 1921Fred E. and MaryGraham$3,000Aug. 11, 1921Davis I. and Irene Hood1,000Dec. 21, 1931Julius O. and Laura M.Miller500 Six per cent interest was payable on each of such loans. Some time during the 1930's Anna acquired the property owned by Fred E. Graham as a result of his failure to repay the loan reflected above. The house was rented until 1945, when it was sold. Anna Budahn received an inheritance from her parents in Germany140 amounting to approximately $300. The State of Wisconsin has no record of any state income tax return having been filed by August and/or Anna Budahn for the years 1919 to 1940, inclusive. Anna Budahn died testate, a resident of Marshfield, Wisconsin, on January 9, 1950. Probate proceedings had in her estate indicated that the decedent owned certain real estate, described as Lot 10, Block 18, in the City of Marshfield, Wood County, Wisconsin, jointly with her husband, August W. Budahn, who survived her. Said real estate was appraised at $7,000 as of the date of Anna Budahn's death. In addition the probate proceedings reflect cash owned by Anna at her death in the total amount of $10,736.54, as follows: Savings account - Central StateBank, Marshfield$5,292.04Savings account - Citizens Na-tional Bank, Marshfield4,969.93Cash on hand474.57Total$10,736.54 Ownership of the said real estate passed to August W. Budahn by right of survivorship under Wisconsin law. Under the will of Anna Budahn the personal property (cash) in the estate was divided into four equal shares after payment of debts, funeral and administrative expenses. On or about July 15, 1950, Lourene received her net distributable 141 share of said estate in the amount of $2,343.88, after payment of the Wisconsin inheritance tax in the amount of $8.40. Lourene's father, August W. Budahn, died intestate on December 13, 1952, in the City of Marshfield, Wisconsin. Probate proceedings in his estate reflect a gross estate appraised at $9,648.62, as follows: Real Estate - Lot 10. Block 18,City of Marshfield$8,500.00Savings Account, Citizens NationalBank, Marshfield344.62Furniture, Clothing and Dishes779.50United States Series E Bond24.50Total$9,648.62 The real estate was sold pursuant to court order and the final decree in said estate showed assets received by the administrator in the total amount of $9,909.67, less expenses, fees and debts of $2,032.87, leaving a total for distribution of $7,876.80, of which Lourene, on or about June 3, 1953, received the amount of $2,611.68 after payment of the Wisconsin inheritance tax in the amount of $13.92. Lourene was first gainfully employed in 1919 by the Graham Real Estate Company in Marshfield. At this time she was living with the Grahams and supporting herself. Her wages gradually increased to $75 per month. She paid $15 per month for board at the Grahams. On October 11, 1921, 142 Lourene married Kane. They had been married secretly and did not live together after their marriage. On March 3, 1922, Lourene filed a suit for divorce. One of the grounds for such action was nonsupport. Subsequent to the institution of the suit the parties had a reconciliation and no further action was had on this suit. A second divorce action alleging nonsupport was instituted by Lourene on October 15, 1923. A divorce decree was granted on the same day. The daughter of petitioners was born shortly after the divorce. Lourene had been living with her parents about six months prior to the divorce and continued to live with them after the divorce. She received no support from Kane during any of this time. Petitioners were remarried on October 11, 1927. Lourene became employed by the Normington Laundry and Dry Cleaning Company in 1924. She remained there ten years. When she started work for Normington she received a lower wage than that received from Graham. On her Wisconsin state income tax return for the year 1927 Lourene reported gross income from Normington in the amount of $890. Such return also bears a notation that Lourene's net income for 1926 was $850. The total income reported 143 on Wisconsin state income tax returns filed by Walde and/or Lourene Kane for the years 1928 to 1935, inclusive, is as follows: 1928$ 1,589.7519291,890.2519303,093.9219312,812.5919321,514.181933790.96997.0019341,674.131935 (loss)3,231.00 The State of Wisconsin has no record of any income tax returns having been filed by either of petitioners for the years 1936 to 1939, inclusive. For the year ended December 31, 1927, on her Wisconsin state income tax return Lourene designated herself as "head of a family." For most of the year 1932 Kane was not working. During the years 1930 to 1934, Kane also worked for Normington. Petitioners left the employ of Normington in 1934 and went to Park Falls, Wisconsin, where, until July 30, 1935, they operated a dry cleaning plant under an arrangement with the First National Bank of that city which had foreclosed its chattel mortgage on the prior operator. Petitioners made no initial investment in this plant but assumed the unpaid balance on the loan to the prior operator in the amount of approximately $3,000. Petitioners operated this plant profitably enough to earn their living expenses until a fire occurred on July 30, 1935, which completely destroyed 144 the plant, equipment, all garments or work in process, and records of the business. The day after the fire petitioners filed a chattel mortgage in favor of Lourene's mother. This mortgage was predated several months and was filed with the idea that there might be various claims and that it would put Anna Budahn ahead of such claims. After the fire petitioners left Park Falls and Kane sold dry cleaning equipment for the Band Box Corporation. He also went into a dry cleaning business known as the Novelty Cleaners in Chippewa Falls, Wisconsin, in partnership with one Herring. Kane did not invest any cash in this business and retained his job with the Band Box. Lourene worked in the plant. In 1940 the petitioners sold their interest in the plant for $1,700. After selling their interest in Novelty Cleaners petitioners moved to Port Washington, and established a dry cleaning plant known as the Port Cleaners. At this time they owned an automobile, some clothing and furniture. They did not purchase any real estate when they first moved to Port Washington but rented an old building as a site for their business. They paid rent for such building in the amount of $18 per month. Petitioners operated 145 their dry cleaning plant on the first floor of this building and had their living quarters on the second floor. In 1943 petitioners purchased the site of their operations and the building thereon for $4,000. In 1945 petitioners, at a cost of approximately $4,500 built another building on this site to house part of their dry cleaning equipment. In addition to erecting the rear plant building petitioners remodeled the old building during the war at a cost of $650 and built a separate garage on the premises at an additional cost of $700. Early in 1947 petitioners contracted to complete the plant by constructing the front part, which was finished that year at a total cost of $16,500. Cleaning and finishing equipment owned by Port Cleaners prior to 1945 had a cost of $680. During the years 1945 to 1947, inclusive, petitioners purchased dry cleaning and finishing equipment and machinery at the following cost: 1945$7,870.0019464,679.6719475,584.80 The purchase of the new cleaning machinery and equipment increased the cleaning capacity of the Port Cleaners. After petitioners began operating the Port Cleaners both of them worked in the business. Lourene was in charge of keeping the books and 146 records. On a few occasions Kane made some entries in the books. The books of Port Cleaners were essentially a single entry system and as such there were no running cash balances nor accounts reflecting property investments. The principal record of Port Cleaners was a cash disbursements journal containing a weekly summary of sales and cash expenditures in the business. This journal also contained a record of bank deposits and checks drawn. In addition to this journal there were summary sheets containing weekly summaries of sales and cash expenses including employees' salaries and withdrawals by petitioners, employees payroll records and a general ledger in which were posted the annual totals from the cash journal. The summary sheets were totaled weekly and such totals were entered in the cash journal. Such figures in the cash journal were the basis for the amount of sales reported on the petitioners' income tax returns. James Lynch commenced working for petitioners in March 1947. He started working as an apprentice and gradually worked up to the position of manager. Petitioners sold the Port Cleaners to Elmer Adams and James Lynch on June 28, 1952. The selling price of the business 147 was $105,700. The cash payment was $19,200 and the buyers agreed to pay the balance at a rate of $100 per week together with interest at five per cent computed and payable weekly. On their Federal and/or Wisconsin state income tax returns for the years 1940 to June 28, 1952, inclusive, petitioners reported the following amounts of gross sales and net income with respect to Port Cleaners: YearGross SalesNet Income1940$ 1,823.04$ 487.0519414,364.89632.3619426,233.151,525.4019439,726.982,192.1619448,871.691,948.24194512,606.562,916.72194622,920.593,599.89194728,142.694,115.64194841,414.844,891.72194943,200.176,884.92195051,059.426,928.47195160,410.667,185.771952 (6 months)34,260.198,818.29After Adams and Lynch purchased Port Cleaners they began a laundry service and also handled leather cleaning, weaving and dyeing, none of which services was offered by petitioners. They also acquired new dry cleaning customers which petitioners did not have. The gross sales and net profit from the business of the Port Cleaners for the last six months of 1952 and the years 1953 and 1954 were as follows: YearGross SalesNet Income1952 (6 months)$36,607.92$ 8,852.83195387,074.1825,263.46195486,741.0821,403.59The 148 investigation of petitioners' income tax liability for the period here involved began on April 23, 1952, when internal revenue agent Grosse first contacted petitioners. Grosse asked that all of the books and records of the Port Cleaners be delivered to the agent's office at West Bend, Wisconsin, within five or ten days. Within that time petitioners delivered a box of records to Grosse, containing ledger sheets, summary sheets and expense invoices. The weekly sales and expense summaries were not segregated by weeks nor were the sheets of the cash disbursements journal in chronological order. The cash disbursements journal was not delivered at first because it was being used in current operations. In an attempt to audit the books and records of the Port Cleaners, respondent's agents sorted pages of the cash disbursements journal according to year, which was done by means of page numbers on the sheets, the dates of entries made, or in the absence of both of these indices, by matching footings carried over. The agents also sorted the ledger sheets by placing all sheets for the same account together. Grosse attempted to place in chronological order sales and expense summary sheets and the 149 supporting invoices for the expense summaries. After completing this arrangement of the summary sheets Grosse "spot checked" 51 separate weeks as to each of which he had put together all of the sales and expense summary sheets. In checking the sales summaries he found that 36 out of the 51 weeks would not "tie in" to the cash disbursements journal but the sales summaries for the other 15 weeks did tie in. He traced the expenses on the summary sheets into the cash disbursements journal. The weekly expense summaries checked for all weeks but one. However, supporting invoices for such expenses were not complete. From his examination of the records presented to him Grosse concluded that the books and records of the Port Cleaners did not correctly reflect income. At this time he decided to complete the audit by use of the net worth method. After deciding to determine petitioners' income by the "net worth" method respondent's agents made various investigations and had conferences with petitioners and their representatives to determine the amounts properly to be used in the net worth statement. As a result of such inquiries respondent arrived at a determination of petitioners' taxable income 150 by use of the net worth plus nondeductible expenditures method. The following schedule reflects respondent's net worth statement: Dec. 31, 1945Dec. 31, 1946Dec. 31, 1947Dec. 31, 1948ASSETSCash on Hand$ 235.00$ 235.00$ 235.00$ 235.00Cash in Banks1,156.223,386.311,458.34971.28Accounts Receivable279.97585.161,086.50888.50Land ContractSupplies Inventory888.751,170.501,231.301,433.65Machinery & Equipment9,405.0014,552.6420,695.9221,789.74Business Trucks &792.001,135.001,135.002,505.00AutomobilesBusiness Land &9,850.009,850.0026,350.0026,350.00BuildingsPrepaid Business232.02227.83185.06515.38InsuranceBusiness Goodwill375.00375.00375.00375.00Personal Property -Lake Land &3,025.005,131.006,131.006,821.00FurnishingsHome Furnishings &1,850.001,850.001,850.001,850.00JewelryAutomobiles902.001,237.001,237.001,500.00Total Assets$28,990.96$39,735.44$61,970.12$65,269.55LIABILITIESAllowance forDepreciation -Machinery & Equipment$ 265.72$ 1,114.52$ 2,324.54$ 3,805.91Truck & Automobile792.0070.94354.69952.40Buildings142.00298.00619.001,105.00Total Liabilities$ 1,199.72$ 1,483.46$ 3,298.23$ 5,863.31$27,791.24$38,251.98$58,671.89$59,406.24Dec. 31, 1946Dec. 31, 1947Dec. 31, 1948NET WORTHIncrease in Net Worth$10,460.74$20,419.91$ 734.35Estimate Cost of Living2,100.002,250.003,500.00TOTAL$12,560.74$22,669.91$ 4,234.35Less: InheritanceTotal$12,560.74$22,669.91$ 4,234.35Plus: Federal Tax Paid632.00450.00State Tax Paid28.0029.93Personal Loss - Sale of LakePropertyCorrected adjusted gross income on$13,220.74$23,149.84net worth basisAdjusted gross income per return$ 3,599.89$ 4,115.64Increase in income$ 9,620.85$19,034.20ASSETSDec. 31, 1949Dec. 31, 1950Dec. 31, 1951Cash on Hand$ 270.00$ 270.00$ 270.00Cash in Banks4,135.286,141.919,104.16Accounts Receivable778.16278.09669.60Land Contract6,540.006,060.00Supplies Inventory1,440.322,059.202,545.50Machinery & Equipment22,321.5524,281.2025,106.20Business Trucks & Automobiles2,622.915,255.485,255.48Business Land & Buildings26,350.0026,350.0026,350.00Prepaid Business Insurance272.42778.91492.61Business Goodwill375.00375.00375.00Personal Property -Lake Land & Furnishings15,569.0010,723.0012,631.00Home Furnishings & Jewelry2,639.002,974.003,349.00Automobiles1,856.002,025.002,982.20Total Assets$76,629.64$88,051.79$95,190.75LIABILITIESAllowance for Depreciation -Machinery & Equipment$ 5,403.23$ 6,449.25$ 8,180.38Truck & Automobile943.59566.821,791.84Buildings1,591.002,077.002,563.00Total Liabilities$ 7,937.82$ 9,093.07$12,535.22$70,691.82$78,958.72$82,655.53NET WORTHIncrease in Net Worth$11,285.58$ 8,266.90$ 3,696.81Estimate Cost of Living3,500.003,500.003,600.00TOTAL14,785.5811,766.907,296.81Less: Inheritance2,343.88Total$14,785.58$ 9,423.02$ 7,296.81Plus: Federal Tax Paid329.001,360.46912.68State Tax Paid53.99147.89151.52Personal Loss - Sale of Lake850.00PropertyCorrected adjusted gross income$15,168.57$11,781.37$ 8,361.01on net worth basisAdjusted gross income per return$ 6,905.32$ 6,980.27$ 7,363.24Increase in income$ 8,263.25$ 4,801.10$ 997.77151 The parties have stipulated that "the assets, liabilities, receipts and payments shown as Exhibit 6-F, attached hereto, truly and correctly reflect assets, liabilities and transactions of petitioners as of the dates, or during the years, indicated thereon." They also stipulated certain supporting schedules to Exhibit 6-F. Exhibit 6-F is as follows: LineDec. 31,Dec. 31,Dec. 31,Dec. 31,1945194619471948ASSETS1 Cash in banks - Exhibit A$ 1,156.22$ 3,386.31$ 1,458.34$ 971.282 Accounts Receivable279.97585.161,086.50888.503 Land Contract4 Supplies Inventory888.751,170.501,231.301,433.655 Machinery & Equipment -Exhibit B8,550.0013,229.6718,814.4719,808.866 Business Trucks & Automobiles -Exhibit C792.001,135.001,135.002,505.007 Business Land & Buildings -Exhibit D9,850.009,850.0026,350.0026,350.008 Prepaid Business Insurance232.02227.83185.06515.389 Lake Land & Furnishings -Exhibit E3,025.005,131.006,131.006,821.0010 Home Furnishings & Jewelry -Exhibit F1,850.001,850.001,850.001,850.0011 Automobiles - Exhibit G902.001,237.001,237.001,500.0012 Total - above assets$27,525.96$37,802.47$59,478.67$62,643.67(Lines 1-11)LIABILITIES - DEPRECIATION13 Machinery & Equipment -Exhibit H$ 230.32$ 1,001.32$ 2,098.98$ 3,450.2814 Trucks & Automobiles - Exhibit792.0070.94354.69952.40I15 Buildings - Exhibit J142.00298.00619.001,105.0016 Total - above liabilities$ 1,164.32$ 1,370.26$ 3,072.67$ 5,507.68(Lines 13-15)17 Inheritance received18 Federal Income Tax Paid -Exhibit K$ 632.00$ 450.00$ 604.0019 Wisconsin Income Tax Paid28.0029.9339.7020 Loss on sale of lake property21 Total - (Lines 18-20)$ 660.00$ 479.93$ 643.70152 LineDec. 31,Dec. 31,Dec. 31,194919501951ASSETS1 Cash in banks - Exhibit A$ 4,135.28$ 6,141.91$ 9,104.162 Accounts Receivable778.16278.09669.603 Land Contract6,540.006,060.004 Supplies Inventory1,440.322,059.202,545.505 Machinery & Equipment -Exhibit B20,292.3222,073.8222,823.826 Business Trucks & Automobiles -Exhibit C2,622.915,255.485,255.487 Business Land & Buildings -Exhibit D26,350.0026,350.00h26,350.008 Prepaid Business Insurance272.42778.91492.619 Lake Land & Furnishings -Exhibit E15,569.0010,723.0012,631.0010 Home Furnishings & Jewelry -Exhibit F2,639.002,974.003,349.0011 Automobiles - Exhibit G1,856.002,025.002,982.2012 Total - above assets75,955.41$85,199.41$92,263.37(Lines 1-11)LIABILITIES - DEPRECIATION13 Machinery & Equipment -Exhibit H$ 4,904.34$5,840.97$ 7,411.7114 Trucks & Automobiles - Exhibit943.59566.821,791.84I15 Buildings - Exhibit J1,591.002,077.002,563.0016 Total - above liabilities$ 7,438.93$ 8,484.79$11,766.55(Lines 13-15)17 Inheritance received2,343.8818 Federal Income Tax Paid -Exhibit K329.001,360.46912.00 *153 19 Wisconsin Income Tax Paid53.99147.89151.5220 Loss on sale of lake property850.0021 Total - (Lines 18-20)$ 382.99$ 2,358.35$ 1,063.52Following Grosse's determination that the books and records were inadequate to determine taxable income they were returned to petitioners, who employed Joseph Barrett, an accountant, to assist them in rearranging such records in proper chronological order. After the books and records of Port Cleaners had been reorganized by Barrett they were sent to Chester R. Roberts, a certified public accountant, for review. In the course of such review the entries on the sales summary sheets were totaled and such totals compared with the amounts petitioners had entered in the cash journal as totals of the respective sheets. Roberts made no attempt to verify the accuracy of the amounts entered on such summary sheets. The following schedule reflects the amount of sales according to the summary sheets as determined in the accountant's review, the amount of sales as reported by petitioners and the net amount of the discrepancies between such reported and determined figures: 194619471948Corrected sales$22,987.92$28,819.91$42,737.37Less: Summary not posted488.97Net errors in summaries67.33188.251,322.53Sales reported$22,920.59$28,142.69$41,414.84154 194919501951Corrected sales$45,633.03$52,106.75$61,945.06Less: Summary not posted990.97Net errors in summaries1,441.891,047.331,534.40Sales reported$43,200.17$51,059.42$60,410.66In connection with the preparation of the above schedule accountant's work sheets were prepared. Such work sheets disclose the amount of overstatement or understatement of sales per week reflected by the entries in the cash disbursements journal as compared to the amount of sales found by the accountant after review of the summary sheets. The following schedule reflects the number, the type and amount of such errors as disclosed on the work sheets for the years 1949, 1950, and 1951 (work sheets for the years 1946 and 1947 were not placed in evidence): 194919501951Number of weeks515252Number of weeks summaries incorrect363623Number of weeks error was understatement292917Number of weeks error was overstatement776Total amount of understatement$2,484.81$1,130.83$1,316.11Total amount of overstatement51.9583.5027.55Average amount of understatement85.6838.9977.42Average amount of overstatement7.9211.934.59 The errors discovered by Roberts as the result of the aforementioned review were generally of two types, (1) 155 incorrect addition of the entries on the weekly summary sheets, or (2) errors in carrying such figures forward or in posting. Of the 75 instances of understatement during the threeyear period 1949 to 1951, inclusive, 41 of such understatements consisted of amounts that were even multiples of $10. Of the 20 instances of overstatement in this period, three consisted of amounts that were even multiples of $10. Opinion This is another so-called net worth case, the determination of which has caused us a considerable amount of difficulty and concern, due largely to the vagueness and inadequacy of the proof and the necessity finally of having to determine most, if not all of the questions involved on the failure of the parties to carry their respective burdens. In this connection it is appropriate at this stage to point out that petitioners have the burden of overcoming the presumptive correctness of the deficiencies determined by respondent, but that respondent has the burden with respect to the issues relating to fraud and limitations as presented by the affirmative allegations of his answer. It is a well established principle that "both parties may fail through inadequate proof on their 156 several issues, and thus the deficiency would be sustained and the penalty set aside." L. Schepp Co., 25 B.T.A. 419">25 B.T.A. 419, 437; Drieborg v. Commissioner, 225 Fed. (2d) 216, affirming in part and reversing in part a Memorandum Opinion of this Court [13 TCM 170,]. First, with respect to the deficiencies determined by respondent by means of the net worth method, petitioners contend that their books, records and accounts are adequate for the purpose of computing their income and therefore that respondent was not justified in using the net worth method for the purpose of determining petitioners' net income in this case. In view of the numerous decisions which have discussed this subject, it would serve no useful purpose to dwell at length on this issue. It is noted that when presented to repondent's agents, petitioners' records had no semblance of order. This, of course, would not render them inadequate, though such lack of orderliness in keeping the records might suggest a lack of carefulness in making them. The magnitude of the task of arranging them would, of course, be no excuse for not examining all available records. Apparently, however, respondent's agents did arrange and examine all 157 the records that were presented to him. The books as such were essentially a single entry system which inherently is susceptible to errors that cannot readily be found. Respondent's agents found almost a complete absence of supporting data for the weekly sales and expense summaries, and also many inconsistencies between the summary sheets and the ledger. The accountants employed by petitioners to organize and review the records after they had been returned by respondent's agents also found certain discrepancies between the summary sheets and ledger due to failure to post and also mathematical errors in the summaries. It is noteworthy that they made no attempts to verify the amounts entered on the summaries. While these facts, of themselves, are not sufficient to establish understatement of income, or unreported sales, they are suggestive of such possibilities and invite other means to verify or ascertain petitioners' correct income. Under these circumstances, respondent was justified in resorting to the net worth method as a test of the accuracy of petitioners' income tax returns and as evidence of their correct net income. Morris Lipsitz, 21 T.C. 917">21 T.C. 917, affd. 220 Fed. (2d) 871, certiorari 158 denied 350 U.S. 845">350 U.S. 845; H. A. Hurley, 22 T.C. 1256">22 T.C. 1256, affd. 233 Fed. (2d) 177. Even where the books and records of a taxpayer appear on their face to be adequate, respondent is not precluded from using the net worth method. Davis v. Commissioner, 239 Fed. (2d) 187, affirming a Memorandum Opinion of this Court [14 TCM 294]. As suggested by the Supreme Court in Holland v. United States, 348 U.S. 121">348 U.S. 121, rehearing denied 348 U.S. 932">348 U.S. 932, books and records may be "more consistent than truthful." It is recognized that the net worth method is not itself a system of accounting but merely a technique for reconstructing a taxpayer's correct net income, regardless of the method of accounting followed by the taxpayer. By a showing of a substantial increase in net worth in excess of reported income, without reasonable explanation of such discrepancy, the net worth method furnishes persuasive evidence of unreported income and reflects on the over-all accuracy of income reported on the books and on the returns. Michael Potson, 22 T.C. 912">22 T.C. 912, affd. sub nom, Bodoglau v. Commissioner, 230 Fed. (2d) 336; Estate of George L. Cury, 23 T.C. 305">23 T.C. 305 [Dec. 20,666]; Morris Lipsitz, supra; Harry Gleis, 24 T.C. 941">24 T.C. 941, 159 affd. 245 Fed. (2d) 237. Petitioners' contention with respect to the propriety of respondent's use of the net worth method is accordingly rejected. Before proceeding to a consideration of respondent's net worth statement, it is to be noted that petitioners have conceded they failed to report certain amounts of sales during each of the years in issue, but argue that they incorrectly claimed allowable depreciation during such years and that the net results of such errors are the following amounts of conceded understatement or claimed overstatement of income: YearAmount1946$ 385.791947386.29 1949906.881950389.3419511,743.65We next consider whether respondent has erred in his determination of deficiencies in income tax of petitioners for the years in issue. Respondent's determination is based upon his net worth statement set forth in our findings. Comparison of this with Exhibit 6-F indicates the principal item in dispute between the parties to be the amount of cash on hand as of the beginning of the net worth period. Respondent determined that petitioners' opening cash amounted to $235. Petitioners contend that they had cash on hand on December 31, 1945, in 160 an amount no less than $42,000. To support their contention petitioners rely upon the familiar cash hoard story. In substance petitioners' story is that over the period of years prior to 1942 the members of the August Budahn family, with the exception of Leo, gave money to Anna Budahn to hold in safe keeping for them. According to petitioners, in 1942 Anna Budahn became ill and notified her children that she wished to turn the money over to them. According to their testimony, petitioners and Arthur Budahn subsequently visited Anna, at which time she gave them $52,000 and $12,000, respectively. The money purportedly given Anna constitutes the source of cash claimed to have been on hand at the beginning of the net worth period. Petitioners' cash hoard story is not only unsupported by the evidence, but is incredible. Petitioners admitted at the hearing that they could only guess how much of the $52,000 purportedly received from Anna represented money which they had given her to save. However, on brief they suggest that of such $52,000 received, approximately $18,135 represented their savings, apparently reasoning that the balance, amounting to $33,865, was contributed by Anna. Petitioners 161 admit that except to the extent of a $300 inheritance received by Anna, the sole source of the money purportedly received was the income and receipts of petitioners and Anna and August Budahn. We have carefully examined the entire record in an effort to determine whether petitioners' cash hoard story has any reliable basis. In our opinion the evidence demonstrates the improbability that such amount of cash could have been accumulated out of the combined earnings of petitioners and Lourene's parents prior to the year 1942. The evidence largely consists of vague and general statements by petitioners and Lourene's brother, Arthur, regarding the life of Lourene's parents, which show nothing more than that they were ordinary frugal working people. Statements in the record indicate that August Budahn worked as a laborer during most of his life and that Anna Budahn was a housewife who also rented rooms to tourists. There is no evidence that the Budahns ever filed a Federal income tax return, nor does it appear that they filed Wisconsin state income tax returns. The record is barren of any credible evidence respecting any specific amount of income of Lourene's parents except for Lourene's 162 statement that her parents sold the small farm in 1918 for $6,000; the copies of mortgages introduced into the record showing the interest earned thereon; and the evidence of interest earned on money placed in a savings account. Respondent's Exhibit KK, upon which petitioners rely as evidence of the amount of August Budahn's earnings as street commissioner, is insufficient to show what amount was earned prior to 1942, at the time of the purported gift, and accordingly it is of no value in determining the amount and sources of the purported cash hoard. At the time of her death in 1950 Anna had a personal estate consisting of $10,736.54, of which $10,261.97 consisted of money in savings accounts. Her personal residence was valued at $7,000, in which she also had a joint interest. In view of the evidence respecting the earnings of the Budahns, the fact that it was necessary to support a family of five from these earnings during many of the years, and the fact that Anna had over $10,000 at the time of her death, we find it unbelievable that in addition thereto she could have accumulated any sizeable amount prior to 1942. There is no evidence that Anna ever made any investments which resulted 163 in large gains. The possibility of any capital appreciation of original savings is therefore eliminated. The evidence presented with respect to petitioners' earnings convinces us that prior to 1942 their net savings were negligible. The evidence reveals only two years while they were purportedly depositing money with Anna, when the combined earnings of petitioners exceeded $2,000. The yearly average of their earnings amounted to less than $1,400. Furthermore, during most of this period the living expenses of three persons came from such earnings. In addition to the evidence of record which demonstrates the incredibility of the contention that the petitioners and Budahns accumulated the purported amount of cash, there are other factors which render their story unbelievable. First, according to petitioners' story, Anna added some $34,000 to petitioners' fund while she contributed only a few dollars to Arthur's. There is nothing in the record to suggest any reason for Anna's favoring Lourene in this manner. To the contrary, the record shows that Anna's will provided for the division of her estate into four equal shares and the distribution of only one of such shares to Lourene. Second, 164 according to petitioners' testimony when they returned home after allegedly receiving the cash from Anna they immediately counted it and the amount made a very definite impression upon them. Yet, when questioned by respondent's agents in connection with the amount of cash purportedly received they were unable to state definitely how much they received and repeatedly changed their answers. Third, the petitioners did not report any gifts received in response to questions with regard thereto on their Wisconsin state income tax return for 1942 although they purportedly received the money during that year. Nor does it appear that the Budahns reported any gift made. Assuming, arguendo, that in 1942 petitioners did receive some cash from Lourene's parents, in order to disturb respondent's determination it must appear that they received more than $10,000 since they appear to have consumed that much in the purchase of land, buildings and equipment, prior to the period in issue. Viewing the record in the light most favorable to petitioners, the evidence is not sufficient to establish that an amount exceeding $10,000 was accumulated prior to 1942. Accordingly, respondent's determination of cash 165 on hand is sustained. The next item in respondent's net worth statement as to which petitioners alleged error in their petition relates to the value placed upon machinery and equipment used in petitioners' dry cleaning business. Upon first reading of the stipulation and Exhibit 6-F referred to above, it might be concluded that the parties had settled their differences as to this item. However, both parties have briefed the question and it is assumed that the figures stipulated in Exhibit 6-F have reference to the amount paid by petitioners in the purchase of the equipment and do not include, or settle the question of, the cost of installation. The amounts shown in respondent's net worth statement exceed those shown in Exhibit 6-F by 10 per cent, which respondent argues is to be added to the stipulated amounts as cost of installing the machinery and equipment. Petitioners do not dispute the propriety in general of including installation expenses as a part of the over-all cost of machinery. They contend, however, that respondent's computation is erroneous because with only one exception no special installation costs were in fact incurred since the installation of the machinery here involved 166 was done by Kane with the assistance of Arthur Budahn and James Lynch. Respondent's agent stated that although the equipment possibly could have been installed by petitioners, since thousands of dollars of electrical and steam equipment was installed it appeared clear that some special installation expenses were incurred. He stated that in the net worth statement respondent had given petitioners credit for doing certain installation work themselves, and thereby had reduced estimated installation expenses from a normal 25 per cent of cost to 10 per cent. The only evidence offered to sustain petitioners' position was the self-serving, unconvincing testimony of Kane. Both Arthur Budahn and James Lynch, who purportedly assisted him with the installation of the machinery, appeared as witnesses for petitioners and presumably could have corroborated Kane's testimony. Yet neither witness was questioned with respect thereto. The petitioners' failure to offer such evidence creates the presumption that if offered it would not have been favorable to them. Wichita Terminal Elevator Co., 6 T.C. 1158">6 T.C. 1158, affd. 162 Fed. (2d) 513; Stoumen v. Commissioner, 208 Fed. (2d) 903, affirming a Memorandum 167 Opinion of this Court [12 TCM 267,]. In view of this and all other evidence respecting the equipment and its installation, we hold that petitioners have failed to sustain their burden of proving respondent's determination of such installation costs to be erroneous. In view of our conclusion respecting installation costs, we also conclude that the amounts allowed by respondent in his net worth statement for depreciation of machinery and equipment are appropriate. Petitioners have conceded, on brief, the correctness of the amounts included in respondent's net worth statement as living expenses. For the reasons set forth above and after careful examination of all the evidence, we conclude that petitioners have failed to overcome the presumptive correctness of the deficiencies determined by respondent for each of the years in issue. We turn next to those issues as to which respondent has the burden of proof, to wit: fraud, the omission in excess of 25 per cent of gross income, and limitations. Respondent contends that a part of the deficiency determined for each of the years in issue was due to fraud with intent to evade tax, thus subjecting petitioners to liability for additions to tax 168 under section 293(b) of the Internal Revenue Code of 1939. He also contends that the returns filed for the years 1946 and 1947 were false or fraudulent with intent to evade tax within the meaning of section 276(a) and accordingly that the assessment and collection of the deficiencies and additions to tax determined for those years are not barred by limitations. The burden of proof with respect to fraud is upon the respondent. Section 1112, I.R.C. 1939. A charge of fraud is never to be presumed, but must be established by respondent by clear and convincing evidence. Henry S. Kerbaugh, 29 B.T.A. 1014">29 B.T.A. 1014, affd. 74 Fed. (2d) 749; Arlette Coat Co., 14 T.C. 751">14 T.C. 751; W. A. Shaw, 27 T.C. 561">27 T.C. 561, affd. 252 Fed. (2d) 681. As pointed out earlier in this opinion, it it well established that "both parties may fail through inadequate proof on their several issues." We believe that respondent has failed to meet his burden of proof of fraud for any of the years involved herein. We reach this conclusion notwithstanding we have heretofore sustained respondent's determination of deficiencies for each of the years involved. As appears from our discussion with respect to that issue, our conclusion is based 169 upon the failure of petitioners to meet their burden. It has long been held that the fact that the respondent determined a greater tax liability than reported and his determination is sustained does not of itself establish fraud. Estate of Louis L. Briden, 11 T.C. 1095">11 T.C. 1095, 1132, affd. sub nom Kirk v. Commissioner, 179 Fed. (2d) 619; Harold B. Franklin, 34 B.T.A. 927">34 B.T.A. 927, 935; James Nicholson, 32 B.T.A. 977">32 B.T.A. 977, affd. 90 Fed. (2d) 978. In the more recent case of Drieborg v. Commissioner, supra, the Sixth Circuit Court of Appeals said: "At the outset it should be emphasized that the failure of the taxpayers to overcome the presumptive correctness of the deficiencies, even though those deficiencies cover a consecutive ten year period, cannot be regarded, in and of itself, as sufficient proof that the deficiencies or any part thereof were due to fraud on the part of the taxpayers. To hold otherwise would be to ignore the statute which imposes on the Commissioner the burden of proving fraud, and the often repeated admonition that such proof must be by clear and convincing evidence. Wiseley v. Commissioner, 6 Cir., 1950, 185 Fed. (2d) 263; Rogers v. Commissioner, 6 Cir., 1940, 111 Fed. (2d) 987, 989; 170 Mitchell v. Commissioner, 5 Cir., 1941, 118 Fed. (2d) 308. There must be additional independent evidence from which fraudulent intent on the part of the taxpayer can be properly inferred. * * "The the difference in the burden of proving ordinary tax deficiencies and civil fraud can have important practical results has long been recognized. 'As to the issue raised by [the Commissioner's] determination of fraud the burden is upon him; and he may fail to sustain such burden, notwithstanding the determined and presumed error in the return. In other words, both parties may fail through inadequate proof on their several issues, and thus the deficiency would be sustained and the penalty set aside.' L. Schepp Co., 1932, 25 B.T.A. 419">25 B.T.A. 419, 437." * * * Considered in the context of those cases, it is to be noted that had we accepted the testimony that Lourene's mother turned $52,000 over to petitioners in 1942 and that petitioners had cash on hand in the amount of at least $42,000 at the beginning of the net worth period, there would have been no understatement of income for any of the years involved. Our failure to find these facts on issues as to which petitioners have the burden is not equivalent 171 to affirmative findings on the fraud issues, as to which respondent has the burden, that petitioners did not have such an amount of money on hand as of December 31, 1945. Respondent has not established the omission of any specific items of income in the returns for the years involved, but bases his contention of fraud on the understatements shown by his net worth statement, the inadequacy of the records, and certain errors shown in petitioners' account due to failure to post and mathematical errors. The errors shown in the books and records were of more or less minor importance and indicate carelessness, inefficiency and negligence but are hardly sufficient to establish willful intent to defraud. An essential element to the establishment of fraud, under section 293(b) and section 276(a), is that of "intent to evade tax," described in E. S. Iley, 19 T.C. 631">19 T.C. 631, 635, as "the intent to defraud the government by calculated tax evasions," and in Mitchell v. Commissioner, 118 Fed. (2d) 308, 310, reversing 40 B.T.A. 424">40 B.T.A. 424, as "the specific 172 purpose to evade a tax believed to be owing." "Negligence, whether slight or great, is not equivalent to the fraud with intent to evade tax named in the statute." Mitchell v. Commissioner, supra. The question of intention is a factual one to be resolved from a consideration of the entire record. M. Rea Gano, 19 B.T.A. 518">19 B.T.A. 518; E. S. Iley, supra.It is recognized that the consistent and substantial understatement of income over a period of years may constitute clear and convincing evidence of fraud. Holland v. United States, 348 U.S. 121">348 U.S. 121. However, where the understatement of income is established only by reason of petitioners' failure to sustain their burden of overcoming the presumptive correctness of respondent's determination based upon the net worth method there must be some additional independent evidence from which fraudulent intent can properly be inferred. Drieborg v. Commissioner, supra. Considering the record as a whole we conclude that respondent has not established by clear and convincing evidence that any part of the deficiencies for any of the years involved was due to fraud with intent to evade tax. Accordingly, petitioners are not liable for any addition to tax 173 under the provisions of section 293(b) for any of the years in issue. It necessarily follows from what we have said above that respondent has likewise failed to establish that the returns filed by petitioners for the years 1946 and 1947 were false or fraudulent with intent to evade tax, within the meaning of section 276(a) of the Internal Revenue Code of 1939. Accordingly, petitioners' claim that the assessment and collection of the deficiencies and additions to tax for the years 1946 and 1947 are barred by limitations must be sustained, unless, as affirmatively alleged by respondent in his answer, it is established by respondent that petitioners omitted from gross income an amount properly includible therein in excess of 25 per cent of the gross income stated in the returns for those years, within the meaning of section 275(c) of the I.R.C. of 1939. In this connection it is noted that respondent alleged the execution of a series of waivers or consents agreeing to the extension of the period of limitations on assessment of deficiencies and additions to tax, as to each of said years, provided the provisions of section 275(c) are applicable, each series beginning within five years from 174 the effective date the respective return was filed. Petitioners, in their reply, denied, on information and belief, the execution of certain of the waivers or consents, which, if true, would have broken the chain and have rendered section 275(c) inapplicable. None of the alleged waivers were placed in evidence. At the trial, however, the parties stipulated that the assessment of additional income taxes and "penalties," for each of the years 1946 and 1947, is barred by section 275, except as it should appear that petitioners omitted from gross income an amount properly includible therein in excess of 25 per cent of the amount of gross income stated in the return, within the meaning of section 275(c), or the return for such year was filed falsely or fraudulently with intent to evade tax, within the meaning of section 276(a). We assume from this that respondent satisfied petitioners that such waivers had been executed and that petitioners no longer urge the non-execution of timely waivers. Section 276(c), providing for a five-year period of limitations, is an exception to section 275(a) providing for a three-year period of limitations. As such the burden is upon the respondent, who is 175 relying upon such exception to establish its application. C. A. Reis, 1 T.C. 9">1 T.C. 9, affd. 142 Fed. (2d) 900. As in the case of the exception on account of fraud provided by section 276(a), respondent's burden of proof is not met by the presumption of correctness attaching to his deficiency notice nor by the mere fact that we have sustained respondent's determination with respect to such deficiencies arrived at by use of the net worth method, due to petitioners' failure to overcome the presumptive correctness of respondent's determination. Cf. C. A. Reis, supra; Estate of Louis L. Briden, supra. In the recent case of Colony, Inc. v. Commissioner, 357 U.S. 28">357 U.S. 28 (1958), the Supreme Court stated that section 275(c) "is limited to situations in which specific receipts or accruals of income items are left out of the computation of gross income." (Emphasis by the Court.) It further stated that the statute was not intended to apply "more generally to errors in that computation arising from other causes." As pointed out in our discussion of the fraud issue, respondent has not established the omission of any specific items of income in the returns for the years involved. On the record respondent 176 has not established that petitioners omitted from gross income an amount properly includible therein in excess of 25 per cent of the gross income stated in the return for either 1946 or 1947. Accordingly he has failed to sustain his burden under section 275(c). Having held that respondent has failed to establish fraud for either of said years, we must conclude that the assessment and collection of the deficiencies and additions to tax for the years 1946 and 1947 are barred by the statute of limitations. We come finally to the question whether petitioners are liable for the additions to tax determined by respondent, under section 294(d)(2) of the Internal Revenue Code of 1939 for "substantial underestimate of estimated tax" for each of the years 1946, 1947, 1949, and 1950. Our holding above that the assessment and collection of the deficiencies and additions to tax for the years 1946 and 1947 are barred by the statute of limitations applies to the additions to tax under section 294(d)(2) here involved. Although petitioners assigned error in their petition to respondent's determination of additions to tax under section 294(d)(2) they offered no evidence with respect thereto and did not 177 mention it on brief. Accordingly, we must assume they have abandoned this issue, and respondent's determination of additions to tax under section 294(d)(2) for the years 1949 and 1950 is sustained. See Albert N. Shahadi, et al. v. Commissioner, 366 F.2d 495">366 F.2d 495 (C.A. 3, April 16, 1959), affirming 29 T.C. 1157">29 T.C. 1157. Decision will be entered under Rule 50. Footnotes. The discrepancy (68() between this and the similar item in respondent's net worth statement is unexplained.. claimed overstatement↩*. The word "had" was deleted and the words "did not have" were added by an official order of the Tax Court, dated June 23, 1959 and signed by Judge Bruce.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625881/	ESTATE OF LUCIE BESAG, CROCKER NATIONAL BANK, A NATIONAL BANKING ASSOCIATION, AND LEON J. ALEXANDER, CO-EXECUTORS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentEstate of Besag v. CommissionerDocket No. 1907-72.United States Tax CourtT.C. Memo 1975-163; 1975 Tax Ct. Memo LEXIS 210; 34 T.C.M. (CCH) 737; T.C.M. (RIA) 750163; May 28, 1975, Filed Gene R. Prasse, for the petitioners. Richard H. Gannon, for the respondent. TANNENWALDMEMORANDUM OPINION TANNENWALD, Judge: Respondent determined a deficiency of $28,286 in the income tax of petitioners' decedent for the year 1967. The only remaining issue is whether certain loans made by decedent became uncollectible during 1967, giving rise to a nonbusiness bad debt loss under section 166(d). 1All of the evidentiary facts have been stipulated. The stipulation of facts and attached exhibits are incorporated herein by this reference. The stipulation recites that the executors "resided or had their principal place of business211 in Los Angeles County, California" at the time the petition was filed. We take this to mean that the individual executor resided, and the corporate executor had its principal place of business, in Los Angeles County. Decedent died in 1970, before the issuance of the notice of deficiency involved in this action. Prior to June 1965, the decedent, then approximately 63 years of age, became acquainted with one Richard or Rick Byron, then approximately 32 years of age. In or about June 1965, Byron proposed that a corporation, Rick Byron, Inc., be created to operate a women's retail fashion store, to be owned and operated by Byron and featuring clothing designed by him. Decedent began loaning money to this corporation, wholly owned by Byron, in June 1965. The corporation did engage in the business as planned, operating a small store in Los Angeles. Decedent supplied all of its working capital on an "as needed" basis. She made a series of advances from June 1965 to June 1967 totaling some $33,000. The store did not do enough business to sustain itself, soon requiring the decedent to continue making loans at the rate of at least $2,000 per month to keep it in operation. In June 1967, Byron212 decided to go into the business of manufacturing women's fashions. The retail store was closed, and manufacturing operations commenced in rented premises in the garment district of Los Angeles. Decedent increased the amounts of her loans to cover the demands of the new business. By the summer of 1967, the business required loans substantially in excess both of decedent's expectations and of the former needs of the retail store. In September 1967, she retained an accountant, Golden, to investigate the corporation's financial condition. No meaningful corporate books existed, and she wanted to discover the true capital needs of the business. Around August 1967, decedent was requested by suppliers to give a blanket guarantee to certain credit purchases by Rick Byron, Inc. Golden reviewed the proposed forms and suggested minor modifications. Pending finalization of the guarantee, decedent was billed directly. This interim guarantee was limited to $500 per order. Ultimately, decedent decided not to execute the blanket guarantee forms. Because the corporation's books had not been posted from the beginning and were effectively worthless, Golden was forced to reconstruct the corporation's213 financial condition. In or about September 1967, and prior to the completion of his examination, he advised the decedent to contact an attorney to formalize her agreements with Byron. She did so, and in early November 1967, prior to Golden's report, decedent and the corporation entered into the following letter agreement: 2Dear Rick: As you know, I have advanced to Rick Byron, Inc., a corporation, the sum of $62,775.00, as of October 7, 1967. I have advanced additional sums during the month of October and have been requested to make further advances in the future. This letter is intended to set forth our understanding with each other and to determine our future course of conduct. Our agreement, therefore, is as follows: (1) All of our prior written agreements are hereby modified and superseded by this letter agreement. (2) You hereby acknowledge that the corporation is indebted to me in the sum of $62,775.00, as of October 7, 1967. You further acknowledge that I have made additional advances to the date hereof. On my part, I agree to advance sums needed for the operations of the corporation to and including December 31, 1967, in an amount not to exceed $5,000.00 per month. 214 I have made [sic] and do not now make any commitment to advance any sums after that date. (3) You agree that the corporation will repay to me, without interest, all of the funds I have heretofore advanced or may hereafter advance. Such repayment is to be made out of and from 10% of the gross receipts of the corporation. I am to be kept advised currently of all activities and receipts of the corporation and given full and complete statements and reports. My share of the gross receipts are [sic] to be paid to me quarterly, commencing January 1, 1968, until paid in full. (4) In the event that further sums are required after January 1, 1968, I have no obligation whatsoever to advance them. Nevertheless, it is my present intention to further advance sums subsequent to January 1, 1968 in an amount equal to the gross repayments made to me prior to that time. All subsequent advances, of course, shall be added to the then outstanding balance and be repaid as the initial advances are to be repaid. (5) We acknowledge that at the present time, Rick Byron is the president of the corporation and Lucie Besag is the secretary. They are also the directors of the corporation. One office is215 vacant. It is agreed that so long as the corporation is indebted to me, I will remain one of the two directors and that, therefore, I will be permitted to participate in each major corporate decision. (6) You have heretofor represented to me that there are only fifty shares of stock outstanding in the corporation and that they are all owned by Rick Byron individually. For and in consideration of the advances of money I have heretofor made to you, you have and do hereby give me the right, privilege and option to buy seventeen shares of stock of the said corporation at and for the price of $1.00 per share. This option shall be valid and subsisting until thirty days after the corporation has repaid to me all of its outstanding indebtedness. (7) Please sign a copy of this letter as our agreement. /s/ Lucie Besag LUCIE BESAG At the end of November 1967, Golden delivered his report to decedent but only with respect to the period ending September 30, 1967. He advised her that the business was "totally insolvent"; that, although he could not yet prepare an accurate216 financial statement, it had liabilities far in excess of its assets; and that it was her periodic loans that kept the corporation afloat. He told her that additional capital would be required for several months because no substantial buyer had been found for the corporation's spring line of fashions. He also informed her that "the only reason to keep the business alive would be in the hopes that the business would enjoy success in the next selling season which was the 'fall season' in May or June * * * the next substantial season available to the company." He suggested that decedent seek repayment of her loans and cease making new ones. Following the report, decedent made only one further loan to the corporation, on December 12, 1967, in the amount of $12,500. 3 The table below summarizes the amounts which decedent advanced to Rick Byron, Inc., totaling $92,503. Month196519661967Jan.$2,500Feb.$ 2,5002,000Mar.2,0003,300Apr.2,0002,150May2,0002,000June$1,0002,0005,500 4July1752,0005,750Aug.2,5002,700Sept.2,0004,000Oct.2,2506,837Nov.5003,00012,391 5Dec.4,2002,75012,500217 The check for the December 1967 loan bore the notation, "as final and last payment." Respondent has not contested that a valid indebtedness existed and that it had a value at some point during the taxable year. The parties have locked horns on the issue of total worthlessness at the end of the taxable year. . In order to prevail, it is incumbent upon petitioners to prove that, as of December 31, 1967, there was no reasonable possibility that all or part of the amount owed could have been collected by diligent effort. The burden of proof is upon them. . Our determination of the worthlessness issue must be made on the basis of all the facts and circumstances. .218 Petitioners lay great stress on the evidence which, they assert, demonstrates that Rick Byron, Inc., was "totally insolvent"by the end of 1967. Their conclusion is based primarily on the statement by the accountant, Golden, of the conclusions he reported to decedent in November 1967. It may be that the corporation was in difficult economic straits. However, petitioners have not introduced evidence of any of the underlying facts that would support or explain Golden's conclusions or his statement that liabilities far exceeded assets. Assuming without deciding that Rick Byron, Inc., was insolvent, this fact would not in and of itself establish the total worthlessness of the idebtedness. . Decedent made no effort at collection and, on the record before us, we cannot conclude that such effort would have been futile in respect of the total indebtedness. Even an insolvent debtor is likely to have some assets out of which a distribution to creditors can be made. Nothing in Golden's statement shows that the corporation had zero or nominal assets or that there existed creditors prior in right to decedent whose claims would exhaust219 what assets there were. 6. It is stipulated that decedent advanced sizeable amounts of cash to the corporation in the last three months of the year, subsequent to the closing date of Golden's report. We cannot assume that these funds were entirely dissipated before the end of the year or were not used to acquire other assets, such as inventory, with realizable value. Moreover, in ascertaining total worthlessness, the potential ability to pay has a bearing and we have no evidence that such potential did not exist herein. , affd. (C.A. 3, 1958). The detailed arrangement, providing for additional loans and for payment out of the corporation's gross receipts, made in November 1967, contains clear indications of an expectation that Rick Byron, Inc., would turn around in 1968 and provides a basis for concluding that220 repayment could be anticipated. Additionally, the $12,500 advance made, on December 12, 1967, after Golden's gloomy report, falls within the ambit of the judicially articulated guideline that "[where] a creditor voluntarily advances further large sums to a debtor * * , [she] can hardly assert the worthlessness of the account on which the new advances were made." . See (C.A. 6, 1969), affirming ; , affirmed on this issue, (C.A. 8, 1973); . 7 The fact that this advance was marked as "final and last payment" does no more than indicate that the flow of funds from decedent would stop; it does not negate the other indicia that the debt could have at least been partially repaid out of gross receipts before the corporation's eventual collapse.8 See (C.A. 8, 1973). Perhaps something occurred between the time of221 this advance and the end of the year to change the potential prospects of Rick Byron, Inc., but, if such was the case, it was incumbent on petitioners to provide evidence on this score. We conclude that, based upon the objective facts as disclosed by the record herein and the reasonable inferences to be drawn therefrom, *222 petitioners have not carried their burden of proof that the indebtedness of Rick Byron, Inc., to decedent was totally worthless by the end of 1967. To account for the parties' agreement on another issue, 9Decision will be entered under Rule 155.Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as amended and in force during the year in issue.↩2. The letter agreement was addressed to, and executed by, Byron in his capacity as president of Rick Byron, Inc.↩3. The figure of $12,000 appears at one point in the stipulation but is inconsistent with other stipulated facts and presumably is due to a typographical error. ↩4. Advances prior to June 1967 are attributable to the retail business; those in June 1967 and thereafter are attributable to the manufacturing operation. ↩5. All November advances were made prior to Golden's report.↩6. The existence of major creditors other than decedent is cast in doubt by the stipulation that as early as August the corporation's suppliers began billing her directly or requiring her to guarantee its credit purchases.↩7. No suggestion has been put forward that this advance should be treated as something other than a loan, thereby negating the inference to be drawn in respect of future prospects of future repayment and creating the possibility of finding that the prior indebtedness became worthless. Cf. . ↩8. In their opening brief, petitioners ask us to take judicial notice of bankruptcy proceedings. In re Rick Byron, Inc.,↩ Case No. 45100CC, Central District of California (Oct. 31, 1968). While we may well take such notice of the fact of bankruptcy, it was incumbent upon petitioners to produce evidence, either by way of a stipulation or offer of proof at a trial, as to the substantive underpinnings of that proceeding. (C.A. 5, 1954).9. The deductibility of certain legal fees allegedly incurred in connection with the Rick Byron, Inc., debt was raised in the petition. No evidence was introduced and no argument was made by petitioners regarding this issue, and we treat it as having been conceded.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625882/	Harry Terwilliger v. Commissioner. Selah Terwilliger and Kathe Terwilliger v. Commissioner. Terwilliger Bros. Inc. v. Commissioner.Terwilliger v. CommissionerDocket Nos. 2302-63, 2303-63, 2304-63. .United States Tax CourtT.C. Memo 1964-207; 1964 Tax Ct. Memo LEXIS 128; 23 T.C.M. (CCH) 1256; T.C.M. (RIA) 64207; August 5, 1964128 Thomas J. Plunket, for the petitioners. Arthur S. O'Neill, for the respondent. MURDOCKMemorandum Findings of Fact and Opinion The Commissioner determined deficiencies in income tax as follows: Harry and Gertrude Ter-williger1959$1,549.87Selah and Kathe Terwilliger19591,740.75Year EndedTerwilliger Bros. Inc.3-31-60686.40The Commissioner, in determining the deficiencies against the individuals, added $5,500 to their jointly reported income as dividends. The assignments of error and the statements of counsel at the opening and closing of the trial indicate that the only issue in the cases of the individual taxpayers is whether the Commissioner erred in determining that the redemption of preferred stock in 1959 was "essentially equivalent to a dividend." Findings of Fact Harry and Gertrude Terwilliger were husband and wife. Selah and Kathe Terwilliger were husband and wife. Each couple filed a joint return for 1959 with the district director at Albany, New York. Terwilliger Bros. Inc. filed its corporate return for its fiscal year ended March 31, 1960, with the same director. Harry and Selah had been carrying on a129 business as partners for many years prior to the formation of the corporation and their transfer of the business to it. Terwilliger Bros. Inc. was incorporated in June 1953. The minutes of its organizational meeting held on July 1, 1953 contain the offer of Harry and Selah to convey to the corporation all of their business assets in exchange for the stock of the corporation to be issued as follows: ToCommonPreferredHarry2000100Harry A.50Ruth Connell50Selah2000100Robert W.20Norma S. Martens20Alfred R.60The preferred stock had a par value of $50 per share and was redeemable at a premium of $5 per share. The offer was accepted and the shares were issued as stated above. Harry A. and Ruth are children of Harry. Robert W., Alfred R. and Norma are children of Selah. There were no changes in the stock holdings material hereto until the preferred was redeemed. The net value for the assets of the corporation as shown on its books at the time of its organization was $324,000. The minutes of a stockholders meeting of Terwilliger Bros. Inc. dated August 12, 1959, is in part as follows: The Treasurer then called the attention130 of the stockholders to the fact that dividends on the preferred stock have never been paid although the corporation has had considerable earnings. At that time the question of the redemption of the preferred stock was discussed at considerable length. Following the discussion a motion was made by Ruth Connell that the directors pay all of the accrued dividends on the preferred stock of the corporation commencing as of the date of the issuance of that stock to and including the end of the last fiscal year, that is, March 31, 1959. This motion was seconded by Robert W. Terwilliger and unanimously carried. Motion was then made by Selah O. Terwilliger and seconded by Ruth Connell requesting that the Directors issue a call for redemption of the preferred stock at Fifty-five Dollars ($55.00) per share pursuant to the provisions of paragraph 4 of the Certificate of Incorporation, and to issue in payment of the consideration for said redemption promissory notes of the corporation payable on March 31st, 1962. This motion was unanimously carried. The accrued dividends on the preferred stock to March 31, 1959, were paid to the holders thereof on August 31, 1959. Promissory notes of the corporation131 payable March 31, 1962, bearing interest at 6 percent per annum were issued to the preferred stockholders on September 2, 1959, on the basis of $55 for each share of preferred. The preferred stock was surrendered to and cancelled by the corporation. The corporation paid $1,320 on March 31, 1960, as interest on the notes. The account ledger of Terwilliger Bros. Inc., in particular the account labelled "Preferred Stock Account No. 150" sets forth a credit entry "July 1, 1953 400 shares at $50. Par $20,000." and a debit entry "September 2, 1959 Stock Retired $20,000." The premium of $2,000 included in the total of notes referred to, supra, was credited to notes payable and debited to the surplus account on September 2, 1959. No dividends were paid on common stock of Terwilliger Bros. Inc. until March 31, 1962. The record of dividends paid thereafter is as follows: March 31, 1962$ 800June 30, 1962800September 30, 19621,600December 31, 19621,600March 31, 19631,600June 30, 19631,600September 31, 19631,600December 31, 1963800The officers of the corporation at all times material hereto were: Selah - President Harry - Vice-president132 Vance Rich - Secretary and Treasurer The petitioners have failed to show that the redemption of their preferred stock was not essentially equivalent to a dividend. All parts of the stipulation not set out above are incorporated herein by this reference. Opinion MURDOCK, Judge: The only issue properly placed in issue and requiring decision is whether the redemption of the preferred stock of Harry and Selah was essentially equivalent to a dividend, as held by the Commissioner in determining the deficiencies against the individuals. Those determinations carry a presumption of correctness. The petitioners have the burden of proving that the Commissioner erred. They have failed to sustain that burden by introducing evidence that the redemption was other than a dividend within the meaning of the law. Counsel for the petitioners argues in his brief that the notes were not income to the cash basis petitioners but no such issue was even suggested before the cases were submitted for decision by the Court and, furthermore, the record does not contain any evidence to support such a contention. The Commissioner concedes the corporate case if the Court holds as it has as to the individual133 petitioners. Decisions will be entered for the respondent in Docket Nos. 2302-63 and 2303-63. Decision will be entered for the petitioner in Docket No. 2304-63.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4669091/	IN THE COMMONWEALTH COURT OF PENNSYLVANIA Peter Norcross, : : Petitioner : : v. : No. 1790 C.D. 2019 : Submitted: July 24, 2020 Pennsylvania Board of Probation : and Parole, : : Respondent : BEFORE: HONORABLE RENÉE COHN JUBELIRER, Judge HONORABLE MICHAEL H. WOJCIK, Judge HONORABLE ELLEN CEISLER, Judge OPINION NOT REPORTED MEMORANDUM OPINION BY JUDGE WOJCIK FILED: March 18, 2021 Peter Norcross (Norcross) petitions for review from an order of the Pennsylvania Board of Probation and Parole (Board)1 that denied his request for administrative review challenging the calculation of his parole violation maximum date. Also before us is a petition to withdraw as counsel filed by Norcross’s court- appointed attorney, David Crowley, Esquire (Attorney Crowley), on the ground that 1 Subsequent to the filing of the petition for review, the Pennsylvania Board of Probation and Parole was renamed the Pennsylvania Parole Board. See Sections 15, 16, and 16.1 of the Act of December 18, 2019, P.L. 776, No. 115 (effective February 18, 2020); see also Sections 6101 and 6111(a) of the Prisons and Parole Code (Parole Code), as amended, 61 Pa. C.S. §§6101, 6111(a). Norcross’s appeal is without merit. For the reasons that follow, we grant Attorney Crowley’s petition to withdraw as counsel, and we affirm the Board’s order. I. Background On December 12, 2014, Norcross was sentenced to a term of 2 years and 22 days to 5 years and 6 months in state prison based on his guilty plea to three drug-related offenses. Certified Record (C.R.) at 1-2. Norcross’s original maximum sentence date was April 18, 2020. Id. On November 14, 2016, the Board paroled Norcross to a community corrections residency. C.R. at 4-6. At the time Norcross was paroled, there were 1,251 days remaining on his sentence. On July 3, 2017, while on parole, Norcross was arrested and charged with possession of a controlled substance. Id. at 13-15. That same day, the Board issued a warrant to commit and detain Norcross for parole violations. Id. at 17. The Luzerne County Court of Common Pleas (trial court) set monetary bail, which Norcross did not post. Id. at 19. On July 12, 2017, Norcross pleaded guilty to possession of a controlled substance but was not sentenced to a period of confinement. Id. at 25. On July 21, 2017, Norcross waived his right to a violation hearing and was detained at the York County Parole Violator Center (PV Center) pending completion of recommended programming. Id. at 30. On September 14, 2017, Norcross was released from the PV Center. On June 27, 2018, Norcross was arrested on drug charges. Id. at 42. That same day, the Board issued a warrant to commit and detain Norcross for parole violations. Id. at 42. The trial court set monetary bail, which Norcross did not post. Id. at 47. On August 1, 2018, the Board rendered a decision to detain Norcross pending disposition of the new criminal charges. Id. at 52. On October 29, 2018, Norcross pleaded guilty to delivery of a controlled substance. Id. at 94. Norcross 2 was sentenced to a period of incarceration of not less than 13 months nor more than 20 months with credit for 245 days served. Id. at 94. The Board charged Norcross as a convicted parole violator (CPV) based on his new conviction. C.R. at 61. Norcross signed a waiver of revocation hearing and a counsel/admission form and a waiver of panel hearing relative to the conviction. Id. at 63-64. A hearing examiner determined that Norcross should be recommitted as a CPV to serve 18 months of backtime with no credit for the time that he spent at liberty on parole, citing the similarity between the new conviction and his original conviction. Id. at 69-72. On December 4, 2018, the Board revoked Norcross’s parole when the second signature was placed on the hearing report. Id. at 73. By decision mailed December 7, 2018, the Board recommitted Norcross as a CPV to serve 18 months’ backtime. C.R. at 85. On April 22, 2019, Norcross received a second Board decision, referencing the December 7, 2018 decision, denying Norcross credit for street time. Id. at 104. The Board credited Norcross with the 71 days that he was detained solely on the Board’s warrant in the PV Center. The Board added the remaining 1,180 days from Norcross’s original sentence to his custody for return date, February 25, 2019, making Norcross’s new maximum sentence date May 20, 2022. Id. at 102. The Board declared that he would not be eligible for parole until August 25, 2020. Id. at 104. On April 29, 2019, Norcross, representing himself, submitted an appeal and a request for administrative review of the Board’s decision, challenging the Board’s authority to alter the sentencing judge’s April 18, 2020 maximum sentence date. C.R. at 108-110. Norcross also argued that because his new conviction was for a nonviolent offense, he could not be forced to forfeit his street time. Id. at 108. 3 On the same day, Norcross filed a counseled administrative review request seeking proof that the Board’s decision to deny credit for street time was made contemporaneously with its decision to recommit him as a CPV. Id. at 106. On October 24, 2019, Norcross sent a letter to the Board inquiring about the status of his appeal and requests for administrative review, raising a new issue regarding the Board’s denial of credit for the days that he was paroled to a community corrections residency and complaining generally that the Board miscalculated his maximum sentence date. Id. at 112. By decision mailed December 9, 2019, the Board denied Norcross’s appeal and request for administrative review upon determining that the Board did not miscalculate his maximum sentence date and properly denied credit for street time, and affirmed its recommitment decision. Id. at 116. From this decision, Attorney Crowley filed a petition for review on Norcross’s behalf. Shortly thereafter, Attorney Crowley filed a petition to withdraw as counsel along with a no-merit letter based on his belief that Norcross’s appeal is without merit. This matter is now before us for disposition. II. Petition to Withdraw Counsel seeking to withdraw as appointed counsel must conduct a zealous review of the case and submit a no-merit letter to the Court, detailing the nature and extent of counsel’s diligent review of the case, listing the issues the petitioner wishes to have reviewed, explaining why and how those issues lack merit, and requesting permission to withdraw. Commonwealth v. Turner, 544 A.2d 927, 928 (Pa. 1988); Hughes v. Pennsylvania Board of Probation and Parole, 977 A.2d 19, 24-26 (Pa. Cmwlth. 2009); Zerby v. Shanon, 964 A.2d 956, 960 (Pa. Cmwlth. 4 2009). 2 The no-merit letter must include “substantial reasons for concluding that a petitioner’s arguments are meritless.” Zerby, 964 A.2d at 962 (quoting Jefferson v. Pennsylvania Board of Probation and Parole, 705 A.2d 513, 514 (Pa. Cmwlth. 1998)). In addition, court-appointed counsel who seeks to withdraw representation must: (1) notify the petitioner of the request to withdraw; (2) provide the petitioner with a copy of the brief or no-merit letter; and (3) advise the petitioner of his right to retain new counsel or raise any new points that he might deem worthy of consideration. Turner, 544 A.2d at 928; Hughes, 977 A.2d at 22. If counsel satisfies these technical requirements, the Court must then conduct an independent review of the merits of the case. Turner, 544 A.2d at 928; Hughes, 977 A.2d at 25. If this Court determines that the petitioner’s claims lack merit, counsel will be permitted to withdraw, and the petitioner will be denied relief. Turner, 544 A.2d at 928; Hughes, 977 A.2d at 27. Upon review, Attorney Crowley’s no-merit letter satisfies the technical requirements of Turner. Attorney Crowley states that he has conducted a review of the record, applicable statutes, and case law. He sets forth the issues that Norcross wishes to have reviewed, specifically that the Board: (1) lacks the authority to alter Norcross’s judicially imposed maximum sentence date; (2) erred by denying credit 2 Where there is a constitutional right to counsel, court-appointed counsel seeking to withdraw must submit a brief in accordance with Anders v. California, 386 U.S. 738 (1967), referred to as an Anders brief, that: (i) provides a summary of the procedural history and facts, with citations to the record; (ii) refers to anything in the record that counsel believes arguably supports the appeal; (iii) sets forth counsel’s conclusion that the appeal is frivolous; and (iv) states counsel’s reasons for concluding that the appeal is frivolous. Commonwealth v. Santiago, 978 A.2d 349, 361 (Pa. 2009); Hughes, 977 A.2d at 25-26. Where, as here, the petitioner has only a statutory, rather than a constitutional, right to counsel, appointed counsel may submit a no-merit letter instead of an Anders brief. Hughes, 977 A.2d at 25-26. 5 for street time because he is a nonviolent offender; (3) did not render the recommitment decision and decision to deny credit for street time contemporaneously; (4) erred in denying credit for the time he was at a community corrections residency; and (5) incorrectly recalculated his maximum sentence date. Attorney Crowley provides a thorough analysis as to why these issues lack merit, citing the applicable statutes, regulations, case law and certified record in support of his conclusions. First, Attorney Crowley explains that the Board’s recalculation of Norcross’s maximum sentence date is not an alteration of a judicially imposed sentence. Attorney Crowley cites well-settled case law explaining that the Board’s recalculation of Norcross’s maximum sentence date after his recommitment as a CPV is proper. Second, the Board has the discretion to credit a nonviolent CPV with street time, but it is not required to do so. Pittman v. Pennsylvania Board of Probation and Parole, 159 A.3d 466, 473 (Pa. 2017). Third, the Board provided a contemporaneous reason for its decision to not award Norcross credit for street time, in compliance with Pittman. Id. Fourth, Attorney Crowley explained that Norcross waived challenging the Board’s decision to not award him credit for the time spent in a community corrections residency by failing to raise the issue in his April 29, 2019 appeal and administrative review request. Finally, Attorney Crowley explains that the Board did not miscalculate Norcross’s new maximum sentence date. Attorney Crowley explained that a parolee who is convicted of a crime while on parole may be recommitted to serve the unserved portion of his original maximum sentence and may be denied credit for street time. 61 Pa. C.S. §6138(a)(2). Based on his review, Attorney Crowley concludes that Norcross’s appeal to this Court lacks merit, and he requests permission to withdraw. Attorney 6 Crowley provided Norcross with a copy of the no-merit letter and his request to withdraw. He advised Norcross of his right to retain new counsel or proceed pro se.3 As we are satisfied that Attorney Crowley has discharged his responsibility in complying with the technical requirements to withdraw from representation, we shall conduct an independent review to determine whether Norcross’s petition for review lacks merit.4 III. Independent Review Norcross first asserts that the Board lacks the authority to alter his “judicially imposed sentence” by recalculating his original maximum sentence date. We disagree. It is well settled that the Board, when recalculating the sentence of a CPV, is not encroaching upon the judicial powers. Rather, the Board is requiring the parole violator to serve his entire sentence under the authority granted to it by the General Assembly. Young v. Pennsylvania Board of Probation and Parole, 409 A.2d 843, 848 (Pa. 1979). In executing this duty, the Board cannot impose backtime in excess of the remaining balance of the parolee’s unexpired term because fixing the sentence is a judicial function. Here, the Board initially paroled Norcross on November 14, 2016, 1,251 days short of his April 18, 2020 maximum sentence date. C.R. at 102. By decision mailed December 7, 2018, the Board recommitted Norcross as a CPV to serve his unexpired term of 1,180 days, giving Norcross credit for the 71 days that 3 Norcross did not retain new counsel or file a pro se brief in support of his petition for review. 4 Our scope of review is limited to determining whether constitutional rights were violated, whether the Board’s adjudication was in accordance with law, and whether necessary findings were supported by substantial evidence. Section 704 of the Administrative Agency Law, 2 Pa. C.S. §704; Miskovitch v. Pennsylvania Board of Probation and Parole, 77 A.3d 66, 70 n.4 (Pa. Cmwlth. 2013). 7 he was detained solely on the Board’s warrant. Id. The Board did not err by recommitting Norcross to serve the time remaining on his original judicially imposed sentence. Norcross next asserts that the Board erred by refusing to award him credit for the time he spent at liberty on parole. Section 6138(a)(2.1) of the Parole Code grants the Board discretion to award credit to a CPV recommitted for the reasons stated in subsections 6138(a)(2.1)(i) and (ii). 61 Pa. C.S. §6138(a)(2.1); Pittman, 159 A.3d at 473. When exercising this discretion, the Board must conduct an “individual assessment of the facts and circumstances surrounding [a parolee’s] parole revocation.” Pittman, 159 A.3d at 474. Further, the Board must “articulate the basis for its decision to grant or deny a CPV credit for time served at liberty on parole.” Id. Although the Board has broad discretion to grant or deny such credit, its decision is subject to appellate review and must be reversed or vacated as an abuse of discretion where the Board has based its denial of credit on an erroneous premise. Id. at 474-75 and n.12. Where the Board denies credit for time served at liberty on parole, that time is applied to the original maximum expiration date to create a new maximum date. Armbruster v. Pennsylvania Board of Probation and Parole, 919 A.2d 348, 351 (Pa. Cmwlth. 2007). In Norcross’s case, he was not convicted of a crime of violence as defined in Section 9714(g) of the Sentencing Code, 42 Pa. C.S. §9714(g). See 61 Pa. C.S. §6138(a)(2.1)(i) and (ii). Therefore, the Board had discretion to grant or deny Norcross credit for the time that he was at liberty on parole. 61 Pa. C.S. §6138(a)(2.1); Pittman. Here, the Board stated that it declined to credit Norcross with the time that he spent at liberty on parole, citing the similarity of the new offense 8 and Norcross’s original offense. C.R. at 69, 104. Upon review, we find no error in the Board’s decision to deny credit for street time. Norcross, in his counseled administrative review request, questions if the Board’s decision to deny credit for street time was made contemporaneously with its decision to recommit him as a CPV. The Board’s decision to recommit Norcross as a CPV was mailed on December 7, 2018. C.R. at 85-86. Norcross states that he was not notified of the Board’s decision to deny credit for street time until April 22, 2019. Id. at 104. The Pennsylvania Supreme Court has held that, pursuant to Section 6138(a)(2.1) of the Code, “the Board must provide a contemporaneous statement explaining its reason for denying a CPV credit for time spent at liberty on parole.” Pittman, 159 A.3d at 475. The revocation hearing report establishes that the decision to deny Norcross credit for street time was made contemporaneously with the decision to recommit him as a CPV, in compliance with Pittman. C.R. at 67-73. Further, Norcross argues that the Board failed to award credit for the time that he spent in the community corrections residency between April 14, 2016, and April 4, 2017. However, Norcross failed to raise this issue in his April 29, 2019 administrative appeal and administrative review request to the Board. C.R. at 108. Administrative appeals and petitions for administrative review must be received by the Board’s central office within 30 days of the Board’s decision. 37 Pa. Code §73.1(a)(1), (b)(1). Second or subsequent administrative appeals and appeals which are out of time will not be received. 37 Pa. Code §73.1(a)(4). The same rule applies to petitions for administrative review. 37 Pa. Code §73.1(b)(3). Moreover, it is well settled that issues not raised before the Board at the revocation hearing or in an administrative appeal or request for administrative review are waived. Chesson v. 9 Pennsylvania Board of Probation and Parole, 47 A.3d 875, 878 (Pa. Cmwlth. 2012); McCaskill v. Pennsylvania Board of Probation and Parole, 631 A.2d 1092, 1094- 95 (Pa. Cmwlth. 1993). Here, the Board decision Norcross challenges was rendered on April 22, 2019. The final day for Norcross to file his appeal or administrative review request was May 22, 2019. Norcross first raised this issue in his October 21, 2019 letter to the Board inquiring about the status of his appeal and administrative review request, 152 days after the appeal period closed. Id. at 112; 37 Pa. Code §73.1(a)(1), (4) and (b)(1), (3). Therefore, Norcross has waived the issue. Finally, Norcross complains generally that the Board erred in its recalculation of his maximum sentence date, and failed to account for all the time he was incarcerated. As discussed above, the Board was within its discretion to deny credit for Norcross’s street time, and properly recalculated his maximum sentence date. IV. Conclusion Upon review, we agree with Attorney Crowley that Norcross’s claims are without merit. Accordingly, we grant Attorney Crowley’s petition to withdraw as counsel, and we affirm the order of the Board denying Norcross’s request for administrative review. MICHAEL H. WOJCIK, Judge 10 IN THE COMMONWEALTH COURT OF PENNSYLVANIA Peter Norcross, : : Petitioner : : v. : No. 1790 C.D. 2019 : Pennsylvania Board of Probation : and Parole, : : Respondent : ORDER AND NOW, this 18th day of March, 2021, the petition to withdraw as counsel filed by David Crowley, Esquire, is GRANTED, and the order of the Pennsylvania Board of Probation and Parole, dated December 9, 2019, is AFFIRMED. __________________________________ MICHAEL H. WOJCIK, Judge	01-04-2023	03-18-2021
https://www.courtlistener.com/api/rest/v3/opinions/4625930/	GEORGE A. SHAHEEN and EDITH A. SHAHEEN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentShaheen v. CommissionerDocket No. 622-80.United States Tax CourtT.C. Memo 1982-445; 1982 Tax Ct. Memo LEXIS 302; 44 T.C.M. (CCH) 694; T.C.M. (RIA) 82445; August 3, 1982. 302 Petitioners received a partnership interest from B and J in exchange for discharging B and J's indebtedness to petitioners. Held, the basis of a partnership interest received in exchange for the cancellation of indebtedness is limited to the fair market value of the interest at the time acquired, unless such interest has no ascertainable fair market value, in which case the basis for such interest is the face amount of the indebtedness discharged. Secs. 742, 1012, I.R.C. 1954. Held further, petitioners failed to establish the fair market value of the partnership interest and failed to show that the interest had no ascertainable fair market value. Since petitioners' share of partnership loss is allowable only to the extent of the adjusted basis of the partnership interest at the end of each partnership year in question, sec. 704(d), I.R.C. 1954, and since such basis was zero at the end of each such year, petitioners may deduct no partnership losses for such years. Charles Haydon, for the petitioners. Ralph A. Eppensteiner, for the respondent. NIMSMEMORANDUM FINDINGS OF FACT AND OPINION NIMS, Judge: Respondent determined deficiencies in petitioners' federal income taxes as follows: 303 YearDeficiency1974$16,713197516,639197616,869The issue for decision is whether petitioners are entitled to deduct certain amounts in each year as a distributive share of partnership losses suffered by the Hunter House - Home for Adults. To resolve this issue we must decide whether petitioners established a sufficient basis in a partnership interest to satisfy the section 704(d)1 limitation on the allowance of losses. FINDINGS OF FACT Some of the facts are stipulated. The stipulation and its attached exhibits are incorporated herein by reference. Petitioners resided in Fayetteville, New York, when they filed the petition in this case. In the federal tax returns filed for the years in issue petitioner George Shaheen listed his occupation as "physician." Petitioner Edith Shaheen listed her occupation as "housewife - real estate agent." This case concerns petitioners' participation in 1974-1976 in a nursing home project which was managed by Emanuel Birnbaum (hereafter "Birnbaum") and Desdemona Jones (now Desdemona Jones-Caruso). Edith Shaheen and Desdemona 304 Jones are sisters. Desdemona Jones was married to John Jones until his death on September 29, 1972. Prior to his death John Jones had participated with Birnbaum in several nursing home ventures. George Shaheen was a close friend of Birnbaum and the Joneses during all relevant periods. John Jones and Birnbaum started doing business together in 1965. Between 1966 and 1971 the Shaheens advanced certain sums of money to Birnbaum, the Joneses or to one of their corporations or partnerships to assist them in the nursing home business. The advances totaled $80,016. The Shaheens had no previous equity interest in the companies to which funds were advanced. Also, they did not receive an equity interest in the companies benefited by the advances in exchange for the funds. It was understood by Birnbaum and George Shaheen that the advances from the Shaheens created a joint personal liability of John Jones and Birnbaum to repay the amounts whenever they were able to repay them. The Shaheens received no note or other writing evidencing indebtedness. Also, they did not charge interest or establish security for repayment of the loans. Although George Shaheen several times inquired about repayment 305 he never demanded repayment or established a schedule for repayment. When John Jones died the Shaheens did not make a claim concerning these advances against his estate. None of the advanced amounts was repaid. From 1970 to 1972 Birnbaum and John Jones established plans, received estimates and obtained authorizations for renovating the Hotel Utica in Utica, New York, and converting it into a nursing home. John Jones died September 29, 1972. Desdemona Jones (hereafter "Jones") took over John Jones' interest in the nursing home ventures at her husband's death. The Hotel Utica project included a corporation and a partnership. The corporation, Hotel Utica, Inc., owned the land, building, fixtures and furniture used in the venture. Birnbaum and Jones were the only shareholders of the corporation. The partnership operated the nursing home. Initially, Birnbaum and Jones were the only partners in the partnership. Although a formal partnership agreement was signed November 16, 1972, the partnership existed prior to that date. Birnbaum and Jones each agreed to contribute $25,000 in cash or prepaid items to the partnership in exchange for their partnership interest. Originally the partnership 306 was named Kennedy Towers - Home for Adults. The name was changed on April 5, 1974, to The Hunter House - Home for Adults (hereafter the "partnership"). The partnership leased the facilities from the corporation pursuant to a lease signed November 1, 1972. The lease, among other things, required the partnership to pay a minimum annual rental of $415,915 which commenced the month the nursing home was ready for occupancy.The partnership paid the rental stipulated in the lease to the corporation during the years in issue. Birnbaum and Jones also arranged financing for the Hotel Utica project during the last part of 1972. On December 11, 1972, they received a commitment letter from a bank for a $2,100,000 loan. The mortgage was closed on February 23, 1973. The loan and mortgage were made with the corporation, Hotel Utica, Inc. Birnbaum and Jones prepared a projection of income and expenses for the Hotel Utica project and submitted it to the bank as part of the loan application. The summary of this projection provided: Net Profit BeforeAssumedLoan AmortizationOccupancyYearor Income TaxesRate1st$129,99439.3%2nd265,74667.6%3rd502,96391.6%This projection made no provision for loan amortization. 307 The commitment letter for the $2,100,000 loan provided that the loan would be repaid over 20 years at a rate of $237,096 per year. The projection also ignored the two-entity form of the venture because it made no provision for the $415,915 annual rental payable by the partnership to the corporation. Renovation costs in 1973 exceeded expectations. Consequently, the corporation made an additional mortgage for an additional $600,000 loan on December 6, 1973. On June 6, 1974, the total $2,700,000 mortgage was assigned to the Rochester Savings Bank. Birnbaum and Jones guaranteed the first $945,000 of this loan. At this time the project was almost complete. The project, however, required a final $100,000 for equipment. Therefore, on June 6, 1974, the corporation got a $100,000 loan from the First Trust & Deposit Company. The loan agreement required both Hotel Utica, Inc. and the partnership to maintain $50,000 of working capital during the 5-year term of the loan. Birnbaum and Jones guaranteed this $100,000 loan. The Shaheens also guaranteed this loan. During June, 1974, the Shaheens, Birnbaum and Jones made an agreement whereby the Shaheens would participate in the partnership. 308 The agreement, as reduced to writing the following year, provided: MEMORANDUM OF AGREEMENT: July 22, 1975 This memorandum is made and entered into between EMANUEL BIRNBAUM and DESDEMONA JONES, hereinafter designated First Parties and GEORGE A. SHAHEEN and EDITH A. SHAHEEN, husband and wife, designated Second Parties: WHEREAS, heretofore on various occasions, Second Parties between February 11, 1966 and August 9, 1971 advanced by way of loan various sums of money which were employed in various Birnbaum and Jones enterprises and totaling altogether in excess of $80,000, no part of which has been repaid; and WHEREAS, Second Parties have also acted as guarantors of a $100,000 bank loan for the benefit of First Parties consummated in June 1974; and WHEREAS, the parties have heretofore agreed that there should be allocated to Second Parties a capital account in the Hunter House operating partnership in the amount of $100,000 to consist of $80,000 paid in capital in discharge of the $80,000 previous advances and $20,000 subscribed capital and Second Parties are to possess in said Hunter House partnership, effective as of January 1, 1974, a 25% interest in the profits and losses of the Hunter 309 House partnership with an annual limitation of $33,333.33 for either profits or losses; and WHEREAS, the parties have agreed that the interest of Second Parties should be solely limited to sharing in the profits and losses as stated with First Parties to continue as the sole General Partners in the operation of the said Hunter House Proprietary Home for Adults at the Hotel Utica premises at Lafayette Street in Utica, NY: NOW THIS AGREEMENT WITNESSETH: 1. The parties agree that this memorandum shall serve as a reduction to writing of the oral arrangement entered into by the parties in the year 1974 to which arrangement the parties have abided to this date. 2. The parties agree that Second Parties shall cease to have an interest in the Hunter House operation, at any time that the said capital account of $100,000 with additions and subtractions based upon earnings, losses, additional contributions or withdrawals may be reduced to zero. 3. The Second Parties shall have the privilege of making additional capital contributions to maintain their said interest in sharing in profits and losses; but if said privilege is not exercised within 30 days after notice that the capital account 310 has been exhausted, then all interest of Second Parties shall terminate. 4. At any time there is a balance in the capital account of Second Parties, First Parties have the privilege of terminating the relationship by tendering to the Second Parties the net balance of the Capital account of Second Parties and the additional sum of $50,000 in cash or bank funds; IN WITNESS WHEREOF, the parties hereto have set their hands and seals the day and year first above written. /s/ EMANUAL [sic] BIRNBAUM /s/ DESDEMONA JONES /s/ GEORGE A. SHAHEEN /s/ EDITH A. SHAHEEN The Shaheens never participated directly or indirectly in the management or control of the partnership or in its operation of the nursing home. The partnership's business certificate was not amended to reflect participation by the Shaheens. Also, the Shaheens' participation in the partnership was not reported to the state authorities who regulated the operation of nursing homes. When the Hotel Utica project began operating as a nursing home in 1974 many of its patients were individuals who recently had been released from psychiatric centers. The appearance of many former psychiatric patients in Utica induced local opposition 311 to the operation. In reaction to local concern the county executive restricted the nursing home so that no more than 50 percent of its potential occupancy could be composed of dischargees from psychiatric institutes. Also, health professionals hesitated to recommend the home to people who were not dischargees of psychiatric institutes due to the presence of many former psychiatric patients at the home. Consequently, the nursing home operated at about 50 percent capacity from the time it commenced operations. The partnership reported the following losses in its calendar year returns for 1974-1976: YearLoss1974$284,7681975350,1971976297,208The Shaheens reported the following amounts as their distributive share of the partnership's losses: YearLoss1974$33,333197533,333197633,334The Shaheens ceased to be characterized as partners of the partnership after 1976. In a deficiency notice dated October 16, 1979, the respondent disallowed these losses for the following reasons: (1) You have failed to establish your interest in that entity was that of a partner; (2) You have failed to establish the adjusted basis of your alleged interest in the entity as of the end of each of those years; 312 and (3) It is determined that the provisions in the alleged agreement upon which your claimed loss was computed do not have substantial economic effect and did have, as their principal purpose, the avoidance or evasion of your personal income taxes. OPINION The question for decision is whether petitioners are entitled to a distributive share of partnership losses suffered by the Hunter House - Home for Adults. Respondent determined that petitioners failed to establish a basis for their alleged partnership interest. Therefore, respondent argues, section 704(d) disallows petitioners' partnership losses. Petitioners assert that their basis in their partnership interest was $180,000 when they entered the partnership in 1974. Petitioners claim that this basis arises from the $80,016 discharge of indebtedness and the guarantee of the $100,000 loan. For the reasons discussed below we agree with respondent's conclusion that petitioners have failed to establish a basis in a partnership interest and thus are barred by section 704(d) from deducting the partnership losses. Due to our conclusion on this issue we do not have to consider the parties' arguments concerning respondent's alternative 313 grounds for disallowing the losses. The relevant part of section 704(d) provides: (d) LIMITATION ON ALLOWANCE OF LOSSES -- A partner's distributive share of partnership loss (including capital loss) shall be allowed only to the extent of the adjusted basis of such partner's interest in the partnership at the end of the partnership year in which such loss occurred. Petitioners have the burden of proving that they had an adequate basis in their partnership interest to take deductions for the partnership losses. Rule 142(a). 2 A new partner's basis in his partnership interest is determined under sections 722 and 742. Section 722 provides: SEC. 722. BASIS OF CONTRIBUTING PARTNER'S INTEREST. The basis of an interest in a partnership acquired by a contribution of property, including money, to the partnership shall be the amount of such money and the adjusted basis of such property to the contributing partner at the time of the contribution increased by the amount (if any) of gain recognized to the contributing partner at such time. Section 742 provides: SEC. 742. BASIS OF TRANSFEREE PARTNER'S INTEREST. The 314 basis of an interest in a partnership acquired other than by contribution shall be determined under part II of subchapter O (sec. 1011 and following). Section 1012 provides the general rule applicable to the sale or exchange of partnership interests: "[t]he basis of property shall be the cost of such property * ." In this case petitioners contend that they received a partnership interest in return for discharging the $80,016 indebtedness of Birnbaum and John Jones and for guaranteeing Hotel Utica, Inc.'s $100,000 debt to the First Trust & Deposit Company. We will analyze the discharge and the guarantee separately. Petitioners concede that the discharge of personal debts of Birnbaum and John Jones does not constitute a contribution to the partnership which could produce section 722 basis. Petitioners argue, however, that they received the partnership interest in exchange for the discharge, thus generating section 742 basis. We find that petitioners' exchange theory does not help them in this case because petitioners failed to establish the value of the partnership interest they received. If a creditor receives property in exchange for discharging a debt then the debt is considered 315 paid to the extent of the fair market value of the property acquired. If the amount of the debt exceeds the fair market value of the property received then the excess is deductible as a section 166 bad debt deduction. The creditor's basis in the acquired property is its fair market value at the time it is received. Commissioner v. Spreckels,120 F.2d 517">120 F.2d 517 (9th Cir. 1941), affg. a Memorandum Opinion of the Board of Tax Appeals; Kohn v. Commissioner,16 T.C. 960">16 T.C. 960 (1951), affd. 197 F.2d 480">197 F.2d 480 (2d Cir. 1952). 3 Petitioners bear the burden of proving the fair market value of the acquired property. Rule 142(a). Petitioners make several arguments to support their contention that their partnership interest was worth at least $180,000 when they received it. Unfortunately for petitioners their arguments are not convincing. Petitioners contend that the lease with Hotel Utica, Inc., the $50,000 working capital requirement contained in the loan agreement with the First Trust & Deposit Company and the $25,000 capital contribution requirement from both Birnbaum and Jones contained in the original partnership agreement gave their partnership 316 interest value.There is no evidence, however, that the lease was valuable or that the partnership complied with the $50,000 working capital requirement. Also, the capital contribution requirement contained in the 1972 partnership agreement fails to establish any value for a partnership interest in 1974. Petitioners also claim that Birnbaum and Jones each invested $300,000 of their own money in the project and that these contributions indicate that substantial value existed for their partnership interest. Again, however, no indication exists concerning the timing of these contributions or the impact on the value of the partnership interest when acquired by petitioners. Also, the circumstances indicate that Birnbaum and Jones made the contributions to their corporation rather than to their partnership. These facts, therefore, do not help petitioners prove the fair market value of the partnership interest they received. Petitioners introduced nothing else which would assist the Court in determining the value of their partnership interest on acquisition. On these facts we find that petitioners failed to satisfy their burden of proof on the valuation issue. Therefore, we hold petitioners 317 established no basis in their partnership interest arising from the discharge of indebtedness. Petitioners cite Gould Securities Co. v. United States,96 F.2d 780">96 F.2d 780 (2d Cir. 1938), Society Brand Clothes, Inc. v. Commissioner,18 T.C. 304">18 T.C. 304 (1952), and Sargent v. Commissioner,T.C. Memo. 1970-214, as support for their contention that the basis in property received in exchange for the discharge of indebtedness is the amount of debt discharged. 4 Petitioners can find no solace in these cases, however, because they squarely hold that the basis equals the entire discharge amount only if (1) the fair market value of the acquired property meets or exceeds the discharge amount; or (2) the acquired property has no ascertainable value. As discussed previously petitioners failed to carry their burden of proving the value of the acquired property. Obviously, they introduced no evidence that the acquired property had no ascertainable value. Contrast Gould Securities Co. v. United States,supra;Society Brand Clothes, Inc. v. Commissioner,supra;Sargent v. Commissioner,supra.Petitioners must suffer the consequences of the record they produced. Therefore, we hold that petitioners have no basis arising 318 from the discharge. Petitioners contend that they have section 722 basis in their partnership interest arising from the guarantee of Hotel Utica, Inc.'s $100,000 loan from the First Trust & Deposit Company. Respondent argues that the guarantee of the corporate debt cannot constitute a contribution to the partnership and thus cannot create section 722 basis. Petitioners argue that the corporation was an empty shell which was created solely to avoid New York usury laws. Petitioners ask us to ignore the corporate form and to consider the guarantee as a contribution to the partnership.5319 We have previously considered taxpayers' arguments that a corporation should be ignored for federal tax purposes because it was formed to avoid New York's usury statutes. In Strong v. Commissioner,66 T.C. 12">66 T.C. 12, 21-22 (1976), affd. without published opinion 553 F.2d 94">553 F.2d 94 (2d Cir. 1977), we stated: The principal guidepost on the road to recognition of the corporate entity is Moline Properties v. Commissioner,319 U.S. 436">319 U.S. 436 (1943). * * * The Court held that the corporation was a separate entity from its inception, and stated its rule of decision as follows: The doctrine of corporate entity fills a useful purpose 320 in business life. Whether the purpose be to gain an advantage under the law of the state of incorporation or to avoid or to comply with the demands of creditors or to serve the creator's personal or undisclosed convenience, so long as that purpose is the equivalent of business activity or is followed by the carrying on of business by the corporation, the corporation remains a separate taxable entity. * * In Burnet v. Commonwealth Improvement Co.,287 U.S. 415">287 U.S. 415, this Court appraised the relation between a corporation and its sole stockholder and held taxable to the corporation a profit on a sale to its stockholder. This was because the taxpayer had adopted the corporate form for purposes of his own. The choice of the advantages of incorporation to do business, it was held, required the acceptance of the tax disadvantages. [319 U.S. at 438-439.Fn. refs. omitted; emphasis supplied.] In cases such as this case in which a corporation was formed to circumvent the New York usury statutes and in which the corporation held title to and mortgaged property, borrowed money, entered leases with respect to the property and received rent checks we held that the corporation satisfied the Moline *321 Properties test. Strong v. Commissioner,supra;Ogiony v. Commissioner,617 F.2d 14">617 F.2d 14 (2d Cir. 1980), affg. a Memorandum Opinion of this Court. 6 We see no reason to adopt a different approach in this case. We hold that Hotel Utica, Inc. may not be disregarded. Consequently, petitioners made no contributions to the partnership and thus can get no section 722 basis for guaranteeing the corporation's loans. 7 Because petitioners failed to establish a basis in their partnership interest at the end of 1974, 1975 and 1976 section 704(d) disallows deductions for petitioners' distributive share of partnership losses. Decision will be entered for the respondent.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 in effect for the years in issue.↩2. All references to Rules are to Tax Court Rules of Practice and Procedure.↩3. See also Sargent v. Commissioner,T.C. Memo. 1970-214↩.4. In their opening brief, petitioners complain (at p. 19) that "[t]here was no attack [by respondent] on the fair value of the interest acquired by petitioners." We find this argument rather disingenuous, given the fact that the fair market value of the consideration received in exchange for forgiveness of indebtedness was the very heart of the issue raised in these three cases so strongly relied upon by petitioners.↩5. Because we decide that the corporate form may not be ignored we do not have to decide if a guarantee constitutes a contribution which would increase a partner's sec. 722 basis. But see sec. 1.722-1, Income Tax Regs.↩; 1 W.McKee, W.Nelson & R.Whitmire, Federal Taxation of Partnerships and Partners sec. 4.02 [1] (1977). Petitioners' argument for disregarding the corporate form must be addressed because if the corporation were ignored then petitioners could make the argument that the corporate liabilities became, in effect, partnership liabilities, an increase in which (to the extent of petitioners' share) would be treated as a contribution of money to the partnership, and consequently would increase the basis of petitioners' partnership interest. Sec. 752(a); 722.6. See also Sarkisian v. Commissioner,T.C. Memo. 1982-199↩. 7. We note the petitioners make no argument that Hotel Utica, Inc. was merely the agent of the partnership. See Roccaforte v. Commissioner,77 T.C. 263">77 T.C. 263 (1981), on appeal (5th Cir. Feb. 4, 1982). See Sarkisian v. Commissioner,T.C. Memo. 1982-199↩, in which we held on facts very similar to the facts in this case that the corporation was not merely an agent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4598676/	DURABILT STEEL LOCKER CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Durabilt Steel Locker Co. v. CommissionerDocket No. 3121.United States Board of Tax Appeals5 B.T.A. 239; 1926 BTA LEXIS 2927; October 27, 1926, Decided 2927 J. W. Fisher, Esq., for the respondent. SMITH 239 SMITH: This is a proceeding for the redetermination of a deficiency in income tax for the fiscal year ended April 30, 1923, in the amount of $793.94, arising from the disallowance of a deduction from gross income of a net loss sustained for the period May 7, 1921, to April 30, 1922. FINDINGS OF FACT. The petitioner was incorporated under the laws of Illinois on May 7, 1921, and kept its books of account on a fiscal year basis ended April 30. For the fiscal period ended April 30, 1922, the petitioner had a net loss of $6,351.49. It filed an income-tax return for the succeeding fiscal year ended April 30, 1923, which, before the deduction of the net loss shown upon its return for the preceding year, showed a net income of $13,234.36. From this total it deducted the net loss for the preceding fiscal period in the amount of $6,351.49. The Commissioner has disallowed the deduction of this net loss for such fiscal period and has computed the deficiency accordingly. Judgment will be entered for the petitioner. *2928 Appeal of Carroll Chain Co., 1 B.T.A. 38">1 B.T.A. 38.	01-04-2023	11-20-2020
https://www.courtlistener.com/api/rest/v3/opinions/4477434/	OPINION. Atkins, Judge: The Notice of Deficiency. The petitioner contends that since it made application under section 825 (a) 1 for a determination of the amount of estate tax, and as the respondent did not send the notice of deficiency until after the expiration of the period of 1 year, it is discharged from personal liability and the notice of deficiency is void as having been sent to an improper party. As we understand the petitioner, it contends that we should hold that it is not personally liable and also that a petition based on the notice of deficiency sent to it precludes our consideration of the estate tax liability of the estate. The notice of deficiency was addressed to the executor, as such, and set forth the respondent’s determination of a deficiency against the estate. It does not purport to determine a personal liability against the executor. Certainly the failure of the respondent to determine the amount of the estate tax within the period prescribed by section 825 would not relieve the estate from liability or preclude the respondent from issuing a notice of deficiency in regard to the liability of the estate. Bessie M. Brainard, 47 B. T. A. 947. Nor can there be any question that the executor of an estate is a proper representative of the estate for the purpose of receiving a notice of deficiency and filing a petition with this Court, whether or not such executor is personally liable for the tax. Safe Deposit & Trust Co. of Baltimore, Executor, 35 B. T. A. 259, affirmed on other issues (C. A. 4) 95 F. 2d 806. As stated, the notice of deficiency does not purport to determine a personal liability against the executor. Accordingly, we do not have before us the question of whether the executor is personally liable. Upon the record before us we hold only that the notice of deficiency was properly mailed to the bank in its capacity as executor and that the petition filed by the executor based upon such notice gives us jurisdiction to consider the estate tax liability of the estate. The petitioner also alleges that any deficiency in estate tax should be assessed against the transferees of the property that is included in the estate, namely, the trustees of the 1936 and 1941 inter vivos trusts and of the testamentary trust. However, the notice of deficiency does not purport to assert any liability against such trustees as transferees, and accordingly the question of their liability is not before us in this proceeding. The 1936 Trust. We think that the provisions of section 811 (c) (1) (G) and 811 (c) (2) 2 require that the value of the property in the 1936 trust be included in the decedent’s gross estate. The terminology “intended to take effect in possession or enjoyment at or after his death” has appeared in the various revenue acts through the, years and such language has been the subject of litigation many times in the Supreme Court.3 The present view of the Supreme Court as to the meaning of this expression is well stated in Fidelity-Philadelphia Trust Co. v. Rothensies, 324 U. S. 108, as follows: Section 302 (c) itself provides for the inclusion within the gross estate of property “to the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death.” As we said in Hellvering v. Hallock, supra, 309 U. S. at pages 110, 111, 60 S. Ct. at page 447, 84 L. Ed. 604, 125 A. L. R. 1368, this provision “deals with property not technically passing at death but with interests theretofore created. The taxable event is a transfer inter vivos. But the measure of the tax is the value of the transferred property at the time when death brings it into enjoyment.” Cf. Reinecke v. Northern Trust Co. 278 U. S. 339, 347, 49 S. Ct. 123, 125, 73, L. Ed. 410, 66 A. L. R. 397. The taxable gross estate, im other words, must include those property interests the ultimate possession or enjoyment of which is held in suspense until the moment of the grantor’s death or thereafter. [Emphasis supplied.] In tbe instant case the trust instrument provided that the net income of the trust should be paid to the decedent’s daughter, Dora, for life with remainder over to her descendants. However, it was provided that if at the time of the grantor’s death he had not created a trust fund in at least an equal amount for each of his other three daughters, and if the net value of his estate was greater than $40,000, then the trustee was to pay oyer the corpus to the trustee of the trust created by the grantor’s last will and testament. Furthermore, it was provided that if the decedent’s daughter, Dora, should predecease the grantor without having children or issue thereof surviving her, the property was likewise to go to such testamentary trustee. Accordingly, it is clear that the ultimate possession or enjoyment of the corpus of this trust was held in suspense until the moment of the grantor’s death. Whether the designated beneficiaries would take in accordance with the terms of the trust depended upon the situation existing at the time of the decedent’s death. We accordingly conclude that the transfer effected by the inter vivos trust was intended to take effect in possession or enjoyment at or after the decedent’s death within the meaning of section 811 (c) (1) (0). Section 811 (c) (2) (enacted by the Technical Changes Act of 1949) provides, however, with regard to transfers prior to October 8, 1949, that even though a transfer was intended to take effect in possession or enjoyment at or after the decedent’s death the property transferred is not to be included in the gross estate unless the decedent has retained a reversionary interest in the property, arising by the express terms of the instrument of transfer, and the value of such reversionary interest immediately, before the death of the decedent exceeds 5 per centum of such property. Section 811 (c) (2) states that the term “reversionary interest” includes the possibility that property transferred by the decedent may return to him or his estate, or may be subject to a power of disposition by him. We think that upon the happening of either of the two contingencies mentioned above, the corpus of the trust would, pursuant to the trust instrument, be subject to a power of disposition by the grantor, inasmuch as up to the time of his death he could alter his will and the provisions thereof regarding the testamentary trust under which the ultimate takers would be determined. Here there is no showing that the value of the reversionary interest immediately before the death of the decedent did not exceed 5 per centum of the value of the property comprising the corpus of the trust. The burden of proof in this respect was upon the petitioner and in the absence of such proof we must assume that the value did exceed the necessary 5 per centum. Estate of Frank W. Thacker, 20 T. C. 474. We are also of the opinion that the amount to be included in the decedent’s estate on account of the property in the 1936 trust is the entire value of the property at the date of death and that such value is not to be reduced on account of the interest of Dora, measured by the life of Edith Stokes Tarver, as contended by the petitioner. Section 811 requires the inclusion in gross estate of the value of all property to the extent of any interest therein of which the decedent made a transfer intended to take effect in possession or enjoyment at or after death. This wording, in the language of the Supreme Court in Commissioner v. Field’s Estate, supra, requires that where “the corpus does not shed the possibility of reversion until at or after the decedent’s death, the value of the entire corpus on the date of death is taxable.” In that case the Court further said: The estate tax is not based on the value of the reversionary interest of the decedent at the time of his death but on the value at the time of his death of the property to which that reversionary interest relates. In this case Dora’s right to any interest in the income or corpus of the 1936 trust was subject to contingencies that existed until the moment of the decedent’s death. This situation requires the inclusion in the decedent’s estate of the value of the entire trust corpus. Estate of Frank W. Thacher, supra. This conclusion is not in conflict with the case of Dominick’s Estate v. Commissioner, 152 F. 2d 843, affirming a Memorandum Opinion of this Court. In that case the value of a beneficiary’s right to income for a term certain, irrespective of the death of the decedent, was allowed as a reduction of the amount to be included in the decedent’s gross estate, but no reduction was allowed on account of an additional interest that was contingent upon the beneficiary’s survival of the decedent. The respondent has determined that the value of the corpus of the 1936 trust at the date of death was $11,901.56 and that value is accepted by the petitioner as correctly measuring the full value of the corpus. We hold that the respondent correctly included the full value in the decedent’s estate. The 1941 Trust. The respondent included in the decedent’s gross estate the amount mat he determined was the value of the corpus of the 1941 trust, the Massee Apartments, less the value of the life estate of the decedent’s widow. Although the petitioner assigns error as to this inclusion, it does not on brief argue against the inclusion as a matter of law but confines its argument to the matter of valuation. It seems clear that under the provisions of section 811 (c) (1) (B) of the 1939 Code 4 the value of the interest in the Massee Apartments transferred by the decedent in 1941 should be included in the gross estate. Under the trust instrument the decedent-grantor retained for his life an interest precisely prescribed by the statute, namely “the right to the income from the property * * We sustain the respondent on this question of law. Estate of George L. Shearer, 17 T. C. 304. There remains the question of the fair market value at the time of decedent’s death of the Massee Apartments. The respondent determined the value to be $225,000, but by amended answer alleges that the value was $255,000 and prays for an increased deficiency The petitioner contends that the value was not in excess of $200,000. We have set out in the findings, general facts concerning the property, including its location and condition, and the gross and net income derived' therefrom. Both parties offered the testimony of expert witnesses as to the fair market value of the property. They took into consideration the factors that we have set out in our findings and based their opinions of value primarily on the expected rate of return from rentals. After taking into consideration all the evidence, including the testimony of the expert witnesses, we have concluded and found as a fact that the fair market value of the Massee Apartments on October 8, 1950, was $215,000. The Massee property is to be included in the gross estate at the value of $215,000, less, however, the value of the life estate of the widow. The respondent determined the value of such life estate to be $22,045.02 and the taxpayer apparently does not contest that figure. In any event, there is no showing that the respondent’s valuation of the life estate was in error. It follows that the respondent is not entitled to the claimed increased deficiency. The Marital Deduction. The question presented is whether the petitioner is entitled to a marital deduction, under section 812 (e) (1) (F) of the Internal Revenue Code of 1939, based on the value of the residuary estate of the decedent which, by his last will and testament, he placed in trust. Section 812 (e) (1) (F) provides for a marital deduction, in the case of an interest passing from the decedent in trust: if under the terms of the trust the surviving spouse is entitled for life to all the income from the corpus of the trust, payable annually or at more frequent intervals, with power in the surviving spouse to appoint the entire corpus free of the trust (exercisable in favor of such surviving spouse, or of the estate of such surviving spouse, or in favor of either, whether or not in each case the power is exercisable in favor of others), and with no power in any other person to appoint any part of the corpus to any person other than the surviving spouse— [[Image here]] if, under the terms of the trust, such power in the surviving spouse to appoint the corpus, whether exercisable by will or during life, is exercisable by such spouse alone and in all events. The petitioner contends that all the conditions prescribed by section 812 (e) (1) (F) have been met, but the respondent argues on brief that the surviving spouse did not have the power to appoint the entire corpus free of the trust to herself or her estate. The respondent apparently recognizes that an unlimited power in the surviving spouse to invade the corpus would qualify as a power of appointment within the meaning of the statute. See Estate of Frank E. Tingley, 22 T. C. 402, affd. (C. A. 1) 223 F. 2d 163. See also Regulations 105, section 81.47a (c) which speaks of “an unlimited power to invade” corpus as an example of a power to appoint such corpus, free of the trust, in favor of the surviving spouse within the meaning of the statute. Respondent contends, however, that the surviving spouse here did not have an v/nlimited power to invade corpus. Section 81.47a of Regulations 105 further provides that: The power in the surviving spouse must be a power to appoint the corpus to herself as unqualified owner or to appoint the corpus as a part of her estate, that is, in effect, to dispose of it to whomsoever she pleases. [Emphasis supplied.] This provision of the Regulations is in accord with the intent of Congress, as evidenced by the Report of the Finance Committee on the bill which became the Revenue Act of 1948 (S. Rept. No. 1013, Part 2, 80th Cong., 2d Sess.), which enacted section 812 (e) (1) (F). That report contains the following statement regarding subparagraph (F) : These provisions have the effect of allowing a marital deduction with respect to the value of property transferred in trust by or at the direction of the decedent where the surviving spouse, by reason of her right to the income and a power of appointment, is the virtual oimer of the ‘property. This provision is designed to allow the marital deduction for such eases where the value of the property over which the surviving spouse has a power of appointment will (if not consumed) be subject to either the estate tax or the gift tax in the case of such surviving spouse.5 [Emphasis supplied.] We turn then to a consideration of whether, under the terms of the testamentary trust, the surviving spouse had the unlimited right during her life to invade the corpus as though she were the virtual owner of the property. The courts of South Carolina in construing wills follow the generally accepted principles that “the cardinal rule of construction is to ascertain and effectuate the intention of the testator” and “that in the construction of a will all of the provisions are to be considered and given effect so far as possible, and the true intent gathered from the four corners of the instrument.” Rogers v. Rogers, 221 S. C. 360, 70 S. E. 2d 637, in which case the Supreme Court of South Carolina quoted from the case of Smith v. Bell, 6 Pet. 68, 74, as follows: The first and great rule in the exposition of wills, to which all other rules must bend, is, that the intention of the testator, expressed in his will, shall prevail, provided it be consistent with the rules of law. The intent of the testator is to be gathered from the whole instrument, giving “due weight to all of its language, considered in the light of the circumstances known to the testator at the time of execution.” Shevlin v. Colony Lutheran Church, 227 S. C. 598, 88, S. E. 2d 674. In ascertaining the testator’s intent from the language used in the will “force and effect must be given to all parts of it, every clause, phrase, and word, if it can be done by any reasonable method of construction, so as to harmonize them with each other and with the whole.” Wates v. Fairfield Forest Products Co., 210 S. C. 319, 42 S. E. 2d 529. It was said in Lemmon v. Wilson, 204 S. C. 50, 28 S. E. 2d 792, 800, that “only a very strong reason can justify the treatment of any of the testator’s words * * * as surplusage.” The part of the decedent’s will with which we are most immediately concerned is Item III (5) (a) in which the trustee is authorized to pay to the surviving widow such sums out of the trust principal “as and when she may demand, for her use and/or for the use or benefit of our children as she deems advisable.” In the light of the rules of construction prevailing in South Carolina, it is our opinion that this language does not confer upon the surviving spouse an unlimited right to invade the corpus and appropriate it as virtually her own property. In reaching this conclusion we have considered all the terms of the will, set forth in detail in our findings. It seems clear to us, when the will is read as a whole, that the decedent intended that his surviving spouse should have the right to draw down only so much of the corpus as might be necessary for her personal use or for the use or benefit of the children, and that he contemplated that there would bfe an unused part of the corpus which should be retained for the benefit of his children. We are unable to find in the above-quoted provision or in any other provision of the will an intent to give the wife the right in her untrammeled discretion to demand all of the corpus and thus' to completely destroy the trust. “Such drastic power is not to be inferred in the absence of clear and definite expression by the testator * * In re Morse's Will, 280 App. Div. 171, 112 N. Y. S. 2d 392. Where an absolute discretion is not clearly given to the beneficiary an exercise of the power of invasion must be founded upon a reasonable judgment dealing with existing facts with due regard for the purposes for which the power is given and also for the rights of those whose interest may be injuriously affected by the exercise of the power. Lovett v. Farnham, 169 Mass. 1, 47 N. E. 246. Throughout the will in the instant case the decedent indicated solicitude for his children, and a desire that they should be benefited by the trust property. Thus, the surviving spouse is required to report to the trustee the amounts appropriated for the use of any child for purposes of determining the amount of each child’s share of the remainder of the trust property at the time of ultimate distribution. The decedent contemplated that even after the death of his wife, the trustee should sell any portion of any child’s trust estate which might be necessary to support that child in the event of illness, misfortune, or other emergency. Furthermore, he contemplated that the corpus of each of certain trusts which he intended to set up during his life for the benefit of his children might under certain circumstances become a part of his testamentary trust. Such expressed intention of the testator regarding the future benefits for the children negatives the petitioner’s contention that the surviving spouse was given an unlimited power to invade the corpus of the trust. Our conclusion that the surviving wife was not granted an unlimited power to appropriate the property as if she were the owner thereof is in general accord with the views expressed by the courts of South Carolina in cases involving the powers of life beneficiaries who have also the right to use corpus. See Lynch v. Lynch, 161 S. C. 170, 159 S. E. 26, and Blakely v. Blakely, 155 S. C. 123, 152 S. E. 24. The case of Comer v. Citizens & Southern Nat. Bank, 182 Ga. 1, 185 S. E. 77, which is quoted and relied on by the petitioner is not in point on the facts. There property was placed in trust for a child with power to use and dispose of it during his life as he might see proper. The court stated that the power given was much broader than the power to merely use the property, that it was “almost as broad as testator could make it” and that it gave the beneficiary power to consume, sell, mortgage, or give away the fee. We conclude that the surviving spouse in the instant case did not have the power to appoint the entire corpus free of the trust in her favor, and that no marital deduction is allowable under section 812 (e) (1) (F) on account of the property passing to the testamentary trust. In accord with our holding on this point is the recent case of Matteson v. United States, (N. D., N. Y.) 147 F. Supp. 535. In that case the decedent left the residue in trust with the income payable to his wife for life, and with a provision that if the wife should find such income not sufficient — “and of its sufficiency she shall be the sole judge” — the trustees were to pay her so much of the trust corpus as she should desire. In holding that the transfer in trust did not qualify for the marital deduction the court said in part: The only event which would allow the invasion of the corpus of the trust fund would be the insufficiency of the income as she decided it in good faith, and this seems far from a power to appoint the entire corpus free of the trust in her favor or to her estate without qualification as provided in the statute and regulations involved. It seems clear to me, in the ikw of New York, that a trust as created here confers only a life estate with remainder over and not an absolute fee with power to dispose either by wili or by sale. (Terry v. Wiggins 47 N. Y. 512, 516; In the Matter of the Estate of Brower 278 App. Div., 851, aff’d. 304 N. Y. 661. See also Matter of Vanderbilt, 281 N. Y. 297, 308). Equally so, it seems clear and logical that the testator here so intended from the wording of his will and the family circumstances present, despite the grant of power to invade if necessary. * * * From a reading of the briefs filed in this case there does not seem to be any difference between the parties as to the existence of other factors necessary to qualify for the marital deduction, such as the entire trust income being payable to the wife at least annually, and the lack of any power of appointment in any other person. However, in view of our holding that the surviving wife did not have the necessary power of appointment of the corpus, we do not pass upon the question whether all the other factors enumerated by the statute have been satisfied. Eeviewed by the Court. Decision will be entered wnder Buie 50. Keen, Johnson, and Wxthey, JJ., dissent. Section 825 (a) of the Internal Revenue Code of 1939 provides : SEC. 825. DISCHARGE OF EXECUTOR FROM PERSONAL LIABILITY. (a) Application poe Discharge. — If the executor makes written application to the Commissioner for determination of the amount of the tax and discharge from personal liability therefor, the Commissioner (as soon as possible, and in any event within one year after the making of such application, or, if the application is made before the return is filed, then within one year after the return is filed, hut not after the expiration of the period prescribed for the assessment of the tax in sections 874 and 875) shall notify the executor of the amount of the tax. The executor, upon payment of the amount of which he is notified, shall be discharged from personal liability for any deficiency in tax thereafter found to be due and shall be entitled to a receipt or writing showing such discharge. SEC. 811. GROSS ESTATE. The value of the gross estate of the decedent shall be determined by Including the value at the time of his death of all property, real or personal, tangible or Intangible, wherever situated, except real property situated outside of the United States— ***** (c) Tbanspbbs in Contemplation op, on Taking Effect at, Death.— (1) General bule. — To the extent of any Interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money’s worth), by trust or otherwise— *** (C) intended to take effect in possession or enjoyment at or after his death. *** (2) Transfers taking effect at death — Transfers prior to October 8, 1949.— An interest in property of which the decedent made a transfer, on or before October 7, 1949, intended to take effect in possession or enjoyment at or after his death shall not be included in his gross estate under paragraph (1) (C) of this subsection unless the decedent has retained a reversionary interest in the property, arising by the express terms of the instrument of transfer and not by operation of law, and the value of such reversionary interest immediately before the death of the decedent exceeds 5 per centum of the value of such property. For the purposes of this paragraph, the term “reversionary interest” includes a possibility that property transferred by the decedent (A) may return to him or his estate, or (B) may be subject to a power of disposition by him, but such term does not include a possibility that the income alone from such property may return to him or become subject to a power of disposition by him. The value of a reversionary interest immediately before the death of the decedent shall be determined (without regard to the fact of the decedent’s death)( by usual methods of valuation, including the use of tables of mortality and actuarial principles, pursuant to regulations prescribed by the Commissioner with the approval of the Secretary. In determining the value of a possibility that property may be subject to a power of disposition by the decedent, such possibility shall be valued as if it were a possibility that such property may return to the decedent or his estate. May v. Heiner, 281 U. S. 238; Klein v. United States, 283 U. S. 231; Helvering v. St. Louis Union Trust Co., 296 U. S. 39; Helvering v. Hallock, 309 U. S. 106; Commissioner v. Field’s Estate, 324 U. S. 113; Commissioner v. Church’s Estate, 335 U. S. 632; Spiegel’s Estate v. Commissioner, 335 U. S. 701. Section 811 (c) (1) requires that there be included in the gross estate of the decedent the value at the time of his death of all property : (1) General rule. — To the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money’s worth), by trust or otherwise— ***** (B) under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (i) the possession or enjoyment of, or the right -to the income from, the property, or (ii) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom ; * * * In this connection it is to be observed that section 811 (f) (2) requires inclusion in the gross estate of property with respect to which any decedent has at the time of his death a general power of appointment created after October 21, 1942, but that under section 811 (f) (3) (A) the term “general power of appointment” does not include a power to consume, invade, or appropriate property which is limited by an ascertainable standard relating to the health, education, support or maintenance of the holder of the power.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4477435/	OPINION. Bettce, Judge: Under the terms of an agreement executed on December 27, 1949, petitioner Celia Goldstein and her husband, Harry Goldstein, now deceased, transferred certain shares of stock in a family-owned plumbing supply corporation to Joseph Shefner and Harry Gainsley. The announced purpose of the agreement is to preserve the corporation for two of the Goldstein’s children, Bernard and Jerome, who have been active in the business, but at the same time to provide a means by which the other three Goldstein children can obtain in money the book value of three-fifths of all of the shares of the corporation. To accomplish this purpose, the agreement provides that at the close of each fiscal year the corporation shall purchase so many of the shares in the hands of Shefner and Gainsley as' the corporation shall determine, but no more than $3,000 worth of shares in any one year while either petitioner or her husband is alive. The proceeds from the sale of such stock to the corporation are to be paid over to the other three children in equal shares, and any dividends received on the stock held by Shefner and Gainsley are to be credited toward the purchase of more shares. The agreement further provides that if both petitioner and her husband die, Bernard and Jerome will purchase any remaining stock held for the benefit of the three remaining children. If the corporation or the sons fail to purchase shares as provided in the agreement, Shefner and Gainsley are empowered to liquidate the corporation and to apply any undistributed surplus toward the purchase of the shares. The obvious result intended by this arrangement is an eventual transfer of all of the capital stock to the sons actively engaged in the business. The agreement was drawn up, however, so that shares of stock owned by the parents will be transferred to Shefner and Gains-ley, as trustees, for the benefit of the three children who are not active in the business. As the stock is purchased from the trustees and retired by the corporation, the amounts received are then turned over to the three beneficiaries. The agreement further contemplates that petitioner will from time to time place additional shares of stock in the hands of the trustees, presumably until the entire capital stock of the corporation has been transferred. In accord with this plan, petitioner placed $21,919.38 worth of stock in the hands of the trustees in 1950, and $8,190.30 worth in 1951. In her gift tax returns for those years, petitioner proceeded on the theory that each gift of stock was in fact a gift of a one-third interest to each of the beneficiaries named in the 1949 agreement. Therefore, in her returns for 1950 and 1951, petitioner excluded $3,000 for each child, or a total exclusion of $9,000 for each year. Respondent disallowed the $9,000 exclusion for both years on the ground that the gift of stock'to the trustees for the benefit of the three children was a gift of future interests. Petitioner first contends that the 1949 agreement is not a trust but is a “buy and sell” agreement under which the “trustees” act as a mere conduit for the transfer of cash to the three named children. This contention is without merit. A trust has been defined as a “fiduciary relationship with respect to property, subjecting the person by whom the property is held to equitable duties to deal with the property for the benefit of another person, which arises as a result of a manifestation of an intention to create it.” Restatement, Trusts sec. 2; 1 Scott, Trusts sec. 2.3. “Manifestation of intention” means the external expression of intention as distinguished from undisclosed intention. Restatement, Trusts sec. 4. The trust instrument itself is the best evidence of “manifestation of intention,” but an express trust may be created even though the parties do not call it a trust, if what is done has the essentials of a trust. 1 Scott, Trusts sec. 2.8. The 1949 agreement in issue here has every characteristic of a bona fide trust. Petitioner and her husband, referred to in the agreement as settlors, entered into an agreement with Joseph Shefner and Harry Gainsley, referred to in the agreement as trustees, whereby the settlors transferred shares of the capital stock of the family corporation to the trustees for the benefit of three of the settlors’ children. By the express terms of the instrument, the trustees were subjected to certain duties with respect to this stock, which included the paying over to the beneficiaries of proceeds received from the corporation upon the purchase and retirement of shares of stock held by the trustees. The trustees were further directed to credit any dividends received by them with respect to the stock held in trust toward the purchase of such shares. Other powers were given to the trustees, all of which dealt with the property transferred to them for the benefit of the settlors’ children. The trustees have fully carried out all of the duties imposed upon them. We therefore hold that the 1949 agreement created a valid trust. The primary issue is whether the gifts of stock to the trustees in 1950 were gifts of future interests within the meaning of section 1003 (b) (3), Internal Revenue Code of 1939,1 That section provides for maximum annual exclusion of $3,000 in the case of gifts other than of future interests in property made after 1942. Congress has defined the term “future interests in property” as “any interest or estate, whether vested or contingent, limited to commence in possession or enjoyment at a future date.” H. Rept. No. 708, 72d Cong., 1st Sess., p. 29 (1939-1 C. B. (Part 2) 478); S. Rept. No. 665, 72d Cong., 1st Sess., p. 41 (1939-1 C. B. (Part 2) 526). The term “includes reversions, remainders, and other interests or estates, whether vested or contingent, and whether or not supported by a particular interest or estate, which are limited to commence in use, possession, or enjoyment at some future date or time.” Kegs. 108, sec. 86.11. Whatever puts the barrier of a substantial period between the will of the beneficiary or donee presently to enjoy what has been given him and that enjoyment makes the gift one of a future interest within the meaning of the regulation. Fondren v. Commissioner, 324 U. S. 18 (1945). Thus, if enjoyment is postponed by reason of a trust provision that the trustee may, in his discretion, pay income from trust property to the donee or accumulate it until a specified contingency occurs, the income interest is a future one. Welch v. Paine, (C. A. 1, 1942) 130 F. 2d 990; Commissioner v. Brandegee, (C. A. 1, 1941) 123 F. 2d 58. Even if the income is required to be distributed by the trustee, but distribution of trust corpus is postponed, the gift of corpus is a future interest. Fisher v. Commissioner, (C. A. 9, 1942) 132 F. 2d 383, affirming 45 B. T. A. 958; Sensenbrenner v. Commissioner, (C. A. 7, 1943) 134 F. 2d 883, affirming 46 B. T. A. 713. By the terms of the trust agreement involved here, the trustees are directed to pay over the proceeds derived from the sale of shares of stock held in trust to the three named beneficiaries “forthwith.” Any dividends declared upon the trust stock are to be credited toward the purchase of more trust shares. However, the corporation alone may purchase the shares of stock held by the trustees. And if the corporation complies with the statutes of Minnesota governing retirement of its stock, it may purchase so many shares as it shall determine. Clearly the trustees have no discretion to delay payment of proceeds received from the sale of trust stock. But the trustees are subject to the control of the corporation, for it and it alone has the power to determine whether or not the trust stock will be purchased and retired. If the corporation chooses not to purchase any stock in a given year, the trustees cannot distribute any of the trust corpus to the beneficiaries because only the “proceeds derived from the sale” of trust shares are to be paid out. Nor does the trust agreement contain any limitation upon the corporation’s discretion in this regard. The corporation is not required to purchase any number of shares each year and there is no provision whereby any of the beneficiaries or the trustees may make demand upon the corporation to retire any of the stock held in trust. Even if a provision for demand had been included in the trust instrument, the corporation may not purchase a single share of stock without first complying with the Minnesota law governing a corporation’s purchase or redemption of its own shares,2 a contingency that might further postpone the donees’ enjoyment of the property. Moreover, the trustees cannot, under-the terms of the trust, sell the stock to any purchaser other than the corporation. The agreement expressly provides that if the corporation fails or refuses to purchase any shares from the trustees, then the trustees have discretion to take such steps as may be necessary to liquidate and dissolve the corporation and to apply any undistributed surplus toward the purchase of such shares. Obviously, if the surplus is not sufficient to cover the book value of the remaining shares in the hands of the trustees, the beneficiaries will never receive the full enjoyment of the trust property. And if the corporation ceases doing business, becomes bankrupt, or enters receivership, the agreement further provides that the beneficiaries will receive as their shares of the trust property only the proceeds remaining for distribution among all of the stockholders of the corporation. Since the interests of the beneficiaries are securely tied to the success or failure of the corporation, it is clear that they have no right to the immediate enjoyment of the trust property. In Willis D. Wood, 16 T. C. 962, it was held that if discretion to determine enjoyment and use of a gift is placed in someone other than the trustee, the donee’s interest is a future one. The interests of the three Goldstein children under the 1949 trust were at all times subject to the discretion of the corporation. Unless it complied with State law and determined to purchase trust stock, the trustees were powerless to make any distribution. Thus, the unbridled discretion of the corporation placed a barrier “between the will of the beneficiary or donee now to enjoy what has been given him and that enjoyment.” Fondren v. Commissioner, supra. Accordingly, we hold that petitioner’s gifts of stock to the trust in 1950 and 1951 were gifts of “future interests” not entitled to the annual exclusion. Commissioner v. Kempner, (C. A. 5, 1942) 126 F. 2d 853, affirming Tax Court Memorandum Opinion dated Feb. 28, 1940; Commissioner v. Sharp, (C. A. 9, 1946) 153 F. 2d 163, affirming 3 T. C. 1062, cited by petitioner, are distinguishable. In those cases neither the trustee nor anyone else had discretion to postpone the enjoyment of the gift property. Gifts of stock in 1949 from petitioner and her husband to the trust have been held to be gifts of future interests to the three children-beneficiaries. Shefner v. Knox, 131 F. Supp. 936 (1955). We reach the same conclusion as to the gifts of stock made by petitioner to the trust in 1950 and 1951. Decision will he entered for the respondent. Subsection (b) (3) which was added to section 1003 of the Internal Revenue Code of 1939 by section 454 of the Revenue Act of 1942, provides : SEC. 1003. NET GIFTS. (b) Exclusions From Girts.— ******* (3) Gifts after 1942. — In the case of gifts (other than gifts of future interests in property) made to any person by the donor during the calendar year 1943 and subsequent calendar years, the first $3,000 of such gifts to such person shall not, for the purposes of subsection (a), be included in the total amount of gifts made during such year. Minn. Stat. sec. 301.22 (1953), provide: Subd. 6. Purchase or redemption of shares of own stoch. A corporation may purchase or redeem shares of its own stock, whether pursuant to contract previously made or otherwise, only as follows : (1) Out of earned surplus ; (2) Out of paid-in surplus; provided, that, if the corporation has outstanding shares entitled to preferential dividends or to a preference upon liquidation, then only such shares may be purchased or redeemed out of paid-in surplus.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625884/	M. R. HOFFMAN, M. R. HOFFMAN, JR., GUY S. HOFFMAN, P. R. HOFFMAN, AND MARION HOFFMAN BAUSMAN, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hoffman v. CommissionerDocket No. 6641.United States Board of Tax Appeals7 B.T.A. 303; 1927 BTA LEXIS 3208; June 14, 1927, Promulgated 3208 1. JURISDICTION. - The petitioners in this action filed their joint petition on August 28, 1925. Thereafter, on May 17, 1926, all of these petitioners except P. R. Hoffman, were adjudicated bankrupts and at the hearing were represented by trustees in bankruptcy. Held, that the Board acquired jurisdiction by virtue of the appeal under the provisions of the Revenue Act of 1924, and is not ousted from such jurisdiction by virtue of section 282(a) of the Revenue Act of 1926. Plains Buying & Selling Assn. v. Commissioner,5 B.T.A. 1147">5 B.T.A. 1147, followed. 2. INDIVIDUAL TAX LIABILITY OF PARTNERS. - Determination in accordance with stipulation of counsel respecting the accounts of the partnership. Charles G. Baker, Esq., and Ralph E. Stine, C.P.A., for the petitioners. L. C. Mitchall, Esq., for the respondent. TRUSSELL 303 In this proceeding the petitioners seek a redetermination of the income-tax liabilities for the years 1918, 1919, and 1920, for which the Commissioner has determined deficiencies as follows: Name191819191920M. R. Hoffman$15,732.05$8,307.61$35.53M. R. Hoffman, Jr7,881.3914.16Guy S. Hoffman7,829.5214.44P. R. Hoffman7,829.4214.44Marion Hoffman BausmanNone.18.003209 304 The trustees representing all petitioners except P. R. Hoffman entered into an agreement with the counsel for the Commissioner as to all the items in controversy entering into the computation of the tax. P. R. Hoffman did not appear at the hearing. On February 15, 1927, John Hertzler, Charles F. Haeger, and John A. Coyle, trustees in bankruptcy for M. R. Hoffman, M. R. Hoffman, Jr., Guy S. Hoffman, Marion Hoffman Bausman, and Esther Hoffman Schadt, as individuals and as partners trading as Hoffman Leaf Tobacco Co., filed an intervening petition, to which respondent filed answer on March 4, 1927. At the trial counsel for the trustees in bankruptcy on behalf of the taxpayers represented by them waived all minor allegations of error contained in the original and amended petition, joined with counsel for the respondent in a stipulation respecting the facts hereinafter set forth and agreeing that the tax liability of the taxpayers represented by them for the years 1918 and 1919 should be redetermined on the basis used by the respondent in his deficiency letters modified by the stipulation respecting the inventory and the expense deductions as hereinafter set forth, and3210 agreed that the deficiencies found by the respondent for the year 1920 were correctly determined. FINDINGS OF FACT. During the taxable years 1918 to 1920, inclusive, the petitioners were members of a partnership carrying on business under the name and style of Hoffman Leaf Tobacco Co. Some time following the year 1921 and prior to May 17, 1926, the membership of this partnership was changed, P. R. Hoffman retiring from the partnership, and Esther Hoffman Schadt became a member of the succeeding partnership. On May 17, 1926, the partnership and the individual members thereof, consisting of M. R. Hoffman, M. R. Hoffman, Jr., Guy S. Hoffman, Marion Hoffman Bausman, and Esther Hoffman Schadt, individually were adjudicated bankrupts. The partnership as it existed during the years 1918 to 1920, inclusive, carried large stocks of leaf tobacco, and the merchandise inventory for the year 1919 was of the money value of $858,862. During the year 1919 the then partnership in the conduct of its business expended for labor, supplies, and similar expenditures the amount of $201,877.73, which amount was a lawful deduction from 305 gross income for the year 1919, but no part of3211 this amount was allowed as a deduction in the computation of deficiencies shown in the deficiency letter. OPINION. TRUSSELL: Following the rule laid down by the Board in its decision and opinion in the case of , we are of the opinion that the Board acquired jurisdiction in this action by virtue of the appeals filed under the provisions of the Revenue Act of 1924 and prior to the adjudication of bankruptcy on May 17, 1926, and that the Board is not ousted of such jurisdiction by virtue of section 282(a) of the Revenue Act of 1926. At the trial counsel for the parties then represented agreed to and dictated into the record a stipulation in words and figures as follows: The parties to this appeal agree (1) that the inventory of January 1, 1919 was $858,862.54, (2) that in the year 1918 the Hoffman Leaf Tobacco Co. expended for labor and supplies and similar expenditures $201,877.73, no part of which has been allowed as a deduction, and that appellants are entitled to said amounts as a deduction, (3) in all other respects the Commissioner's determinations are correct. The deficiencies may be redetermined in accordance3212 with the foregoing findings of fact and opinion upon 15 days' notice, pursuant to Rule 50, and judgment will be entered accordingly.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625885/	ESTATE OF ETHLYN DAVIS, DECEASED, DON M. DAVIS, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEstate of Davis v. CommissionerDocket No. 28647-90United States Tax CourtT.C. Memo 1993-392; 1993 Tax Ct. Memo LEXIS 403; 66 T.C.M. (CCH) 542; August 26, 1993, Filed 403 For petitioner: Francis M. Smith and Michael M. Billion. For respondent: J. Anthony Hoefer. GERBERGERBERMEMORANDUM OPINION GERBER, Judge: Petitioner has filed a Motion For An Award Of Reasonable Litigation Costs pursuant to Rule 2311 and section 7430. In our opinion of April 8, 1993, we valued decedent's cause of action against Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch). Estate of Davis v. Commissioner, T.C. Memo 1993-155">T.C. Memo. 1993-155. Our findings of fact and opinion therein are incorporated by this reference. For convenience, the relevant facts are summarized. Decedent died on November 4, 1986, with a lawsuit pending against Merrill Lynch. The cause of action was filed on August 21, 1985, and alleged, among other things, that Merrill Lynch had committed fraud and deception404 in violation of the Securities and Exchange Act of 1934. Decedent initiated the action because a Merrill Lynch account executive churned her account. Decedent sought $ 122,674.30 in compensatory damages and $ 6 million in punitive damages. Merrill Lynch offered to settle the case on two occasions, but neither offer was accepted. On August 12, 1988, as the result of a second jury trial, decedent's estate received an award of $ 100,000 in compensatory damages and $ 2 million in punitive damages and the District Court entered judgment. The U.S. Court of Appeals for the Eighth Circuit affirmed the judgment. On November 16, 1990, pending appeal to the U.S. Supreme Court, the District Court approved a $ 2 million settlement subject to 45 percent attorney's fees. After fees and expenses, decedent's estate received $ 1,065,555. The issue in the prior case was the value of the cause of action on the date of death. Respondent determined in the notice of deficiency, and asserted at trial, that the value of the lawsuit was $ 2,100,000. Petitioner contended that the value was $ 62,255. We held that the fair market value, as of the date of death, of decedent's cause of action against405 Merrill Lynch was $ 323,232. Section 7430 provides that, in any court proceeding brought by or against the United States, the "prevailing party" may be awarded reasonable litigation costs. Sec. 7430(a). A taxpayer is a prevailing party only if it establishes: (1) That the position of the United States in the proceeding was not substantially justified; (2) that it substantially prevailed with respect to the amount in controversy or with respect to the most significant issue presented; and (3) that it meets the net worth requirements of 28 U.S.C. section 2412(d)(2)(B) on the date the petition was filed. Sec. 7430(c)(4)(A). In addition to being a prevailing party, a taxpayer must also establish that it exhausted the administrative remedies available to it within the Internal Revenue Service and that it did not unreasonably protract the proceeding. Sec. 7430(b)(1) and (4). Respondent concedes that petitioner substantially prevailed with respect to the amount in controversy and that petitioner meets the net worth requirement. Respondent also concedes that petitioner exhausted its administrative remedies and that petitioner has not unreasonably406 protracted this proceeding. Therefore, the issue for our consideration is whether respondent's position in this litigation was substantially justified. Petitioner bears the burden of proving that respondent's position was not substantially justified. Rule 232(e); Baker v. Commissioner, 83 T.C. 822">83 T.C. 822, 827 (1984), vacated and remanded on other grounds 787 F.2d 637">787 F.2d 637 (D.C. Cir. 1986). Respondent's loss or concession of an issue does not, ipso facto, render respondent's position not substantially justified. Wasie v. Commissioner, 86 T.C. 962">86 T.C. 962, 969 (1986). Whether the position of the United States in this proceeding was substantially justified depends on whether respondent's positions and actions were reasonable in light of the facts of the case and the applicable legal precedents. Sher v. Commissioner, 89 T.C. 79">89 T.C. 79, 84 (1987), affd. 861 F.2d 131">861 F.2d 131 (5th Cir. 1988). Petitioner's motion seeks only litigation costs and not administrative costs. The reasonableness of respondent's prelitigation position is not to be considered. Therefore, we will407 only consider respondent's position after the filing of the petition. Respondent's position at trial was that decedent's cause of action against Merrill Lynch was worth $ 2,100,000 on the date of death. In Estate of Davis v. Commissioner, supra, we stated that respondent's determination seemed to be derived from the amount of the judgment affirmed by the Court of Appeals. We noted that respondent provided no rationale for her contention and that the amount of recovery subsequent to the date of death is not controlling. This, however, does not mean that respondent's position was not substantially justified. To determine if respondent's position was not substantially justified, we must consider the specific facts of the case; i.e., the nature of the asset to be valued, and also the nature of valuation cases in general. Cases involving the valuation of an asset are unique because "Valuation has been consistently recognized as an inherently imprecise process." Estate of Smith v. Commissioner, 57 T.C. 650">57 T.C. 650, 655 (1972), affd. 510 F.2d 479">510 F.2d 479 (2d Cir. 1975). We further noted in Estate of Davis v. Commissioner, supra,408 that the valuation of a lawsuit is a unique and abstract endeavor because a lawsuit is not regularly traded in commerce and because the valuation process is not as objectively achievable as with other types of assets. When decedent initiated the cause of action against Merrill Lynch, she asked for over $ 6 million in damages. Merrill Lynch offered to settle the case for less than $ 2 million on several occasions, but each offer was refused. Therefore, petitioner knew that the cause of action had considerable value. We do not think that respondent acted unreasonably when she similarly asserted that the cause of action had considerable value at the date of death. We hold that petitioner has not established that respondent's position in the proceeding was not substantially justified, and, therefore, petitioner is not entitled to recover reasonable litigation costs pursuant to section 7430. Because of our holding, it is unnecessary to consider the reasonableness of the fees and costs claimed. An appropriate order will be issued. Footnotes1. 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, unless otherwise indicated.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625886/	Estate of Dan C. Marcus, Myrtle Martin Marcus, Administratrix v. Commissioner. Myrtle Marcus v. Commissioner.Estate of Marcus v. CommissionerDocket Nos. 41960, 41961.United States Tax CourtT.C. Memo 1955-298; 1955 Tax Ct. Memo LEXIS 43; 14 T.C.M. (CCH) 1150; T.C.M. (RIA) 55298; October 31, 195543 Milton R. De Reyna, Esq., for the petitioners. D. Louis Bergeron, Esq., for the respondent. OPPERMemorandum Findings of Fact and Opinion OPPER, Judge: These consolidated proceedings involve deficiencies in income tax for the calendar year 1946 against Dan C. Marcus and Myrtle Martin Marcus in identical amounts of $27,130.80. Dan C. Marcus died prior to the petition being filed. Myrtle Martin Marcus is administratrix of his estate. The only question is whether respondent properly increased petitioners' distributive share of partnership income for 1946 by increasing the partnership net income. Findings of Fact Dan C. Marcus, hereafter referred to as decedent, and Myrtle Martin Marcus, hereafter referred to as petitioner, filed individual income tax returns for 1946 with the collector of internal revenue for the district of Louisiana. Under Louisiana community property laws, each reported one-half of decedent's distributive share of partnership income, as determined by the partnership bookkeeper. Decedent was an equal partner with Charles Buisson and Ralph Gall in a commission business of placing bets on race horses for customers. The firm, known as Marcus, Buisson, 44 and Gall, had its principal place of business in New Orleans. All three partners were actively engaged in the business. Two of their employees, Rene Labarre and Louis Trust, also handled bets, activity of the latter being confined to the office. Edward Bothe was employed as a bookkeeper. Labarre and Bothe are now dead and Trust incapacitated. The office was equipped with four telephones by which most of the business was conducted. That business consisted of taking and placing orders to make bets with handbooks in or about New Orleans, where approximately 800 to 1,000 bookmakers operated. Business originated both locally and from out-of-town customers including those in Baton Rouge, Louisiana; Houston, Texas; Cincinnati, Ohio; Chicago, Illinois; Harrisburg, Pennsylvania; Las Vegas, Nevada; and California. Some business originated in the office where local businessmen were allowed to take bets that came in on telephone orders. Occasionally, bets for these customers were made at the race track by a partner or an employee. A partner attempted to lay off the bets placed by the callers and the customers in the office. This was done by telephone calls to various bookmakers, first to45 those who would pay the partnership 2 per cent, then to those who would pay 1 per cent, and finally to those who would pay no commission. If this proved unsuccessful, a partner or Labarre would take cash and try to lay off the bets personally with bookmakers around the city. Sometimes bets from one out-of-town customer were laid off to another. Occasionally bets were laid off at the race track. If none of these efforts were successful, the partnership was forced to back the bet itself, but that was not the usual order of business. When an order was received, either by telephone or in person, it was recorded on a scratch pad. Each bet was entered on a separate ticket showing the name of the bettor, the amount bet, and the horse involved. Below that was written the name of the bookmaker who took the bet and the rate of commission he paid. If cash was sent out to a local bookmaker, that was also indicated. The bettor might be identified on the ticket by an alias or a number rather than by name. Each day, an individual sheet was prepared for each bettor. At the end of the day, a summary of all tickets for any one customer was placed on his sheet. If the partnership owed him money, 46 the commission was deducted; if the money was due it, the commission was added. These sheets were totaled to show the net amount won or lost. A separate sheet would be prepared for "Cash," and on this would be entered cash bets from customers in the office as well as bets laid off in cash with local bookmakers or at the track. The figures from individual sheets were put on a daily recap sheet, prepared in triplicate, one copy going to each partner. The recap showed total receipts from identified bettors and "Cash," total disbursements to identified bookmakers and to "Cash," and disbursements for operating expenses, including rent, telephone, race news service, laundry service, salaries and wages, and social security taxes. The difference between the total collections and the total pay-outs, including expenses, was to represent income for the day. The partnership posted a wall sheet for each day of operations containing race information needed in its business and by its customers. After the daily recap was made, the individual sheets and the "Cash" sheet were rolled up with the wall sheet, secured by a rubber band, and dated. They were then kept in a desk drawer for no more than47 30 days before being destroyed. The tickets or scratch sheets were kept for 7 to 10 days to check possible errors. Then they would be destroyed, in part due to fear of a police raid. During 1946, the only permanent records maintained by the partnership were a black-bound book called the ledger and a grey-bound book called the daybook or journal. No other records or documents were produced for audit or investigation. All cash and checks were handled by Gall who made deposits of a portion of the checks to his personal checking account. All disbursements by check were made from his personal account for either partnership or personal expenditures. Periodically, decedent delivered to the bookkeeper at his home several of the recaps. At no time was the bookkeeper furnished the scratch sheets, customers' account or "Cash" sheets, or the bank statements showing the deposits and withdrawals. From the recaps the bookkeeper made entries in the ledger and the daybook or journal. All of the information on the daily recaps was contained in the ledger, while the daily wins or losses for the year were carried to the daybook or journal. The bookkeeper never attempted to reconcile Gall's bank account, 48 or the daily sheets with the recaps. The daily wins or losses did not reflect the amount of commission received on each individual transaction. The ledger shows total collections for 1946 of $2,259,030.40 and total pay-outs of $2,220,067.40. Included in these amounts are $585,525.50 and $654,922.50, respectively, which represent the totals of items which are identified in the ledger only by the description "Cash." Pay-outs to "Cash" exceeded collections of "Cash" by $69,397. Each side of the daily entry in the ledger was totaled and the net difference found, which was to represent gain or loss for the day. The net amount was carried to the journal where a monthly total was taken. The monthly total wins, total losses, and net wins as shown in the Journal were as follows: TotalTotalYear 1946WinsLossesNetJanuary$ 1,778.55$ 283.80$ 1,494.75February1,360.65659.95700.70March2,190.35581.351,609.00April1,605.25705.70899.55May3,195.351,205.601,989.75June4,104.50592.303,512.20July3,346.70224.853,121.85August3,047.10256.852,790.25September1,343.45611.80731.65October968.45894.3574.10November1,641.70605.251,036.45December2,018.40385.551,632.85Year 1946WinsLossesNetTotal$26,600.45$7,007.35$19,593.1049 A partnership return of income for 1946, prepared on a cash basis by the bookkeeper and signed by Gall, was filed with the collector of internal revenue for the district of Louisiana disclosing gross receipts of $38,963, deductions of $19,369.90, and ordinary net income of $19,593.10. Petitioner and decedent each reported one-half of decedent's distributive share of the net income. In the statutory notices of deficiency, respondent determined that the partnership net ordinary income had been understated by at least $299,891.56 based on the following computation: Partnership income reported$ 19,593.10As corrected319,484.66Additional income$299,891.56Decedent's 1/3 interest therein$ 9,963.84Additional income, each spouse49,981.92 The additional income before deducting operating expenses and income already reported is equal to exactly 15 per cent of the gross collections. The operating expenses and gross collections are as reported in the return and as revealed by the ledger and journal. The partnership's true gross income was 2 per cent of its total collections of $2,259,030.40. Opinion As in other similar cases "the question resolves itself50 into one of fact and we think it should properly be decided on the basis of the weight to be given to the evidence adduced. Cf. H. T. Rainwater, 23 T.C. 450">23 T.C. 450." Jack Showell, 23 T.C. 495">23 T.C. 495, 499. Respondent contends that his arbitrary figure of 15 per cent has not been shown to be erroneous but with this we are forced to disagree. Particularly in view of the evidence of the manner in which this betting business was conducted, any such figure would not only be arbitrary but grossly excessive. On the other hand, petitioner had no right to complain that respondent did not accept the partnership's figures since the taxpayers themselves were the ones who were responsible for destruction of the original records; nor of the fact that respondent has accepted some of the figures shown by the books of account and rejected others. Jack Showell, supra. Giving effect to the testimony that most of the partnership's income was from commissions not exceeding 2 per cent, we do not know how many bets carried commissions of 2 per cent, how many of 1 per cent, and how many of nothing. But the absence of records from which these figures could be adduced is of the*51 partnership's own making. Assuming a 2 per cent commission on all business, the gross income figure to be employed should be approximately $45,000. While on the one hand this gives no effect to the possibility that some bets were made at a lower commission, it also takes no account on the other hand of the possible net wins on bets which the partnership was required to retain. We have accordingly concluded that in the absence of more definite records, the gross income to be employed is the 2 per cent figure in place of the $38,963 shown on the return. Our finding of fact to this effect disposes of the controversy. Decisions will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625887/	Thomas F. Doran, et al. 1 v. Commissioner. Doran v. CommissionerDocket Nos. 51871-51874, 51877-51880.United States Tax CourtT.C. Memo 1956-121; 1956 Tax Ct. Memo LEXIS 175; 15 T.C.M. (CCH) 629; T.C.M. (RIA) 56121; May 18, 1956175 Roy E. Lowe, Esq., Spokane & Eastern Building, Spokane, Wash., for the petitioners. Gordon N. Cromwell, Esq., for the respondent. WITHEYMemorandum Findings of Fact and Opinion WITHEY, Judge: The Commissioner has determined a deficiency in income tax of the petitioners for 1947 as follows: PetitionerDkt. No.DeficiencyThomas F. Doran51871$ 884.56Ethel M. Doran51872922.06Oney S. Riggs51873854.74Dorothy F. Riggs51874854.74Ida Bee MacDonald51877984.25Clara Nieman518785,582.16Gus H. Nieman518795,491.91John W. MacDonald51880984.25The issue for decision is whether petitioners as stockholders of a corporation received taxable dividend distributions by the application on the purchase price of stock in that corporation for their accounts of the proceeds of a life insurance policy, the premiums upon which had been paid by the corporation. Findings of Fact All the stipulated facts are found accordingly. These cases have been consolidated for trial and opinion. At all times material herein the following petitioners were and still are husband and wife: Thomas F. Doran and Ethel M. Doran; Oney S. Riggs176 and Dorothy F. Riggs; John W. MacDonald and Ida Bee MacDonald; and Gus H. Nieman and Clara Nieman. Each petitioner filed his or her separate individual income tax return for 1947 with the collector of internal revenue at Tacoma, Washington. Inland Motor Freight, hereinafter referred to as Inland is a Washington corporation with its principal office in Spokane. During the year at issue it was a public carrier of freight and commodities for hire. All of the husband-petitioners herein and Grover C. Ealy had been since 1943, and continued to be in 1947, stockholders and actively engaged in the operation and management of Inland. Ealy died on March 19, 1947. All were members of the board of directors. Ealy was principal stockholder and president of Inland at his death. There were in addition four other stockholders not involved in this controversy. Prior to July 3, 1943, informal discussion among Inland's stockholders began concerning the accumulation of a fund for the purchase of the stock of any deceased stockholder for the surviving stockholders. A special stockholders' meeting was held on that date at which it was formally resolved that Inland "purchase and pay for" insurance upon177 the lives of certain of its stockholders as follows: "G. C. Ealy$50,000G. H. Nieman35,000Oney S. Riggs10,000J. W. MacDonald10,000T. F. Doran10,000G. B. Halverson10,000" and "that a contract be worked out among the stockholders whereby this insurance should be purchased, the premiums to be paid by the company and upon the death of either of those insured, the face of the policy on the one so deceased should be paid to the company and disbursed by the company to all of the stockholders as a special dividend and the proceeds received by said stockholders as a special dividend to be used by them to apply on the purchase of the stock in the Inland Motor Freight of the one so deceased." In pursuance of the resolution, Inland, on July 14, 1943, made application to a life insurance company for the issuance of an insurance policy upon the life of Ealy in the face amount of $50,000, it being requested that Ealy's estate be the beneficiary. Similar applications were also made with respect to the other stockholders in accordance with the referred to corporate resolution. The insurance company, refusing to issue the policies with proceeds payable to the178 estates of the respective assureds, issued in lieu thereof policies which were payable to Inland on the death of the insured. Inland's officers refused to accept such policies and, on October 25, 1943, a special meeting of the board of directors was held at which it was resolved that Inland "purchase said insurance" in the manner set forth in a contract entered into by and between the majority of the stockholders, dated July 10, 1943. The contract of July 10, 1943, provided that the president, vice-president, and secretary and treasurer of Inland, who were G. C. Ealy, Gus H. Nieman and O. S. Riggs, respectively, were authorized and directed as trustees to apply for and obtain the designated life insurance with themselves, as trustees, named the beneficiaries thereof, and with Inland to pay the premiums thereon; and that, upon the death of any insured, the proceeds of the policy insuring his life be collected by the trustees and distributed by them to the surviving stockholders of record at the time of such death in proportion to their stock ownership. It was further there provided that "said proceeds when distributed may be used by the then stockholders to purchase the common stock179 in the company held by the one so deceased at the time of his death." Each of the signatories to the contract and their respective wives further agreed that upon the death of any of them the Inland common stock then owned by the deceased would be offered for sale at book value to the surviving stockholders for a period of 90 days. On December 20, 1943, an application was made by the trustees for life insurance upon the lives and in the amounts above listed. In due course the policies were issued and delivered to the three trustee-beneficiaries. Upon the death of Ealy on March 19, 1947, petitioner, Gus Nieman, was elected president of Inland, petitioners, J. W. MacDonald and Thomas Doran, were elected vice-presidents, and the three with petitioner, Oney Riggs, then became the trustees under the terms of the July 10, 1943, agreement. As such, they received the proceeds of the policy of insurance upon the life of Ealy in the amount of $50,785.30. The executor of Ealy's estate entered into negotiation with the surviving signatories of the July 10 agreement for the sale and purchase of the Inland stock belonging to Ealy at his death. The negotiations resulted in a written agreement180 by the terms of which such stock was sold to Gus Nieman, Thomas Doran, Oney Riggs, John MacDonald and G. B. Halverson at a sale price of $143,820. A down payment of $50,000 was made to the seller by the trustees by endorsement to him of the check which represented the proceeds of Ealy's life insurance. In accordance with the sales agreement the stock was forthwith deposited with an escrow agent to await completion of payment of the purchase price at which time the stock was to be delivered to the above-named purchasers. As members of the marital community consisting of the various petitioner-husbands and-wives, the communities were bound by and received the benefits of the stock purchase agreement, and, in accordance with the community property law of Washington, the respondent has determined deficiencies against the petitioner-wives as well as their husbands. All premiums upon the policy of life insurance here involved covering the life of Ealy were paid by Inland directly to the issuing insurance company and were charged against surplus on Inland's books. No income tax deduction was at any time taken or claimed by Inland for the payment of such premiums. No charge to Ealy was made181 upon the corporation's books for such premium payments and none of Inland's shareholders have reported such premium payments as dividends. The corporation did not claim or receive dividends on any of the policies of insurance here involved and did not carry the policies as an asset upon its books, either as to accrued dividends or cash surrender value. The corporation at no time physically received the proceeds of the insurance upon the life of Ealy. In making application for the policy of insurance upon the life of Ealy and in claiming, receiving and disbursing the proceeds thereof at Ealy's death, the trustees were acting for and in behalf of Inland. Opinion Petitioners contend that Inland has never become the owner or possessor of the proceeds of the insurance on the life of its one-time president and principal stockholder, Grover C. Ealy, and that it, therefore, follows the corporation could not and did not distribute such proceeds to petitioners. Their contention is predicated upon the proposition that the stockholders, as individuals, have contracted with each other with respect to the application for such life insurance, the claim for the proceeds thereof, the receipt182 of the proceeds and the purchase of the deceased's Inland stock for the benefit of petitioners and that Inland was not a party to that contract. We are not impressed with their contention. Careful consideration of the minutes of the stockholders' meeting of July 3, 1943, the application for insurance upon the life of Ealy, the minutes of the board of directors' meeting of October 25, 1943, and the stockholders' contract, wherein it was agreed such insurance should be obtained and, in case of the death of an insured, the disposition of the proceeds of such insurance, amply justify our finding of fact that the trustees, in applying for the insurance and in receiving and disbursing the proceeds thereof, were acting for and in behalf of Inland. They were its agents for those purposes and did not represent the stockholders as individuals. It follows that Inland received the proceeds of the Ealy policy which, although not representing income in its hands, United States v. Supplee-Biddle Hardware Co., 265 U.S. 189">265 U.S. 189, did represent income to petitioners, its stockholders, when distributed to them through the purchase of stock for their benefit. Isaac May, 20 B.T.A. 282">20 B.T.A. 282.*183 The record does not disclose the earnings and profits of the corporation at the time of purchase of Ealy's Inland stock by the trustees, but such earnings are presumed to be adequate for that purpose under the provisions of section 115 (b) of the Internal Revenue Code of 1939 in the absence of proof to the contrary. Respondent has increased the taxable income of each petitioner by an amount which represents a proportion of the amount expended by the trustees for the purchase of Ealy's Inland stock which is in exact ratio to their stock interests in Inland. We hold he has properly done so. Decisions will be entered for the respondent. Footnotes1. The proceedings of the following petitioners are consolidated herewith: Ethel M. Doran, Docket No. 51872; Oney S. Riggs, Docket No. 51873; Dorothy F. Riggs, Docket No. 51874; Ida Bee MacDonald, Docket No. 51877; Clara Nieman, Docket No. 51878; Gus H. Nieman, Docket No. 51879; and John W. MacDonald, Docket No. 51880.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625888/	AGGIE L. MIZELL, INDIVIDUALLY AND AS A PERSONAL REPRESENTATIVE OF THE ESTATE OF BEULAH ISABELLE NETTLES, DECEASED, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentMizell v. CommissionerDocket No. 13306-81.United States Tax CourtT.C. Memo 1984-254; 1984 Tax Ct. Memo LEXIS 418; 48 T.C.M. (CCH) 83; T.C.M. (RIA) 84254; May 9, 1984. John S. Duss, for the petitioner. Judy K. Hunt, for the respondent. SCOTT MEMORANDUM FINDINGS OF FACT AND OPINION SCOTT, Judge: Respondent determined deficiencies in the income tax of the estate of Beulah Isabelle Nettles, deceased, for the calendar years 1973, 1974, 1975, 1976, 1977 and 1978 in the amounts of $27,500.59, $27,776.41, $27,992,91, $28,099.43, $31,893.16 and $33,156.45, respectively, and additions to tax under section 6653(b)1 for these respective years of $13,750.30, $13,888.21, $13,996.46, $14,049.72, $15,946.58 and $16,578.23. Respondent also determined a deficiency in the tax of Beulah Isabelle Nettles, deceased, for the period January 1, 1979, through July 13, 1979, in the amount of $12,689.10 and an addition to tax for this period under section 6653(b)419 of $6,344.55. By an amendment to answer, respondent alleged that the liability for taxes of Beulah Isabelle Nettles, deceased, for the years 1973 through the period ending July 13, 1979, were as follows: Additions to TaxYearTaxSec. 6653(b)1973$136,079$68,040197420,96710,484197519,1839,592197611,7985,89919778,1214,06119784,7132,35719791,178589The issues for decision are: (1) Whether, for each of the years 1973 through 1978, Beulah Isabelle Nettles failed to report income which she received and whether for the period January 1, 1979, through July 13, 1979, Aggie L. Mizell, as the personal representative of the estate of Beulah Isabelle Nettles, deceased, failed to report income received by Beulah Nettles during that period; (2) whether a part of the underpayment of tax resulting from the failure of Beulah Nettles to report all of her income for each of the years 1973 through 1978 and the failure of her personal representative to report all of Beulah Nettles' 420 income for the period January 1, 1979, through July 13, 1979, was due to fraud with intent to evade tax under section 6653(b) for each of these years; (3) whether the assessment and collection of the deficiency in income tax for each of the years 1973 through 1978 and for the period January 1 through July 13, 1979, are barred by the statute of limitations; and (4) whether the estate of Buelah Nettles is estopped by the doctrine of equitable estoppel from contending that Beulah Nettles earned in years prior to January 1, 1973, any part of the cash money found in her safe deposit boxes at the time of her death. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Aggie L. Mizell is the personal representative of the estate of Beulah Isabelle Nettles. At the time the petition in this case was filed, Ms. Mizell resided in Jacksonville, Florida. For each of the calendar years 1973 through 1978, Beulah Isabelle Nettles (hereinafter decedent), under the name of Beulah Player, filed a joint Federal income tax return with Eugene M. Player, with the Office of the Director, Southeast Internal Revenue Service Center, Chamblee, Georgia. For the period421 January 1 through July 13, 1979, the personal representative of decedent's estate filed on behalf of the estate an individual income tax return for decedent. For approximately 50 years prior to her death on July 13, 1979, decedent was engaged in prostitution under various names, including the names Peggie Brown, Peggy Brown, Beulah Isabell VunCannon, Peggy Isabell Brown, Beulah Parramore Player, Beulah Isabella Player and Beulah Strickland. Prior to January 1, 1972, she was arrested on several occasions for vagrancy or prostitution. One of these arrests was under the name of Beulah VunCannon. Decedent was murdered on July 13, 1979. For the calendar years 1964 through 1969, Eugene M. Player filed Federal income tax returns in which he claimed exemptions for himself and his wife, and showed his wife as having no income. On the return for each of the years 1967, 1968 and 1969, he showed his wife's name as Beulah. For the year 1970, decedent, under the name of Beulah Player, filed a joint Federal income tax return with Eugene M. Player. In December 1973 and early 1974, an agent of the Office of Internal Revenue Service, Jacksonville, Florida, examined the Federal income tax422 returns filed by decedent, under the name Beulah Player, jointly with Eugene Player for the years 1971 and 1972. An indirect method of proof was used in the audit of the Federal income tax returns of decedent and Eugene Player for these years. On the basis used by respondent, unreported income of $8,342 for 1971 and $14,312 for 1972 was shown. Tax deficiencies of $1,466 and $2,807, respectively, and additions to tax under section 6653(b) in the amounts of $733 and $1,403.50 were determined by respondent. On March 14, 1974, decedent and Eugene Player agreed to the assessment of these deficiencies and additions to tax for the calendar years 1971 and 1972 and delivered to the Office of Internal Revenue Service, Jacksonville, Florida, a $6,730.04 cash payment for the deficiencies and additions to tax. As of December 31, 1972, decedent held bank savings accounts with the following amounts on deposit: First Federal#27032$ 3,182.32First Federal#2826419,500.49Springfield Atlantic#653112016,363.71Marine National#1-2650-114,343.55Total$53,390.07During the course of the audit of decedent's 1971 and 1972 liabilities in late 1973 and early423 1974, the examining agent asked decedent if she had any safe deposit boxes or a cash hoard in any amount, and she told him that she did not have any safe deposit boxes and that she kept no more than about $50 cash on hand at any one time. After he was given this information, the agent wrote out in handwriting the following statement, which was signed by decedent and Eugene Player: During the periods from Jan. 1, 1972 through Dec. 31, 1972 I had no more than $50.00 undeposited personal cash on hand and had only three savings accts--1 at the Springfield Atlantic $65,311.20 and 2 at the 1st Fed. Savings and Loan, nos. 28264 and 27032. I had no checking accounts during this period. Beulah Player E. M. Player After this statement was signed, Mr. Player called the Revenue agent and said his wife had forgotten about a savings account at the Marine National Bank and that he would bring the statements to the office that afternoon, January 2, 1974. Mr. Player told the agent that he and his wife had no more than $50 undeposited personal cash on hand between January 1, 1971, and December 31, 1971. After receiving the information from decedent and Mr. Player that decedent had424 no safe deposit boxes, the agent mailed letters of inquiry to several banks in Jacksonville, Florida, asking whether Beulah Player or Eugene Player had a safe deposit box at the bank and whether they had bank accounts at the bank. Each of these banks responded that there were no bank accounts other than those previously disclosed to the agent by decedent and Eugene Player, and that there were no safe deposit boxes at the bank under the name of Beulah Player or Eugene Player. At the time of making this inquiry, the examining agent had the arrest record of decedent showing some of the names used by decedent other than Beulah Player. From December 31, 1972, through the date of her death, decedent owned three parcels of real estate, one on Beaver Street, one on East 31st Street, and one on Edison Avenue in Jacksonville, Florida. She owned no other real estate. In February 1975, decedent received the sum of $12,000 as the beneficiary of a life insurance policy on the life of her brother, Willie Nettles, who died in February 1975. On January 5, 1976, decedent purchased a 1976 Plymouth Fury automobile using the name Beulah I. Strickland, making a $2,000 downpayment to the seller of425 the automobile. As of the date of her death, decedent owned jewelry, all of which was acquired prior to December 31, 1972, which was valued in the estate tax return filed for her estae on April 11, 1980, at $38,000. At the date of her death, decedent had the following sums of cash in safe deposit boxes at the banks indicated: Springfield Atlantic Bank$ 70,000Marine National Bank226,010Barnett National Bank50,000Atlantic National Bank78,000Total$424,010At the date of her death, decedent had the following amounts on deposit at the banks indicated: Marine National Bank#012625010$20,060Barnett National BankChecking30,000Springfield AtlanticBank#01-065311-2028,442Total$78,502On the income tax returns filed by decedent and Mr. Player for the years 1973 through 1978, gross income was reported in the amounts of $3,617, $3,584, $4,095, $4,423, $3,644 and $3,875, respectively. The income shown consisted of between $3,000 and $4,000 of interest and a small net amount of income from property rentals. The gross rentals reported ranged from $3,640 to $5,376 during these years. The only year in which any tax426 was shown as due was $116 for the year 1973. For the period January 1 through July 13, 1979, decedent's personal representative reported that decedent had interest income of $2,061 and income from rentals of $1,675, making a total gross income of $3,736. The gross rentals shown for this period were $2,600. No tax was shown as due. On July 20, 1979, Aggie L. Mizell, decedent's sister, filed a Petition for Administration of decedent's estate, alleging that she was next of kin of decedent and entitled to Letters of Administration. On July 23, 1980, Letters of Administration were issued to her as personal representative of decedent's estate. Thereafter, Eugene M. Player filed a separate Petition for Administration, a Petition for Removal of the Personal Representative and Revocation of the Letters of Administration granted to decedent's sister. He alleged in his petition that he was the common-law husband of decedent and thus was the next of kin and entitled to the Letters of Administration as personal representative of decedent's estate. Hearings on the petition of Eugene M. Player were held in August and November 1979 and in January and February 1980. More than 50 witnesses427 were called to testify and more than 40 exhibits were filed in evidence. On February 27, 1980, the judge of the circuit court in and for Duval County, Florida, after discussing the conflicting testimony given in the proceedings, entered an order holding that there was not a common-law marriage between decedent and Eugene M. Player and denied Mr. Player's petition. In the order denying Mr. Player's petition, the following is stated: Beulah Isabel Nettles, a/k/a Beulah Isabel Player, Beulah Isabel Parramore, Beulah VunCannon, Beulah I. VanCannon, Beulah Strickland, Joyce Whaley, and more generally known as Peggy Brown, died intestate on July 13, 1979, at the age of 65. She was a well-known prostitute and was still active in her profession at the time of her death. The decedent had accumulated a large estate consisting of $512,398.61 in cash, time certificates, savings and personal property. The cash was in a number of safe deposit boxes in various banks in Jacksonville. In addition, she owned real estate of the approximate value of $145,000.00. The total value of the estate is $657,398.61. In May 1980, an audit of the 1979 income tax return filed on behalf of decedent's estate428 was begun and was expanded to include the calendar years 1973 through 1978. On December 9, 1980, the Revenue agent conducting the audit of decedent's tax liabilities for the years 1973 through 1979 was advised by the attorney for her estate that the estate had distributed $94,100 in cash and property to Eugene Player in settlement of a claim he made against the estate. On December 22, 1980, a petition was filed in the proceedings in Duval County with respect to decedent's estate for allowance of a personal representative's fee, an attorney's fee, authorization for sale of the remaining physical assets and distribution of the assets and discharge of the personal representative. On December 26, 1980, respondent mailed to the circuit court of Duval County a proof of claim against the estate showing estimated tax liability owed by decedent for the years 1973 through 1979 in the amount of $300,000. On January 20, 1981, a jeopardy assessment under section 6861 was made with respect to decedent in the amount of $341,857.81, which amount included income tax deficiencies, additions to tax under section 6653(b), and interest. On January 21, 1981, respondent mailed a Proof of Claim for Internal429 Revenue Taxes to the circuit court for Duval County showing tax liability owed by decedent for the years 1973 through 1979 in the amount of $341,857.81. On January 22, 1981, the circuit court for Duval County entered an order for payment of compensation to the personal representative of decedent's estate, for payment of attorney's fees and for a partial distribution. Assets of the estate were in fact distributed pursuant to this order. The safe deposit box which decedent has at Marine National Bank of Jacksonville was acquired by her under the name Alice Cannon on December 12, 1973. The only entry shown as made into the box after it was acquired was on December 13, 1973. Decedent, from June 15, 1960, until the date of her death, had a safe deposit box at the Barnett National Bank of Jacksonville under the name of Beulah I. VunCannon. This box was entered by decedent a number of times during each of the years 1961 through 1973, one of the entries in 1973 being on December 10. It was entered twice in 1974, twice in 1976, and the last entry made was on June 12, 1979. No entries into the box were made in 1977 and 1978. From March 20, 1962, until the date of her death, decedent430 had a safe deposit box at the Atlantic National Bank of Jacksonville under the name of Beulah Nettles. On March 11, 1974, the original box obtained under the name Beulah Nettles at the Atlantic National Bank was changed to another box. The only entry shown on the record of Atlantic National Bank into the changed box prior to decedent's death was on May 7, 1976. Decedent had a safe deposit box at the Springfield Atlantic Bank under the name of Janice I. Whaley. This box was obtained on December 10, 1973, was entered on December 11, 1973, and was entered on April 6, 1978, and April 7, 1978. The last entry into this Springfield Atlantic Bank safe deposit box prior to the date of decedent's death was the entry on April 7, 1978. Respondent mailed the statutory notice of deficiency to the personal representative of decedent's estate on March 17, 1981. In this notice of deficiency, respondent determined that decedent's gross income for each of the years 1973 through 1978 was $69,088, and for the period January 1 through July 13, 1979, was $34,544. In the notice of deficiency, decedent's income tax was computed on the basis that the unreported income received by decedent in each of431 the years involved was received primarily from prostitution and therefore was subject to the self-employment tax. The tax was computed on the basis of an unmarried individual with one personal exemption and the standard deduction. In his amendment to answer, respondent determined that decedent had omitted income for the years 1973 through 1978 and the period January 1 through July 13, 1979, in the following amounts: YearOmitted Income1973$279,778.58197449,730.78197545,894.17197631,684.49197722,171.92197812,172.0019794,420.15This computation was arrived at by assuming that in each of the years 1973 through 1978, $7,692.24 of the $50,000 in the safe deposit box at the Barnett National Bank was income to decedent, and that $3,846.56 was decedent's income from the cash in this box the first 6 months of 1979. Respondent also included in decedent's income from the cash in the safe deposit box at the Atlantic National Bank $22,829.16 in each of the years 1973, 1974 and 1975, and $9,512.52 in the year 1976, making a total of $78,000 in this box at the date of decedent's death. Respondent determined that in each of the years 1973 through432 1977, decedent had income of $13,333.32 with respect to the cash in the safe deposit box at the Springfield Atlantic Bank and in 1978 had $3,333.40 income with respect to this cash, making a total of $70,000 in that box at the date of decedent's death. To this respondent added $5,383.92 in 1973 and $1,346.12 in 1974 for the cash used in payment of the 1971 and 1972 income tax deficiencies and additions to tax. Respondent added $666.66 in each of the years 1973 and 1974 and $666.68 in 1975 because of the 1975 downpayment of $2,000 on the Plymouth automobile, and in each of the years 1973 through 1978 added $3,863.28 because of increases in savings accounts, and added for the period January 1 through July 13, 1979, $1,932.33 from this source. Respondent, for the years 1975, 1976, 1977 and 1978 reduced the otherwise determined income by $2,490.51, $2,716.92, $2,716.92, $2,716.92, respectively, for the life insurance proceeds received by decedent, and on this basis reduced the otherwise determined income for the period January 1 to July 13, 1979 by $1,358.73. OPINION The first two issues in this case are inter-related. The first is whether decedent failed to report income for433 the years 1973 through 1978 and whether the personal representative of decedent's estate failed to report decedent's income for the period January 1, 1979, through July 13, 1979. The second issue is whether any understatement of tax resulting from any failure to report income for each of these years was due to fraud with intent to evade tax. Clearly, from the record here, decedent had income for each of the years 1973 through 1978 and for the period January 1 through July 13, 1979, which was not reported on her Federal tax returns. The record establishes that decedent was a prostitute during all the years here involved and received income from this occupation. However, on her tax returns she only reported her interest income and rental income for the years 1973 through 1978. The record here also shows the omission of income from the return filed by decedent's personal representative for the first 6-1/2 months of 1979. It has been stipulated that decedent was engaged in the occupation of being a prostitute during all the period here involved. No income from this occupation was reported on decedent's Federal income tax returns. Large amounts of cash were contained in safe deposit434 boxes at the date of her death and there had been a substantial increase in the amount decedent had on deposit in banks from January 1, 1973, to the date of her death. The evidence is clear that decedent understated her income for each of the years 1973 through 1978 and that her income for the period January 1 to July 13, 1979, was understated. We so hold. Petitioner does not deny the understatement of income but merely argues as to the amount of the understatement. Petitioner has the burden of showing error in respondent's determination of decedent's income. Estate of Broadhead v. Commissioner,391 F.2d 841">391 F.2d 841, 844 (5th Cir. 1968), affg. a Memorandum Opinion of this Court. However, the burden of showing that there was an underpayment of tax and that some part of such underpayment is due to fraud is upon the Commissioner, and he must make this showing of fraud by clear and convincing evidence. Webb v. Commissioner,394 F.2d 366">394 F.2d 366, 377 (5th Cir. 1968), affg. a Memorandum Opinion of this Court. Papineau v. Commissioner,28 T.C. 54">28 T.C. 54, 57 (1957).435 The fraud which the Commissioner must show implies bad faith and intentional wrongdoing, with a specific intent to evade tax. Webb v. Commissioner,supra.In the instant case, respondent has shown by clear and convincing evidence that an underpayment of the tax existed and that decedent's failure to report income from the practice of prostitution was due to fraud with intent to evade taxes. Decedent's tax returns for the years 1971 and 1972 had been investigated in late 1973 and early 1974, and decedent had been informed of her duty to report her income from prostitution. She had agreed to the tax and addition to tax under section 6653(b) as determined by respondent for these years. When decedent filed joint returns with Mr. Player for the years 1973 through 1978, reporting none of her income from the practice of prostitution, she clearly knew that she was under-reporting her income. The failure over so many years to report income, particularly after having been informed that the unreported income should be reported, is a clear indication of an intent to evade tax. In fact, petitioner does not argue that decedent's failure to report the major portion436 of her income for each of the years 1973 through 1978, and her personal representative's failure to report the major portion of decedent's income for the first 6-1/2 months of 1979, was not due to fraud. The evidence in this case is so clear and convincing, that a part of the underpayment of tax in each of the years and for the period here in issue was due to fraud with intent to evade tax, that we need not prolong the discussion of this aspect of this case. Not only is there a failure to report income present here, but decedent made false statements to respondent's agents, concealed income, and kept funds in cash under assumed names. These facts support the conclusion that decedent's omission of a large portion of her income was made with intent to evade tax; we conclude that respondent has clearly established this fact. The real issue between the parties here is the amount of the taxable income omitted by or on behalf of decedent. Respondent initially divided the amounts of cash in the various safe deposit boxes at the date of decedent's death equally over the entire period here involved, and added to the amounts so determined a proration over this period of time of the increases437 in decedent's cash in various bank accounts. Respondent made certain minor adjustments to these figures to arrive at an equal amount of unreported income for each of the years 1973 through 1978 and one-half that amount for the period January 1, 1979, through July 13, 1979. At the trial, evidence was introduced which showed that this proration could not be correct since at the date of her death decedent had $226,010 in cash in a safe deposit box in the Marine National Bank which had been opened on December 12, 1973, and entered only once before her death, that entry being on December 13, 1973. The record also showed that other safe deposit boxes which decedent had were entered on December 10 and 11 of 1973. In any event, the evidence is unmistakable that the $226,010 was either income which decedent received in the year 1973 or was money she had accumulated in prior years and placed in the safe deposit box in 1973. Respondent amended his answer to allege that the entire $226,010 in the safe deposit box at the Marine National Bank at the date of decedent's death was income to her in 1973. Respondent has a presumption of correctness with respect to the income of $69,088, which he438 had determined in the notice of deficiency was decedent's gross income for 1973 as compared to $3,617 of income as reported on decedent's tax return. However, under his allegations in his amendment to answer, the burden is on respondent to establish that any amount in excess of the $69,088 determined in the notice of deficiency was income received by decedent in the year 1973. Not only has respondent totally failed to establish that decedent actually received more in adjusted gross income in 1973 than he determined in the notice of deficiency, the evidence that is in the record indicates to the contrary. The fact that decedent entered other safe deposit boxes at approximately the same time she opened the box at the Marine National Bank indicates that in fact the $226,010 she put in that bank in December 1973 was from amounts she had previously accumulated. Decedent had rented safe deposit boxes since the early 1960's. There is nothing in the record to even suggest that decedent's activities in 1973 differed from her activities in prior or subsequent years. In fact the stipulated fact that she engaged in prostitution during all these years indicates to the contrary. Respondent439 relies solely on the statement written out by an Internal Revenue agent and signed by decedent in connection with the investigation of her 1971 and 1972 tax liabilities to establish the fact that decedent had not over $50 in cash as of January 1, 1973. This statement is, of course, evidence and is to be weighed along with the other evidence of record to determine whether the evidence establishes that decedent had only $50 in cash as of January 1, 1973. In our view, the evidence as a whole clearly indicates to the contrary of the statement made by decedent that at no time during the year 1972 did she have over $50 in cash. In connection with the same investigation, decedent told respondent's agent that she had no safe deposit boxes. This record clearly shows this statement to be false. The evidence of entry into other safe deposit boxes which she had maintained for some years around the time of the placing of the $226,010 in the Marine National Bank safe deposit box, indicates that decedent must have had some of this cash prior to January 1, 1973. The record also shows that decedent filed a joint return with Eugene Player for the year 1970 reporting only income from interest and440 rent; for the years 1967 through 1969, and by inference the years 1964 through 1966, decedent filed no income tax returns, but rather, Eugene Player showed her on his returns as his unemployed wife with no income. The record is reasonably clear that from 1964 through 1970 decedent reported no income for tax purposes but during all of these years was engaged in prostitution, producing income from this occupation. The fact that decedent concealed receipt of income during these years is evidence that some of the cash transferred from other safe deposit boxes to the safe deposit box at the Marine National Bank was earned by decedent during years prior to 1973 and that certainly some of this cash was earned during the years 1964 through 1970. On the basis of this record, we conclude that the statement made by decedent to the Revenue agent, that at no time during the year 1972 did she have more than $50 in cash, written down by him and signed by decedent, was false. The evidence in this case does not sustain respondent's affirmative allegation that decedent's income for the year 1973 exceeded the $69,088 which respondent determined in the notice of deficiency was her income for that441 year. Respondent, recognizing that the evidence might not support a finding that decedent in fact had only $50 in cash at January 1, 1973, has alleged that decedent's estate should be estopped to deny this fact under the doctrine of equitable estoppel. As was pointed out in Estate of Kingdon v. Commissioner,9 T.C. 838">9 T.C. 838, 844 (1947), a party claiming equitable estoppel must show that there was a false representation or misleading silence in a statement of fact rather than an opinion or statement of law, that he was ignorant of the true facts and that he would be adversely affected by the statement made by the person against whom equitable estoppel was claimed. In Bartel v. Commissioner,54 T.C. 25">54 T.C. 25 (1970), we discussed at some length the principle of equitable estoppel and the related principle that in tax matters a consistency of treatment of income items may be required. Considering the requirements of equitable estoppel and related principles as applied in tax cases, we conclude that the facts in this case do not support the application of such principles. 442 In the years 1971 and 1972, respondent used the statement by decedent of an amount of no more than $50 cash on hand to support his reconstruction of decedent's income for those years. Respondent in effect recognizes this but argues that he has been adversely affected by this statement by permitting tax years prior to 1971 to become closed and his records with respect to these years destroyed. He argues that he relied on the statement by decedent in permitting this to occur. Perhaps the simple answer to this argument is that respondent, who has the burden of proof on this issue, has totally failed to show that he is in any different position with respect to years prior to 1971 now than he was when his agent obtained the statement from decedent. At the time decedent signed this statement the statute of limitations, absent fraud, a 25 percent understatement of income or failure to file a return, had run with respect to all years prior to the year 1970, and it was close to the time the statute would run with respect to the year 1970. Respondent has not shown why decedent's return for 1970 was not included with the investigation of the years 1971 and 1972. Neither has respondent443 shown any adverse affect he has suffered by any destruction he might have done of records for the years 1970 and prior years. The evidence in this record is reasonably clear that decedent filed no tax returns from 1964 through 1969 and that in 1970, as she had in 1971 and 1972, she filed a joint return with Eugene Player, reporting only interest income and rental income. In fact, it is difficult to understand why, when investigating decedent's tax liability for the years 1971 and 1972, respondent did not include in the investigation the year 1970. Certainly, this action was not because of a reliance on any statement made by decedent as to the small amount of cash she had on hand. Since respondent has failed to show two of the basic elements of equitable estoppel, namely that he was ignorant of the fact that decedent's income was not reported in years prior to 1971 when decedent made the statement as to her cash or that he was adversely affected by the statement, equitable estoppel is not applicable. There are also other reasons here to hold against respondent on his claimed equitable estoppel contention. Obviously, the agent did not believe decedent's statement that she did444 not have any safe deposit boxes since he attempted to ascertain from various banks whether this statement was true. However, he only used the name Beulah Player in inquiring as to whether she had safe deposit boxes. The agent testified that he had decedent's arrest record when he was making his investigation of her tax liability for 1971 and 1972. This arrest record, which is in the record in this case, shows a use by decedent of the name Beulah Isabella VunCannon, along with a number of other names, including Beulah Player and Peggy Brown. Had the agent inquired as to the existence of safe deposit boxes under the name of Beulah VunCannon, which he was aware of, he would have located the safe deposit box at the Barnett National Bank of Jacksonville which was opened on June 15, 1960, by decedent. This discovery might have led him to inquire as to safe deposit boxes under other names. On this record, we conclude that petitioner is not estopped to deny that decedent had more than $50 cash on January 1, 1973. Having concluded that respondent failed in his burden of proof that decedent had income in 1973 in excess of the $69,088 he determined as her income in that year, we hold that445 for the year 1973 decedent's income was $69,088, since petitioner has totally failed to meet the burden of showing to the contrary for the year 1973. Petitioner has sustained the burden of showing that no portion of the $226,010 cash in the Marine National Bank should be allocated to years after 1973. The record, however, shows that there were some entries into the Barnett National Bank safe deposit box during the years 1973, 1974, 1976 and 1979, and for this reason we conclude that respondent's distribution of the amounts in this box over the years here in issue is a reasonable allocation. See Estate of Bartlett v. Commissioner,22 T.C. 1228">22 T.C. 1228, 1232 (1954). However, since there was an entry into this box on December 10, 1973, close to the time the Marine National Bank box was open, we conclude that it is reasonable to determine income by distributing the amount found in the Barnett National Bank safe deposit box over only the years 1974, 1975, 1976, 1977, 1978 and the first six months of 1979, the last entry to that box being June 12, 1979, and hold that this amount should be so distributed. The record shows that the last entry by decedent into the safe deposit446 box at Atlantic National Bank was on May 7, 1976, but does not show when all of the previous entries were made, although she had a safe deposit box at that bank from March 20, 1962. Decedent exchanged one box at this bank for another in 1974. Based on this evidence, we conclude it is reasonable to distribute the cash in this box at the date of decedent's date ratably over the years 1974, 1975, and the first six months of 1976, and hold that this allocation should be made. The safe deposit box at the Springfield Atlantic Bank was opened on December 10, 1973. This box was entered on December 11, 1973, and twice in 1978, once on April 6 and once on April 7. On this evidence we conclude that it is reasonable to distribute the cash in this box ratably over the years 1974, 1975, 1976, 1977 and for the period January 1, to April 7, 1978, and hold that this distribution should be made. Petitioner made no argument with respect to the method used by respondent to distribute the income he determined must have been earned by decedent because of the increase in the amounts of the cash in her bank accounts or the adjustments made by respondent because of the expenditure of $2,000 as a downpayment*447 on a Plymouth automobile, the $12,000 inheritance decedent received from her brother, and the cash used to pay 1971 and 1972 income taxes. The method used by respondent to distribute income from increases in bank accounts and the adjustments to income is reasonable and it is approved, limiting, however, total 1973 income to $69,088 as above stated. Because we have concluded that decedent filed fraudulent returns with intent to evade tax for each year here in issue that might otherwise be barred by the statute of limitations, we hold that none of the years here involved is barred by the statute of limitations. Decision will be entered under Rule 155.Footnotes1. Unless otherwise stated, all statutory references are to the Internal Revenue Code of 1954, as amended and in effect during the years here in issue.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625890/	ROSCOE W. FIELDS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentFields v. CommissionerDocket Nos. 18149-82, 14935-83.United States Tax CourtT.C. Memo 1985-345; 1985 Tax Ct. Memo LEXIS 291; 50 T.C.M. (CCH) 411; T.C.M. (RIA) 85345; July 15, 1985. Robert P. Crowther and Robert B. Nadler, for the respondent. WILBURMEMORANDUM FINDINGS OF FACT AND OPINION WILBUR, Judge: Respondent determined the following deficiencies and additions to tax: Additions to taxYearDeficiencySec. 6653(a)Sec. 6653(b) 11978$5,527$276.3519792,501125.0519806,284$3,142Petitioner did not appear at trial in these cases. The Court therefore granted respondent's oral motion to dismiss for failure to properly prosecute with respect to each issue as to which petitioner bears the burden of proof. Rule 123(b). 292 Petitioner bears the burden of proving that respondent's deficiencies and the additions to tax under section 6653(a) are incorrect. Rule 142(a); Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933). As a result, only the addition to tax for fraud in 1980 remains in dispute. FINDINGS OF FACT Petitioner resided in Knoxville, Tennessee during the year in issue and when the petition was filed in this case. Respondent served upon petitioner requests for admissions to which petitioner failed to respond. The allegations in the requests for admissions are therefore deemed admitted pursuant to Rule 90(c). In 1980, petitioner was employed by the Union Carbide Corporation in Oak Ridge, Tennessee. Petitioner received wages from Union Carbide of $23,723.95 in that year. In 1979, petitioner filed with his employer an employee's withholding allowance certificate (Form W-4) on which he certified that he was entitled to 19 withholding exemptions and allowances. Petitioner filed with respondent a Form 1040 (U.S. Individual Income Tax Return) for the 1980 taxable year. Petitioner did not provide any information from which taxable income could be ascertained, however, and instead chose293 to respond to the inquiries with the words "object" and "N/A." Although petitioner's employer properly furnished petitioner with a Form W-2 which clearly stated the amount of petitioner's wages, petitioner failed to submit the form with the document he filed with respondent. Petitioner attached to his Form 1040 a claim for overpayment of taxes, on which he claimed a refund of $96.28 for amounts withheld from wages. On that claim, petitioner stated that "[n]o tax has been assessed," and repeated his Fifth Amendment argument. Petitioner failed to respond to interrogatories and requests for documents served upon him by respondent. OPINION Petitioner filed a Form 1040 with the Internal Revenue Service for the taxable year 1980 on which he refused to disclose any information from which his tax liability could be assessed. He stated on that document that he objected to providing the information "on grounds of self incrimination." Petitioner attached to the form a claim for overpayment of taxes, and he failed to attach the Form W-2 furnished by his employer. Petitioner also filed a Form W-4 on which he claimed 19 exemptions. Respondent maintains that these actions constitute fraud. 294 We agree with respondent. Respondent bears the burden of proving the existence of fraud by clear and convincing evidence. Section 7454(a); Rule 142(b). The burden of proof is met by showing that the taxpayer intended to evade taxes that he knew or believed that he owed, Stoltzfus v. United States,398 F.2d 1002">398 F.2d 1002, 1004 (3d Cir. 1968), and that he engaged in conduct intended to conceal, mislead, or otherwise prevent the collection of taxes. Acker v. Commissioner,26 T.C. 107">26 T.C. 107, 112 (1956). The existence of fraud is to be determined from consideration of all the facts and circumstances. Stratton v. Commissioner,54 T.C. 255">54 T.C. 255, 284 (1970). In Hebrank v. Commissioner,81 T.C. 640">81 T.C. 640 (1983), this Court upheld imposition of the addition to tax fraud on facts similar to those in the instant case. The petitioner in Hebrank filed false information on his W-4 Form, filed a Form 1040 that did not constitute an adequate return, and deliberately obliterated some of the information on the W-2 form he attached to his "return." Hebrank v. Commissioner,supra at 642, 643. In the instant case petitioner likewise295 filed false information on his W-4 Form, and filed a Form 1040 that did not constitute a "return." Reiff v. Commissioner,77 T.C. 1169">77 T.C. 1169, 1177 (1981). As we stated in Hebrank v. Commissioner, "[f]ailure to file is not conclusive evidence of fraud, but is a factor worthy of consideration, particularly when coupled with the submission of a false Form W-4." Hebrank v. Commissioner,supra at 642, citing Habersham- Bey v. Commissioner,78 T.C. 304">78 T.C. 304 (1982). In addition, petitioner failed to attach to his Form 1040 the W-2 forms provided by his employer, and refused to provide documentation requested by respondent. His conduct was clearly intended "to make respondent's job of monitoring compliance more difficult," and to "thwart the tax system so as to evade payment of a tax he knew he owed." See Hebrank v. Commissioner,supra at 643, 644. The circumstances present in this case warrant imposition of the addition to tax for fraud. Appropriate orders and decisions will be entered.Footnotes1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue, and any reference to "Rules" is to the Tax Court Rules of Practice and Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625891/	APPEAL OF ROY E. CRUMMER.Crummer v. CommissionerDocket No. 3008.United States Board of Tax Appeals4 B.T.A. 54; 1926 BTA LEXIS 2389; April 22, 1926, Decided Submitted November 25, 1925. 2389 Profit on sale of an undivided interest in a partnership for shares of stock in a corporation determined. H. W. Washington, Esq., for the taxpayer. Arthur J. Seaton, Esq., for the Commissioner. ARUNDELL54 Before STERNHAGEN, LANSDON, and ARUNDELL. The Commissioner determined a deficiency in income tax for the calendar year 1919 in the amount of $13,266.73. That portion of the deficiency in dispute arises from the Commissioner's method of computing the gain derived from the sale by petitioner of an undivided interest in a partnership for stock in a corporation. 55 FINDINGS OF FACT. The petitioner was from 1911 to 1919 a member of the copartnership of D. E. Dunne & Co., and from January, 1919, to May 15, 1919, he was a member of the firm of Brown-Crummer Co., a copartnership. On May 16, 1919, he became vice president of the Brown-Crummer Co., a corporation, which position he still holds The firm of D. E. Dunne & Co. started business as a municipal bond house in July, 1897, and continued in business under that name until January 2, 1919. Petitioner is a nephew of D. E. Dunne, and in 1911 was given by the latter a one-half2390 interest in the partnership of D. E. Dunne & Co. Thereafter, the partnership continued to operate with Crummer and Dunne and equal partners until January 2, 1919, when Dunne disposed of his interest therein to Warren E. Brown. In January, 1919, Brown purchased from Dunne the latter's interest in the partnership of D. E. Dunne & Co., consisting of the good will and going business, for which he paid $50,000 in cash. Immediately thereafter, there was formed the copartnership of Brown-Crummer Co., in which each held a one-half interest. Brown at the same time contributed $100,000 in cash to the new partnership and Crummer contributed his one-half interest in the business and cash or securities of the value of $100,000. The business continued until May 15, 1919, during which period Crummer disposed of a portion of his interest in the partnership so that on May 15, 1919, he held an undivided 44 1/6 per cent interest in the copartnership of Brown-Crummer Co. During the period from January 2, 1919, to May 15, 1919, the business earned profits in the amount of $6,111.43. On May 16, 1919, petitioner and Brown and other members of the copartnership conveyed their interests therein2391 to Brown-Crummer Co., a corporation. The value of the stock received in exchange for the partnership assets was $314,629.89, and the value of the stock received by the petitioner was 44 1/6 per cent of that amount. The business was operated under the name of D. E. Dunne & Co. from 1897 to October, 1911, the principal owner during this period being D. E. Dunne. In October, 1911, Dunne transferred a one-half interest in the business to petitioner, but before doing so distributed all of the earnings and money invested in the business so that D. E. Dunne & Co. started operations with no assets other than the name, good will, and office equipment theretofore used in the business. For some years prior to 1909 and 1910, J. E. Dunne, an uncle of D. E. Dunne, owned a one-fourth interest in the partnership of D. E. Dunne & Co. He had invested in the business $25,000, with the understanding that he would receive interest at the rate of 6 56 per cent on the money so invested and an additional interest in the profits. His interest in the business was purchased in 1909 or 1910 by D. E. Dunne, who at that time repaid the $25,000, gave by way of interest $7,500, and in addition J. 2392 E. Dunne was paid $12,500, making a total of $45,000. The partnership of D. E. Dunne & Co. had made profits between the years 1897 and 1909 of approximately $160,000. The business continued to be operated successfully and was making money on March 1, 1913, and continued as a profitable venture to January, 1919, when Dunne sold his interest to Warren E. Brown. OPINION. ARUNDELL: The petitioner does not dispute the taxability of the profit from the transaction whereby he sold his undivided interest in the copartnership of Brown-Crummer Co. to the corporation of the same name for stock. The point of disagreement is the cost of petitioner's undivided interest in the partnership of Brown-Crummer Co. The Commissioner has used as a basis $100,000, which petitioner paid in to the partnership in cash or securities of that value. Petitioner contends that in addition he paid in to the partnership his one-half interest in the going business and good will of D. E. Dunne & Co. and that the March 1, 1913, value of that interest must be added to his cost in determining the basis on which gain or loss is to be computed. The good will in the partnership of D. E. Dunne & Co. cost Crummer2393 nothing, but was a gift from his uncle, and we are unable to determine the March 1, 1913, value in question from the meager facts in evidence. We can not on the evidence presented fix a value, nor are we persuaded that any value in fact existed. No records were produced showing the earnings of the partnership either before or subsequent to March 1, 1913, and such figures as were testified to were given as estimates and approximations. The value of good will in a partnership can not be determined on such evidence, and on the facts as they appear in the record we are constrained to approve the Commissioner's determination. Order of redetermination will be entered on 15 days' notice, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625892/	ESTATE OF MARGARET SENA, MARY ROSSI, Executrix, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEstate of Sena v. CommissionerDocket No. 11044-77.United States Tax CourtT.C. Memo 1980-433; 1980 Tax Ct. Memo LEXIS 161; 41 T.C.M. (CCH) 67; T.C.M. (RIA) 80433; September 25, 1980, Filed 161 Held, transfers of property by the decedent within 3 years of her death were made in contemplation of death. Robert B. Milgroom, for the petitioner. Barry J. Laterman, for the respondent. SIMPSONMEMORANDUM162 FINDINGS OF FACT AND OPINION SIMPSON, Judge: The Commissioner determined a deficiency of $21,026.23 in the petitioner's estate tax. The only issue for decision is whether transfers of certain real estate made by the decedent within 3 years of her death are includable in her estate as transfers made in contemplation of death. FINDINGS OF FACT Some of the facts were stipulated, and those facts are so found. The decedent, Margaret Sena, died on January 26, 1974, and was a resident of Lynn, Mass., at the time of her death. The executrix of her estate, Mary Rossi, filed a Federal estate tax return for the decedent's estate in August 1974 with the Internal Revenue Service Center, Andover, Mass. Mrs. Rossi resided in Lynn, Mass., at the time she filed the petition in this case. The decedent was born in Italy in 1892 and was 81 years of age when she died from cerebro-vascular arteriosclerosis. During the 3 years prior to her death, she had been admitted to the hospital on five occasions: in December 1971, August 1972, August 1973, December 1973, and again in January 1974, when she eventually died in the hospital. The decedent's length of stay in the hospital varied from163 a minimum of 5 days to a maximum of 9 days, and she was treated for ailments such as diverticulitis, angina pectoris, hypertensive heart disease, and congestive heart failure. On June 13, 1968, the decedent executed a will in which she devised to her son, Norman Sena, the following properties in Lynn, Mass.: 38 Estes Street, 44 Estes Street, Lot Number "B" on Fortesque Terrace, 8 and 10 Fortesque Terrace, and 12 and 14 Fortesque Terrace. The decedent also devised the property at 32 Chestnut Street, Lynn, Mass., to Ruth Sena, the wife of Norman Sena. In her will, the decedent also devised the property at 281 and 281-1/2 Essex Street, Lynn, Mass., to her daughter, Mary Rossi, and the property at 7, 9, and 15 Fortesque Terrace in Lynn, Mass., to her daughter, Doris Sena O'Connell. On July 29, 1970, Norman Sena died. On April 23, 1973, the decedent executed a deed which conveyed the property at 281 and 281-1/2 Essex Street to Mary Rossi. On June 30, 1973, the decedent executed another deed which conveyed the following properties to Ruth Sena: 38 Estes Street, 44 Estes Street, 32 Chestnut Street, 8 and 10 Fortesque Terrace, and 12 and 14 Fortesque Terrace. The Federal estate164 tax return for the estate of the decedent reported that she owned no real estate at the time of her death and that she had made no transfers of property during her life. In his notice of deficiency, the Commissioner determined that the properties transferred by the decedent to Mrs. Rossi and Mrs. Sena in 1973 were transfers in contemlation of death for which no consideration was given to the decedent. Accordingly, he included in the decedent's gross estate the value of such properties at the date of her death. OPINION The sole issue for decision is whether the transfers of property by the decedent to Mrs. Rossi and Mrs. Sena in 1973 were transfers made in contemplation of death within the meaning of section 2035 of the Internal Revenue Code of 1954. As in effect at the time of the decedent's death, section 2035(a) provided that the value of an estate included "the value of all property * * * of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth) * * * in contemplation of his death." 1 At that time, section 2035(b) provided in part: "If the decedent within165 a period of 3 years ending with the date of his death (except in case of a bona fide sale for an adequate and full consideration in money or money's worth) transferred an interest in property, * * such transfer * * * shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this section." Section 2035 was intended "to reach substitutes for testamentary dispositions and thus to prevent evasion of the estate tax." United States v. Wells,283 U.S. 102">283 U.S. 102, 117 (1931). Section 2035(b) created a rebuttable presumption that the transfers within 3 years before death were made in contemplation of death. Estate of Honickman v. Commissioner,58 T.C. 132">58 T.C. 132, 135 (1972), affd. without pub. opinion 481 F. 2d 1399 (3d Cir. 1973). The burden is on the estate or party challenging the determination of the Commissioner166 to prove that such transfers by the decedent were not in contemplation of death. Estate of Gerard v. Commissioner,57 T.C. 749">57 T.C. 749, 757 (1972), affd. per curiam 513 F. 2d 1232 (2d Cir. 1975). The resolution of the issue before us turns on whether the decedent's dominant motive for making the transfers, as determined from all the facts and circumstances, was the thought of death or a purpose normally associated with life. United States v. Wells,283 U.S. at 118; Estate of Gerard v. Commissioner,supra at 758. In Estate of Johnson v. Commissioner,10 T.C. 680">10 T.C. 680, 688-689 (1948), this Court stated that the factors to be considered in determining the dominant motive of a decedent in making an inter vivos transfer of property include: (1) the age of the decedent at the time of the transfer; (2) the decedent's health; (3) the interval between the transfer and the decedent's death; (4) the amount of property transferred in proportion to the amount of property retained; (5) the existence of a general testamentary scheme of which the transfers were a party; (6) the relationship of the donee to the decedent; and167 (7) the existence of a long-established gift-making policy on the part of the decedent. In support of its position, the estate presented witnesses who claimed that the decedent was merely carrying out an agreement with her daughter and daughter-in-law when she made the transfers of properties to them. According to their testimony, there was a contest over the will of the decedent's husband who died in 1967, and as a part of the settlement of that contest, the decedent agreed to give the properties to Mrs. Rossi and to Norman and Ruth Sena in return for their promise to take care of her during her life. Mrs. Rossi and Mrs. Sena both testified that they did indeed care for the decedent, providing her with money, groceries, medication, and other things. They assert that additional evidence of the decedent's donative intent is provided by four gift tax returns for the years 1968 through 1971, purportedly made out to accomplish the decedent's desire to transfer the properties in issue to Mrs. Rossi and Mrs. Sena through a series of gifts.After careful consideration of all the evidence in the record, we are not persuaded that the transfers at issue were not in contemplation of death. 168 It is well established that in cases of this type, the age and health of the decedent, while not decisive, must be given considerable weight in ascertaining the dominant motive for a decedent's transfer of property within the 3-year period prior to death. United States v. Wells,283 U.S. at 117; Estate of Lowe v. Commissioner,64 T.C. 663">64 T.C. 663, 673 (1975), affd. per curiam 555 F. 2d 244 (9th Cir. 1977); Estate of Johnson v. Commissioner,supra at 688. Here, the decedent was 81 years old at the time the properties were transferred, and she had been hospitalized twice with serious illnesses. In addition, the transfer to Mrs. Rossi was identical to the disposition of the property which the decedent had included in her will, and the properties transferred to Ruth Sena would have been transferred to Norman and Ruth Sena under the decedent's will.See Cleveland Trust Company v. United States,421 F.2d 475">421 F. 2d 475, 478 (6th Cir. 1970). Moreover, it is significant that although the witnesses claimed that the transfers were pursuant to a promise made in 1968, the transfers at issue were not made until almost 5 years169 after the alleged promise, and they were not made until the health of the decedent had declined and not until 8 months prior to her death. Also, the transfers at issue constituted a large portion of her estate, and there is no evidence that she ever made gifts prior to the transfers at issue. The evidence on which the estate relied was not convincing. The testimony concerning the support furnished the decedent by Mrs. Rossi and Mrs. Sena was general and vague and fell far short of establishing that the transfers to them were for "adequate and full consideration in money or money's worth." Also, Mrs. Rossi and Mrs. Sena claimed that they reported the income from the properties at issue, but they did not produce their tax returns showing that such income had been reported by them. In addition, the alleged gift tax returns were never filed with the Internal Revenue Service, and three of the four alleged returns are undated. Although such documents purported to reflect gifts of portions of the properties at issue, deeds transferring title to such portions of such properties were never executed and filed prior to the transfers in 1973. Thus, the evidence shows that although the*170 decedent may have considered making gifts of the properties at an earlier time, she actually failed to carry out such plan until she was near death. In conclusion, the estate was given every opportunity to present evidence on the issue of whether the transfers by the decedent in 1973 were made in contemplation of death, and the evidence presented by it is insufficient to satisfy its burden of proving that such transfers were not in contemplation of death. Accordingly, we hold that the value of the properties transferred by the decedent in April and June of 1973 to Mrs. Rossi and Mrs. Sena is includable in her gross estate under section 2035. Decision will be entered for the respondent. Footnotes1. Any reference to sec. 2035 in this opinion is a reference to the provisions as in effect at the time of the decedent's death.However, for decedents dying after Dec. 31, 1976, sec. 2035↩ has been amended by sec. 2001(b) of the Tax Reform Act of 1976, Pub. L. 94-455, 90 Stat. 1848.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625893/	Estate of John Joseph Tuohy, Junior, Deceased, Bank of America National Trust and Savings Association, Executor, Petitioner, v. Commissioner of Internal Revenue, RespondentTuohy v. CommissionerDocket No. 16327United States Tax Court14 T.C. 245; 1950 U.S. Tax Ct. LEXIS 273; February 17, 1950, Promulgated 273 Decision will be entered under Rule 50. Upon the facts, held, decedent and not his mother during her lifetime elected to take the proceeds of two life insurance policies under an optional provision of the policies; held, further, that such election constituted a transfer of property within the meaning of section 811 (c) of the Internal Revenue Code. Estate of Mabel E. Morton, 12 T. C. 380. A. R. Rowell, Esq., for the petitioner.R. G. Harless, Esq., for the respondent. Hill, Judge. Leech, J., dissents. HILL 246 OPINION.Respondent determined a deficiency in estate tax in the amount of $ 6,240.68. Certain adjustments made by respondent are not contested. The only issue is whether the respondent erred in including in the274 gross estate of decedent one-half of the value of the proceeds of two life insurance policies issued on the life of the mother of decedent.All of the facts were stipulated and they are so found.John Joseph Tuohy Jr., the decedent, died on July 26, 1944. The petitioner is the duly authorized and acting executor of the estate of decedent. The estate tax return was filed with the collector of internal revenue for the first district of California at San Francisco.At the date of his death, John Tuohy was a minor. He left no issue. He was survived by a minor brother and three sisters.On July 10, 1928, the John Hancock Mutual Life Insurance Co., hereinafter referred to as the company, issued to Agnes Tuohy, mother of decedent, a policy of insurance on her life in the amount of $ 25,000. On September 18, 1928, the same company issued another policy on her life, also in the amount of $ 25,000. The beneficiaries named in each policy were the five children of Agnes Tuohy.On June 8, 1939, Agnes Tuohy signed and dispatched a letter to the company at its home office in Boston, Massachusetts, together with properly executed directions to change the beneficiaries of the above mentioned275 policies. The two policies were enclosed with the letter and the forms for the necessary endorsements. The company was instructed, among other things, to change the beneficiaries on both policies from the five children named to "John J. Tuohy, Jr., and Thomas M. Tuohy, equally or to the survivor." The company endorsed the policies showing the change of beneficiaries on September 30, 1939, effective as of the date of the direction, June 8, 1939. In addition to the instructions above mentioned, Agnes Tuohy, in her letter of June 8, 1939, also stated:I do not, however, wish the proceeds of these policies, in the event of my death, paid in cash but it is my wish that the Company, at my death, hold the proceeds of these policies under your Option No. 1 and have interest only paid annually to the beneficiaries until each son has reached his thirty-fifth birthday, at which time the amount due shall be forthwith paid in cash.Should either of my aforementioned sons predecease me, or die while receiving interest payments as requested, in such event, the amount that would have been payable to said son shall be accrued to the benefit of the surviving son under the same provisions unless 276 the said deceased son shall die leaving lawful issue, in which event, said deceased son's share shall be continued to be held by the Company at interest and interest payable semiannually for the benefit of said issue, per stirpes, until the twenty-first birthday of said issue or to a date not beyond thirty years from my death, then full amount due is to be paid in cash to said issue.247 Pending the preparation by you and its proper execution by me of the document necessary to effect this arrangement, I should like to have this request serve in the place of such document.John J. Tuohy, Jr., was born on November 27, 1923 and the birthdate of Thomas M. Tuohy is July 30, 1925.Agnes Tuohy died on November 16, 1939, at which time the two policies were in force. Because on her death the beneficiaries of the policies were minors, the Bank of America National Trust & Savings Association was appointed guardian of the estate of those minors by the proper court.On February 8, 1940, the bank filed in the proper court a petition for an order authorizing it as guardian to execute and deliver to the company a direction to change the beneficiaries under the policies and to direct the company277 to pay the proceeds of the policies in accordance with option 1. Attached to the petition to the court was an exhibit which contained the following:Bank of America National Trust and Savings Association, guardian of the estates of John J. Tuohy, Jr., and Thomas M. Tuohy, sons of the late Agnes G. Tuohy, and beneficiaries under the above numbered policies issued by the John Hancock Mutual Life Insurance Company of Boston, Massachusetts, on the life of the said Agnes G. Tuohy, deceased, does hereby direct that the proceeds of said policies amounting to Fifty Thousand Three Hundred Thirty-Seven Dollars ($ 50,337.00) shall be paid by the said John Hancock Mutual Life Insurance Company for the equal benefit of the said John J. Tuohy, Jr., and Thomas M. Tuohy, in accordance with the terms of option #1 of the settlement options of said policies, annual interest payments beginning one year after the death of the said Agnes G. Tuohy on each son's share to be made to such son until he attains the age of 35 years at which time the share in the amount payable of such son so attaining said age shall be paid to such son in one sum.Said guardian hereby further directs that in the event of the278 death of either of said sons prior to attaining the age of 35 years such deceased son's share in the amount payable shall be paid in one sum to the surviving children of such deceased son, share and share alike; provided, however, that if any of such deceased son's children have not attained the age of 21 years the shares of such children under said age shall be paid in accordance with said option #1, semiannual interest payments on each such child's share to be made to such child until he or she attains the age of 21 years at which time such child's share shall be paid to such child in one sum; with the express provision, however, that if any of such deceased son's children shall be receiving interest payments at the expiration of a period of thirty years after the death of the said Agnes G. Tuohy then at such time each such child's share shall be paid to such child in one sum.Said guardian directs that in the event of the death of any of the children of either of said sons after becoming entitled to interest payments and before payment in full of his or her share as hereinbefore provided the share of such deceased child in the amount payable shall be added equally to the shares279 of the survivors or survivor of such deceased son's children and paid in the manner provided for payment of such survivors' or survivor's share; if, however, at the death of either of said sons there shall be no surviving children of such deceased son or in the event of the death of the last survivor of such deceased 248 son's children thereafter and before payment in full of such deceased child's share as hereinbefore provided, such deceased son's share of the amount payable shall be added to the share of the insured's other said son and paid in the manner provided for payment of such other said son's share.Said guardian directs that in the event of the death of the last survivor of said sons and the children of said sons before payment in full the amount payable shall be paid in one sum to the executors or administrators of such last survivor.On March 4, 1940, pursuant to that petition, the court issued an order authorizing the request made in the petition. Shortly after that the guardian executed and delivered to the company the proper document authorized by the order of the court for the change of the beneficiaries.Upon receipt of that direction of the guardian and in280 accordance with it the company endorsed the policies as of March 22, 1940. Such endorsement constituted an agreement by the insurance company to pay the principal of the insurance proceeds under the conditions of the elected option. The insurance company never agreed to pay such principal sum under the conditions outlined in Agnes Tuohy's letter.The mode of payment of the proceeds of the two policies under the option elected by the guardian differed in certain material respects from the direction of payment set forth by Agnes Tuohy in her letter of June 8, 1939.Option 1 of the policies reads as follows:Option 1 -- Proceeds left on Deposit. -- The net sum payable may be left on deposit with the Company, and the Company will pay interest thereon at not less than three and one-half per centum per annum. The principal of the sum left with the Company on deposit will be paid under such conditions as may be agreed upon when the option is elected.At the date of death of Agnes Tuohy, pursuant to her valid change of beneficiaries under both policies, the beneficiaries, decedent and his brother, were entitled to obtain immediate payment of the proceeds of the policies. The proceeds281 of the policies vested in the beneficiaries upon the death of the insured.The respondent determined that the decedent's 50 per cent share in the proceeds of the two life insurance policies above mentioned should be included in the gross estate of decedent in accordance with section 811 (c) of the Internal Revenue Code.Respondent contends that decedent's mother's election to settle under option 1 of the policies of insurance involved was not effectively made during her life and that consequently when the guardian directed the company to pay the proceeds under option 1 there was a transfer sufficient to bring the value of decedent's interest in those proceeds into his gross estate within the meaning of section 811 (c) of the code. 249 Petitioner contends, however, that decedent's mother selected option 1 prior to her death by the letter which she wrote to the company on June 8, 1939, and that: * * The defeasance of John J. Tuohy's interest in the event of his death derived its force, * * * from what the insured did in her lifetime, and not from what he did after her death, and his act in purporting to create such a defeasible interest was not a taxable transfer.We can not282 agree under the facts of this case that decedent's mother, Agnes Tuohy, effectively elected that the proceeds of her policies of insurance should be paid in accordance with the terms of option 1. Petitioner admits on brief that the insurance company did not recognize Agnes Tuohy's letter as an election of option 1. In its requested findings of fact the following is stated:On the 9th day of February, 1940, the John Hancock Life Insurance Company not having recognized Mrs. Tuohy's letter of June 8, 1939, as a sufficient election of Option 1, said Bank of America National Trust and Savings Association as such guardian, filed in said court in the matter of said guardianship a petition for an order authorizing it as such guardian to execute and deliver to the insurance company a direction to change the beneficiaries under said policies, a copy of which said petition is attached to said Stipulation and marked Exhibit E. * In addition, the letter upon which petitioner relies as proving this election of option 1 by decedent's mother contains a statement which shows that she recognized that the letter was not effective as such election. The statement is as follows: * * Pending the283 preparation by you and its proper execution by me of the document necessary to effect this arrangement, I should like to have this request serve in the place of such document.There was no evidence adduced to show that such document was ever executed.It would seem that if Agnes Tuohy's election of option 1, as indicated in her letter of June 8, 1939, had been a sufficient election it would not have been necessary for the guardian to petition the court to direct the company to pay the proceeds under option 1. In this state of the record we can not say that petitioner has sustained its burden of overcoming respondent's determination that the election was made by decedent and not by his mother.The petitioner argues, among other things, that there was no affirmative act of the company necessary to put the terms of Mrs. Tuohy's letter into effect and that, even assuming such was required, yet petitioner should prevail because "equity will nevertheless regard the change as having been made," citing Estate of Burnett, 47 Cal. App. (2d) 464; 118 Pac. (2d) 298, and Johnston v. Kearns, 107 Cal. App. 557">107 Cal. App. 557;284 290 Pac. 640.250 With respect to the affirmative act contention, we can not see how petitioner's position is strengthened, for, exclusive of any further act by the company, it is apparent from the facts that some additional affirmative act was required of decedent's mother. This is indicated in the portion of the letter of June 8, 1939, quoted in our findings. So far as the record shows, nothing further was done by Agnes Tuohy after the writing of that letter to perfect the selection of option 1.As to the equity argument, it should be noted that the cases cited by petitioner involve situations where the insured had done all he could to effect a change of beneficiary in the policy, but died before the formal documents could be executed. In those cases death came within hours or a few days after the designation of change in the policy and the question was whether "the efforts of the insured prior to his death were effective to change the beneficiary under the policies so as to make the proceeds * * payable to the beneficiary." Estate of Burnett, supra. The California court there held that they were effective. Here, 285 however, Agnes Tuohy apparently did not perform what was required of her, although there was ample time to do so. The letter in which she indicated a desire to select option 1 was written on June 8, 1939, and she died on November 16, 1939. We therefore must conclude that she never perfected an election of option 1.Thus, having so decided, we must next determine whether the election of option 1 by decedent constituted a transfer of property within the meaning of section 811 (c), as respondent contends. We think, in view of Estate of Mabel E. Morton, 12 T.C. 380">12 T. C. 380, that that question must be answered in the affirmative. In that case decedent was a beneficiary of proceeds of policies of insurance on the life of her husband. At the death of her husband she was entitled to a lump sum payment of those proceeds. However, instead of taking them as a lump sum, the decedent elected to have the insurer retain the principal amount, paying her interest and so much of the principal during her life as she determined. The remainder was to be paid to her children and grandchildren. During her life the decedent received monthly interest payments, but she did not286 withdraw any part of the principal. The respondent determined that the proceeds of the policies of insurance were includible in the gross estate of the decedent under sections 811 (c) and (d), Internal Revenue Code. We agreed with the respondent stating, among other things, the following:* * * These funds were as much hers as if she had settled with the insurance company by receiving lump sum payments, and by her action she transferred them to those who upon her death were the recipients. Estate of William J. Higgs, 12 T. C. 280; cf. Chase National Bank v. United States, 278 U.S. 327">278 U.S. 327. * * *251 We do not believe the facts of this case are distinguishable from those of Estate of Mabel E. Morton, supra. Here, as there, the decedent was entitled to a lump sum payment of proceeds of the policies upon the death of his mother. However, instead of taking in that form, he elected to take under an optional method of settlement as above outlined. Under that mode of settlement, he retained the income until the age of 35, at which time the principal was to be paid to him in one sum. Under287 this optional method of settlement decedent also elected that, in the event of his death prior to attaining the age of 35, his share was to be paid either to his surviving children, or if he left no issue, that amount was to be added to the share of the survivor of the two beneficiaries. In view of the above facts, therefore, we conclude, on the basis of Estate of Mabel E. Morton, supra, page 384, that there was a transfer "to those who upon [his] death were the recipients." See Chase National Bank v. United States, 278 U.S. 327">278 U.S. 327. We therefore conclude that there was a transfer of property of a character which makes it includible in decedent's gross estate under section 811 (c).Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625894/	Irving D. Fisher and Sylvia Fisher, Petitioners v. Commissioner of Internal Revenue, RespondentFisher v. CommissionerDocket No. 5481-67United States Tax Court54 T.C. 905; 1970 U.S. Tax Ct. LEXIS 150; April 29, 1970, Filed 150 Decision will be entered for the respondent. The petitioner, as president of a corporation the stock of which was owned by his son, received a stated salary, and, in addition, withdrew amounts from the corporation which were carried on the corporate books as accounts receivable and notes receivable. Held, that such additional amounts withdrawn by the petitioner constituted additional compensation for services, rather than loans to him. Maurice Weinstein, for the petitioners.Denis J. Conlon, for the respondent. Atkins, Judge. ATKINS905 The respondent151 determined deficiencies in income tax for the taxable years 1963, 1964, and 1965 in the respective amounts of $ 926.97, $ 2,488.38, and $ 1,992.53, and additions to tax under section 6653(a) of the Internal Revenue Code of 1954 for the taxable years 1963, 1964, and 1965 in the respective amounts of $ 46.35, $ 124.42, and $ 99.63. Some of the issues, including the issue with respect to the additions to tax, having been conceded by the petitioner, the only issue remaining for determination is whether certain amounts which petitioner purportedly borrowed from the corporation by which he was employed were in fact loans to petitioner or were taxable income to petitioner.FINDINGS OF FACTSome of the facts were stipulated and are incorporated herein by this reference. Petitioners Irving D. Fisher and Sylvia Fisher are husband and wife and were such during the taxable years 1963 through 1965, inclusive. At the time of the filing of the petition herein, they were residents of Milwaukee, Wis. They filed their joint Federal income tax returns for the taxable years 1963, 1964, and 1965 with the district director of internal revenue at Milwaukee, Wis. Sylvia Fisher is a party to this proceeding152 solely by virtue of having signed the joint returns, and as a matter of convenience Irving D. Fisher will hereinafter be referred to as the petitioner.906 Since the early 1940's petitioner has been engaged in the business of buying and selling various types of scrap metal. Between 1940 and 1947 he was a partner in a partnership engaged in this business. The other partners were his father, Lewis Fisher, his mother, Dorothy Fisher, his brother, Edward Fisher, and his brother -in-law, Joseph Cohen. In 1947 a corporation, Fisher Iron & Steel Co., was organized and took over the business of the partnership. Petitioner was a stockholder in this corporation, as were the other partners of the partnership. Petitioner was a principal officer of both the partnership and the corporation, buying and selling scrap metal on their behalf.During the years 1956 and 1957 petitioner, as a managing officer of Fisher Iron & Steel Co., received salaries of $ 24,000 and $ 27,000, respectively. Between 1952 and 1960, he also made substantial withdrawals from the corporation in addition to his salary.For its fiscal year ended April 30, 1960, Fisher Iron & Steel Co. sustained a loss of $ 15,304.96, 153 which practically depleted its working capital. In view of its financial situation and past operations it was decided to cease operations, after which its only activity consisted of disposing of its merchandise, collecting accounts receivable, and paying liabilities. At about this time substantial Federal tax liabilities were assessed against Fisher Iron & Steel Co. It has continued to remain in existence but has ceased to carry on any active operations. Its balance sheet as of April 30, 1961, showed as its only assets accounts receivable from officers, a building on leased premises which had no value, and $ 74.99 in cash. Its liabilities totaled $ 11,019.44 which it has never been able to pay. Included among the accounts receivable from officers was an amount of $ 24,248.12 due from petitioner. Fisher Iron & Steel Co. has never collected this amount from petitioner.On July 29, 1960, Steel Trading, Inc. (hereinafter referred to as the corporation), was incorporated. It had an authorized capital stock of 5,000 shares of a par value of $ 100 per share. On August 8, 1960, 300 shares were issued to Dorothy Fisher, petitioner's mother, for $ 30,000. She paid for this stock by154 giving checks to the corporation for $ 10,200 on August 5, 1960, and $ 1,000 on August 11, 1960, and by transferring to it marketable securities valued at $ 16,835.13 and U.S. series E savings bonds worth $ 2,250, for a total payment of $ 30,285.13. The balance of $ 285.13 was carried by the corporation as a liability to Dorothy Fisher.Dorothy Fisher continued to own the 300 shares until her death on August 9, 1961. Pursuant to the provisions of her will, these shares were transferred by her estate to Michael Fisher, petitioner's son, on October 1, 1963. Michael Fisher still owns these 300 shares. None of the other authorized shares was ever issued by the corporation and petitioner does not now own, and never has owned, any of its stock.907 On August 2, 1960, the corporation purchased for $ 10,240 the assets of Fisher Iron & Steel Co., consisting of machinery, equipment, automobiles, and merchandise. It carried on the same general business of buying and selling scrap steel as had been carried on by Fisher Iron & Steel Co., except that the products were not handled physically. Rather, the trading was conducted on a brokerage basis, the corporation dealing only with shipping155 documents.For the fiscal years ended July 31, 1963 through 1968, the directors of the corporation have been petitioner, his wife, and his son, Michael Fisher. Petitioner has continuously been president of the corporation. For fiscal years 1963 through 1967 petitioner's wife has been its vice president, and Michael Fisher has been its secretary-treasurer. Petitioner was its general manager. He ran the business. He had expert knowledge of the scrap steel business and did the buying and selling of the scrap steel. Such success as the corporation had was due to his skill in buying and selling scrap steel. Petitioner's son, Michael, was away from home from 1961 to 1964 attending law school at Madison, Wis. Thereafter he was engaged in the practice of law.According to the corporation's books, petitioner was paid salaries for the corporation's taxable years ended July 31, 1963, 1964, and 1965, in the respective amounts of $ 10,400, $ 12,000, and $ 12,000. Michael Fisher was paid $ 3,000 for each of the corporation's fiscal years ended July 31, 1964 and 1965. During those 3 fiscal years no other business salaries were paid.For Federal income tax purposes, the corporation reported156 total sales of about $ 215,000 and taxable income of $ 3,292.83 for the fiscal year ended July 31, 1963, total sales of about $ 365,000 and taxable income of $ 13,004.19 for the fiscal year ended July 31, 1964, total sales of about $ 244,000 and a net loss of $ 1,465.09 for the fiscal year ended July 31, 1965, and total sales of about $ 272,000 and taxable income of $ 5,843.56 for the fiscal year ended July 31, 1966.The petitioner had authority to draw checks on the corporation's bank account. In his taxable years 1963, 1964, and 1965, petitioner by checks drawn on such account made total withdrawals from the corporation in the respective amounts of $ 2,831.42, $ 8,352.08, and $ 7,230.47, in addition to his stated salary. The withdrawals were generally in relatively small amounts that were used for petitioner's personal living expenses consisting of payment of pharmacy bills, hotel bills, rent, and other expenses. For example, among the withdrawals in 1964 was an amount of $ 1,650 which was used to pay the rent for an apartment in which petitioner resided. The petitioner's son, Michael, knew that petitioner was making withdrawals in excess of his stated salary.These withdrawals157 were treated on the corporation's books as accounts receivable due from petitioner. On July 31, 1964, petitioner 908 executed an unsecured demand note to the corporation for $ 9,000, bearing interest of 4 percent per year, and on July 31, 1965, he executed a similar note for $ 4,500, these amounts thereafter being carried as notes receivable instead of accounts receivable. The corporation continued to carry the excess of the withdrawals over the amount of these notes as accounts receivable. The withdrawals were never deducted by the corporation as expenses. It continued to treat the notes and accounts receivable as assets.At the time these withdrawals were made Michael Fisher was generally aware of petitioner's financial condition. He knew that the only source of petitioner's income was his salary from the corporation. He also knew of some of his debts, including his outstanding obligations to Fisher Iron & Steel Co. He was also aware of the fact that in 1962 there had been a mortgage foreclosure on petitioner's residence.On August 17, 1960, notices of Federal tax liens against petitioner were filed in the U.S. District Court, Eastern District of Wisconsin, in amounts158 totaling $ 76,340.19 for the taxable years 1946 through 1950, inclusive, and 1952. In connection with these outstanding tax liabilities the petitioner, on February 12, 1962, submitted to the district director an offer in compromise. On February 12, 1964, he submitted an amended offer, which included such liability and an additional tax liability of about $ 1,000 for the taxable years 1958 and 1959. Attached to these were statements showing petitioner's financial condition. The only assets listed are petitioner's furniture values at $ 2,000 and cash varying from $ 50 to $ 200. Petitioner's only listed source of income was his salary from the corporation. The financial statements show that as of July 31, 1960, petitioner was indebted to Fisher Iron & Steel Co. in the amount of $ 26,998.12 and that that liability remained unpaid. These statements indicate that the first mortgage on petitioner's residence was foreclosed in 1962 and that he was not able to redeem it.With the offer in compromise in 1962 and the amended offer in 1964, there were proposed collateral agreements under which a percentage of petitioner's income would be applied in payment of his total outstanding tax 159 liability.On November 29, 1965, the district director accepted petitioner's offer in compromise of $ 10,000 payable as follows: "$ 2,000 payable within 30 days from the date of this letter, the balance of $ 8,000 payable in quarterly installments of $ 400 commencing with March 15, 1966 and thereafter on the 15th day of every third succeeding month until paid in full."A collateral agreement was also executed which provided that in addition to the payment of the $ 10,000 the petitioner, from his annual income during the period 1966 to 1975, would pay on his total tax liability 20 percent of his income exceeding $ 6,000 but less than $ 8,000, 909 30 percent exceeding $ 8,000 but less than $ 10,000, and 50 percent of his annual income in excess of $ 10,000.On March 17, 1958, petitioner was convicted in the U.S. District Court for the Eastern District of Wisconsin, upon his plea of nolo contendere, of the offense of "attempting to evade and defeat Income Tax due and owing to the United States, by filing with the Collector of Internal Revenue a false and fraudulent income tax return, etc. in violation of Section 145(b), Int. Rev. Code; 26 U.S.C., Section 145160 (b)" for the taxable year 1950.In their joint income tax returns for the taxable years 1963, 1964, and 1965 the petitioner reported as his only income the amounts of $ 10,400, $ 12,000, and $ 12,000, respectively, received as salary from the corporation.In the notice of deficiency the respondent recomputed petitioner's taxable income for the taxable years 1963, 1964, and 1965 by including therein, as salary income from the corporation, the withdrawals in the respective amounts of $ 2,831.42, $ 8,352.08, and $ 7,230.47.There was no bona fide intention on the part of either the petitioner or the corporation that the amounts withdrawn by the petitioner from the corporation in excess of his stated salary in the taxable years 1963, 1964, and 1965 should be repaid and therefore the withdrawals did not give rise to a bona fide debtor-creditor relationship. The amounts withdrawn constituted taxable compensation to the petitioner.OPINIONThe issue presented is whether amounts totaling $ 18,413.97 withdrawn by petitioner from the corporation in excess of his stated compensation in 1963, 1964, and 1965 constituted amounts borrowed from the corporation as contended by petitioner or whether161 they constituted additional compensation to petitioner as determined by the respondent. On brief the respondent contends that there was no bona fide debtor-creditor relationship between petitioner and the corporation and that these withdrawals, irrespective of any formal obligation to repay, are income to the petitioner within the meaning of section 61(a) of the Internal Revenue Code of 1954. 1Whether a bona fide debtor-creditor relationship exists is a question of fact to be determined upon a consideration of all the pertinent facts in the case. See Jack Haber, 52 T.C. 255">52 T.C. 255, affd. (C.A. 5) 422 F. 2d 198 (1970).162 An essential element is whether there exists a good-faith 910 intent on the part of the recipient of the funds to make repayment and a good-faith intent on the part of the person advancing the funds to enforce repayment. See Chism's Estate v. Commissioner, (C.A. 9) 322 F. 2d. 956, affirming a Memorandum Opinion of this Court, and C. M. Gooch Lumber Sales Co., 49 T.C. 649">49 T.C. 649.Here the amounts which the petitioner withdrew from the corporation were recorded in the corporation's books as accounts receivable and thereafter $ 13,500 of the withdrawals was made the subject of two unsecured demand notes providing for interest at 4 percent. At the trial the petitioner testified that his son Michael, who owned all the stock of the corporation, knew of the withdrawals and that both he and his son expected the amounts to be repaid when he was able to make repayment. Michael testified that he knew of these withdrawals and that he expected the petitioner would repay these amounts, and that there was no understanding between them that the amounts would not have to be repaid.The judicial ascertainment of someone's subjective163 intent or purpose motivating actions on his part is frequently difficult, and his true intention is to be determined not only from the direct testimony as to intent but from a consideration of all the evidence. Army Times Sales Co., 35 T.C. 688">35 T.C. 688, and American Properties, Inc., 28 T.C. 1100">28 T.C. 1100, affd. (C.A. 9) 262 F. 2d 150. In determining such question an essential consideration is whether under all the particular facts and circumstances there was a reasonable expectation of repayment in light of the economic realities of the situation. C. M. Gooch Lumber Sales Co., supra.In American Properties, Inc., supra, we stated:The statement of an interested party of his intention and purpose is not necessarily conclusive. Helvering v. National Grocery Co., 304 U.S. 282">304 U.S. 282, affirming 35 B.T.A. 163">35 B.T.A. 163. In R. L. Blaffer & Co., 37 B.T.A. 851">37 B.T.A. 851 affd. (C.A. 5) 103 F. 2d 487, certiorari denied 308 U.S. 576">308 U.S. 576, we stated164 that one's categorical statement may be of less weight than the facts and circumstances which affect it and that "[to] be skeptical of the weight to be accorded an interested witness' statement in view of other evidence is not the same as wholly to reject the statement as if it were dishonest." * Upon a consideration of the whole record, it is our conclusion that the withdrawals here in question did not give rise to a bona fide debtor-creditor relationship. At the time of the withdrawals the petitioner was in fact, if not in law, insolvent. Federal tax liens totaling $ 76,340.19 were outstanding against him during the years 1963, 1964, and 1965. Since 1960 the petitioner had also been indebted to Fisher Iron & Steel Co. in the amount of $ 26,998.12. This obligation has never been discharged. Prior to the withdrawals the mortgage on petitioner's home had been foreclosed and he had been unable to redeem it. The petitioner's assets consisted of only his furniture valued 911 at $ 2,000 and an insubstantial amount of cash. His only source of income was the salary that he received from the corporation. The petitioners son Michael was aware of the petitioner's financial165 condition. The petitioner testified in effect that he expected to expand the corporation's operations and increase its earnings and thereby enable it to pay him a larger salary out of which he could repay his indebtedness, including the withdrawals in question. However, even if he had been able to obtain an increase in his stated salary, we fail to see how he could have expected to repay his indebtedness, including the withdrawals, from any such increase. In 1962 the petitioner had commenced negotiations with the Internal Revenue Service looking toward a compromise of his large tax liability and was aware that as a condition to a compromise it would be necessary to enter into a collateral agreement requiring that a substantial portion of his future income be applied in payment of the total tax liability over and above any amount agreed upon in compromise. As shown by the facts, the petitioner in 1965 did enter into a compromise agreement and a collateral agreement which provided for such application over a period of 10 years to the extent of 20 percent of income between $ 6,000 and $ 8,000, 30 percent of income between $ 8,000 and $ 10,000, and 50 percent of all income in excess166 of $ 10,000. We think the conclusion is inescapable that there was no reasonable expectation, at the time the amounts in question were withdrawn from the corporation, that they would be repaid. Under all the circumstances it is our conclusion that there was no bona fide intention on the part of either the petitioner or the corporation that the amounts in question should be repaid. It should be added that, insofar as the record shows, no part of the withdrawals has been repaid and that, although the demand notes called for the payment of interest, no interest has ever been paid.We are not here presented with the question which often arises as to whether a withdrawal from a closely held corporation constitutes a dividend rather than a bona fide loan. All the stock of the corporation was owned by the petitioner's son Michael, and there could be no basis for holding that the petitioner was in receipt of a dividend. However, we have held that where no bona fide indebtedness existed withdrawals by an officer may constitute taxable compensation. See Jack Haber, supra.Here the respondent determined that the withdrawals constituted salary income, and 167 on this record we cannot conclude that such determination was erroneous. On the contrary, the evidence supports that determination. Petitioner ran the corporation and he apparently was the only one who rendered services that produced any income for it. Michael apparently devoted little or no time to the corporation, having been away at school for 2 of the years in question and having been occupied in his own profession during the 912 remaining year. Apparently the petitioner was rendering to the corporation substantially the same services as he had rendered to the corporation by which he had been previously employed, which was a corporation owned by himself and his family. During the years 1956 and 1957 he had drawn from that corporation salaries in the respective amounts of $ 24,000 and $ 27,000. Under the circumstances, we think it reasonable to conclude that the petitioner's services were worth more than his stated salary and that the corporation permitted the petitioner to make withdrawals only in connection with the rendition of such services. There is no intimation that the amounts withdrawn constituted gifts to petitioner from the corporation or from his son Michael. 168 We therefore hold that the withdrawals in question constituted taxable compensation to petitioner.Decision will be entered for the respondent. Footnotes1. Sec. 61(a) of the Internal Revenue Code of 1954 states:SEC. 61. GROSS INCOME DEFINED.(a) General Definition. -- Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: (1) Compensation for services, including fees, commissions, and similar items; * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625895/	EMIL RIES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Ries v. CommissionerDocket No. 26423.United States Board of Tax Appeals25 B.T.A. 896; 1932 BTA LEXIS 1460; March 15, 1932, Promulgated 1460 An Illinois corporation, organized and operated for profit, disposed of all its property to another Illinois corporation later created, not for profit, the latter corporation paying for the property of its predecessor in debenture bonds, which were distributed to the stockholders of the prior corporation pro rata and in proportion to their holdings of stock therein. Petitioner owned stock in the original corporation which was acquired prior to 1913 and cost him $11,000, and received therefor debenture bonds of the second corporation of the face value of $3,666.66, but their fair market value at the time received, the evidence does not disclose. The March 1, 1913, fair market value of the stock which cost the petitioner $11,000 prior to that date is not in evidence. In the absence of such evidence, in the circumstances of this case as fully detailed in our findings of fact, held, the Commissioner's action in disallowing petitioner's claim of loss is approved. Frederick D. Silber, Esq., for the petitioner. W. R. Lansford, Esq., for the respondent. SEAWELL896 The Commissioner determined deficiencies in income tax for 1922 in the amount1461 of $777.87 and for 1923 in the amount of $285.30. The deficiency for 1922 only is contested, the deficiency for 1923 having been conceded by the petitioner. The deficiency for 1922 is due to the disallowance by the Commissioner of a deduction from gross income for an alleged loss of $7,333.33 sustained by the petitioner in that year. The case is submitted on the pleadings, stipulation, exhibits and testimony of the petitioner. FINDINGS OF FACT. The petitioner is a resident of Chicago, Illinois. From 1896 to 1902 the petitioner acquired capital stock of the Post Graduate Medical 897 School of Chicago, an Illinois Corporation organized for profit, of the par value of $11,000, for which he paid par. On March 31, 1922, the corporation had more than seventy stockholders, its officers on that date being Dr. William L. Baum, president; Dr. Emil Ries, vice president; Dr. H. L. Meyers, secretary; and Dr. A. A. Goldsmith, treasurer. On March 31, 1922, another Illinois corporation, not for profit, was organized, known as Post Graduate Hospital and Medical School, its object being, as follows: To conduct a Post Graduate Hospital and any other hospital that may come under1462 the management of the corporation; to conduct post graduate teaching of medicine in all its branches; to conduct one or more dispensaries with the necessary drug dispensaries; to conduct a training school for nurses; to conduct all laboratories necessary for the purposes of hospital and school; including anatomical, X-Ray, chemical, pathological, and similar laboratories. The by-laws of this latter corporation adopted March 31, 1922, among other things provided that membership in the corporation should consist of the persons named in the charter as directors and such other persons who shall be elected by the directors, who possessed the power by resolution to designate the qualifications of membership in the corporation. The by-laws further provided that the membership should be personal and should terminate with the death of such member; that a member might resign but that such resignation would create no vacancy in the membership; that there should be no limit to the number of members and each member should have the right to attend all meetings and cast one vote thereat. Upon the organization of said corporatiov, March 31, 1922, and thereafter, the following named persons1463 were the sole members of the corporation: Dr. William. L. Baum. Dr. Emil Ries. Dr. Harry L. Meyers. Dr. Alexander A. Goldsmith. M. Moeller. R. W. Hardon. Edmund M. Sinnott. Donald N. Clausen. Martin J. Isaacs. T. J. Sullivan, Sr. Melvin Joseph Cassidy. O. J. Stein. The Post Graduate Hospital and Medical School, in order to acquire a hospital and medical school for carrying on its objects, on March 31, 1922, by proper resolution of its members, authorized a proposal to purchase of the Post Graduate Medical School of Chicago "its equipment and all property rights, contracts and undertakings and engagements" and to pay therefor $23,000, to be evidenced by debenture bonds due on or before 20 years afterward, with interest at 5 per cent per annum, payable semiannually. On April 11, 1922, the authorized proposition was submitted to a special meeting of the stockholders of the Post Graduate Medical 898 School of Chicago, which passed resolutions accepting the same and stating therein, among other things, as reasons for so doing, that: WHEREAS, the function of the Post Graduate Medical School is the teaching of medicine to graduates in medicine and the1464 fostering of research and investigation, and, WHEREAS, the function of the Post Graduate Medical Hospital is the care of the sick and the study and improvements of methods of treatment, and, WHEREAS, these functions are not, cannot be and should not be carried out as a dividend paying business, but are a distinct service to science and the community and as such needed by and useful to the community, and therefore worthy of and entitled to the support of the community, and, WHEREAS, the stockholders of the Post Graduate Medical School of Chicago recognize the above statements as true and are willing and anxious to sacrifice considerable parts of their moneys invested in stock of the Post Graduate Medical School of Chicago, for the purpose of increasing its usefulness and improving its standing, * * . Resolutions were also passed authorizing the officers to execute all necessary instruments to convey its assets to the Post Graduate Hospital and Medical School and directing, upon consummation of the sale, that possession of the property of the Post Graduate Medical School be delivered to the Post Graduate Hospital and Medical School "upon receiving the notes" of the latter, 1465 which notes when received were to be held "in the Company's treasury to abide the further action of the board of directors of the Company." Thereafter (the evidence does not disclose the date) proper instruments of transfer were executed by the Post Graduate Medical School of Chicago, conveying all its property and assets to the Post Graduate Hospital and Medical School, possession thereof being also given, and in full payment therefor the Post Graduate Medical School of Chicago received from the other corporation its 5 per cent debenture bonds of the face value of twenty-three thousand dollars. The evidence does not show how or from what source said bonds were payable. On June 15, 1922, at a special meeting of the directors of the Post Graduate Medical School of Chicago, a resolution was adopted (authority being given therefor by the stockholders) directing that the $23,000 of "notes" or debenture bonds (the consideration for said transfer) be distributed to the stockholders of the Post Graduate Medical School of Chicago, ratably and in proportion to their holdings of stock in the company. Thereupon, the directors of the Post Graduate Medical School of Chicago unanimously adopted1466 resolutions, reciting it had no assets of any kind, having sold all its physical property and distributed the proceeds thereof among its stockholders, and directing that it be dissolved and its charter surrendered and that certificate of dissolution be filed in the office of the Secretary 899 of State at such time as the officers of the corporation should determine for its best interests. Thereafter, in 1922, a dissolution certificate was duly executed and filed with the Secretary of State of Illinois and other action taken in accordance with the statutes of Illinois, resulting in the Post Graduate Medical School of Chicago ceasing to exist in that year. In accordance with the provisions of the resolution of June 15, 1922, passed by the board of directors of the Post Graduate Medical School of Chicago, the $23,000 of 5 per cent debenture bonds were in 1922 duly and ratably distributed to its stockholders, the petitioner herein receiving bonds of the face value of $3,666.66. Petitioner gave to the Post Graduate Hospital and Medical School 5 per cent debenture bonds aforesaid to the face value of $2,233.33 for the purpose of furthering the scientific work of such corporation1467 and in order to reduce its interest-paying charges. The Commissioner disallowed $7,333.33 claimed as a loss by petitioner in his income-tax return for 1922, being the difference between the par value of the stock of the Post Graduate Medical School of Chicago originally owned by him and the face value ($3,666.66) of said 5 per cent debenture bonds received by him as stated above. The stockholders in the Post Graduate Medical School of Chicago held stock therein of a total par value of $69,000 and when the Post Graduate Hospital and Medical School acquired the assets of the former corporation the stockholders thereof received therefor the aforesaid debenture bonds of the face value of $23,000. The Post Graduate Hospital and Medical School of Chicago had a different staff of officers from the original or first corporation. The value of the buildings of the Post Graduate Medical School of Chicago as shown by its return for 1922 was $111,795.85, with a total depreciation of $18,216.17 for previous years and $2,235.92 for that year. For the year 1919 the net income of the Post Graduate Medical School of Chicago as reported for Federal tax purposes was $3,606.62, after repairs1468 of $3,356.76 had been made; for the year 1920 the net profits for such tax purposes so reported were $2,391.89, after $6,241.61 repairs had been made; and for 1921 said profits were $3,643.46, after $4,467.42 repairs were made. The Post Graduate Medical School of Chicago, organized and operated as a profit-making corporation, ceased to exist as such because not very successful and desiring to escape the payment of taxes. The Post Graduate Hospital and Medical School which succeeded it and acquired all its assets was organized and operated as a nonprofit-making corporation, exempt from Federal taxes. Both corporations were organized and operated largely for the same objects and purposes. 900 The return filed by the Post Graduate Medical School of Chicago for the calendar year 1922 was made for both corporations, it being stated therein: "This company was succeeded April 1, 1922 by the Post Graduate Hospital and Medical School, an Illinois corporation organized not for pecuniary profit. The books of the two companies reflect a continuity of ownership and control and in this return the gross income has been prorated between the two companies." The return is duly signed1469 and sworn to by the president and treasurer of the corporation. No dividends were ever declared or distributed to the stockholders of the Post Graduate Medical School of Chicago, all monies made by the corporation being immediately put into the plant for repairs, etc. No attempt was made to sell its property to any person or corporation other than the Post Graduate Hospital and Medical School which acquired the same in the manner stated. There was, at the time of the transfer of the property, a first mortgage of about $16,000 thereon. The then fair market value of the property of the Post Graduate Medical School of Chicago, or what such might have been sold for, the evidence does not disclose. The property, however, had depreciated in value. What was the fair market value, if any, of the debenture bonds at the time received by the petitioner is not shown, though their maximum value was not more than their face amount. The fair market value on March 1, 1913, of petitioner's stock in the Post Graduate Medical School is not in evidence. OPINION. SEAWELL: The evidence shows there were two corporations organized largely for the same purposes. The Post Graduate Medical1470 School of Chicago, herein termed the first corporation, was organized as a profit-making corporation. The second corporation, the Post Graduate Hospital and Medical School, was organized as a nonprofit-making corporation. The record shows the first corporation was not operated very successfully and on that account and to escape payment of taxes, which as a corporation for profit it had to pay, it was deemed advisable to organize another corporation, a nonprofit-making corporation which would acquire the property of the first, and to dissolve the first corporation. Resolutions passed by the stockholders of the Post Graduate Medical School of Chicago stated that they were "willing and anxious 901 to sacrifice considerable parts of their moneys invested in stock" of such school "for the purpose of increasing its usefulness and improving its standing" and were, therefore, ready to accept and did accept the proposition made by the Post Graduate Hospital and Medical School, which resulted in the stockholders of the first corporation, holding $69,000 of its stock, receiving therefore $23,000 of debenture bonds of the latter corporation, the petitioner herein receiving for his1471 stock in the first corporation, which stock cost him $11,000, debenture bonds of the second corporation of the face value of $3,666.66. Prior to the acceptance of the proposition made the first corporation by the second corporation, there was no attempt made to sell the assets of the first corporation. What might have been realized by such a sale or what was then the value of the stock in such corporation is not shown. The net result of the transaction is that the petitioner, having before March 1, 1913, purchased shares of the first corporation for $11,000, received in 1922 a liquidation thereof in the form of debentures having a face value of $3,666.66. What their fair market value was at the time of their receipt by the petitioner is not in evidence. The applicable law in the circumstances of the instant case is the Revenue Act of 1921, which makes it necessary for March 1, 1913, value of the shares of stock in the Post Graduate Medical School of Chicago, purchased by the petitioner prior to that date, to be shown before any loss can be allowed petitioner because of the receipt by him of debentures of the face value of only $3,666.66. The evidence failing to show the March 1, 1913, value1472 of shares which cost petitioner $11,000, no loss can be reckoned nor allowed. . If the petitioner's shares on March 1, 1913, were worth not more than $3,666.66 (the maximum value of the debentures he received) he would have no recognizable gain or loss. ; . In view of the fact that the March 1, 1913, value of petitioner's shares is not in evidence, it is unnecessary to discuss or decide whether there was in law a reorganization or an exchange. The Commissioner determined there was no loss and there is no evidence adduced overcoming the presumption of the correctness of such determination. Such determination is, therefore, approved. As to the deficiencies for both years, 1922 and 1923, Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625896/	Marian M. Smiley v. Commissioner.Smiley v. CommissionerDocket No. 2170-63.United States Tax CourtT.C. Memo 1964-138; 1964 Tax Ct. Memo LEXIS 196; 23 T.C.M. (CCH) 842; T.C.M. (RIA) 64138; May 18, 1964196 Marian M. Smiley, pro se, 1504 Linwood, Evansville, Ind. Thomas J. Young, for the respondent. SCOTT Memorandum Findings of Fact and Opinion SCOTT, Judge: Respondent determined a deficiency in petitioner's income tax for the calendar year 1961 in the amount of $150. The issue for decision is whether petitioner is entitled to deduct a loss in the amount of $750 which she sustained in 1961 upon the sale of a leasehold interest in property. Findings of Fact Petitioner who resides in Evansville, Indiana, filed an individual Federal income tax return for the calendar year 1961 with the district director of internal revenue at Indianapolis, Indiana. On June 9, 1958, petitioner purchased for $1,750 a leasehold estate in a property situated on a riverbank. The property was improved with a frame building containing one room approximately 12 by 14 feet and a porch approximately 6 by 12 feet. The leasehold was for 30 years. The building was referred to by petitioner as a "camp". In the particular area in which this camp was located the owners of the property along the river would not sell the property but had leased various pieces of property to individuals for construction197 of camps. Petitioner's camp was situated on riverfront property with steps down to the river. There were two small lakes and an artificial lake near the camp. The camp was furnished, the furnishings including a stove and refrigerator. On the property leased there was an outside water pump and outside toilet near the cabin. The artificial lake near the cabin had resulted from a dam across the river, and on this lake was located a club called the Tristates Sportsmen Club. Prior to the time petitioner purchased the property she had heard that the Government was considering developing the area in which the camp was located into a resort type area, and she believed that the property would increase in value. The camp was located approximately 35 miles from Evansville, Indiana where petitioner was residing at the time she acquired the camp. She learned of the camp being for sale by reading an advertisement in an Evansville newspaper. Petitioner borrowed the entire purchase price of the camp from a small loan company in Evansville, Indiana. Petitioner purchased the camp with the idea that she would pay off the loan over the years, that the camp would increase in value, and that she would198 sell the camp at an increased price at a later date and use the proceeds to assist in sending her son to college. In 1958 petitioner's son was 9 years old, and petitioner and her son lived in a 7-room house with petitioner's mother, father, and sister. For the first 3 months after petitioner purchased the camp she and her son spent every other weekend at the camp. Approximately 3 months after purchasing the camp, petitioner lost her job at Evansville, Indiana and obtained a similar job in Terre Haute, Indiana and moved there. After losing her job, petitioner refinanced her car in order to make the payments on the camp but made no attempt to sell the camp. She did attempt to rent the camp but was not successful in doing so except on a very few occasions, because of the difficulty in renting property of this type when she was not in Evansville. In 1961 petitioner sold the camp at a loss of $750 which she deducted on her income tax return for the year 1961. Respondent disallowed the claimed deduction. Ultimate Finding of Fact Petitioner's primary purpose in acquiring the leasehold interest in the camp was to sell this interest at a profit after the Government developed the199 area in which the camp was located. Opinion The question here is one of fact. If, as respondent contends, petitioner acquired this camp primarily for the purpose of using it as a place to spend weekends with her son, the loss on the sale is a personal loss and not deductible. , affirmed (C.A. 2, 1962). This is true even though the taxpayer purchases the property with an expectation of making a profit on the sale of the property after it has served the personal purpose for which it was primarily acquired. . Where, however, a taxpayer purchases a piece of property primarily for the purpose of deriving a gain upon the sale thereof, if upon the sale a loss is incurred, such loss is deductible as a loss incurred in a transaction entered into for profit. . Cf. . In the instant case petitioner testified unequivocally that her intention in purchasing the camp was to derive a profit upon the sale thereof after the Government had developed the area for recreational200 purposes. We believe petitioner's testimony. Not only was petitioner's demeanor as a witness such as to make her testimony quite persuasive but the other facts of record support petitioner's statements. If petitioner had, in fact, purchased the camp, as respondent contends, for a place to spend weekends with her son, it appears that she would have sold the camp when she lost her job and had to obtain employment in Terre Haute, Indiana. She did not sell the camp at that time but refinanced her automobile in order to be able to retain the camp. Respondent's primary arguments are based on statements which he contends petitioner made when she purchased and sold the camp and on statements he contends were made to petitioner by her son's doctor. Petitioner said if in fact she had stated when she purchased the camp, that she wanted it for herself and her son to spend weekends in, and when she sold it had told the purchaser that she had bought it at a time when her son was at an age where he needed to get away from his grandparents and have a place where he could pursue manly activities, such statements were merely made in general conversation and did not express what her true reasons201 for purchasing the camp were. Petitioner was doubtful that she had even made the statements. Petitioner admitted that her son's doctor had suggested that it would be beneficial to her son if she and her son lived alone. She denied that he had suggested that she obtain a property similar to the camp. We hold that petitioner is entitled to deduct the $750 loss on the sale of the leasehold interest in the camp as a capital loss from a transaction entered into for profit. Decision will be entered for petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625899/	CHESTER W. FANNON, JR., AND MARY T. FANNON, Petitioners, V. COMMISSIONER OF INTERNAL REVENUE, RespondentFannon v. CommissionerDocket No. 33986-84.United States Tax CourtT.C. Memo 1986-572; 1986 Tax Ct. Memo LEXIS 32; 52 T.C.M. (CCH) 1113; T.C.M. (RIA) 86572; December 2, 1986. Malcolm E. Ritsch, Jr.,James H. Price III and James W. Morris III, for the petitioners. William L. Ringuette, for the respondent. DRENNENMEMORANDUM FINDINGS OF FACT AND OPINION DRENNEN, Judge: Respondent determined deficiencies in petitioners' Federal income tax for taxable years33 ending December 31, 1979, 1980 and 1981 in the amounts of $29,095.59, $39,811.23, and $27,837.71, respectively. The single issue for decision is: what was the fair market value on December 17, 1979, of a "scenic easement" over certain real estate in Rappahannock County, Virginia, donated by petitioners to the Virginia Outdoors Foundation. Some of the facts have been stipulated. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference. Petitioners are husband and wife whose legal residence at the time of filing the petition herein was Castleton, Virginia. For taxable years 1979, 1980 and 1981, petitioners timely filed joint Federal income tax returns with the Director, Internal Revenue Service Center, Memphis, Tennessee. Petitioners own approximately 333 acres of scenic, rural property located in the Jackson District of Rappahannock County, Virginia. The subject property is located two and one-half miles from Washington, Virginia. Washington, the county seat, is approximately 65 miles southwest of Washington, D.C. The population of Washington, Virginia in 1979 was approximately 200. It grew approximately 30.7 percent between 197034 and 1980 while Rappahannock County grew approximately 17.2 percent during the same years. Most of petitioners' property consists of gently rolling pasture, cropland or woods. Two rivers, the Thornton and Battle Run, pass through the property. Other than petitioners' residence, swimming pool, barn and miscellaneous frame buildings, the property is largely unimproved. There are no sidewalks or curbs, sewage disposal is by an individual on-site septic system, and water is provided by means of drilled wells. Access to petitioners' property is provided by two paved state highways. Virginia state Route 729 is the eastern boundary for much of the property and state Route 618 bysects the property east and west at its midpoint. By a valid deed of easement dated December 17, 1979, petitioners conveyed to the Virginia Outdoors Foundation, an "open-space easement in gross over, and a right in perpetuity to restrict the use of" approximately 308.25 acres 1 of petitioners property (hereafter referred to as the "scenic easement" or "easement"). Virginia Outdoors Foundation is a qualified charitable organization described in section 170(c)(2). 2 The restrictions imposed by the scenic easement35 on the use of the property include: (1) no dumping of refuse; (2) restrictions on signs and outdoor advertising; (3) with the exception of one 38 acre parcel, no subdivison into parcels less than 50 acres each; (4) only selective culling of timber; (5) restrictions on grading, blasting or earth removal; (6) restrictions on the number and type of structures that may be constructed on each parcel in the event of subdivision; and (7) restrictions on industrial or commercial activities. Conveyance of the scenic easement to the Virginia Outdoors Foundation qualified under section 170(c) as a charitable contribution. On their Federal income tax return for taxable year 1979, petitioners reported the value of the easement as $236,752. Petitioners attached to their 1979 return copies of the deed and an appraisal letter dated December 8, 1979, from Mr. J. Newbill Miller ("Miller"), a local real estate expert. The deduction taken by petitioners on36 their 1979 return was limited to $56,353 by section 170(b)(1)(C). $79,209.90 was carried over to petitioners' 1980 Federal income tax return and $57,199 was carried over to petitioners' 1981 Federal income tax return. 3In his notice of deficiency, respondent valued the scenic easement at zero. Accordingly, respondent disallowed petitioners' charitable contribution deductions based on the easement for taxable years 1979, 1980 and 1981. 4The only matter in dispute is the fair market value on December 17, 1979, of the scenic easement donated to the Virginia Outdoors Foundation. To establish the easement's fair market value, petitioners37 and respondent each presented the testimony of an expert witness. PETITIONERS' EXPERT TESTIMONY Petitioners called Miller as a witness to verify his previous appraisal. Miller has lived most of his life in Rappahannock County, has been a real estate agent for over 20 years, a member of three boards of realtors, and is actively engaged in appraising real estate in Rappahannock and surrounding counties. He is recognized as a real estate expert by the circuit courts of Warren, Madison, Rappahannock and Fauquier Counties of Virginia. Miller has had extensive experience in zoning and land use in Rappahannock County. He served as Chairman of the Rappahannock County Board of Supervisors for 10 years and as a member of the Rappahannock Planning Commission for 20 years. In addition, Miller served for eight years as mayor of Washington, Virginia, and served one term as the District Director of the Soil and Water Conservation Service. In his letter dated December 8, 1979, Miller concluded that the highest and best use of the property before the easement was granted was residential development, but that the scenic easement prevented that use of the property so its highest and best use38 after the easement was for agricultural use. He used the "before and after" method to value the easement. Easement fair market value was derived by subtracting the agricultural value of the land with the easement ($68,248) from the projected "development value" of the land without the easement ($305,000). 5 He thus opined that the fair market value of the easement was $236,752. In a subsequent report dated October 25, 1985, Miller listed the market data and valuation formulae he used in valuing the scenic easement. At trial, Miller testified the property had unique attributes "that39 make for successful residential home sites. It has view, it has rolling land, it has trees, it has streams, and it has long road frontage." He consulted "two of the top three realtors in the area" who confirmed the desirability of the property for residential development. Although at the time of contribution the property was zoned for agricultural use, Miller testified that petitioners could have requested the property be rezoned and that the request would have been granted. In so stating, Miller drew upon his experience as Chairman of the Board of Supervisors and member of the Rappahannock Planning Commission at the time the ordinances regarding land use in Rappahannock County were enacted. Although Miller maintained the easement's value was $236,752, at trial he increased his valuation of petitioners' property based on its current use from $305,000 to $336,000. 6Miller further testified the 1979 pre-easement value of petitioners' property, fully subdivided, would be $763,000, or $2,500 per acre. 7Miller derived the40 $2,500 per acre valuation by comparing petitioners' property, hypothetically developed for residential use, to other developments within Rappahannock County. He relied heavily on sales of residential lots in Peyton Farm, a development 1-1/2 miles west of petitioners' property. Miller testified that residential lots in Peyton Farm sold for $3,000 to $5,000 per acre which, when adjusted to 1979 values, would result in values between $2,500 to $3,400 per acre. Miller then subtracted costs totaling $512,000, which he testified would be incurred to develop the property into residential lots, plus a ten percent "margin of error" from $763,000 to reach a "development profit" of $226,000. Apparently, the Court is to infer that the "development profit" represented the value of the scenic easement because realization of that profit is prohibited by the scenic easement. Petitioners introduced as evidence several outside41 studies prepared by third parties. None of the studies were cited in Miller's appraisal reports of December 8, 1979, or October 25, 1985. Miller did testify however, that he considered the studies for purposes of his testimony at the trial held November 20, 1985. One such study outlining the property's soil composition was prepared by E. O. Gooch & Associates ("Gooch Study"). Petitioners commissioned the Gooch Study to determine the suitability of the soil for use in construction of septic tank drain fields required for residential development of petitioners' property. In his appraisal report of October 25, 1985, Miller assumed the property could be subdivided into five acre lots. However, in light of the Gooch Study, Miller testified at trial that ten acre lots would be required to provide each lot with suitable soil for septic tank drain fields. Two other soil surveys, Soil Survey of Rappahannock County prepared by the United States Department of Agriculture Soil Conservation Service and a study of Virginia Agricultural use-values co-produced by the Virginia Polytechnic Institute (jointly referred to as the "VPI Study"), were also introduced. Miller testified that the VPI42 Study showed petitioners' property had greater capacity for septic drain fields than did the Gooch Study. Nevertheless, Miller chose to rely on the Gooch Study for purposes of his testimony at trial. Another third party report was issued by the Commissioner of the Revenue of Rappahannock County ("appraiser") and dated November 15, 1985 ("appraiser's report"). It stated that petitioners' property was assessed in 1982 at $1,000 to $1,200 per acre 8 and was subsequently lowered to $700 per acre "after consideration was given to the scenic easement placed on the property." No other reason was given for the devaluation. At the time of trial, only one sale of property encumbered by a scenic easement was reported to have occurred in Rappahannock County. This sale, recorded as Beattle-to-Favareau, 9 occurred on November 28, 1983. The stated sales price for the 98 acre parcel was $700 per acre. Miller testified the value of the land would have been $1,400 per acre were it43 not encumbered with the scenic easement. No evidence was offered that the restrictions in the scenic easement on the Beattle property contained provisions similar to those in issue before us. However, respondent did not challenge Miller's use of this property as a comparable either at trial or in his post-trial briefs. He challenged Miller's testimony thereon only with respect to the property's fair market value. With the exception of the Beattle land, petitioners' property was the only property in the general area encumbered by a scenic easement. Miller stated the devaluation of the underlying property caused by a scenic easement is greater in an area where a prospective buyer has numerous properties not encumbered from which to choose. He testified that sales of land encumbered by scenic easements in Fauquier, a county in Virginia where numerous parcels are so encumbered, does not provide reliable information on the value44 of petitioner's scenic easement. Miller listed additional factors, including the presence of foreign buyers in Fauquier County, which distinguish real estate values in Fauquier from those in Rappahannock. RESPONDENT'S EXPERT TESTIMONY Respondent's expert witness, Mr. John A. Davidson ("Davidson"), is a real estate appraiser with the Internal Revenue Service, Philadelphia District, with a post of duty in Richmond, Virginia. Prior to his employment with the Internal Revenue Service, Davidson was employed by the United States Army Corps of Engineers as Chief Appraiser. He has qualified as an expert in Federal Courts in Newark, New Jersey, the Northern District of Miississippi, and the United States Tax Court. Davidson refers to himself as an "outside appraiser," who he believes is more objective. Although he testified at trial that he sometimes consults local experts in the real estate market under study, he did not do so in this case. Davidson did not go on the property, but instead observed it from the road. 10 He used data in part collected for a previous case before this Court concerning the value of a scenic easement located in Fauquier County. 1145 Davidson also used the "before and after" method to value the easement. In his appraisal report dated November 1, 1985, Davidson valued petitioners' property both before and after the easement at $345,000. He therefore assigned a zero value to the scenic easement donated by petitioners to the Virginia Outdoors Foundation. His 58 page report contained market data and assumptions he used in deriving his before and after value of petitioners' property. Davidson was not aware of the Beattle-to-Favareau transaction. He stated in his report, "This appraiser does not know of any encumbered properties which have resold in Rappahannock County. Therefore, it is necessary to go into competing areas for comparison purposes." Accordingly, Davidson listed ten "resales" of encumbered property located in the adjoining Fauquier and Clarke counties. The data indicated annual appreciation of the subject properties ranging from 4.36 percent to 122.47 percent 12 despite scenic easement restrictions similar to those imposed on petitioners' property. Davidson concluded, "Since no other potential land use approaches46 the same overall property value, the present use as agricultural is recognized as the highest and best use of the subject property" both before and after imposition of the easement. This assumption formed the foundation of his appraisal. He did not consider residential development of the property feasible due to existing zoning restrictions and what he perceived as local sentiment against such development. It was his opinion that residential development of petitioners' property would face a protracted "sell-out" of five to seven years which would reduce the residential value, if any, of petitioners' property. Neither his report nor his testimony provides data on the value of petitioners' property assuming residential development was its highest and best use. Although Davidson's appraisal report sets forth in detail the zoning restrictions which might frustrate residential development of the property, he testified upon cross examination that he did not consider zoning an impediment to subdivision of the property into residential lots. He also admitted that given a choice between property encumbered by a scenic easement and property without easement, a potential buyer might have47 financial inducement to buy the property without the scenic easement. ULTIMATE FINDINGS OF FACTThe fair market value on December 17, 1979, of the scenic easement donated by petitioners to the Virginia Outdoors Foundation was $90,956. OPINION There is no dispute in this case that an actual donation was made to a qualified charitable donee under section 170(c). To determine the allowable deduction, however, we must determine the fair market value of the donated property, the scenic easement. Fair market value is defined as "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts." 13Section 1.107A-1(c)(2), Income Tax Regs. A recognized method of establishing the fair market value of a scenic easement where no comparable sales are available is to measure the difference between the fair market value of the subject property immediately before the easement was granted and the fair market value of the property48 after the easement was granted. Any decline in fair market value as a result of the easement represents the fair market value of the easement itself. This "before and after approach" was approved by respondent in Rev. Rul. 73-339, 2 C.B. 68">1973-2 C.B. 68, clarified by Rev. Rul. 76-376, 2 C.B. 53">1976-2 C.B. 53. 14Both experts agree the before and after approach should be used to value the scenic easement. They agree the highest and best use of the property after the easement was granted was for agricultural use. However, they disagree over its best use before the easement was granted. Miller concluded49 residential development was the most profitable use of the property before the easement was imposed. Davidson concluded agricultural use was its highest and best use both before and after the easement was granted. Opinion evidence is admissible on the question of value; however, it must be weighed in light of the demonstrated qualifications of the expert and all other evidence of value. Anderson v. Commissioner,250 F.2d 242">250 F.2d 242, 249 (5th Cir. 1957), affg. a Memorandum Opinion of this Court. We are not bound by the opinion of any expert witness when that opinion is contrary to our own judgment. Barry v. United States,501 F.2d 578">501 F.2d 578 (6th Cir. 1974); Kreis' Estate v. Commissioner,227 F.2d 753">227 F.2d 753, 755 (6th Cir. 1955), affg. a Memorandum Opinion of this Court; Tripp v. Commissioner,337 F.2d 432">337 F.2d 432 (7th Cir. 1964), affg. a Memorandum Opinion of this Court. We may embrace or reject expert testimony, whichever, in our best judgment, is appropriate. Helvering v. National Grocery Co.,304 U.S. 282">304 U.S. 282 (1938); Silverman v. Commissioner,538 F.2d 927">538 F.2d 927, 933 (2d Cir. 1976),50 affg. a Memorandum Opinion of this Court. We are not restricted to choose one valuation over the other, but may extract relevant findings from each in drawing our conclusions. See Chiu v. Commissioner,84 T.C. 722">84 T.C. 722 (1985). It is not unusual in valuation cases that two expert appraisers reach significantly different conclusions. However, the reports and testimony of the experts in this case are so dissimilar that it strains the credibility of their testimony. Perhaps both experts were too "result oriented" in this case. This places the Court in the unenviable position of applying its judgment in an area where it has no particular expertise, a process which has been described as "inherently imprecise" at best. Messing v. Commissioner,48 T.C. 502">48 T.C. 502 (1967). See also Symington v. Commissioner, 87 T.C. (filed Oct. 29, 1986). Davidson valued the property as agricultural use land before the easement at $345,000, or approximately $1,119.22 per acre. This is reasonably close to the price being paid for other properties in the area without easements. However, Davidson believed that agricultural use was the highest and best use of the property51 both before and after the easement and that the easement did not interfere with that use. He therefore arrived at the same value for the property, $345,000, after the easement. Using the before and after method to value the easement, he valued the easement at zero. On its face, this appears to us to be short sighted. Even if the highest and best use of the land before the easement was for agriculture use, or as a country gentleman's estate, the imposition of the easement was bound to reduce the value somewhat, unless we acknowledge that such use of the land will never change. 15 We believe Davidson relied too much on the fact that residential development had not progressed on a large scale in Rappahannock County when this easement was granted. This ignores the fact, however, that Peyton Farm, about one-half miles from petitioners' property, had been developed and marketed for residential use and that residential development was progressing quite rapidly from Washington, D.C. north and west and toward Rappahannock County. Davidson agreed at the trial that a buyer would probably pay more for the property without the easement than with the easement. We agree with this. But neither52 Davidson nor respondent gave us any opinion on what the property would be worth as prospective residential development property. We think Davidson lacked a personal understanding of the characteristics of petitioner's property which made it suitable for residential development. This may be due in part to his inability to obtain access to the property for purposes of his appraisal and his decision not to seek the advice or opinion of local experts, which Davidson admitted might have been helpful. Davidson's report failed to reflect transfers of the Beattle property, property similar to petitioners' location in Rappahannock County, both before and after a scenic easement had been granted. The property sold for $700 per acre after the easement, while Miller testified its fair market value before the easement was about $1,400 per acre. We believe Miller possessed a superior knowledge of petitioners' property and local governmental and community attitudes toward real estate development. However, his appraisal report lacked a detailed, analytical approach to valuation of petitioner's property, and we53 have had difficulty in determining how he arrived at the values reported in his appraisals. Miller's testimony at trial amplified his written report, and we have given weight to this testimony. But in our opinion Miller did not justify such a sharp drop in the value of the property as a result of the scenic easement. Because the property has never been used for residential purposes, petitioners' must show, consistent with their burden of proof, that residential development was the highest and best use of their land and that "there existed a reasonable probability the land would be so used in the reasonably near future." Stanley Works and Subsidiaries v. Commissioner, 87 T.C. (1986) (slip opinion at p.17). In applying the above standard, we find petitioners carried their burden in establishing residential development to be the property's highest and best use. The following factors influenced our decision: (1) Land used for residential purposes in the general vicinity of petitioners' property has a higher value than agricultural land. The disparity is particularly apparent by comparing assessed values of residential property against those of agricultural property. 54 (2) Land formations found on petitioners' property, such as rolling hills, tree lines and the presence of streams and rivers, could be incorporated into a desirable residential community. (3) Surface and subsurface soils appear adequate to support construction of multiple residences. (4) Soil studies establish the ability of much of petitioners' property to support essential septic tank sewage systems. (5) The property is readily accessible by two paved highways. (6) Although zoned for agricultural use at the time of contribution, we are convinced by Miller's testimony that rezoning of petitioners' property would follow such a request. In light of his long participation in local zoning policy, Miller's testimony was credible and convincing. (7) Population growth patterns around petitioners' property suggest residential development is reasonably probable in the reasonably near future. 16 There was a noticeable movement of small "high tech" and other business out the corridor northwest of Washington, D.C. toward Rappahannock County that attracted residential development in that direction. 55 Having concluded that residential development was the highest and best use of petitioners' property before the easement was granted, we must determine the decrease in value of the property resulting from the scenic easement, which effectively prevented such use. Normally respondent's determination of value would be presumed to be correct and petitioners' would have the burden of proving that respondent's determination of the value of the easement was wrong, but under the circumstances here involved we cannot conclude that respondent has established a presumption of correctness that petitioner must disprove. Presumably in reliance on his determination that residential development was not the highest and best use of the property before the easement was granted, respondent has made no determination of the value of the property for residential development prior to the granting of the easement. Our conclusion that residential development was the pre-easement highest and best use of the property does not place the burden of proof on respondent to prove that value but it does relieve petitioner from the presumptive correctness of respondent's determination of value. Consequently, we56 must determine that value ourselves, based on all the evidence relative thereto, without the benefit of any presumptions. While most of the evidence of the value of the property for preeasement residential development was presented by petitioners we are not satisfied with petitioners' valuation of the property for that purpose. Miller's first method of valuation, reflected in his appraisal letter of December 8, 1979, was based on an Internal Revenue Service special farm valuation formula for estate tax purposes, based on net rental income, which we do not find to be appropriate here. 17 The second method was based on development of the property into 30 ten acre lots. Petitioners admit residential development requires that the soil be suitable for installation of septic tank sewage systems. Initially, Miller assumed the property could be subdivided into five acre lots. However, after reading several reports on the suitability of soil in the Rappahannock area for sewage purposes he increased the necessary acreage per lot to 10 acres, thus reducing the number of lots. But the Gooch study, upon which Miller relied and which focused specifically on petitioners' property, concluded57 that approximately one-half of petitioners property, land adjacent to the Beattle Run and Thornton River, is subject to flooding and is not suitable for septic tank drain fields. Miller failed to submit, either in written or graphic form, any evidence indicating how the property could be subdivided into 30 ten acre lots with each lot containing enough soil suitable for septic tank drain fields. Miller's third method of arriving at his conclusion was reliance on the report of the Commission of Revenue of Rappahannock County (assessor herein). That report, while lacking in specific explanations of why the action was taken, states that in 1982 a 161.72 acre tract owned by petitioners was assessed at $1,000 per acre but was later lowered to $700 per acre, a 28.20 acre tract owned by petitioners was assessed at $1,200 per acre which was later reduced to $700 per acre, and a 118.33 acre tract owned by petitioners was assessed at $1,200 per acre but was later reduced to $700 per acre, all "after consideration was given to the scenic easement placed thereon." While we do not normally rely on assessor's58 values, we have held that assessed value may be considered when the relationship of assessed value and fair market value is demonstrated, but basically as a corroboration of fair market value determined by a more reliable method. Northern Trust Co. v. Commissioner, 87 T.C. (1986). Since petitioners rely to some extent on this report it was received in evidence to support petitioners' argument that the value of their property was reduced by the easement. This was corroborated by the sale price of the Beattle property after that easement was granted. There is not much dispute that the pre-easement value of the land as it was being used at the time the easement was granted, for agricultural use, was about $330,000 to $335,000 or between $1,000 and $1,200 per acre. While there is no explanation in the assessor's report of how he arrived at the amount of devaluation caused by the easement, his figures are supported by the devaluation of the Beattle property which occurred after an easement was granted. On the whole we find that the assessor's devaluation of the property attributable to the easement was useful as a guideline. However, because we have no evidence of how it59 was arrived at, (and petitioners who rely on it made no effort to supply such information), and because we feel that the assessor's devaluation represents a rather high percentage of the value before the easement for property for which there was little prospect of immediate development, we cannot accept it as determinative for purposes of this case. Using our own best judgment based on the evidence put before us we conclude that the granting of the scenic easement resulted in a devaluation of petitioners' property to the extent of $200 per acre on the 161.72 acre parcel that had been assessed at $1,000 per acre, and of $400 per acre on the two parcels, 28.20 and 118.33, that had been assessed at $1,200 per acre. Using the "before and after" method we find that the value of the easement was $90,956, calculated as follows: Assessor'sPre-EasementPost-EasementTotal ParcelAcresValue Per AcreValue Per AcreDevaluationDevaluation161.72$1,000 $800 $200 $32,344 28.20 1,20080040011,280118.331,20080040047,332Total Devaluation$90,956 18 Valuation of the easement $90,956 60 Decision will be entered under Rule 155.Footnotes1. Approximately 25 acres of petitioner's property were excluded from the scenic easement. ↩2. All section references are to the Internal Revenue Code of 1954, as amended, and in effect during the taxable years in question.↩3. Only petitioners' 1979, 1980 and 1981 Federal income tax returns are before this Court.However, if the Court were to allow the full value of the easement as claimed by petitioners, the balance of $43,990.10 could be carried over the claimed as a charitable deduction on petitioners' returns for subsequent years.↩4. In addition to donation of the scenic easement, petitioners claimed other charitable deductions totaling in the aggregate $4,817 for taxable years 1979, 1980 and 1981. Respondent has not challenged these deductions.↩5. Because of Miller's trial testimony we believe he incorrectly listed the "development value" of the property as $305,000 in his December 8, 1979 report. He later testified, infra, the value of petitioner's property subdivided for residential development to be $763,000. Although we cannot be certain, we believe Miller's $305,000 figure represented the value of the property as it was then used -- neither fully agricultural, nor fully residential. This use of petitioners' property at the time of the donation of the scenic easement will hereinafter be referred to as the property's "current use."↩6. The record does not explain why Miller's valuation of the easement is not affected by his increased valuation of petitioners' pre-easement property.↩7. Miller multiplied 305.25 acres by $2,500/acre ($763,125) and then rounded the result to $763,000. The correct acreage of petitioner's property encumbered by the scenic easement is 308.25 acres. Miller's pre-easement valuation must accordingly be increased to $770.625.↩8. 161.72 acres was assessed at $1,000 per acre, 146.53 acres at $1,200 per acre, and the remaining property was not considered in the Commissioner's report because it was not subject to the scenic easement.↩9. Mr. and Mrs. Charlie Swain, sellers in the referenced transaction, were divorced prior to transfer of their property. Upon separation, Mrs. Swain assumed her maiden name, Beattle. Apparently, Ms. Beattle sold the encumbered property to Favareau.↩10. Petitioners allowed Mr. Rapp, an Internal Revenue Service appraiser, to come onto petitioners' property to complete his appraisal. When completed, respondent refused to release this first report to petitioners. Consequently, petitioners refused to grant Davidson, second Internal Revenue Service appraiser, access to their property. We draw no negative inference from petitioners' refusal to allow a visit by a second appraiser without production of the first report. ↩11. See Symington v. Commissioner,↩ 87 T.C. (filed Oct. 29, 1986), which involved the value of a scenic easement in Fauguier County, Virginia, and in which Davidson testified as an expert.12. Average annual appreciation of the ten properties was 37.17 percent.↩13. This long accepted definition of "fair market value" is not too appropriate for a scenic easement which is hardly a marketable product. But it is quite an appropriate definition of fair market value of the underlying property before and after a scenic easement has been granted. These values are necessary ingredients in a "before and after" method of valuing a scenic easement.↩14. See also Akers v. Commissioner,T.C. Memo. 1984-490, affd. 799 F.2d 243">799 F.2d 243 (6th Cir. 1986); Thayer v. Commissioner,T.C. Memo. 1977-370↩.15. See Symington v. Commissioner,↩ 87 T.C. (filed Oct. 29, 1986).16. We need not determine that extensive residential development of Rappahannock County is imminent or even a "few years down the road." Our inquiry is centered on petitioners' property and the probability of its development, were it not encumbered by the scenic easement, in the reasonably near future.↩17. Furthermore, we find no support for the figures used in applying the formula.↩18. We again voice our concern over the time and resources spent by this Court in resolving valuation disputes and repeat our admonition that such cases should be disposed of short of Court proceedings. See Symington v. Commissioner,↩ 87 T.C. (filed Oct. 29, 1986). Our experience has indicated that seldom do the parties get their experts together before trial to discuss their differences.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625902/	PARKERSBURG IRON & STEEL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Parkersburg Iron & Steel Co. v. CommissionerDocket No. 13876.United States Board of Tax Appeals17 B.T.A. 74; 1929 BTA LEXIS 2357; August 6, 1929, Promulgated 2357 1. Liberty bonds, purchased at par, were used at that value in payment of dividends, the market price then being less than par. Held, no loss sustained. 2. Factory alterations suggested by Government authorities supervising war work which did not increase the efficiency of the factory, and which have been continued in use, held to constitute capital expenditures. 3. Cost of removal of an engine from one part of a factory to another, held deduct ble as an ordinary and necessary expense. 4. Cost of machinery and equipment purchased and used solely for war work, which was scrapped immediately upon termination of that work, held deductible as a loss sustained during the taxable year. 5. Invested capital may not be reduced by use of a tentative tax in computing earnings available for distribution. W. W. Spalding, Esq., for the petitioner. Maxwell E. McDowell, Esq., and F. B. Schlosser, Esq., for the respondent. MARQUETTE 75 This is a proceeding for the redetermination of deficiencies in income and profits taxes asserted by the respondent for 1918 and 1920, in the amounts of $38,296.06 and $5,643.38, respectively. 2358 The petitioner also seeks a redetermination of its tax liability for 1919, for which year the respondent has determined an overassessment of $311.20. The petition sets forth the following assignments of error: (a) Disallowance as a deduction for 1918 of $2,708.00, representing a loss on Liberty bonds disposed of in that year; (b) Disallowance as a deduction for 1918 of $20,565.47, representing the amount expended in changing and re-arranging certain units of petitioner's plant; (c) Disallowance as a deduction for 1918 of $8,766.44, representing amortization sustained in that year; (d) The reduction of invested capital for 1918 by $31,824.48, representing dividends alleged to have been paid in excess of the current earnings available at the dates of payment; (e) The invested capital for 1919 and 1920, as now computed, will be increased on account of the reduced tax liability for 1918. At the hearing the petitioner abandoned its claim to a deduction for 1918 for amortization, referred to in assignment (c), and substituted therefor the claim to a deduction of $4,570.45, representing the cost of certain items of plant equipment acquired in 1918 and alleged to have been abandoned2359 in the same year. At the hearing respondent moved that the appeal as to 1919 be dismissed, on the ground that no deficiency had been determined for that year. FINDINGS OF FACT. The petitioner, a corporation with its principal office at Parkersburg. W. Va., is engaged in carrying on a sheet mill business, manufacturing black, blue, and galvanized sheets. During 1918 petitioner manufactured corrugated sheets, stove pipes and stove pipe elbows under Government war contracts. Approximately two-thirds of the work done in petitioner's plant, during that year, was in the production of articles under Government contracts. On February 25, 1918, petitioner declared a special dividend of 12 1/2 per cent out of earnings of 1917, payable March 15, 1918, to stockholders of record as of March 1, 1918. The resolution provided that the dividend was to be paid in Second Liberty Loan bonds at par, with coupons attached, except that any dividend payable to any stockholder, of less than $50, was to be paid in cash. During 1918 the petitioner had outstanding capital stock of a total par value of 76 $400,000. The dividend was paid on March 15, 1918, by turning over to the stockholders2360 Second Liberty Loan bonds of $48,750 par value and cash in the amount of $1,250. The cost of these bonds to the petitioner was $48,750. On the date of payment of the dividend, Second Liberty Loan bonds were sold on the Pittsburgh Stock Exchange at $96.20, high, and $96.10, low, for a $100 bond. On July 22, 1918, the petitioner declared a special dividend of 7 per cent, payable July 31, 1918, to stockholders of record as of July 22, 1918. The resolution provided that the dividend was to be paid in Third Liberty Loan 4 1/4 per cent bonds, with coupons attached, except that any dividend payable to any stockholder, of less than $50, was to be paid in cash. The dividend was paid on July 31, 1918, by turning over to the stockholders Third Liberty Loan bonds of $26,500 par value and cash in the amount of $1,500. The cost of these bonds to the petitioner was $26,500. On the date of payment of the dividend, Third Liberty Loan 4 1/4 per cent bonds were sold on the Pittsburgh Stock Exchange at $95.10, high, and $95, low, for a $100 bond. In its return for 1918 petitioner claimed a loss deduction of $1,462.50 upon the disposition of the Second Liberty Loan bonds turned over to stockholders2361 in payment of the March 15 dividend, and a loss deduction of $1,245.50 upon the disposition of the Third Liberty Loan bonds turned over to stockholders in payment of the July 31 dividend. In each instance the loss claimed represented the difference between the cost of the bonds to petitioner and the estimated fair market value thereof at the date of disposition. The deductions have been disallowed by the respondent, on the ground that "as the bonds were distributed as dividends to the stockholders at cost to the corporation there was no loss to the company. At the time of acceptance of Government war contracts in 1918, petitioner was carrying on its manufacturing operations in a three-story building. The greater part of the operating machinery was located on the first floor. The second and third story lofts were used principally for storage purposes, but a few of the elbow machines, about ten in number, were operated on the second floor. The building, in general, was satisfactory and adequate for the needs of petitioner's business. Early in 1918 engineers of the United States Army, following an inspection of the plant, requsted that in order to improve the lighting conditions2362 certain changes in the building construction and rearraging of factory rooms be made, and this request was complied with. All of the machinery on the two upper floors was removed to the first floor, necessitating a general rearrangement of machinery on the first floor. This rearrangement of machinery necessitated the 77 abandonment of certain machine foundations and the laying of new foundations, with the result that the first floor was so cut up the petitioner found it necessary to lay an entirely new floor. The second and third floors were torn out, skylights were installed in the roof, and the electric lighting system was rearranged. The tearing out of the two upper floors also necessitated a rearrangement of all line shafting for the machines. The productivity of the plant was not increased by reason of these alterations. The total cost of all work done in making the alterations amounted to $11,210.88. The alterations and changes were continued in use throughout all of the taxable years on appeal. The cost of the alterations was taken as an expense deduction in the return for 1918, but disallowed by the respondent. Until the acceptance of Government war contracts, 2363 petitioner's bar mill was adapted to and utilized for the rolling of bars of light gauge, about 10 to 11 pounds per foot. Work under Government contracts required the rolling of bars of much heavier gauge, 18 to 20 pounds per foot. The strain of rolling bars of such heavy gauge, with that of increased or forced production, resulted in the blowing up of the engine in the bar mill with the accompanying destruction of all coupling pinions and gears. A survey of the market with the view of acquiring an engine to replace the one destroyed disclosed that it would take a long time to secure one suitable to the purposes for which it was to be used. Thereupon, petitioner removed an engine located in its sheet mill and installed it in the bar mill. The total cost of cleaning up the wreckage in the bar mill, the tearing down of the engine in the sheet mill, and its installation in the bar mill, amounted to $9,354.59, all of which was taken as an expense deduction in the return for 1918, but disallowed by the respondent. For the production of articles under Government war contracts, the petitioner during 1918 purchased and installed special equipment for painting and drying sheets at a2364 cost of $2,946.24, special stovepipe machinery at a cost of $537.78, and one set of bending rolls, at a cost of $800. All of petitioner's war contracts were canceled within a week or two after the Armistice. After the cancellation of these contracts, the petitioner had no further use for any of this special equipment, and before the close of 1918 all of it had been definitely abandoned and scrapped. In addition to the items mentioned in the preceding paragraph, the petitioner in 1918 installed a system of flood lights on the grounds upon which its plant stood. The lights were so located as to give light to all parts of the premises. The purpose of the installation of these lights was to give protection against unauthorized trespassers. The total cost of installation amounted to $286.43. Since the discontinuance of work under war contracts, two of the seven lights 78 installed have not been used at all, while the other five lights have been used once or twice when flood conditions were prevalent in the vicinity of petitioner's plant. In determining, for invested capital purposes, the amount of earnings available for distribution, at the dividend dates of March 312365 and July 31, 1918, the respondent deducted a tentative tax of $69,092.65. Respondent has reduced the invested capital of 1919 by $29,501.93, on account of an income and profits-tax liability of $69,810.54 for 1918, prorated from the dates the several installments thereof became due and payable. Also, respondent has reduced invested capital of 1920 by $6,312.28, on account of additional income and profits taxes found due for 1918, and by $18,771.80 on account of an income and profits-tax liability of $44,546.27 for 1919, prorated from the dates the several installments thereof became due and payable. OPINION. MARQUETTE: Petitioner complains of the respondent's action in disallowing as a deduction for 1918 an alleged loss of $2,708, representing the difference between the cost to petitioner of the Second and Third Liberty Loan bonds distributed to stockholders in payment of the February 25 and July 22 dividends, and the estimated fair market value thereof at the dates of distribution. The dividend of February 25, at the rate of 12 1/2 per cent, and that of July 22, at the rate of 7 per cent, amounted to $50,000 and $28,000, respectively. Following the dividend declarations2366 of February 25, and of July 22, and on the due dates for the payment of the dividends, the petitioner became indebted to its stockholders in the sums of $50,000 and $28,000, respectively. Both of these obligations were liquidated and settled in accordance with the terms of the declaratory resolutions, the first, by distributing to the stockholders Second Libery Loan bonds of a par value of $48,750, and cash of $1,250, and the second, by distributing to the stockholders Third Liberty Loan bonds of a par value of $26,500, and cash of $1,500. The bonds so distributed to the stockholders had been acquired by the petitioner at a price equivalent to their par value. Thus the petitioner acquired and disposed of the bonds at the same price and, under those circumstances, it suffered no loss. What the prevailing market prices may have been on stock and bond exchanges, at the dates of disposition, is not material. One may dispose of property for more or less than its fair market value. The decisive factor in the determination of whether one derives a gain or sustains a loss in a particular transaction, is the consideration received for parting with the subject matter. Here, in exchange2367 for bonds for which it had paid a 79 price equivalent to par, the petitioner received a cancellation of its indebtedness to stockholders equivalent, in amount, to the par value of the bonds. The case of , upon which the petitioner relies, is not in point. In that case, Liberty bonds were distributed to stockholders in payment of a dividend, at their fair market value, which was less than cost. The two cases are not analagous. We find no error in the respondent's action of which the petitioner complains. Petitioner alleges that respondent erred in disallowing the deduction as an ordinary and necessary expense, for 1918, of the cost, $11,210.88, of the alterations and changes made in the factory building in that year. Upon the record before us we entertain no doubt that the expenditures incident to making such alterations and changes are of a capital nature, and that the respondent correctly disallowed the item in question as a deduction from gross income. Various reasons are suggested by the petitioner as the basis for the allowance of the disputed item, none of which appeal to us as proper grounds for the2368 action sought to be taken. It is contended that the making of the alterations was an involuntary act, done upon orders of engineers of the Army; that neither the efficiency, productivity, nor the value of the plant has been increased by virtue of the alterations; and that the petitioner has been placed at a decided disadvantage in making the alterations, by reason of having to provide additional storage space and of the cramped and congested operating conditions existing in the building because of the removal of all of the machinery to one floor. Assuming all such conditions and circumstances to be true, and we do not decide that they are, we still adhere to the conclusion already announced. It is undenied in the record that the general purpose for which these alterations and changes were made, the general improvement of lighting conditions in the building, has been accomplished, although, perhaps, not to the degree expected or hoped for. Furthermore, all such alterations and changes have been continued in use throughout all of the taxable years on appeal, and the record contains no hint of any subsequent abandonment. We find no error in the action of the respondent in disallowing2369 the cost of the alterations and changes as a deduction from gross income for 1918. In 1918 the engine in petitioner's bar mill "blew up" or "smashed through itself," carrying to destruction much of the coupling pinions and gears, due to strains of war work and forced production in excess of rated or safety capacity. The petitioner expended the sum of $9,354.59 in cleaning up the wreckage in the bar mill, and in tearing down an engine in the sheet mill and installing it in the bar mill. This item, with that of $11,210.88 disposed of in the preceding paragraph, is represented in the sum of $20,565.47 referred to in the 80 second assignment of error. In our opinion this item of $9,354.59 constitutes an ordinary and necessary expense of the business, and the respondent erred in disallowing it as a deduction from gross income of 1918. At the hearing the third assignment of error, relating to the deduction for 1918 of amortization of war facilities, was abandoned, and the petitioner substituted therefor a claim for a loss deduction of $4,570.45, representing the cost of certain items of plant equipment acquired in 1918 and alleged to have been abandoned in the same year. 2370 The amount claimed as a deduction is made up of the following expenditures: For special equipment for painting and drying sheets, $2,946.24; for special stovepipe machinery, $537.78; for one set of bending rolls, $800; for installation of flood lights on premises, $286.43. All of this equipment, except flood lights, was acquired and installed for the prosecution of work under Government war contracts. Shortly after the Armistice, these contracts were canceled and this special equipment, unsuitable to the normal peace-time operations of petitioner's business, was abandoned and scrapped - "thrown in the graveyard," as the witness stated. Petitioner is clearly entitled to a loss deduction for 1918 of $4,284.02, representing the cost of special equipment for painting and drying sheets, of special stovepipe machinery, and of one set of bending rolls, all of which equipment was abandoned and scrapped in that year. As to the flood lights, seven in number, installed on the premises for the purpose of protection against unauthorized trespassers, it appears that five have been occasionally used subsequent to 1918. Therefore, no loss deduction seems proper in respect of these lights on2371 the ground of abandonment. Circumstances would indicate that this facility is within the statutory provisions relating to the amortization of war facilities; but the petitioner abandoned all claim to amortization of war facilities, and that action was taken after proof was placed in the record that it had not made claim for amortization within the time prescribed by statute. In determining, for invested capital purposes, the amount of earnings available for distribution at the dividend dates of March 31 and July 31, 1918, the respondent deducted a tentative tax of $69,092.65. This action of the respondent is contrary to the decision of this Board in , and is in error. See, also, ; . Proper adjustments of invested capital for 1920, on account of income and profits taxes for 1918 and 1919, will be made under Rule 50, when the correct tax liability for each of those years has been redetermined in accordance with this decision. 2372 *81 Respondent's motion to dismiss as to 1919, on the ground that no deficiency has been determined for that year, is granted upon the authority of . Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625904/	Estate of Sarah F. Bremer, Deceased, New England Merchants National Bank of Boston, Executor v. Commissioner.Estate of Bremer v. CommissionerDocket No. 4138-62.United States Tax CourtT.C. Memo 1966-39; 1966 Tax Ct. Memo LEXIS 248; 25 T.C.M. (CCH) 216; T.C.M. (RIA) 66039; February 23, 1966Robert J. McDonough, for the petitioner. J. Frost Walker, Jr., for the respondent. FAYMemorandum Opinion FAY, Judge: Respondent determined a deficiency in petitioner's estate tax in the amount of $129,683.28. The sole issue for decision is whether the entire corpus of a trust created in 1905 by Sarah F. Bremer, deceased (hereinafter referred to as decedent), wherein she reserved the income for life and a general testamentary power of appointment over the corpus is includable in her249 gross estate under section 2036(a) of the Internal Revenue Code of 1954 or whether 40 percent of the trust corpus is excludable from her gross estate pursuant to section 2036(b). All of the facts are stipulated and are incorporated herein by this reference. The New England Merchants National Bank of Boston (successor to the New England Trust Company) is the executor under the will of the decedent, who died on July 6, 1958. The estate tax return for the Estate of Sarah F. Bremer was filed with the district director of internal revenue, Boston, Massachusetts. On July 27, 1905, decedent executed a trust indenture (creating a trust) and transferred certain property to Alfred Bowditch and S. Parker Bremer as trustees. Under the terms of the indenture, decedent reserved to herself the right to receive the net income from the trust for her life and a general testamentary power of appointment enabling her to designate the taker of the principal after her death. The trust indenture provided for the disposition of the trust principal if the decedent failed to exercise the above-said power of appointment. With the exception of the reserved testamentary power of appointment, 250 the indenture contained no provision authorizing or permitting decedent to alter or amend any of its terms in any manner. On June 13, 1918, decedent and the New England Trust Company (now the New England Merchants National Bank of Boston) executed an agreement under which decedent appointed the New England Trust Company as successor trustee to Alfred Bowditch. On December 31, 1947, decedent executed a will in which she exercised the testamentary power of appointment reserved to her under the 1905 trust (1) by directing in article Twentieth of said will that certain cash bequests be paid from the trust, (2) by directing in article Twenty-First that certain taxes be paid from the trust property, and (3) by appointing in article Twenty-Third that 36/60 (60 percent) of the balance of the trust property remaining after payment of sums under articles Twentieth and Twenty-First be paid to certain specified persons and organizations. Following the execution of the above-mentioned will, decedent on December 31, 1947, executed an instrument entitled "RELEASE OF POWER" by which she irrevocably released all of her right, title, and interest in the general testamentary power of appointment251 referred to heretofore over the portion of the trust property which was not appointed in the will. Decedent died on July 6, 1958, leaving as her last will the one executed on December 31, 1947. The same will was admitted to probate in the Norfolk County Probate Court in the Commonwealth of Massachusetts. The Supreme Judicial Court of Massachusetts stated, in New England Trust Company v. Faxon, 343 Mass. 273">343 Mass. 273, 178 N.E. 2d 488 (1961), that the trust indenture executed by decedent in 1905 was irrevocable. Petitioner included in decedent's gross estate the portion (60 percent) of the trust corpus over which decedent, in her will dated December 31, 1947, exercised her testamentary power of appointment. Petitioner did not include in decedent's gross estate the portion (40 percent) of the trust corpus over which decedent, in the above-said will, did not exercise her testamentary power of appointment over which she released said power by inter vivos instrument dated December 31, 1947. In his notice of deficiency, respondent determined that the entire value of the trust created by decedent on July 27, 1905, is includable in the decedent's gross estate pursuant to section 2036 of the Internal Revenue Code252 of 1954. The ultimate issue for decision is whether the entire corpus of the trust created by decedent in 1905 is includable in decedent's gross estate under section 2036(a) of the Internal Revenue Code of 1954 or whether the portion (40 percent) of the corpus affected by the release of the power by an inter vivos instrument in 1947 is excludable from her gross estate pursuant to section 2036(b). The relevant provisions of section 2036(a) read as follows: The value of the gross estate shall include the value of all property * * * to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust * * * under which he has retained for his life * * * (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom. Section 2036(b), however, provides that section 2036(a) is inapplicable to a transfer made prior to March 4, 1931. 1253 It is respondent's position that decedent's transfer in trust in 1905 was not irrevocable for Federal estate tax purposes because decedent retained a general testamentary power of appointment over the corpus; 2 that the transfer first became irrevocable in 1947 when decedent exercised her testamentary general power of appointment; that section 2036(b) applies only to irrevocable transfers made prior to March 4, 1931; and that since, at all times, prior to March 4, 1931, the transfer in issue was "revocable," section 2036(b) does not operate to except said transfer from the operation of section 2036(a). Petitioner contends that the "transfer" referred to in section 2036(b) was the original transfer of the property in trust in 1905 and, therefore, section 2036(a) is inapplicable because the transfer as contemplated by section 2036(b) was consummated before March 4, 1931. The facts presented in the instant case bear an appreciable identity to those involved in Estate of Ellie G. Canfield, 34 T.C. 978">34 T.C. 978 (1960),254 affd. 306 F. 2d 1 (C.A. 2, 1962). There, the decedent executed an indenture of trust in 1919, reserving for herself both the trust income for life and a testamentary general power of appointment over the corpus. The Canfield trust, as the trust in the instant case, was irrevocable under state law. The decedent therein released her power of appointment subsequent to 1931 and died after the enactment of the Internal Revenue Code of 1954. This Court held that the transfer referred to in section 2036(b) was the original transfer in trust in 1919 when the decedent reserved to herself the trust income for life and the testamentary power of appointment and, therefore, the trust corpus was properly excludable from decedent's gross estate by virtue of section 2036(b). 3255 In the absence of any meaningful basis for distinguishing Canfield from the instant case, we believe this Court's decision in Canfield is controlling herein. It is unnecessary for us, at this time, to analyze the phase of estate tax law involved in the case before us since this has been done fully in Canfield both by this Court and the Court of Appeals for the Second Circuit. Suffice it to say, we think that the meaning of the word "transfer" as used in section 2036(b) has been correctly interpreted in Canfield. We hold for petitioner. Decision will be entered under Rule 50. Footnotes1. SEC. 2036. TRANSFERS WITH RETAINED LIFE ESTATE. (b) Limitation on Application of General Rule. - This section shall not apply to a transfer made before March 4, 1931; nor to a transfer made after March 3, 1931, and before June 7, 1932, unless the property transferred would have been includible in the decedent's gross estate by reason of the amendatory language of the joint resolution of March 3, 1931 * *↩2. Respondent concedes that for purposes of Massachusetts law decedent irrevocably surrendered legal title to the corpus when she executed the trust indenture in 1905.↩3. The Court of Claims, in Smith v. United States, 139 F. Supp. 305">139 F. Supp. 305 (Ct. Cl. 1956), and the United States District Court for the Northern District of Indiana, in Studebaker v. United States, 195 F. Supp. 841">195 F. Supp. 841 (D.C.N.D. Ind. 1961), (decided after this Court's decision in Estate of Ellie G. Canfield, 34 T.C. 978">34 T.C. 978 (1960), affd. 306 F. 2d 1↩ (C.A. 2, 1962)), held for respondent on facts similar to those presented herein and in Canfield, with the essential difference that the trusts in Smith and Studebaker were revocable by the settlors acting in conjunction with a person lacking a substantially adverse interest. The Second Circuit, in Canfield, noted that the factual situations in both Smith and Studebaker were "in sharp contrast to [Canfield] in which legal title was irrevocably committed." This basis of distinguishing Smith and Studebaker is equally applicable to the present case.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625905/	UNION & PEOPLES NATIONAL BANK OF JACKSON, A NATIONAL BANKING ASSOCIATION, AND E. B. ROBERTS, ADMINISTRATORS (WITH WILL ANNEXED) OF THE ESTATE OF EDITH M. DANCER, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Union & Peoples Nat'l Bank v. CommissionerDocket No. 70456.United States Board of Tax Appeals30 B.T.A. 1277; 1934 BTA LEXIS 1196; July 25, 1934, Promulgated 1196 In her will the decedent attempted to dispose of certain trust property in respect of which she had been given a power of appointment in the trust agreement. The state court of proper jurisdiction determined that the power of appointment was not properly exercised in accordance with the trust agreement and that the property in question did not pass by the attempted exercise of the power of appointment, but passed in accordance with the provisions of the trust agreement. Held, that the trust property did not pass under a general power of appointment exercised by the decedent by will and is not includable in her gross estate under the provisions of section 302(f) of the Revenue Act of 1926. Freuler v. Helvering,291 U.S. 35">291 U.S. 35. Howard F. Burns, Esq., Justin R. Whiting, Esq., and William H. Aubrey, Esq., for the petitioners. Philip M. Clark, Esq., and Stanley B. Pierson, Esq., for the respondent. SMITH 1278 This proceeding involves a deficiency in estate tax of the estate of Edith M. Dancer in the amount of $97,326.10. The only question presented for our determination is whether there should be included in the1197 decedent's gross estate the value of a certain trust estate which was created by the decedent's husband and over which the decedent was given a power of appointment to be exercised by her will. FINDINGS OF FACT. The decedent's husband, John B. Crouse, on January 12, 1920, entered into a trust agreement with the Cleveland Trust Co., which, so far as material to this proceeding, reads as follows: 17. One-third (1/3) of the rest, residue and remainder of the trust estate shall be held by The Cleveland Trust Company, in trust, nevertheless, for the uses and purposes and for the benefit of the persons hereinafter named, viz.: As soon as possible, after my death, to pay to my said wife, Edith M. Crouse, out of said one-third (1/3) the sum of One Hundred Thousand ($100,000.00) Dollars in cash, unconditionally, to do with as she pleases, and the remainder of said one-third (1/3) to invest and reinvest the same with the approval in writing of my said wife in United States, State, County, or Municipal bonds and pay the net income arising therefrom to my said wife monthly, for the period of and during the term of her natural life, and in no case shall said Trustee withhold the payment1198 to my said wife of said net income longer than one month after the receipt thereof by it, and on the death of my said wife, my said Trustee shall pay, transfer and distribute the balance of the trust property together with the interest, income and dividends arising therefrom in its hands mentioned in this paragraph to such persons as my said wife may by her Last Will and Testament designate and appoint, and upon the terms and conditions imposed by my said wife in her said Will, or in default of such designation or appointment, then the same shall pass to and vest in and be distributed among the same persons, in the same manner and proportions and upon the same trusts, terms and conditions as in paragraph 20 hereof provided. * * * 20. If my said wife, Edith M. Crouse, shall not survive me, then and in that case all property and rights hereinbefore directed to be conveyed, delivered or held for her benefit shall be held by The Cleveland Trust Company in trust for the uses and purposes and for the benefit of the persons hereinafter named, vix.: To invest and reinvest the same and in quarterly installments to pay the interest, income and dividends arising therefrom to my said stepdaughters, 1199 Gladys M. Avery and Grace A. Avery in equal shares until the said Gladys reaches the age of thirty-five (35) years, or, should she sooner die, until such time as, living, she would have reached the age of thirty-five (35) years, at which time my said Trustee shall divide, pay and distribute the same 1279 between my said step-daughters or their issue per stirpes in equal shares; provided that if either of my said step-daughters should die, before the said Gladys reaches the age of thirty-five (35) years, leaving no issue her surviving, the whole of the trust property in this paragraph mentioned shall be paid and transferred to the other or to the surviving issue of such other in equal shares at such times as the said Gladys, if living, shall reach the age of thirty-five (35) years, or dead, at such time as she would have reached said age. If both my said step-daughters should die before the said Gladys M. Avery reaches the age of thirty-five (35) years leaving no issue them surviving, then and in that event the Trustee shall hold the property to it in this paragraph hereinbefore directed to be held by it in trust for the same persons mentioned in paragraph 17 hereof upon1200 the same terms, trusts and conditions therein expressed. John B. Crouse died November 26, 1921, and thereafter the income of the trust was paid to the decedent. On January 2, 1925, the decedent, then a resident of East Cleveland, Ohio, entered into a trust agreement with the Cleveland Trust Co., trustee, under the terms of which she transferred certain property in trust, the income from which was to be paid to her for life and after her death $50,000 was to be paid to each of her two daughters and after payment of other specific bequests the remainder was to be divided into two equal parts and each daughter was to receive the income from one part for life. The trust agreement further provided: I authorize and empower each of my daughters to dispose of the share of the trust estate held for her benefit or so much thereof as may remain undistributed by last will and testament in such manner as each one may desire, and upon the death of either daughter exercising such power of testamentary disposition, the Trustee shall pay over and distribute said share in accord therewith, and thereupon this trust to such extent shall cease and determine. Upon failure of either of the daughters1201 to exercise the power of appointment the property was to vest in the surviving issue of such daughter. The decedent reserved a power to revoke or alter the trust agreement at any time. The trustees were empowered, among other things, to make advances or to borrow money during the lifetime of the decedent with her written permission, or after her death, if necessary for the improvement, protection, or preservation of the trust estate. In such case the trustee was to have a lien upon the trust estate and might issue its promissory notes secured by a mortgage on any property of the trust estate. The decedent executed her will on December 23, 1925. Subsequently, in 1928, she married William G. Dancer and became a resident of the State of Michigan. She died March 18, 1930, and her will was admitted to probate in the Probate Court of Livingston County, Michigan, on April 10, 1930. 1280 The decedent's will, after making certain specific bequests, provided in paragraph IV as follows: Inasmuch as my husband, JOHN B. CROUSE, under the provisions of a certain trust agreement dated the 12th day of January, 1920, between my said husband and THE CLEVELAND TRUST COMPANY, as Trustee, 1202 gave to me power to dispose by last will and testament of a certain portion of the trust estate held under the terms of said trust agreement, as more particularly set forth in paragraph 17 of said trust agreement; now, therefore, in the exercise of such power of testamentary disposition, I give, devise and bequeath all of the portion of said trust estate held under the terms of said trust agreement over which I have power of testamentary disposition, and also all the rest, residue and remainder of my property, of whatsoever character and wheresoever situate, to THE CLEVELAND TRUST COMPANY, of Cleveland, Ohio, to be held, managed and controlled by it, as Trustee, under settlement of trust entered into by and between myself and said Trust Company dated the 2nd day of January, 1925, to be administered under the powers and discretions therein conferred, and in accordance with its agreement, for the uses and purposes therein set forth. The decedent's daughters, Grace A. Avery Cowan and Gladys M. Avery Gale, were of the ages of 38 and 40 years, respectively, at the time of the decedent's death. On or about November 29, 1930, the Cleveland Trust Co., assuming to act under paragraph1203 IV of the decedent's will, transferred the property held by it as trustee under the John B. Crouse trust to the trust created by the decedent, claiming to hold the property by virtue of the exercise of the power of appointment by the decedent in her will. One of the decedent's daughters, Mrs. Cowan, challenged the right of the Cleveland Trust Co. to hold the property under the exercise of the power of appointment by the decedent and demanded that the trustee distribute one half of the trust property to her, claiming to be the owner thereof under the provisions of the John B. Crouse trust agreement. In the meantime, one of the decedent's daughters, Mrs. Gale, had died and the Cleveland Trust Co. had been made executor of her estate. Thereupon, the Cleveland Trust Co., as trustee of both the John B. Crouse trust and the Edith M. Crouse trust, brought suit for a construction of the trust agreements. The Court of Common Pleas of Cuyahoga County, Ohio, on September 1, 1932, decreed that the attempted exercise of the power of appointment in decedent's will had failed and that the property in question be returned to the John B. Crouse trust avd distributed in accordance with the terms1204 of that trust agreement. Thereafter, the trustee distributed the trust property in accordance with the decree. In its decree the court ruled that the decedent in her will did not make a valid appointment of the property of the John B. Crouse trust; that the decedent was not authorized to include the 1281 property in a trust with the residue of her estate, but that the power was limited to naming in her will the persons to receive the trust property upon here death; that the two daughters had a vested estate in the trust property subject to be divested by a valid appointment exercised by the decedent in her will, which valid appointment was never made; and that the trust property became the absolute property of the two surviving daughters upon the death of the decedent by virtue of the provisions of paragraph 17 of the John B. Crouse trust agreement. In the determination of the amount of inheritance tax due the State of Michigan upon the decedent's estate the State of Michigan instituted a proceeding in the Probate Court of Livingston County, Michigan. Subsequently and appeal was taken to the Circuit Court of Livingston County, and on August 15, 1933, that court entered1205 a judgment finding, as did the Court of Common Pleas of Cuyahoga County, Ohio, that the decedent failed in her will to exercise validly a power of appointment in respect of the John B. Crouse trust property, and that such property did not pass under the decedent's will and was not subject to inheritance tax in the State of Michigan. The opinion of the court reads in part as follows: (3) The property held by The Cleveland Trust Company as Trustee of John B. Crouse under agreement dated January 12th, 1920, as amended, respecting which the decedent had a power of appointment, did not become part of the estate of Edith M. C. Dancer, deceased, and title thereto did not pass by virtue of her will, paragraph IV of said will being void and of no legal effect as an exercise of the power of appointment. The decedent did not designate in her will the persons to receive the beneficial title; she attempted to govern the distribution of the property over which she had a power of appointment by will only, by the provisions of her agreement with the trustee; this is not a valid appointment by will, in accordance with the limitations of the instrument creating the power. The trust agreement of1206 Mrs. Dancer reserves a power of revocation and alteration to be exercised by a mere notice delivered to the trustee, not in accordance wtih the requirements of the statute of wills. Decedent was further limited by the trust agreement to appoint an estate in fee. She had the simple power to name in her will the persons to take the absolute beneficial ownership. Her two daughters had a vested estate in the remainder of the trust property, which could be divested only by a valid appointment to others; her attempt to limit the daughters to an equitable life estate constituted a failure to exercise the power given her; the absolute title to the property in fee passed to the two daughters directly under the trust agreement of John B. Crouse. The decedent was not authorized to create a trust of the property subject to the power of appointment, and her attempt to do so is not a valid appointment under the power. Decedent's trust agreement further attempts to delegate the distribution of the property to the trustee to dispose of in accordance with its agreement with her. By the provisions of the trust agreement she again attempted to delegate to her daughters the exercise of the power1207 of appointment, to be exercised by their wills. This attempted delegation of the power is not an exercise thereof under the provisions of the trust agreement 1282 which contemplated that decedent alone should exercise the power of appointment and designate the persons to receive the property after her death. Title to said property passed directly to Gladys M. Avery Gale and Grace A. Avery Cowan as remaindermen, by the provisions of the trust agreement of John B. Crouse. There was accordingly no transfer of said property by reason of the will of the decedent subject to inheritance tax in this state. (4) The property held by the Cleveland Trust Company at Cleveland, Ohio, under the trust agreement of John B. Crouse is not subject to inheritance tax in this state; that the Michigan Inheritance Tax Law does not apply to and does not tax property permanently located outside of the jurisdiction of the state. * * OPINION. SMITH: The issue before us in this proceeding is whether the value of the property held by the John B. Crouse trust passed under a general power of appointment exercised by the decedent in her will and is therefore taxable in the decedent's estate under1208 the following provisions of the Revenue Act of 1926: SEC. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated - * * (f) To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will * * . The decedent by her will attempted to exercise the power of appointment in respect of the property by directing that it be transferred to the trust which she herself had created, but the Court of Common Pleas of Cuyahoga County, Ohio, which had jurisdiction of the property, has decreed that the attempted exercise of the power of appointment in the decedent's will failed and that the property in question passed in accordance with the terms of the John B. Crouse trust agreement. The property was actually distributed pursuant to the court's decree and the time for appeal has since expired. The Supreme Court held, in ; reversing 1209 , and affirming , that the decision of the state court, until reversed or overruled, establishes the law of that state respecting the distribution of trust property within its jurisdiction. The Court there said: * * * We understand the respondent to concede the binding force of a state statute, or a settled rule of property, followed by state courts, and, as well, an antecedent order of the court having jurisdiction of the trust, pursuant to which payments were made. But, if the order of the state court does in fact govern the distribution, it is difficult to see why, whether it antedated actual payment or was subsequent to that event, it should not be effective to fix the amount of the taxable income of the beneficiaries. We think the order of the state court was the order governing the distribution within the meaning of the Act. 1283 Moreover, the decision of that court, until reversed or overruled, establishes the law of California respecting distribution of the trust estate. It is none the less a declaration of the law of the State because not based on a statute, or earlier decisions. The rights of the beneficiaries1210 are property rights and the court has adjudicated them. What the law as announced by that court adjudges distributable is, we think, to be so considered in applying section 219 of the Act of 1921. In , it was held that the gross estate of a decedent did not include a trust fund over which the decedent had a power of appointment by will where the trust estate did not pass under the power of appointment for the reason that the appointees under the decedent's will elected to renounce their bequests thereunder and to take as remaindermen under the will of the creator of the trust; that under the New York law the attempt to execute the power was not effective because it did nothing. The statute here involved, section 302(f) above, includes in the gross estate the value of the property "passing under a general power of appointment exercised by the decedent." The state court of proper jurisdiction has determined that the trust property in question did not pass under a power of appointment exercised by the decedent. In the circumstances of this case it would be necessary, in order to sustain the respondent's position, to*1211 reach a conclusion contrary to that reached by the Ohio court as well as those of the State of Michigan, namely, that, as a matter of fact and of law, the property in the John B. Crouse trust did actually pass by a general power of appointment exercised by the decedent in her will. In our opinion we are precluded from making such a determination. Even if we were in doubt as to the correctness of the fuling reached by the state courts as to whether the property passed by the attempted exercise of the power of appointment, we would be disposed to follow them. We therefore hold that the value of the property in the John B. Crouse trust is not includable in the decedent's gross estate. In respect of the further issue contained in the petition as amended, it was stipulated at the hearing that the amount of $10,969.20 was paid to the State of Michigan as an inheritance tax on the decedent's estate. As provided in section 301(b) of the Revenue Act of 1926, such amount is allowable as a credit in computing the Federal estate tax due on the decedent's estate. Reviewed by the Board. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625906/	GEORGE A. LEMBCKE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Lembcke v. CommissionerDocket No. 75365.United States Board of Tax Appeals33 B.T.A. 700; 1935 BTA LEXIS 718; December 11, 1935, Promulgated 718 A corporation increased its common capital stock and distributed a stock dividend. Two years later it made a further increase, reclassified all but 4 percent of the stock as preferred, and distributed a preferred stock dividend. The corporation, beginning two years after the second increase, was required to redeem or purchase for retirement each year out of surplus or net profits, after payment of dividends on the preferred stock, an amount of such preferred stock in par value equal to 5 percent of the largest amount in par value ever outstanding. The evidence disclosed that the increases were made not to disguise later distributions of cash dividends, but for legitimate business purposes, namely, in order to satisfy the demand of banks for a larger capitalization in order to obtain unsecured short term loans necessary for the operation of the business, and in order to satisfy the request of a stockholder anticipating retirement from active participation in the business that the larger portion of the stockholders' investments be placed in preferred stock. Held, that amounts distributed in redemption of the preferred stock were not to be treated as taxable dividends under section719 115(g), Revenue Act of 1928. Allen G. Gartner, Esq., for the petitioner. C. A. Ray, Esq., for the respondent. MURDOCK 700 The Commissioner determined a deficiency of $2,889.73 in the petitioner's income tax for 1931. The petitioner raises the only issue in the case by the following assignment of error: In determining the taxable net income of the petitioner for the year 1931, the Commissioner failed to include as income the profit arising from the sale of 215 1/2 shares of the preferred stock of Bernuth Lembcke Co. Inc., but ruled the entire proceeds of same to be a dividend in the ordinary course of business and taxable at legal surtax rates. 701 FINDINGS OF FACT. The petitioner is an individual. He was a stockholder in 1931 of the Bernuth Lembcke Co. He was also its treasurer and secretary until he retired. That corporation was engaged in the business of buying creosote oil abroad for cash, transporting it, and selling it in the United States, principally to railroads. The business was incorporated in 1907 with capital stock of $200,000. Its name was changed and the par value and type of its shares were changed, but720 the total par value of the outstanding capital stock remained the same until January 21, 1927, at which time the capital stock consisted of 2,000 shares of common stock. A stock dividend of 8,000 shares of common stock was declared and paid to the stockholders of record on January 21, 1927. The capital stock of the company was reclassified on March 22, 1929. A preferred stock dividend of $1,100,000, represented by 11,000 shares, each having a par value of $100, was declared and paid on March 22, 1929. The stock dividend of January 21, 1927, and the stock dividend of March 22, 1929, were both declared out of earned surplus. The following table shows the holdings on the dates above mentioned: Shares heldNameJanuary 21, 1927March 22, 1929After March 22, 1929CommonCommonPreferredCommonPreferredO. M. Bernuth6183092,7813096,180Adeline E. Bernuth6183092,7813096,180George A. Lembcke431215 1/21,939 1/2215 1/24,310Molly S. Lembcke333166 1/21,498 1/2166 1/23,330Total2,0001,0009,0001,00020,000A "Certificate of Increase of Capital Stock and Number of721 Shares and Classification and Reclassification of Shares" provided that the preferred stock should have 6 percent cumulative dividends and that: On or before the first day of January, 1931 and annually on or before the first day of January in each year thereafter (until all the Preferred Stock of the Corporation shall have been retired) the Corporation, from and out of its surplus or net profits remaining after the full dividends on the Preferred Stock for all past quarterly dividend periods shall have been paid, shall acquire by redemption or purchase its preferred Stock for retirement up to an amount thereof in par value equal to at least five per cent. (5%) of the largest amount in par value of such Preferred Stock which shall ever have been issued and outstanding. The directors were free to determine the time and manner of acquiring the stock but they could not pay more than the redemption price, 702 plus accrued dividends. If the acquisitions fell behind, the deficiency was to be made up out of surplus and net profits before any dividend was to be paid on or set apart for other stock. Preferred stock could also be redeemed in whole or in part at any dividend paying722 date upon thirty days' notice and the payment of par and accrued dividends. The board of directors of the Bernuth Lembcke Co. adopted a resolution on March 17, 1931, which was in part as follows: The President stated that this corporation was required on or before the first day of January, 1931, in accordance with its certificate of incorporation as amended, to retire, either by redemption or purchase, an amount equal to 5% of the largest amount in par value of its preferred stock which had ever been issued and outstanding. He further stated that the largest amount of par value of such preferred stock was $2,000,000 and that accordingly the company was required to redeem a minimum of $100,000 par value of such stock; that none had been purchased and that accordingly the same must be by redemption. He further stated that there was sufficient surplus after the payment of all dividends on the preferred stock to make such redemption. After consideration and discussion and on motion duly made and seconded the following resolutions were unanimously adopted: RESOLVED that this corporation redeem out of surplus on April 1, 1931, at par and accrued dividends 1000 shares of its preferred723 stock, such redemption being made pro rata, from the respective holders of such preferred stock as nearly as may be; and that the proper officers of this corporation notify holders of record of such preferred stock of such redemption, specifying the respective amounts to be so redeemed. FURTHER RESOLVED that upon presentation of said stock the proper officers of this corporation be and they hereby are authorized to pay the par value thereof plus accrued dividends to April 1, 1931. The President further stated that after making provision for dividends on preferred stock payable on January 1, 1931, and for the redemption of 1000 shares of the preferred stock on April 1, 1931, whih accrued dividends to such date, there remains sufficient surplus to declare a dividend on the balance of preferred stock outstanding for the balance of the year. On motion duly made and seconded the following resolution was unanimously adopted: RESOLVED that a dividend on the preferred stock of this company of 1 1/2% payable on each of the following dates, viz.: April 1, July 1 and October 1, 1931, to stockholders of record on such respective dates, be and the same hereby is declared. Two hundred724 and fifty shares of preferred stock held by the petitioner were redeemed pursuant to the resolution of March 17, 1931. The company distributed to him $21,550 in cash on April 1, 1931. The company had at that time earnings or profits accumulated after February 28, 1913, in excess of the total distributions made pursuant to the resolution of March 17, 1931. The next change in the outstanding capital stock of the corporation was the purchase from the petitioner of 1,077 shares by the corporation in 1934. 703 The petitioner, in his income tax return for 1931, reported a capital gain of $5,140.32 from the redemption of the 215 1/2 shares of preferred stock of the Bernuth Lembcke Co. The Commissioner, in determining the deficiency, eliminated the capital gain reported and included in income $21,550 as dividends. He explained that he held the distribution to be essentially equivalent to a dividend and the entire amount received was taxable as a dividend and no part of it was taxable as capital gain. A cargo of creosote oil cost between $350,000 and $400,000. Customers of the company did not always make prompt payment and the company sometimes borrowed from banks on three725 months' paper as its needs required. The bank loans to the Bernuth Lembcke Co. were made on its unsecured notes and sometimes amounted to as much as $250,000 or $300,000. The gross sales, gross profit from trading, interest paid, surplus and undivided profits, and cash dividends as shown by the returns 1 for the various years, were as follows: YearGross salesGross profit fromInterest paidSurplus andCash dividendtradeundividend profits,December 311923$ 5,503,112.17$335,994.43$8,853.02$955,134.67$36,00019247,775,638.681,141,688.4055,905.041,104,447.8836,00019256,752,671.72471,019.8761,458.97996,257.7154,00019266,105,713.44407,577.6348,594.421,132,561.7919279,759,001.01618,537.4838,282.18636,752.4754,00019288,230,709.63537,789.6718,381.711,782,531.67100,00019296,205,285.04453,387.6042,812.081,736,502.65230,00019304,785,150.69318,103.1927,558.561,321,997.68420,00019312,261,746.61205,693.9611,506.76892,786.34117,000726 The redemption on April 1, 1931, of the 215 1/2 shares of preferred stock of the Bernuth Lembcke Co. held by the petitioner was not at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend. The 215 1/2 shares of preferred stock had been held by the taxpayer for more than two years at the time they were redeemed. The amount distributed to the petitioner in the redemption of the 215 1/2 shares of stock was distributed in partial liquidation of the corporation OPINION. MURDOCK: The Commissioner has applied section 115(g) of the Revenue Act of 1928, which provides: If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the 704 distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable727 dividend. The petitioner concedes that if the distribution in question was at such time and in such manner as to make it essentially equivalent to the distribution of a taxable dividend, then the amount distributed represented in its entirety a distribution of earnings or profits accumulated after February 28, 1913. He contends, however, that sections 115(c) and (h) apply, that is, that the distribution and redemption of the preferred stock was in partial liquidation of the corporation, since the term "amounts distributed in partial liquidation" is defined in subsection (h) as a distribution by a corporation in complete cancellation or redemption of a part of its stock. Undoubtedly the distribution in question was in complete cancellation or redemption of the 215 1/2 shares of stock owned by the petitioner. Subsection (c) provides that amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The parties have agreed that if the petitioner's contention is correct, the gain determined under section 111 was $8,788.09 and all of it is recognized for tax purposes. The respondent does not contend that it would728 not be taxable as capital gain. The Commissioner has determined that the distribution was at such time and in such manner as to make it essentially equivalent to the distribution of a taxable dividend. It was, therefore, encumbent upon the petitioner to produce sufficient evidence to overcome the presumption of correctness which attaches to the Commissioner's determination. He sketched, by his evidence, the history of the corporation in so far as changes in its capital structure were concerned. The details of the issuance and redemption of the particular stock in question appeared as a part of that evidence. Thus far there is no dispute between the parties. The only witness for the petitioner was Oscar M. Bernuth. He had been interested in the business of the corporation since 1898 and was president of the corporation during the period most important to this proceeding. He gave several reasons for the increase in the capital stock which took place in 1927 and also for the increase in capital stock and the change from common to preferred stock which was made in 1929. Some of his reasons are not clear or persuasive, particularly when viewed in the light of other evidence729 in the case. However, two of his reasons are not without force. The corporation was forced by the necessities of its business to borrow a considerable amount of money from banks on its short term unsecured paper. 705 The banks making these loans preferred that the corporation should have a larger capitalization and felt that the credit which they extended to the corporation would be better secured if such an increase were made. The witness stated that this was one of the reasons for the increase in 1927 and also one of the reasons for the increase in 1929. Another reason which he gave us was that the petitioner had expressed a desire to retire from active participation in the business and in anticipation of this retirement, which actually took place in 1931, had requested that a larger portion of the investment of the stockholders in the corporation be placed in preferred stock. These two reasons can not be disregarded. They indicate that the stock dividends of 1927 and 1929 were declared for legitimate business purposes rather than to disguise the later distribution of cash dividends. The redemption in 1931 was no part of a plan to distribute cash dividends in avoidance*730 of tax. The redemption was at par. The amount distributed was relatively small. Neither the time nor the manner of the redemption indicates an ordinary dividend. Cf. ; affd., . It was a true partial liquidation. Decision will be entered under Rule 50.Footnotes1. The returns for years prior to 1928 were separate returns of the Bernuth Lembcke Co. Thereafter the returns were consolidated returns. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625908/	Wilbur Buff, Petitioner v. Commissioner of Internal Revenue, RespondentBuff v. CommissionerDocket No. 3573-68United States Tax Court58 T.C. 224; 1972 U.S. Tax Ct. LEXIS 130; May 8, 1972, Filed 130 Decision will be entered under Rule 50. 1. Held, the funds embezzled by the petitioner in the taxable year 1965 did not constitute gain or income to him since in the same taxable year, there was, by agreement of the parties, a confession of judgment entered against him for the amount taken.2. Held, the petitioner is not entitled to deductions claimed in 1965 for the payment of real property taxes and for the payment of home mortgage interest payments.3. Held, petitioner has carried his burden of proving that he is entitled to a carryover capital loss.4. Held: No part of any underpayment of any tax for 1965 was due to negligence or intentional disregard of rules and regulations. Therefore, the petitioner is not liable for the addition to the tax under sec. 6653(a). Robert D. Heyde, for the petitioner.Marwin A. Batt and Marlene Gross, for the respondent. Quealy, Judge. Dawson, 132 J., dissenting. Raum and Withey, JJ., agree with this dissent. Hoyt, J., dissenting. Raum, Withey, Scott, Dawson, Tannenwald, and Simpson, JJ., agree with this dissent. QUEALY224 The respondent determined a deficiency in the Federal income tax of the petitioner and an addition to the tax as follows:Addition to taxAddition to taxYearDeficiencyunder sec. 6651(a) 1under sec. 6653(a)1965$ 10,650.40$ 518.34$ 532.52At the trial, the petitioner and the respondent stipulated to the following disposition of certain issues:225 (1) The petitioner is not entitled to any medical expense deduction.(2) The petitioner is entitled to a deduction of $ 81 for general sales taxes.(3) The petitioner is entitled to a deduction of $ 31.20 for State and local gasoline taxes.(4) The petitioner is entitled to a deduction of $ 107.42 for interest expense, not including133 mortgage interest.Since the trial, the respondent has agreed that the petitioner is entitled to the $ 4,800 of exemptions for his wife and children and that no additions to the tax pursuant to section 6651(a) should be imposed.Four issues remain for determination by the Court. Those issues are:(1) Whether the petitioner must include as gross income amounts which he embezzled from his employer in 1965.(2) Whether the petitioner is entitled to deductions for real estate tax and home mortgage interest payments made by a dependent.(3) Whether the petitioner is entitled to a deduction against ordinary income for a carryover of a capital loss realized in a prior year.(4) Whether any part of any underpayment of tax for the taxable year 1965 was due to negligence or intentional disregard of rules and regulations.FINDINGS OF FACTSome of the facts have been stipulated. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.Wilbur Buff (hereinafter referred to as the petitioner) is an individual who was a legal resident of Richmond Hill, New York, at the time of the filing of the petition herein. Petitioner filed his 1965 Federal income tax134 return with the district director of internal revenue at Brooklyn, New York. At the time of the filing of his return, he was incarcerated at Rikers Island Penitentiary, New York, N.Y.During the year 1965, the petitioner was married to but living apart from his wife, Hilda. Hilda Buff was not employed during that year, and she did not file a separate individual Federal income tax return.At the beginning of 1965, the petitioner was employed as a bookkeeper by S&D Meats, Inc., Brooklyn, New York. From January 1, 1965, to June 7, 1965, the petitioner embezzled a total of $ 22,739.56 from S&D Meats, Inc. (hereinafter sometimes referred to as S&D). When the embezzlement was discovered in June 1965, the petitioner immediately admitted the embezzlement. He was presented with an affidavit of confession of judgment by his employer and on June 7, 1965, signed the affidavit "for a debt justly due to the plaintiff," S&D Meats, Inc., for the sum of $ 22,000 plus interest.The petitioner also agreed to continue working for S&D and to pay $ 25 per week in partial repayment of the debt. During the period from 226 June 7, 1965, until July 7, 1965, the petitioner faithfully complied with135 this agreement. During this same period, and as part of his agreement with S&D, the petitioner also borrowed $ 1,000 from the Lafayette Bank, Brooklyn, New York, and paid over the proceeds of that loan to S&D in partial repayment of the debt.On or about July 7, 1965, petitioner's employer became dissatisfied with this arrangement. The petitioner was fired, and the affidavit of confession of judgment was filed with the Supreme Court, County of Queens. On July 19, 1965, judgment was entered against the petitioner for $ 22,000 plus interest and costs of $ 687.25. The judgment received by S&D against the petitioner is still outstanding.In 1956, the petitioner purchased a house on Collier Avenue, Far Rockaway, New York, for $ 18,750. The petitioner made a downpayment of $ 6,000, and the remainder of the purchase price was financed through a mortgage that the petitioner renewed on two occasions. The house was acquired in the name of Hilda Buff. During the taxable year 1965, petitioner and Hilda Buff were estranged. Hilda Buff asserted ownership of the house; and, during 1965, she made payments of real property taxes of $ 592.76 and payments of interest of $ 642.80 on account of136 the house.In 1957, the petitioner formed a corporation, Biltmore Securities Corp. (hereinafter referred to as Biltmore), to engage in the securities business as a broker-dealer in securities. The petitioner was sole stockholder and president of Biltmore.Biltmore had 400 shares of stock outstanding, in exchange for which the petitioner transferred $ 4,000 to the corporation. The petitioner obtained the $ 4,000 through a personal loan from the World National Bank, New York, N.Y., in the amount of $ 5,000. Of those funds, $ 1,000 was used in organizing the corporation. From time to time after the formation of Biltmore, the petitioner contributed additional capital to the corporation.Biltmore was dissolved in 1960. It had no net assets or net worth upon dissolution, and the petitioner received nothing upon dissolution except an income tax refund of $ 2,852.93.In his return for the taxable year 1960, the petitioner set forth a capital loss of $ 22,950 on the dissolution of Biltmore. In addition, the petitioner showed a capital loss of $ 1,822.28 carried over from a prior year. As a result of offsetting said loss against capital gains realized in 1960 and subsequent years, together137 with the deduction of $ 1,000 against other income for the years 1960 to 1964, inclusive, petitioner's 227 return for the year 1965 set forth an unused capital loss of $ 18,425.13, on account of which petitioner claimed a deduction of $ 1,000. The computation of the amount of the unused capital loss and the deduction was made in the return as follows:Capital loss carryforward for year 1961 as per schedulefiled$ 24,547.16Used thru 19646,122.03Unused18,425.13To 1965 to 10401,000.0017,425.13Expired17,425.13Balance carried forward0The petitioner had a loss carryforward to the year 1965 in an amount of not less than $ 1,000 on account of the loss sustained on the dissolution of Biltmore in the taxable year 1960.The petitioner did not report any part of the funds that he embezzled as income on his 1965 Federal income tax return.ULTIMATE FINDINGS OF FACT(1) No part of the funds originally embezzled by the petitioner in 1965 constituted income to the petitioner in that year.(2) The petitioner was entitled to a deduction of $ 1,000 of the capital loss suffered on the dissolution of Biltmore as an offset against income for the taxable year 1965. 138 (3) The petitioner is not entitled to deductions in 1965 for the property taxes on the real estate and interest payments on the mortgage on the house on Collier Avenue in Far Rockaway, New York.(4) No part of any underpayment of any tax for the petitioner's taxable year 1965 was due to negligence or intentional disregard of rules and regulations.OPINION1. Treatment of Embezzled ProceedsWith respect to this issue, the facts are not in dispute. In 1965, the petitioner was employed by S&D Meats, Inc. In the period between January and June of that year, the petitioner "embezzled" some $ 22,000 of funds belonging to his employer. Early in June 1965, the petitioner's embezzlement was discovered. He readily admitted taking the money. Thereupon, at the request of his employer, the petitioner executed 228 a confession of judgment and affidavit "for a debt justly due to the plaintiff" for the sum of $ 22,000 plus interest. 2139 In addition to the confession of judgment, the petitioner obtained a loan in the amount of $ 1,000 from the Lafayette Bank, Brooklyn, New York, which he paid to his employer. At the same time, the employer retained the petitioner as an employee pursuant to an agreement whereby $ 25 per week of the total wages payable to the petitioner would be withheld in partial repayment of the petitioner's debt.We thus have a simple situation where an embezzler is discovered and within the same taxable year the embezzler and his employer agree that the amount taken shall be treated as a judgment debt due from the embezzler. Whether it is a matter of self interest or otherwise, the employer initially deemed it to be to his advantage to disregard the criminality of the petitioner's act in consideration for the agreement by the petitioner to repay the debt.The respondent argues that once there has been a misappropriation of funds by the employee -- the die is cast -- the embezzler realizes taxable income. The respondent contends that the only offset to the realization of such income is through the "deduction" allowed by the respondent under section 165(c)(2) on account of the repayment of the140 amount embezzled. Thus, the respondent contends that the income of the embezzler is subject to diminution only by repayment of the amount embezzled, and he concludes that such diminution occurs only in the taxable year of such repayment.The petitioner argues that in determining whether petitioner realized income as a result of taking funds which belonged to his employer, the transaction must be looked at as of the close of the taxable year. In that light, the petitioner cannot be said to have realized any gain. While he had taken and spent some $ 22,000 belonging to his employer, there was entered against him a judgment for an equivalent amount. New York Civil Practice Law section 5201 (McKinney 1963) provides as follows:A money judgment may be enforced against any property which could be assigned or transferred, whether it consists of a present or future right or interest and whether or not it is vested, unless it is exempt from application to the satisfaction of the judgment.Section 5203 of the New York Civil Practice Law then provides that a judgment, when docketed, constitutes a lien on any real property for a period of 10 years, which period can be renewed.The petitioner's141 argument would clearly be correct if the Court in the instant case were faced with a situation where there had been a 229 receipt of income through error or mistake. United States v. Merrill, 211 F. 2d 297 (C.A. 9, 1954); J. W. Gaddy, 38 T.C. 943">38 T.C. 943 (1962), reversed in part on other grounds 344 F. 2d 460 (C.A. 5, 1965). See also Bates Motor Trans. Lines v. Commissioner, 20">200 F. 2d 20 (C.A. 7, 1952), affirming 17 T.C. 151">17 T.C. 151 (1951), and Norman Mais, 51 T.C. 494">51 T.C. 494 (1968). In United States v. Merrill, supra, the taxpayer received a payment of $ 7,500 in executor's fees which were mistakenly paid out by his wife's estate in 1940. The mistake was discovered in the same year, and the taxpayer made appropriate adjustments to his records and those of his wife's estate in recognition of the mistake. The $ 7,500 was subsequently repaid by the taxpayer in 1943. The court held that the taxpayer was not taxable on the payment in 1940. In so holding, the court said in pertinent142 part:We think the $ 7500 receipt in 1940 was thereby placed outside the operation of the "claim of right" rule. * * * The usual case for application of the rule involves a taxpayer who has received funds during a taxable year, who maintains his claim of right thereto during that year, and who subsequently, in a later year, is compelled to restore the sum when his claim proves invalid. We are not aware that the rule has ever been applied where, as here, in the same year that the funds are mistakenly received, the taxpayer discovers and admits the mistake, renounces his claim to the funds, and recognizes his obligation to repay them. * * * We think there is no warrant for extending the harsh claim of right doctrine to such a situation. * * In J. W. Gaddy, supra, this Court said:The case of United States v. Merrill, supra, admittedly creates an exception to the claim-of-right doctrine. The Tax Court in Charles Kay Bishop, 25 T.C. 969">25 T.C. 969 (1956), has accepted the doctrine of United States v. Merrill, supra. We have not found any decision which 143 has eliminated the exception to the claim-of-right doctrine announced in United Statesv. Merrill. * * * The claim-of-right doctrine and the exception to that doctrine announced in the Merrill case are both in essence predicated upon the practical principle of requiring taxpayers to account on the basis of an annual accounting period; cf. Burnet v. Sanford & Brooks Co., 282 U.S. 359">282 U.S. 359 (1931). Therefore, if the taxpayer does not discover the mistaken overpayment, renounce his claim of right thereto, and recognize his obligation for repayment in the same taxable accounting period, the general rule of the claim of right applies and the exception to the doctrine is inapplicable. See Healy v. Commissioner, 345 U.S. 278">345 U.S. 278.We must determine if there is a difference with respect to an illegal taking which would call for the application of a different rule.The treatment of embezzled funds as income to the embezzler is of relatively recent origin. James v. United States, 366 U.S. 213">366 U.S. 213 (1961). Fifteen years prior to the James case, the Supreme Court had held that the proceeds144 of embezzlement were not taxable as income. Commissioner v. Wilcox, 327 U.S. 404">327 U.S. 404 (1946). In the consideration of the question presented here, we must therefore look to the James case as a starting point.230 In James v. United States, supra, the petitioner, a union official, had embezzled large sums during the years 1951 through 1954, inclusive. He failed to report these amounts in his gross income. He was indicted and convicted of willfully attempting to evade the Federal income tax on such funds. His conviction was affirmed on appeal by the U.S. Court of Appeals for the Seventh Circuit (273 F.2d 5">273 F. 2d 5). On certiorari, the Supreme Court reversed that decision and remanded the case with direction to dismiss. In so doing, however, a majority of the Supreme Court took occasion to overrule its prior decision in Commissioner v. Wilcox, supra.Writing the opinion for the Court, Chief Justice Warren said:When a taxpayer acquires earnings, lawfully or unlawfully, without the consensual recognition, express or implied, of an obligation to repay and145 without restriction as to their disposition, "he has received income which he is required to return, even though it may still be claimed that he 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, supra, at p. 424. In such case, the taxpayer has "actual command over the property taxed -- the actual benefit for which the tax is paid," Corliss v. Bowers, supra. This standard brings wrongful appropriations within the broad sweep of "gross income"; it excludes loans. When a law-abiding taxpayer mistakenly receives income in one year, which receipt is assailed and found to be invalid in a subsequent year, the taxpayer must nonetheless report the amount as "gross income" in the year received. United States v. Lewis, supra; Healy v. Commissioner, supra.We do not believe that Congress intended to treat a law-breaking taxpayer differently.Clearly, the opinion of the majority in the James case holds that embezzled funds constitute income in the hands of the embezzler, notwithstanding the indebtedness or obligation to repay which arises as146 a matter of law from the taking of property belonging to another. The dominion and control over the funds which the embezzler acquires through his act and the economic enjoyment which he derives from such funds are relied upon as a basis for the tax. The opinion goes on to state that "to the extent that the victim recovers back the misappropriated funds, there is of course a reduction in the embezzler's income." As authority for this latter proposition, the opinion refers to the brief filed on behalf of the Government.Following the James case, respondent promulgated Rev. Rul. 65-254, 2 C.B. 50">1965-2 C.B. 50, which provides that each of several acts of embezzlement falls within the ambit of section 165(c)(2) as a transaction entered into for profit, and that upon making restitution of the embezzled funds, the embezzler is entitled to a deduction under section 165 on account of a loss resulting from such transaction. The clear intent on the part of the respondent in adopting this view was to accord to the embezzler the same treatment that is accorded to taxpayers who are forced to return funds received as income through error or mistake. As 147 the law now stands, it its thus incumbent upon 231 this Court to treat the embezzlement of funds by an employee in the same manner as any other "transaction entered into for profit" regardless of the criminality involved.In Norman Mais, supra, the petitioner had sold securities belonging to his employer and kept the proceeds. His embezzlement was discovered later in the same year. The petitioner freely admitted his guilt and surrendered a part of the proceeds to his employer. He held out the balance, partly on the advice of his counsel, pending the disposition of criminal charges against him. In the subsequent year, the petitioner was charged and found guilty of the embezzlement, whereupon he made a further restitution. The petitioner argued that the embezzlement did not constitute income because of his admission of guilt, or acknowledgment of debt, in the same year. This Court rejected the petitioner's argument saying:We believe that the respondent's determination is correct. We interpret the James case as meaning that any taxpayer who acquires property under circumstances which do not permit the conclusion that the property was received148 with a consensual recognition, express or implied, of an obligation to repay, and without restriction as to its disposition, is in receipt of taxable income. Certainly in the case of an embezzlement it cannot be considered that the funds are obtained by the embezzler under any consensual recognition of an obligation to repay; indeed, the victim of the embezzlement is unaware of the diversion of his property. The Supreme Court clearly recognized that in the case of an embezzlement the embezzler is in receipt of taxable income despite the fact that the embezzler has an unqualified duty and obligation to repay the money embezzled. The Court pointed out that even in the case of a law-abiding taxpayer who mistakenly receives income in one year, which receipt is assailed and found to be invalid in a subsequent year, the amount received must be reported in gross income in the year received. The Court then went on to state in effect that in the case of either type of taxpayer any amount repaid may be deducted in the year in which the repayment is made.As pointed out by the petitioner, we have held in J. W. Gaddy, 38 T.C. 943">38 T.C. 943, reversed in part on other issues149 (C.A. 5) 344 F. 2d 460, that where a taxpayer mistakenly obtains funds to which he is not entitled and in the same year recognizes a fixed and definite obligation to repay and makes provision for such repayment, the amounts received are not to be considered as taxable income in the year of receipt. We think that case is clearly distinguishable from the instant case. * * * Similarly, the case of United States v. Merrill, (C.A. 9) 211 F. 2d 297, cited by petitioner is also distinguishable, since in that case there was also an implied consensual recognition of an obligation to repay any overpayment.In the case now before us, the petitioner went further than the taxpayer in the Mais case. Not only did the petitioner freely admit to having taken the money, but the petitioner executed an affidavit of judgment and went out and borrowed funds to make partial restitution. Likewise, petitioner's employer accepted the petitioner's obligation and continued petitioner's employment. Thus, unless we are wholly to disregard the acts of the parties, we must assume that there 232 was a consensual agreement between the petitioner150 and his employer to treat the transaction as giving rise to a "debt" due from the petitioner. That agreement arose in the same year that the funds were embezzled. If we look to the transaction as of the close of the taxable year, we find that the petitioner had formally relinquished any claim of right. His status was no different than if he had borrowed the money. This case thus becomes indistinguishable from United States v. Merrill, supra, and from J. W. Gaddy, supra.The case of Norman v. Commissioner, 407 F. 2d 1337 (C.A. 3, 1969), affirming a Memorandum Opinion of this Court, is clearly distinguishable on its facts from the instant case. In that case, the funds of the employer were diverted by the taxpayer to his own use in the taxable years 1958 through 1962. When the diversions were discovered in 1962, the taxpayer, "in satisfaction" of the employer's claim against him, repaid part of the funds owed to his employer, and irrevocably transferred stock to a trust for the benefit of his employer. Specified amounts of the stock so transferred were to be turned over to the 151 employer in 1962 and in each of the succeeding years. As part of the same transaction, the taxpayer and his employer executed an agreement reciting that for consideration the parties to the agreement released each other from all claims of any nature arising out of the taxpayer's employment.In the instant case, as distinguished from the Norman case, the embezzlement of funds by the petitioner, his recognition of the obligation to repay the embezzled funds, and the making of arrangements for the repayment of those funds, all took place within the same taxable year. Furthermore, in the instant case, there was a consensual recognition of an obligation to repay the embezzled funds in that the petitioner, at the request of his employer, confessed judgment for the amount due.It is well recognized that the parties to a transaction, dealing at arm's length, may alter, amend, or revoke the transaction so as to change its character for tax purposes if their action takes place within the same taxable year as the original transaction. United States v. Merrill, supra;J. W. Gaddy, supra. The James case does not require a 152 different rule merely because there was a taking of property without the consent of the owner. On the contrary, as interpreted by this Court, the James case requires that the original taking be treated just as any other transaction entered into for profit. Where there is "consensual recognition" of indebtedness within the same taxable year, formalized by a confession of judgment, such a transaction does not result in the realization of taxable gain.233 2. Deductibility of Taxes and InterestIn 1956, the petitioner and Hilda Buff, the petitioner's wife, purchased a house on Collier Avenue in Far Rockaway, New York. Title was taken in the name of Hilda Buff. In 1965, she made payments of interest on the mortgage in the total amount of $ 642.80 and paid real property taxes of $ 592.76.The record fails to disclose any liability on the part of the petitioner for the payment of any interest or taxes on account of the house. Furthermore, Hilda Buff refused to pledge the house to secure the debt of the petitioner which is now before us; and, in substance, she has asserted ownership. In view of these considerations, we find and hold that the petitioner has failed to substantiate153 the deductions which he claimed for taxes and mortgage interest, and we therefore sustain the respondent's disallowance of such deductions.3. Capital Loss CarryoverThe petitioner formed Biltmore Securities Corp. in 1957, putting $ 4,000 of his own money into the stock. During the next few years, the petitioner contributed additional capital to the corporation. In 1960, Biltmore was dissolved and the petitioner received nothing in the dissolution except a $ 2,852.93 income tax refund.Pursuant to section 331, the $ 2,852.93 received by the petitioner was treated as being in full payment for the petitioner's stock in Biltmore. Accordingly, the petitioner suffered a capital loss in 1960 on the liquidation of the corporation.The respondent was fully apprised of the loss and made no effort, either in this proceeding or with respect to any prior years, to refute the claims of the petitioner. Instead, the respondent relied solely on the inability of the petitioner, at this late date, to substantiate the amount of the loss. Under the circumstances, we believe that the petitioner's testimony must be accepted to the extent of the amount claimed for the year 1965, and he is clearly154 entitled to a $ 1,000 deduction from ordinary income in that year.4. Negligence PenaltyThe respondent has asserted additions to tax under section 6653(a)3 for negligence or intentional disregard of rules and regulations. Since 234 we have found that the embezzled funds did not constitute income to the petitioner in 1965, the failure to report said funds as income for that year is not an adequate basis for the assertion of the section 6653(a) penalty.With respect to all other adjustments which the respondent relies155 upon to establish the underpayment of tax to which he now applies the section 6653(a) penalty, we find that, on the basis of the record as a whole, the petitioner, in good faith, believed that the items which were the subject of such deductions did present substantial issues of law and/or fact; and settlement of some of those issues does not constitute negligence or intentional disregard of rules and regulations. Consequently, we hold that the petitioner is not liable for the penalty asserted by the respondent. J. Bryant Kasey, 54 T.C. 1642">54 T.C. 1642 (1970); Tatem Wofford, 5 T.C. 1152">5 T.C. 1152 (1945); Herman Senner, 22 B.T.A. 655">22 B.T.A. 655 (1931).Decision will be entered under Rule 50. DAWSON; HOYTDawson, J., dissenting: In almost all respects I agree with the views expressed by Judge Hoyt in his dissenting opinion. But, since the rationale of the majority herein is so astonishing, I am impelled to add the following comments.It is simply hokey to say that what happened here gave rise to a "debt" due from the petitioner to S & D Meats, Inc., and to draw an analogy to cases like United States v. Merrill, 211 F. 2d 297156 (C.A. 9, 1954), and J. W. Gaddy, 38 T.C. 943">38 T.C. 943 (1962). I am surprised that the majority has chosen to fan the flickering flame of form under circumstances where it rewards the thief with an unintended tax benefit and places in jeopardy the victim's embezzlement loss deduction. It may now be argued that the petitioner's promise to repay the embezzled funds offsets any claimed loss in that year. If any loss is to be allowed, it might have to be postponed until the so-called promise to repay is shown to be worthless. This creates an absurd situation. The effect of the majority opinion is to destroy the underpinnings of the Supreme Court's decision in the James case.In any event, I think the rationale of the Merrill case, so heavily relied upon by the majority, is of questionable validity. It erroneously permits a cash basis taxpayer to deduct from or offset against his income for the taxable year an amount which is merely acknowledged to be owed to another but has not yet been paid. I see no distinction between this situation and one where a cash basis taxpayer executes a promissory note for the repayment of a loan together with interest, due157 in installments over several years. Surely we would not conclude 235 that this cash basis taxpayer could deduct all the interest due over the term of the loan in the first year when he executed his note, even though the face amount of the note is for the amount of the loan plus the interest due. To the extent that a renunciation of the Merrill holding would work a hardship in certain circumstances, relief should be obtained through congressional expansion of the ameliorative provisions now contained in section 1341 of the Code.Hoyt, J., dissenting: I respectfully dissent from the majority opinion holding that the petitioner did not receive taxable income in 1965 as a result of his embezzlement of funds in that year because of his confession of a judgment in favor of his employer in the same year for the amount stolen.James v. United States, 366 U.S. 213 (1961), established the basic principle that embezzled funds constitute taxable income because at the time of an embezzlement there is no consensual recognition, expressed or implied, of an obligation to repay the money embezzled; therefore, the taxpayer is chargeable with income158 to the extent of the amounts embezzled and is entitled to deductions only when repayments are made. Quoting from the Government's brief, the Court concluded that, "If, when, and to the extent that the victim recovers back the misappropriated funds, there is of course a reduction in the embezzler's income." (Emphasis supplied.) James v. United States, supra at 220.I would conclude that even if the parties in the year of embezzlement make an arrangement for repayment of the embezzled funds, this cannot have the effect of changing the original transaction into one in the nature of a loan; in the absence of a consensual recognition at the time of the taking, the acquisition of embezzled funds results in the receipt of taxable income by the embezzler. As indicated by the Supreme Court, this standard brings wrongful appropriations within the broad sweep of gross income; it excludes loans. James v. United States, supra at 219.It is obvious from the facts before us here that there was no consensual recognition when petitioner embezzled funds from his employer in 1965. The petitioner's confession of a worthless159 judgment thereafter in the year he was caught with his hand in the till did not, to any extent, constitute a repayment in that year; that the judgment was not worth the paper it was written on is clearly shown by the finding that it remains outstanding today, some 7 years later. It can no more be regarded as repayment in 1965 than a worthless promissory note given at that time. In so stating, I do not mean to imply that the 236 giving of a promissory note or other evidence of indebtedness by an otherwise solvent embezzler, would necessarily constitute payment sufficient to support a current deduction. That is a question which need not now be decided.It seems to me that the majority's conclusion that the "consensual agreement" between the embezzler and his victimized employer in 1965, after his crime was detected, changed the nature of the embezzled funds from taxable income to nontaxable borrowed funds, equates such subsequent agreement with full repayment in that year. Thus, this taxpayer, who embezzled over $ 22,000 from his employer in 1965 and who had the full use, command, and benefit of those funds, escapes taxability without making restitution merely because he was160 caught early in the same year and before the end thereof he acknowledged his obligation to make restitution. This seems contra, not only to the doctrine enunciated in the James case but also to other more recent cases.In Norman v. Commissioner, 407 F. 2d 1337 (C.A. 3, 1969), certiorari denied 395 U.S. 947">395 U.S. 947 (1969), affirming a Memorandum Opinion of this Court, the taxpayer had embezzled funds from his employer in each of the years 1958 through 1962. In October 1962, the taxpayer, in satisfaction of his employer's claim against him for all years including 1962, paid the employer cash and placed stock in trust to be delivered to the employer over a number of years. It was there held that the amounts embezzled constituted income to the taxpayer in the years of embezzlement, and that the taxpayer was entitled to a deduction in 1962 for the amount repaid during such year. The fact that the arrangement to repay was made in 1962 did not change the embezzled funds taken that year from income, taxable under James, to nontaxable proceeds from a loan. In affirming our Memorandum Opinion the Court of Appeals stated 161 in part as follows:In our view the 1962 agreement neither purported to nor could change the original legal character of Norman's earlier conduct from embezzlement to borrowing. * In Norman Mais, 51 T.C. 494">51 T.C. 494 (1968), the petitioner embezzled funds and when caught in the same year acknowledged his obligation to make restitution. The same arguments were made on behalf of the taxpayer in that case. We rejected them and after discussing the arguments and applicable principles stated (p. 498):We interpret the James case as meaning that any taxpayer who acquires property under circumstances which do not permit the conclusion that the property was received with a consensual recognition, express or implied, of an obligation to repay, and without restriction as to its disposition, is in receipt of 237 taxable income. Certainly in the case of an embezzlement it cannot be considered that the funds are obtained by the embezzler under any consensual recognition of an obligation to repay; indeed, the victim of the embezzlement is unaware of the diversion of his property.We then stated that the acknowledgment by the embezzler of his legal obligation162 to repay could not be considered a consensual agreement which would justify treating embezzled funds as in any way similar "to borrowed funds and hence excludable from gross income." We concluded (p. 499): "The only relief available to the embezzler is to deduct from income of any year any amount repaid in such year in restitution."I think the majority here is rejecting those principles announced and applied only a few years ago by this Court in Norman Mais. The majority opinion seeks to distinguish the cases by the statement that here the petitioner went further by executing an affidavit of judgment after he was caught. I submit that this is merely a matter of degree, a distinction without a difference. The two cases cannot stand together and yet the majority opinion does not refuse to follow Mais or expressly overrule it.It seems clear to me that the results reached in Mais and in Norman were correct and required by the opinion of the Supreme Court in James v. United States, supra. The cases of United States v. Merrill, 211 F. 2d 297 (C.A. 9, 1954), and J. W. Gaddy, 38 T.C. 943 (1962),163 reversed in part on other grounds 344 F. 2d 460 (C.A. 5, 1965), involving funds mistakenly received and held under a claim of right, on which the majority relies, are clearly distinguishable, as pointed out in our opinion in Norman Mais, supra. The quotation from Mais contained in the majority opinion omits the carefully drawn distinctions indicating that there were implied consensual recognitions to repay excessive receipts (Gaddy) and overpayments (Merrill), which obligations were similar to the obligation to repay a loan. No such similar recognition or obligation existed here when petitioner embezzled his employer's funds and I would deny the petitioner's attempt to change the nature of the income by a subsequent mea culpa confession of an uncollectible judgment even though it occurred during the same year. Respondent has allowed petitioner a deduction for the small amount he repaid his victim in 1965; I think that is all he should be allowed. I would follow Mais and Norman here and thus not do damage to stare decisis, creating the inevitable doubts, confusion, and uncertainty that the majority*164 opinion will certainly engender. Footnotes1. All statutory references are to the Internal Revenue Code of 1954. as amended, unless otherwise indicated.↩2. The affidavit was filed in the Supreme Court of the County of Queens; and, on July 19, 1965, judgment was entered against the petitioner for $ 22,000 plus interest and cost of $ 687.25.↩3. 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/1625730/	25 So. 3d 1047 (2010) Brenda BLOODGOOD v. Nikesha LEATHERWOOD, April Garcia, Individually and as Parent and Next Friend of Monique Garcia, Vincent Buck and Azyia Buck, Minors; Kenneth Anderson; and American Family Insurance. No. 2008-IA-01811-SCT. Supreme Court of Mississippi. January 21, 2010. 1048 M. Reed Martz, attorney for appellant. Bo Roland, attorneys for appellee. Before CARLSON, P.J., DICKINSON and PIERCE, JJ. DICKINSON, Justice, for the Court. ¶ 1. Service via certified mail upon an out-of-state defendant was returned as "unclaimed/refused." Because the defendant was not properly served, we reverse and remand the case for further proceedings. FACTS AND PROCEDURAL HISTORY ¶ 2. On July 23, 2002, a motor vehicle collision occurred near Belden, Mississippi, between vehicles driven by Nikesha Leatherwood and Brenda Bloodgood, a Tennessee resident. Leatherwood and her passengers ("Leatherwood") originally filed suit against Bloodgood on March 25, 2003, in the Lee County Circuit Court. The suit was dismissed without prejudice on February 15, 2005, for failure to serve Bloodgood with process. The instant suit was filed in the Lee County Court on June 17, 2005. ¶ 3. Leatherwood obtained a 120-day extension of time for service on October 11, 2005, and she made numerous unsuccessful attempts to serve Bloodgood personally. Leatherwood eventually attempted to serve Bloodgood via certified mail per Mississippi Rule of Civil Procedure 4(c)(5). The U.S. Postal Service attempted to deliver the summons and complaint on December 22, 2005; December 28, 2005; and January 6, 2006. The mailing was eventually returned to sender marked "Unclaimed/Refused." This is a new, singular designation used by the Postal Service rather than the prior practice of returning a letter as either "unclaimed" or "refused." ¶ 4. On July 14, 2006, Bloodgood, via special appearance, filed her answer and raised the issue of improper service with a request that the action against her be dismissed. Bloodgood alleges the statute of limitations for bringing the action expired on August 19, 2006. On October 6, 2006, Bloodgood filed a revised motion to dismiss, asking that the action against her be dismissed with prejudice since the statute of limitations had expired. Bloodgood claims that she never refused the certified mailing. There is no dispute that service was attempted at the correct residential address. ¶ 5. On October 16, 2008, the trial judge issued an order finding that Bloodgood was effectively served as of January 1, 2006. The order stated that "[t]he Court is unwilling to penalize the Plaintiffs because of the methods of operation of the United States Postal Service, specifically that the Postal Service did not state whether the envelope was either refused or unclaimed." From that order, this appeal is taken. ISSUES RAISED ¶ 6. The ultimate issue in this appeal is whether the trial judge properly denied Bloodgood's motion to dismiss for insufficiency of process. Bloodgood raises the following issues: I. Whether Mississippi's Non-Resident Motorist Statute, Miss.Code Ann. § 13-3-63, was the exclusive method by which Leatherwood should have effected service on Bloodgood. 1049 II. Whether the certified mailing by Leatherwood, returned as "unclaimed/refused," was insufficient to comply with the requirements of Mississippi Rule of Civil Procedure 4(c)(5). III. If service is found to be improper, whether this action should be dismissed. STANDARD OF REVIEW ¶ 7. This Court reviews de novo a trial court's grant or denial of a motion to dismiss. Fletcher v. Limeco Corp., 996 So. 2d 773, 776 (Miss.2008) (citing Vicksburg Partners, L.P. v. Stephens, 911 So. 2d 507, 513 (Miss.2005)). ANALYSIS I. Whether Mississippi Code Section 13-3-63 provides the exclusive method by which Bloodgood should have been served. ¶ 8. Bloodgood first argues that service upon her should have been accomplished through Mississippi's nonresident motorist statute, Mississippi Code Section 13-3-63, rather than Mississippi Rule of Civil Procedure 4(c)(5). Section 13-3-63 provides, in pertinent part: The acceptance by a nonresident of the rights and privileges conferred by the provisions of this section, as evidenced by his operating, either in person or by agent or employee, a motor vehicle upon any public street, road or highway of this state, or elsewhere in this state, or the operation by a nonresident of a motor vehicle on any public street, road or highway of this state, or elsewhere in this state, other than under this section, shall be deemed equivalent to an appointment by such nonresident of the Secretary of State of the State of Mississippi to be his true and lawful attorney, upon whom may be served all lawful processes or summonses in any action or proceeding against him, growing out of any accident or collision in which said nonresident may be involved while operating a motor vehicle on such street, road or highway, or elsewhere in this state, and said acceptance or operation shall be a signification of his agreement that any such process or summons against him which is so served shall be of the same legal force and validity as if served on him personally. Miss.Code Ann. § 13-3-63 (Rev.2002) (emphasis added). ¶ 9. Although Bloodgood cites numerous cases in which this Court has endorsed Section 13-3-63 as an appropriate method by which nonresidents may be served, none of them supports her contention that it is the exclusive method, and one even contradicts this point. See Trailer Exp., Inc. v. Gammill, 403 So. 2d 1292, 1293 (Miss.1981) ("It is our opinion that appellee had her choice as to the manner of serving appellant.") The plain language of the statute says that service "may" be served pursuant to its provisions. Additionally, the Mississippi long-arm statute, Section 13-3-57, provides: Any nonresident person ... who shall commit a tort in whole or in part in this state against a resident or nonresident of this state ... shall thereby be subjected to the jurisdiction of the courts of this state. Service of summons and process upon the defendant shall be had or made as is provided by the Mississippi Rules of Civil Procedure. Miss. Code Ann. § 13-3-57 (Rev.2002). Mississippi Rule of Civil Procedure 4(c)(5) provides: "In addition to service by any other method provided by this rule, a summons may be served on a person outside this state by sending a copy of the summons and of the complaint to the person to 1050 be served by certified mail." Miss. R. Civ. P. 4(c)(5). ¶ 10. Section 13-3-63 merely provides an alternative method to serve a particular class of out-of-state defendants. Furthermore, even if the statute provided an exclusive method of service, it would conflict with Rule 4. This Court is vested with the inherent power to promulgate procedural rules. Newell v. State, 308 So. 2d 71, 76 (Miss.1975). Accordingly, this issue is without merit. II. Whether Bloodgood was properly served pursuant to Rule 4(c)(5). ¶ 11. Bloodgood argues that she was never properly served with process as required by Mississippi Rule of Civil Procedure 4(c)(5). The rule provides: (5) Service by Certified Mail on Person Outside State. In addition to service by any other method provided by this rule, a summons may be served on a person outside this state by sending a copy of the summons and of the complaint to the person to be served by certified mail, return receipt requested. Where the defendant is a natural person, the envelope containing the summons and complaint shall be marked "restricted delivery." Service by this method shall be deemed complete as of the date of delivery as evidenced by the return receipt or by the returned envelope marked "Refused." Miss. R. Civ. P. 4(c)(5) (emphasis added). ¶ 12. Bloodgood contends that the service of process on her was deficient because (1) the envelope was not marked as restricted delivery, and (2) the mailing was returned to sender with the new postal designation of "unclaimed/refused" rather than as either "unclaimed" or "refused." A. "Restricted Delivery" ¶ 13. Bloodgood first argues that Leatherwood did not comply with the rule because the envelope was not marked "restricted delivery." A "mark" is defined as a "symbol, impression, or feature on something, usu[ally] to identify it or distinguish it from something else." Black's Law Dictionary 808-09 (8th ed.2005). In the instant case, the envelope had an attached return receipt containing the words "4. Restricted Delivery? (Extra Fee)" with a checked box beside it. The attached receipt plainly marked the mailing for restricted delivery as contemplated by Rule 4, and this issue is without merit. B. "Unclaimed/Refused" ¶ 14. Bloodgood next argues that service was not proper under Rule 4(c)(5) because the mailing was returned with the new postal designation "unclaimed/refused." This designation is problematic because it combines the previously distinct designations of "unclaimed" and "refused," which have different meaning and effect under our rules. See Jones v. Flowers, 547 U.S. 220, 229-35, 126 S. Ct. 1708, 1716-719, 164 L. Ed. 2d 415 (2006); see Young v. Huron Smith Oil Co., Inc., 564 So. 2d 36, 37 (Miss.1990). ¶ 15. A return envelope marked "refused," as required by Rule 4(c)(5), denotes that the Postal Service actually attempted delivery on the defendant, who refused to accept it. A returned envelope marked "unclaimed" simply means that the Postal Service was unsuccessful in delivering the mailing to the defendant, whether because delivery was attempted at the wrong address, the defendant simply was not home at the time the Postal Service attempted delivery, or some other reason. ¶ 16. Leatherwood argues that, because the return envelope literally had the word "refused" on it, it should be treated as being in compliance with the rule. In other words, she insists that we should 1051 treat "unclaimed/refused" as the equivalent of "refused." This argument fails. As stated above, "unclaimed" and "refused" have two entirely different meanings, and we have no way to know which applied in this case. When drafting our rules, this Court included the requirement that, for service to be effective, an undelivered mailing must actually have been refused by the defendant, as evidenced by the returned envelope marked "refused." A returned envelope marked "unclaimed" is insufficient to satisfy service requirements under Rule 4(c)(5). Additionally, the United States Supreme Court has held that a certified mailing returned as "unclaimed" is insufficient to satisfy constitutional due process requirements for service of process. See Jones v. Flowers, 547 U.S. 220, 126 S. Ct. 1708, 164 L. Ed. 2d 415 (2006) (holding that, after a mailed notice was returned unclaimed, a state was required by the Due Process Clause of the Fourteenth Amendment to take additional reasonable steps to notify the owner before the sale could proceed). ¶ 17. The designation of "unclaimed/refused" renders impossible a determination whether the mailing was refused or unclaimed. Therefore, the service of process upon Bloodgood failed to comply with Rule 4(c)(5) and consequently, the trial court erred by finding that Bloodgood was properly served. III. Whether this Action Should be Dismissed. ¶ 18. Bloodgood next argues that, since service was not effectuated within 120 days of filing the complaint, it should be dismissed. Bloodgood argues that, because the statute of limitations expired August 19, 2006, the dismissal should be with prejudice. This Court finds that dismissal is not warranted at this juncture in the proceedings. ¶ 19. Mississippi Rule of Civil Procedure 4(h) provides that if service of the summons and complaint is not made upon a defendant within 120 days after the filing of complaint, the action shall be dismissed unless the plaintiff can show good cause.[1] The filing of a complaint tolls the applicable statute of limitations for 120 days, but if the plaintiff fails to serve process on the defendant within that 120-day period, and in the absence of an extension of time for service of process, the statute of limitations begins to run again automatically. Holmes v. Coast Transit Auth., 815 So. 2d 1183, 1185 (Miss.2002). A plaintiff who does not serve the defendant within the 120-day deadline must either refile the complaint before the statute of limitations expires or show good cause for failing to serve the defendant within the 120-day period; otherwise, dismissal is proper. Id. "The rule therefore provides that the plaintiff will have an opportunity to show good cause after the 120 days period has elapsed." Webster v. Webster, 834 So. 2d 26, 29 (Miss.2002). The plaintiff has the burden of establishing good cause. Holmes, 815 So.2d at 1185. ¶ 20. Regarding what constitutes "good cause," this Court has remarked that: [G]ood cause is likely (but not always) to be found when the plaintiff's failure to complete service in timely fashion is a 1052 result of the conduct of a third person, typically the process server, the defendant has evaded service of the process or engaged in misleading conduct, the plaintiff has acted diligently in trying to effect service or there are understandable mitigating circumstances, or the plaintiff is proceeding pro se or in forma pauperis. Id. at 1186 (quoting 4B Charles Alan Wright & Arthur R. Miller, Federal Practice & Procedure § 1137, at 342 (3d ed.2000)). ¶ 21. While the trial court erred by finding that Bloodgood was served properly, Leatherwood should now be afforded the opportunity to apply for additional time to serve process and to demonstrate whether the circumstances in this case constitute good cause for failing to serve the defendant. ¶ 22. This matter is remanded to the trial court for a determination as to whether Leatherwood can show good cause for her failure to serve Bloodgood properly. If the trial court determines that good cause existed for failure to serve Bloodgood within the 120-day period, Leatherwood should be granted an extension for service of process, during which she may properly effectuate service and proceed with the action. CONCLUSION ¶ 23. Service of process is not effected properly under Rule 4(c)(5) when the mailing is returned as "unclaimed/refused." Accordingly, the trial judge erred by finding that Bloodgood was served properly in this case. The judgment of the trial court is reversed, and this matter remanded to the trial court to determine whether the circumstances in this case constitute good cause for Leatherwood's failure to properly serve Bloodgood within the time period prescribed by Mississippi Rule of Civil Procedure 4(h). ¶ 24. REVERSED AND REMANDED. CARLSON, P.J., RANDOLPH, LAMAR, CHANDLER AND PIERCE, JJ., CONCUR. GRAVES, P.J., DISSENTS WITH SEPARATE WRITTEN OPINION JOINED BY WALLER, C.J., AND KITCHENS, J. GRAVES, Presiding Justice, Dissenting: ¶ 25. I disagree with the majority's finding that service of process on Bloodgood failed to comply with Rule 4(c)(5), and therefore I dissent. I would find that service of process was sufficient under Rule 4(c)(5) for the following reasons: the certified mailing containing the summons and complaint was returned to the sender with the marking "Unclaimed Refused" (a marking including the word "Refused"); it is undisputed that the address at which the U.S. Postal Service attempted to deliver the mailing was the correct address; the Postal Service documented that it had attempted to deliver the mailing at that address on three separate occasions; the Postal Service documented that it had provided notice of each of those attempted deliveries to the addressee; and lastly, Bloodgood evidently was made aware of the summons and complaint, because she filed an answer. These facts, in aggregate, adequately support the trial judge's finding that Bloodgood was effectually served. ¶ 26. The marking of "Unclaimed Refused" is ambiguous, but it is just as reasonable, if not more so, for a sender of mail to conclude that such a marking indicates that the mailing was refused as it is for a sender to conclude that the mailing was simply unclaimed. The Postal Service defines "Refused" as "[a]ddressee refused to accept mail or pay postage charges on 1053 it." United States Postal Service, Domestic Mail Manual (DMM), § 507, Exh. 1.4.1, http://pe.usps.com/text/dmm300/507. htm#wp1112866 (last accessed Jan. 8, 2010). The Postal Service defines "Unclaimed" as "[a]ddressee abandoned or failed to call for mail." Id. See also Jones v. Flowers, 547 U.S. 220, 245, 126 S. Ct. 1708, 1725, 164 L. Ed. 2d 415 (2006) ("`Unclaimed'... may indicate that an intended recipient has simply failed or refused to claim mail."). Based on those definitions, which are readily available to the public, it is just as rational, if not more so, to conclude that a mailing marked "Unclaimed Refused" was refused rather than simply unclaimed.[2] ¶ 27. In addition, regardless of what a sender thinks the "Unclaimed Refused" marking indicates in terms of what actually happened when the Postal Service attempted delivery, the sender reasonably could conclude, as it did in the instant case, that the "Unclaimed Refused" marking fulfills Rule 4(c)(5)'s requirement that the returned mailing be marked "Refused." ¶ 28. I agree with the majority that a mailing marked "Unclaimed" (and not "Unclaimed Refused") cannot be said to satisfy the requirement of Rule 4(c)(5) that a returned mailing be marked "Refused;" however, until the Postal Service clarifies the meaning of "Unclaimed Refused" or Rule 4(c)(5) is amended to clarify that such a marking is insufficient under the Rule, the "Unclaimed Refused" marking must be analyzed as the new, distinct term that it is. Whether it fulfills the requirement of Rule 4(c)(5) can be determined only through consideration of the circumstances in each specific case. ¶ 29. In the instant case, the "Unclaimed Refused" marking, in conjunction with the other relevant facts, supports a finding that Bloodgood was effectually served. As noted above, it is undisputed that the address at which the Postal Service attempted to deliver the mailing was the correct address; the Postal Service documented that it had attempted to deliver the mailing at that address on three separate occasions; the Postal Service documented that it had provided notice of each of those attempted deliveries to the addressee; and Bloodgood evidently was made aware of the summons and complaint, because she filed an answer. From these facts, despite Bloodgood's claims to the contrary, it is most logical to conclude that Bloodgood either outright refused the mailing or effectively refused it by failing to retrieve it from the post office after receiving notices that the post office was *1054 holding it for her.[3] Therefore, I would find that service of process was sufficient under Rule 4(c)(5). ¶ 30. Accordingly, I must dissent and would affirm the trial court's order finding that service upon Bloodgood was complete and effective on or about January 1, 2006. WALLER, C.J., AND KITCHENS, J., JOIN THIS OPINION. NOTES [1] The full text of Rule 4(h) is as follows: Summons: Time Limit for Service. If a service of the summons and complaint is not made upon a defendant within 120 days after the filing of the complaint and the party on whose behalf such service was required cannot show good cause why such service was not made within that period, the action shall be dismissed as to that defendant without prejudice upon the court's own initiative with notice to such party or upon motion. Miss. R. Civ. P. 4(h). [2] While use of the majority's definitions of "Refused" and "Unclaimed" would not affect my conclusions, it should be noted that the majority includes no citation for its definitions. Furthermore, the two cases the majority cites as support for the assertion that "`unclaimed' and `refused' ... have different meaning and effect under our rules" do not necessarily support that statement. The two cases Jones v. Flowers, 547 U.S. 220, 126 S. Ct. 1708, 164 L. Ed. 2d 415 (2006), and Young v. Huron Smith Oil Co., 564 So. 2d 36 (Miss. 1990) neither mention the term "Refused" nor contrast the term "Refused" with the term "Unclaimed." In addition, Jones v. Flowers did not unequivocally state, as the majority suggests, that a certified mailing returned as "unclaimed" is insufficient service of process to satisfy constitutional due process requirements. Rather, as the majority more or less notes in its explanatory parenthetical to the Jones case, Jones held that "when mailed notice of a tax sale is returned unclaimed, the State must take additional reasonable steps to attempt to provide notice to the property owner before selling his property, if it is practicable to do so." Jones, 547 U.S. at 225, 126 S. Ct. 1708. In other words, the Jones court was ruling on the sufficiency of process in one specific situation, and it also noted that additional process was due only if practicable. [3] The fact that Leatherwood made numerous unsuccessful attempts to serve Bloodgood personally is further evidence that Bloodgood was attempting to avoid acceptance of the summons and complaint.	01-04-2023	10-30-2013
https://www.courtlistener.com/api/rest/v3/opinions/4477510/	OPINION. Murdock, Judge: The Commissioner determined a deficiency of $705.16 in income tax for 1951, a deficiency of $1,022.88 in excess profits tax for 1950, and a deficiency of $392.65 in excess profits tax for 1951. The petitioner eliminated $23,871.38 for the base period year 1946 as an abandonment deduction in computing its excess profits tax credit on its returns for the taxable years. The issue for decision is whether it has shown that it meets the requirements of section 433(b) (10) (C). That section provides: (O) Deductions of any class shall not be disallowed under such paragraph unless the taxpayer establishes that the increase in such deductions— (i) is not a cause or a consequence of an increase in the gross income of the taxpayer in its base period or a decrease in the amount of some other deduction in its base period, which increase or decrease is substantial in relation to the amount of the increase in the deductions of such class, and (ii) is not a consequence of a change at any time in the type, manner of operation, size, or condition of the business engaged in by the taxpayer. The Commissioner does not question the fact that the petitioner has met the other requirements of the statute. The facts have been submitted by a stipulation, which is adopted as the findings of fact. The petitioner filed its income and excess profits tax returns for the years 1950 and 1951 with the collector of internal revenue for the twenty-third district of Pennsylvania. Its-books were kept and its returns filed on an accrual basis of accounting. It is engaged in the manufacture of material for electrical equipment. The petitioner erected at its manufacturing plant an old secondhand power plant, which it had purchased elsewhere, and put it into operation at some time in 1940. It also acquired boilers, coal- and ash-handling equipment, and other equipment needed for the operation of a high-pressure steam heating system for its plant. It thereafter used the equipment mentioned to produce its own steam for heating its plant until February 1942. The petitioner had purchased from a public utility all of the electric energy which it used for power prior to February 1942, at which time it installed electric generating equipment. It generated a part of its electric power and heated its buildings with exhaust steam from the generator engine thereafter until May 1946. The petitioner was studying various methods of improving the efficiency of its power plant during the years 1942 to the early part of 1946. It employed consulting engineers in this connection, and it reached the conclusion that its high operating cost was due in part to inefficiency of the boilers. The board of directors, on March 8, 1946, authorized the abandonment of the power plant and the substitution of an automatic low-pressure heating system. The power plant was shut down in April, and the petitioner purchased all of its electric power requirements from a public utility after May 1946. The petitioner contracted in June 1946 for oil-fired heating boilers, which were delivered on November 7, 1946, and were in operation by February 1947. The change from the high-pressure to the low-pressure steam system of heating also involved a change from coal to oil as the fuel to fire the boilers. The new system occupied only a small part of the old powerhouse. The same radiators were used under the new system as had been used formerly. The old power plant has not been used since 1946 and it had no value after abandonment except as scrap. The Commissioner allowed the petitioner a deduction of $23,871.38 for 1946, representing the loss on the abandonment of the power plant equipment. The average number of kilowatt-hours of power which the petitioner purchased yearly from a public utility and the average cost thereof were as follows: For the years 1937 through 1941, 502,880 kilowatt-hours and $10,624.21; for the years 1943 through 1945, 384,947 kilowatt-hours and $7,896; and for the years 1947 through 1949,932,559 kilowatt-hours and $19,865.73. The base period for the purpose of computing the excess profits tax credit for the taxable years, consists of the years 1946 through 1949. Sec. 435 (b). The following table shows the net sales, cost of sales, gross income, and pounds of copper produced with relation to the petitioner for the years indicated: [[Image here]] The following table shows the cost of producing heat and power in the petitioner’s own plant for the years indicated: [[Image here]] The petitioner, in computing its excess profits credit, used the following amounts as excess profits net income for the base period years: 1946_ $136,390.12 1947_ 144,833.10 1948_ 195, 634.86 1949_ (loss) Average_ $118,964. 52 The Commissioner gave the following explanation in the statement attached to the notice of deficiency: It is determined that you are not entitled to disallow an abandonment loss of $23,871.38 for the year 1946 in computing your excess profits tax credit for the year 1950 [and 1951] under the provisions of section 435 of the Internal Revenue Code [income method], inasmuch as you have not established that said loss is not a cause or a consequence of an increase in your gross income in your base period or a decrease in the amount of some other deduction in your base period and is not a consequence of a change at any time in the manner of operation of your business as required by section 433 (b) (10) of the Internal Revenue Code. “Abandonment” is one of the classes of adjustments allowed by the statute in computing the excess profits credit, but a deduction allowed for one of the base years for abandonment cannot be disallowed in computing the excess profits credit unless it meets the requirements of section 433 (b) (10) (C) quoted above. Failure to establish any one of those three negatives is fatal to this taxpayer’s case. Cf. William Leveen Corporation, 3 T. C. 593, 595. The petitioner has failed to prove that the deduction allowed for 1946, based upon the abandonment of its old power plant and representing the unrecovered cost of all of its power plant equipment in excess of salvage, was not a consequence of a change in the “manner of operation” of the business which it engaged in, within the meaning of section 433 (b) (10) (C) (ii). The change from generating a large part of its own power requirements in its* own plant and from heating the plant with the same boilers used for generating the power, to purchasing its entire power requirements from a public utility and heating the plant with a wholly new system was a change in the manner of operation of the business of sufficient magnitude and importance to disqualify the petitioner under the provision just mentioned. The number of kilowatt hours purchased and the cost before, during, and after the change is some indication of the size and importance of the change. That change related directly to the operation of the business and to major items of cost. It had been the subject of much study and discussion. Engineers had been consulted. The change was expected to result in substantial economies. These, and perhaps other circumstances, show that the change was a substantial one in the operation of the business, and the abandonment of the power plant equipment was a direct consequence of this change in the manner of operation of the business. Cf. Wentworth Manufacturing Co., 6 T. C. 1201, 1208-9; Gulf States Utilities Co., 16 T. C. 1381; Crow-Burlingame Co., 15 T. C. 738. Those cases were decided under different provisions of the law but both parties regard cases decided under those provisions as pertinent authority here. Cf. Fulton Foundry & Machine Co., 26 T. C. 953. The questions of whether the petitioner has shown that it is not disqualified under the two provisions of section 433 (b) (10) (C) (i) need not be considered, since the holding above is fatal to the petitioner’s case in any event. Decision will be entered for the respondent.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625909/	STANLEY E. WILSON and CHRISTINE WILSON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.Wilson v. CommissionerDocket No. 6483-76.United States Tax CourtT.C. Memo 1980-288; 1980 Tax Ct. Memo LEXIS 291; 40 T.C.M. (CCH) 835; T.C.M. (RIA) 80288; August 4, 1980, Filed Allan Howeth and Kirk R. Manning, for the petitioners. H. Steven New, for the respondent. GOFFEMEMORANDUM FINDINGS OF FACT AND OPINION GOFFE, Judge: The Commissioner determined deficiencies in petitioners' Federal292 income tax for the taxable years 1972 and 1973 in the respective amounts of $58,571.45 and $1,194.07. Due to concessions of the parties, the sole issue for our decision is whether petitioners are entitled to utilize the installment method under section 453, Internal Revenue Code of 1954, 1 in reporting gain from the sale to an irrevocable trust established for the benefit of their children of stock in a corporation being liquidated. At the trial of the instant case respondent relied upon the anticipatory assignment of income theory. However, for the first time in his opening brief respondent set forth new theories of constructive receipt at the time of the sale of stock to the trust and the "substance and realities" of petitioners' sale. FINDINGS OF FACT Some of the facts have been stipulated. The stipulations of facts and accompanying exhibits are incorporated herein. Stanley E. Wilson and his wife, Christine Wilson (herein petitioners), who timely filed their joint Federal income tax returns for the taxable years 1972 and 1973 with the Internal Revenue Service293 Center at Austin, Texas, resided at Fort Worth, Texas, at the time they filed their petition in this proceeding. Mr. Wilson was an employee of radio station KFJZ, Fort Worth, Texas for several years when, in 1965, Texas State Network, Inc. (TSN) purchased the radio station. 2 Following the purchase of the radio station, Mr. Wilson became president of TSN, general manager of the station, and an owner of 10 percent of the outstanding stock of TSN. As president of TSN, Mr. Wilson controlled most of its day-to-day operations but did not make overall policy decisions and did not dictate policy on corporate matters. Mr. Arnold Malkan, who owned 73.2 percent of all outstanding TSN stock, and was chairman of the board of directors, was responsible for such matters. On June 10, 1971, the board of directors of TSN unanimously agreed to recommend to the shareholders that they adopt a plan for the complete liquidation and dissolution of TSN under the provisions of section 337. In addition, the board authorized the corporate officers to execute an Agreement for Sale and Purchase of Assets whereby TSN and its subsidiaries294 agreed to sell substantially all of their assets to Communications, Inc. of Austin, Texas (herein Communications). On December 22, 1971, the board adopted a plan of complete liquidation and authorized TSN officers to consummate the sale of assets to Communications as set forth in the provisions of the agreement of June 10, 1971. In January 1972 petitioners contacted their attorney for the purpose of investigating the feasibility of establishing a trust for the benefit of their three children and selling their TSN stock to the trust. 3 Following this meeting, petitioners' attorney contacted the Fort Worth National Bank trust department to discuss a trust agreement in which the bank would act as trustee. Petitioners' attorney also informed the bank that TSN was in the process of liquidation and proposed that petitioners sell all of their TSN stock to the trust for approximately $50,000 cash and $250,000 in notes, payable over a 10-year period. Negotiations between the bank and petitioners' attorney followed which involved the bank's decision to become trustee, revisions to the proposed trust agreement, and suggested types of investments to be utilized by the trust. 295 On February 26, 1972, the shareholers of TSN approved the plan of complete liquidation and authorized the officers and directors to sell TSN assets, pursuant to the plan. By November 1972 TSN had completed the sale of substantially all of its assets. 4On December 5, 1972, Mr. Malkan, as chairman of the board of directors, reported that the initial distribution in liquidation had been delayed by stock transfer agent requirements and requested the board of directors to authorize the transfer of stock owned by TSN to the TSN shareholders. The board of directors approved a resolution which authorized the secretary of TSN to direct the transfer agents to transfer the said shares to the shareholders of TSN.Petitioners completed their negotiations with the bank and on December 6, 1972 created an irrevocable trust for the benefit of their children. The bank agreed to act as trustee.Under the trust agreement petitioners held the right to appoint any successor trustee provided that they appoint another296 bank having capital and surplus of at least $10,000,000 and in which they did not have a substantial interest either through stock ownership or otherwise. Contemporaneously, petitioners entered into an installment sale contract with the bank as trustee. Under the contract petitioners sold all of their stock in TSN (70,000 shares) to the trust for $300,000, payable $25,000 in cash prior to December 31, 1972, $25,000 in cash payable on January 15, 1973 and the remaining $250,000 covered by a 10-year promissory note payable in nine annual installments commencing January 15, 1974, of $20,000 each and a final installment of $50,000. At this time the bank was aware that the sale of TSN assets was completed and that the liquidation proceeds attributable to the shares it purchased from petitioners would soon be distributed to the bank as trustee. Following the execution of the installment agreement, petitioners delivered a stock certificate representing 70,000 shares of TSN stock to the trustee. On December 8, 1972, the bnak took the necessary measures to have the stock reissued in its name as trustee. From this date the bank was the record holder of the stock and operated independently297 and beyond the control of petitioners. The board of directors of TSN approved the first liquidating distribution on December 15, 1972. Petitioners' attorney notified the bank on December 20, 1972, that there had been a mistake in the valuation of the shares of stock in Dee Williams Manufacturing Corporation, an asset held by TSN which was to be distributed pursuant to the liquidation. Both the bank and petitioners assumed that this stock had a higher value than, in fact, it had. Consequently, the terms of the installment agreement and the promissory note were redrafted by changing the purchase price from $300,000 to $270,000 based upon a mutual mistake of fact. 5 On December 20, 1972, TSN delivered to the trustee its allocable share of the initial liquidating distribution having a value of $266,000, consisting of cash and a promissory note. 298 On their joint Federal income tax return for the taxable year 1972 petitioners reported the sale of their TSN stock to the trust under the installment method provided in section 453. Consistent with this approach petitioners reported that portion ($12,037) received in 1972 pursuant to the installment agreement as long-term capital gain. The Commissioner, in his statutory notice of deficiency, made the following determination: (a) It is determined that long-term capital gain attributed to a 1972 disposition of 70,000 shares of Texas State Network stock is taxable in the amount of $128,000.02 as shown below instead of $12,037.00 reported on the return because (1) it has not been established that stock rather than liquidating proceeds was disposed of in 1972, and (2) it has not been established that you are entitled to report the transaction on the installment basis. Taxable income for 1972 is increased by the difference of $115,963.02. Liquidating distribution TSN stock$270,000.05Less: Miscellaneous item not received4,000.00Net amount received$266,000.05Less: Basis of stock10,000.00Gain realized$256,000.05Less: Section 1202 deduction128,000.03Taxable capital gain as revised$128,000.02299 OPINION The issue for our decision is whether petitioners are entitled to report the gain from the sale of their stock in a liquidating corporation under the installment method. Mr. Stanley E. Wilson was an employee of radio station KFJZ Fort Worth, Texas for several years prior to the time Texas State Network, Inc. (herein TSN) purchased the radio station in 1965. After the radio station was purchased Mr. Wilson acquired 10 percent of all outstanding stock of TSN. In addition, Mr. Wilson became president of TSN as well as general manager of the radio station. At a meeting held on June 10, 1971, the board of directors of TSN adopted a resolution recommending to the TSN shareholders that a plan of complete liquidation under section 337 be adopted. On December 22, 1971 the plan of liquidation was adopted calling for the sale of substantially all TSN assets and the distribution of the proceeds to TSN shareholders. In January 1972, Mr. Wilson and his wife (herein petitioners) contacted their attorney for the purpose of exploring the possibility of establishing a trust for the benefit of their three children and selling their TSN stock to the trust under the installment method300 set forth in section 453. Petitioners' attorney notified the First National Bank, Fort Worth, Texas, and proposed the creation of a trust for petitioners' children with the bank as trustee. Negotiations followed which related to specific aspects of implementing the trust. On February 26, 1972, the shareholders of TSN approved the plan of complete liquidation and authorized TSN to sell its assets. By November 1972 TSN had completed the sale of substantially all of its assets. Remaining assets were stocks in various corporations owned by TSN which TSN intended to distribute in kind upon final liquidation. TSN also set aside a portion of the proceeds from the sale of their assets in order to meet contingent liabilities. On December 6, 1972, petitioners and the bank, in its capacity as trustee, entered into a written agreement which established the trust for petitioners' children. In conjunction with this agreement, petitioners and the bank executed an installment sale contract whereby petitioners sold their TSN stock to the trust. The installment contract provided for payments by the trust over a 10-year period with a total purchase price of $300,000. 6 At this time the301 bank was aware of TSN activities relating to its plan of complete liquidation. Petitioners delivered their stock certificates to the bank on December 8, 1972 and the bank immediately had the TSN stock issued in its name as trustee. On December 15, 1972 the board of directors authorized the initial distribution in liquidation and the trustee as a shareholder, on December 20, 1972, received its allocable share which had a value of $266,000. Respondent contends that petitioners are not entitled to utilize the provisins of section 453 in the sale of their stock to the trust. Respondent argues that, considering the "substance and realities" of petitioners' sale of stock, the transaction lacked economic substance. Accordingly, respondent suggests three alternate characterizations of this transaction: (1) the sale of corporate assets by TSN, followed by the distribution of the proceeds to petitioners, and the sale of the proceeds to the trust by petitioners; (2) the trustee should be considered an agent or escrow holder302 for petitioners and receipt of the liquidation proceeds by the trustee is receipt by petitioners; or (3) petitioners had constructive receipt of the liquidation proceeds prior to their sale of TSN stock to the trust. In his opening statement at the trial of this case, counsel for respondent unequivocally informed the Court and counsel for petitioners that his position was based upon an anticipatory assignment of income theory. In addition, counsel for respondent informed the Court that the facts in the instant case were distinguishable from those 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), a case relied upon by petitioners. For the first time in his opening brief respondent asserted that the "substance and realities" of the transaction regarding petitioners' stock sale demonstrated that petitioners attempted to defer their gain from such sale while incurring no real economic risk by accepting installment payments from the trust. On reply brief petitioners contend that respondent's "substance and realities" theory constitutes undue surprise and places them in a disadvantaged posture. Petitioners, relying303 upon Riss v. Commissioner, 57 T.C. 469 (1971), affd. sub nom. Commissioner v. TransportManufacturing & Equipment Co., 478 F.2d 731">478 F.2d 731 (8th Cir. 1973), urge that respondent should be precluded from raising a theory for the first time in his opening brief. We agree with petitioners. In Riss, respondent for the first time on brief relied upon section 482. We held at page 474 of 57 T.C.: Our inherent authority is to decide cases upon issues properly before us. This case may well have presented opportunities for applying section 482 or some theory within the assignment-of-income area; however, these opportunities were lost when respondent failed to inform petitioner either in the statutory notice, in his answer, or at trial of his intended theory for sustaining the deficiency. Accordingly, we modify our prior opinion and hold that petitioner realized none of the gain from the sale of the truck trailers.In affirming the Court of Appeals held at page 736 of 478 F.2d: Although the most appropriate times to advise the taxpayer of the Commissioner's theories to sustain an assessment would be first in the notice of deficiency and then in the304 Commissioner's answer, we do not hold that the Commissioner necessarily loses his right to pursue a theory or Code section that is not specifically raised before or at trial.The basic consideration is whether the taxpayer is surprised and disadvantaged when the Commissioner has failed to plead section 482. Commissioner v. Chelsea Products, supra at 197 F.2d 624">197 F.2d 624; Nat Harrison Associates, Inc., supra 42 T.C. at 617; Burrell Groves, Inc. 16 T.C. 1163">16 T.C. 1163, 1169 (1951). However, the longer the Commissioner delays in not expressly advising the taxpayer of the intended theories, the more reason there is to conclude that the taxpayer has not received fair notice and has been substantially prejudiced so as to deny the Commissioner consideration of theories raised for the first tie in post trial briefs. * * The arguments relating to the "substance and realities" theory, i.e., no risk incurred by petitioners upon the sale of their stock, constitutes a new theory, see Stiles v. Commissioner, 69 T.C. 558">69 T.C. 558 (1978), and under such theory305 petitioners, who proceeded at trial by relying upon respondent's assignment of income theory, would be required to produce additional evidence in order to establish that they were not assured of receiving all of the payments at the time of the sale. To allow respondent to rely on this new theory obviously places petitioners at a disadvantage. Cf. Schuster's Express, Inc. v. Commissioner, 562 F.2d 39">562 F.2d 39 (2d Cir. 1977), affg. per curiam 66 T.C. 588">66 T.C. 588 (1976). Likewise, respondent's argument that the stock sale, in reality, was made solely for the purpose of minimizing taxes cannot be raised for the first time on brief because it also places petitioners at a disadvantage. In order for petitioners to effectively respond to this theory, they would be required to show their reasons for the creation of the irrevocable trust and the sale of their stock to the trust. The trial having concluded, petitioners are unfairly prevented from rebutting this theory which is beyond the scope and independent of an assignment of income theory.Finally, respondent's theory that petitioners were in constructive receipt of the liquidation proceeds prior to the sale of their306 stock will not be considered when raised for the first time on brief. Respondent, in arguing this theory, contends that the liquidation process had so ripened and matured by the time petitioners sold their stock to the trust that they were in constructive receipt of the liquidation proceeds and were, therefore, taxable in the year of constructive receipt. In arguing this theory respondent relies upon a line of cases which involve gifts of stock in a liquidating corporation to charity. See Jones v. United states, 531 F.2d 1343">531 F.2d 1343 (6th Cir. 1976); Kinsey v. Commissioner, 477 F.2d 1058">477 F.2d 1058 (2d Cir. 1973), affg. 58 T.C. 259">58 T.C. 259 (1972); Hudspeth v. United States, 471 F.2d 275 (8th Cir. 1972); and Allen v. Commissioner, 66 T.C. 340 (1976). Here again, this theory would require petitioners to establish that the liquidation process had not reached an irretrievable state in order to demonstrate that they did not have an unfettered right to the liquidation proceeds. The stipulation of facts and the evidence produced during the trial gave some indication that problems existed at the time petitioners sold their stock307 to the trust which threatened the plan of liquidation. Petitioners, in their requested findings of fact, suggested that problems existed which threatened the completion of the liquidation but respondent objected, basing his objection on the fact that no one testified who could establish the fact that the plan of liquidation was threatened. Respondent cannot have it both ways. Since he failed to put petitioners on notice of his reliance on the constructive receipt theory applicable to the time petitioners sold their stock he cannot now argue that petitioners have failed to negate the presence of constructive receipt at the time of the stock sale. Moreover, the above cases upon which respondent relies involved the question of whether the taxpayers were taxable on the gain resulting from the liquidation of the respective corporations whereas the instant case involves the question of whether petitioners can utilize the installment method of reporting gain. See Weaver v. Commissioner, 71 T.C. 443">71 T.C. 443 (1978). In response to respondent's theory, i.e., anticipatory assignment of income, asserted at trial, petitioners rely upon Rushing v. Commissioner, 441 F.2d 593">441 F.2d 593 (1971),308 affg. 52 T.C. 888">52 T.C. 888 (1969), and contend that the facts in the instant case are substantially indistinguishable from those in Rushing. 7 In Rushing two individuals each owned 50 percent of the stock in two corporations. Both corporations adopted a plan of complete liquidation under section 337. Following the adoption of the plan, the corporations sold substantially all of their assets. Immediately before the expiration of the 12-month liquidation period specified in section 337, both individual shareholders created irrevocable trusts for the benefit of their children and sold their corporate stocks in installment sales to the trusts. After the sales of the stock to the trusts were consummated, the trustee as sold shareholder of the corporations liquidated the corporations and received the liquidation proceeds. Respondent, in Rushing v. Commissioner, supra, argued that the sale of the stock to the trusts constituted an anticipatory assignment of income and, therefore, the taxpayers were not entitled to utilize the provisions of section 453. In deciding Rushing the Court of Appeals for the Fifth Circuit first set forth what the case309 did not involve: At the outset we feel compelled to state what this case is not about. In the first place, there is no attempt here to change the character of the gain involved and convert what would be ordinary income into capital gain. The gain realized by the taxpayers on the liquidation of the corporations, whether derived through sale on the installment basis to the trust or directly from the liquidation proceeds, would be entitled to capital gains treatment. Secondly, this is not a case where one taxpayer has attempted to shift the gain to a second taxable entity in order to reap the benefits of the second entity's lower tax rate. The price the trusts paid the taxpayers310 for the stock was the full value of the stock, including the appreciation in value which would be realized upon liquidation. * * * [441 F.2d at 597.] Accordingly, the Court rejected respondent's reliance upon the anticipatory assignment of income theory because no income was assigned. The facts in the instant case clearly demonstrate what this case is not about, as in Rushing. Petitioners did not assign any income as a result of the installment sale agreement they made with the trustee. After holding that respondent's theory of anticipatory assignment of income did not apply, the Court went on to decide whether the interjection of the trusts insulated the taxpayers from constructive receipt of the liquidation proceeds at the time the trusts received the liquidation proceeds from the corporations. We hasten to point out that our discussion of constructive receipt at this juncture is different from our earlier discussion herein where we held that respondent is precluded from asserting the constructive receipt theory for the first time on brief. That discussion involved respondent's argument that petitioners were in constructive receipt of the liquidation311 proceeds prior to the time they sold their stock to the trust and involved critical facts which were not addressed in Rushing. In Weaver v. Commissioner, supra, we stated that the issue of control in questions relating to section 453 is centered more on petitioners' receipt of an economic benefit from the liquidation proceeds. See also Roberts v. Commissioner, 71 T.C. 311">71 T.C. 311 (1978) and Lustgarten v. Commissioner, 71 T.C. 303 (1978). In Rushing v. Commissioner, supra, the question was whether the taxpayers were in constructive receipt of the liquidation proceeds at the time the trusts liquidated the corporations and received the proceeds, not at the time the taxpayers sold their stock to the trusts. However, since petitioners rely upon Rushing they recognize the potential application of constructive receipt theory at the time of liquidation and distribution to the trustee. Accordingly, the critical question presented is whether the trustee was under the control of petitioners to such an extent at that time that petitioners constructively received the proceeds when distributed to the trustee. 312 Weaver v. Commissioner, supra.In Rushing, the court held that the trusts created by the taxpayer were autonomous entities which controlled the proceeds and no right of recapture inured to the benefit of the taxpayers, and that the taxpayers retained no effective benefit or control over the liquidation dividend after the sale of their stock to the trusts. Rushing v. Commissioner, supra, at 598. Petitioners take the position that the bank was an independent entity whose obligation was to protect the interests of the trust beneficiaries, the children of petitioners. The facts confirm their position. Petitioners established irrevocable trusts for the benefit of their children. While they retained the right to appoint a successor trustee, this right was limited to appointing another bank in which they did not have any substantial interest. The bank was independent of petitioners' control and was responsible to petitioners' children, the beneficiaries under the trust agreement.Moreover, respondent concedes that the bank was independent of petitioners' control. 8 Accordingly, petitioners obtain the benefits of the liquidation proceeds*313 only under the installment sales contract which provide for installment payments. The facts here are virtually indistinguishable from those in Rushing and, therefore, we hold that petitioners are entitled to utilize the provisions of section 453 with respect to reporting the gain from the sale of their TSN stock in the taxable year 1972. In so doing we again reaffirm the correctness of Rushing and note that the instant case is appealable to the appellate court which decided Rushing, i.e., the United States Court of Appeals for the Fifth Circuit. Decision will be entered for the petitioners. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended.↩2. TSN was organized and incorporated under the laws of Texas.↩3. As of July 1972 and at all pertinent times thereafter, petitioners owned seven percent of all outstanding TSN stock.↩4. TSN retained shares of stock it held in various corporations and contemplated that these shares would be distributed in kind to the shareholders as a liquidation distribution.↩5. In negotiating the price finally paid by the bank for petitioners' TSN stock, petitioners and the bank based $266,000 of the purchase price on the value of the cash, notes, and shares of various stock held by TSN to be received as a liquidating distribution, with $4,000 being allocated to contingent claims owed to TSN, after deducting outstanding liabilities of TSN.↩6. On December 20, 1972 petitioners and the bank agreed to change the purchase price of the TSN stock from $300,000 to $270,000 due to a mutual mistake of fact.↩7. Most recently we have confirmed our position in Rushing v. Commissioner, 441 F.2d 593">441 F.2d 593 (1971), affg. 52 T.C. 888">52 T.C. 888 (1969); Weaver v. Commissioner, 71 T.C. 443">71 T.C. 443 (1978); Roberts v. Commissioner, 71 T.C. 311">71 T.C. 311 (1978); Lustgarten v. Commissioner, 71 T.C. 303">71 T.C. 303 (1978), on appeal (5th Cir., Apr. 30, 1979); and Pityo v. Commissioner, 70 T.C. 225">70 T.C. 225 (1978); Goodman v. Commissioner↩, 74 T.C. (Jul. 16, 1980).8. It is curious to us that respondent, on opening brief, argues that the bank acted as a mere agent of petitioners while in his reply brief makes no objection to petitioners requested finding of fact to the contrary. Due to his failure to object we find this fact as requested by petitioners.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625910/	JOSEPH E. GANNON and BETTYJANE GANNON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentGannon v. CommissionerDocket No. 9848-78.United States Tax CourtT.C. Memo 1980-81; 1980 Tax Ct. Memo LEXIS 499; 39 T.C.M. (CCH) 1261; T.C.M. (RIA) 80081; March 20, 1980, Filed Joseph E. Gannon, pro se. Robert A. Miller, for the respondent. TIETJENSMEMORANDUM FINDINGS OF FACT AND OPINION TIETJENS, Judge: Respondent determined deficiencies of $1,616.45 and $731.27, respectively, in petitioners' Federal500 income taxes for 1974 and 1975. The issues 1 for our determination are (1) whether "rental allowances" paid by petitioner-husband's employer to him are includable in income under section 61 2 and whether they are deductible under section 162 as employee business expenses; (2) whether petitioners are entitled to a greater moving expense deduction in 1975, under section 217, than has been allowed by respondent; (3) whether, in connection with petitioner-wife's occupation of real estate agent, petitioners are entitled to a greater deduction, under section 162, for telephone and automobile expenses than has been allowed by respondent; and (4) whether petitioners are liable for self-employment taxes in 1974 and for additional self-employment taxes in 1975. 501 FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation and attached exhibits are incorporated herein by reference. At the time they filed their petition, petitioners resided at Ellicott City, Maryland. For the years at issue, petitioners timely filed joint Federal income tax returns. Petitioner Joseph E. Gannon (hereinafter Joseph), an engineering and construction site manager for the General Electric Company (hereinafter Company), received, in addition to his regular salary, a rental allowance of $3,412.50 in 1974 and of $2,475.00 in 1975. 3 These amounts were shown as income and included on his W-2 forms from the Company. 502 Joseph felt that his job circumstances were somewhat unique. He had to relocate often on short notice, and the Company encouraged him to move his family with him.In June, 1973, petitioners moved from Wilmington, North Carolina to Columbia, Maryland; in June, 1975, they moved to Mattoon, Illinois, and in May, 1976, they returned to Columbia, Maryland. The move from Columbia, Maryland to Mattoon, Illinois in 1975 is the subject of the second issue. On their 1975 return, petitioners claimed the following moving expense deductions: A. Transportation of goods$2,138.59B. Travel, meals and lodging290.56C. Pre-move and temporaryquarters1,000.00D. Expenses incident to settlementof unexpired lease751.33E. Expenses incident to acquiringa new lease300.00TOTAL$4,480.48Respondent determined that petitioners were reimbursed the following amounts from the Company and disallowed the moving expense claimed to the extent of these reimbursements: A. Moving allowance$250.00B. Car registration34.00C. Telephone installation17.33TOTAL$301.33Respondent also determined that part of the amount claimed for transportation503 of goods represented storage of household goods for over 30 days and disallowed $113 of the allowance claimed. Similarly, respondent determined that the amount claimed with respect to expenses incident to acquiring a new lease was a security deposit for obtaining the lease and disallowed the entire $300 claimed. During 1974 and 1975, Bettyjane Gannon (hereinafter Bettyjane) worked as a real estate agent. In connection with Bettyjane's business, petitioners claimed deductions in 1974 for telephone expenses of $420 and for automobile expenses of $3,370. For 1975, petitioners claimed a deduction of $210 for telephone expenses.Respondent determined that petitioners were entitled to a business expense deduction of one-half of their basic telephone rate of $18 per month ($108 per year) for their residential telephone. Respondent, further, allowed only $1,200 (10,000 business miles at a rate of 12" per mile) for Bettyjane's automobile expenses for 1974 and disallowed the remaining $2,170. Bettyjane was not present at trial and no new evidence was introduced with respect to these items. Joseph affirmed, "My contention is that I provided the necessary information and stated my position504 and the IRS has disagreed and placed arbitrary values on these claims." Before the disallowance of Bettyjane's business expenses, her business had shown a loss in 1974. Petitioners, therefore, paid no self-employment taxes in that year. Respondent, depending on an outcome to the third issue favorable to him, determined that Bettyjane had net self-employment income in 1974 in the amount of $1,031.00 upon which petitioners, he asserts, are liable for self-employment tax of $81.45. Likewise, as a result of a disallowance of part of the claimed telephone expense in 1975, respondent determined that Bettyjane had more self-employment income upon which petitioners are liable for additional self-employment tax of $8.06. ULTIMATE FINDINGS OF FACT (1) Petitioners must include in their income the rental allowance Joseph received from the Company in 1974 and 1975 and may not deduct them as employee business expenses; (2) Petitioners are not entitled to a moving expense deduction in 1975 in excess of that allowed by respondent; (3) Petitioners are not entitled to business expense deductions for telephone and for automobile expenses in excess of that allowed by respondent; and (4) 505 Petitioners are liable for self-employment taxes in 1974 and for additional self-employment taxes in 1975. OPINION Respondent's determination of deficiency is presumptively correct. Petitioners have the burden of proving such determination is wrong. Welch v. Helvering, 209 U.S. 111">209 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure.Section 61(a) provides a comprehensive definition of gross income. The Supreme Court has interpreted gross income to include "undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion." Commissioner v. Glenshaw Glass Co., 348 U.S. 426">348 U.S. 426, 431 (1955). Petitioners have characterized the rental allowance paid by Joseph's employer as a rent subsidy. Nevertheless, Joseph received the payments because of the services he performed for the Company and those payments clearly increased his wealth. The rental allowances paid to Joseph in 1974 and 1975, therefore, are includable in petitioners' gross income. Deductions are a matter of legislative grace; petitioners must prove they are entitled to a deduction under the terms of the applicable statute. Interstate Transit Lines v. Commissioner, 319 U.S. 590">319 U.S. 590 (1943),506 New Colonial Ice Co. v. Helvering, 292 U.S. 435">292 U.S. 435 (1934).Section 162 allows a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. Section 262 provides that no deduction shall be allowed for personal, living and family expenses. Section 1.262-1(b)(3), Income Tax Regs., lists costs for maintaining a household, such as rent, as an example of nondeductible personal, living and family expenses. Although petitioners were required to move frequently, were encouraged to relocate their family and to rent and not purchase a home, petitioners' rental allowances in 1974 and 1975 cannot be characterized as a business expense; rather, they are nondeductible personal expenses. Respondent's error in allowing petitioners a deduction for food and lodging in connection with Joseph's temporary employment in 1975 4 does not provide a basis for us to find a deduction for the remainder of the rental allowances paid to Joseph in 1975. With regard to petitioners' claim for507 moving expense deductions and for telephone and automobile business expense deductions greater than the amounts already allowed by respondent, petitioners have offered no evidence to substantiate their contentions. Joseph's statement that he disagrees with respondent's "arbitrary values" on these items does not prove that respondent's determination is incorrect. Having failed to substantiate Bettyjane's business expenses in an amount greater than that allowed by respondent, petitioners are also liable for self-employment taxes on the increased amount of her income. Decision will be entered for the respondent. Footnotes1. Respondent's determination of deficiencies includes a decrease in petitioners' medical expense deductions in the amounts of $96.02 for 1974 and $79.29 for 1975. This reduction is due to respondent's adjustments for petitioners' adjusted gross income, which adjustments petitioners herein contest, and not based on any dispute over petitioners' medical expenditures in those years.↩2. All statutory references are to the Internal Revenue Code of 1954, as amended and in effect for the years in issue, unless otherwise stated.↩3. With respect to 1975, respondent determined that Joseph was entitled to a deduction for food and lodging in the amount of $648 and, therefore, disallowed only the remaining $1,827. In his testimony, Joseph asserted that respondent was taking an inconsistent position by allowing a deduction for some of his rental allowance. On brief, respondent asserted that he had not previously realized that petitioners did not maintain a home in Columbia, Maryland while they were in Illinois, and thus had erroneously allowed the deduction for food and lodging.↩4. Respondent thought petitioners were maintaining a home in Columbia, Maryland when Joseph was employed in Mattoon, Illinois.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625911/	EDMUND CHESTER SIEKIERSKI, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentSiekierski v. CommissionerDocket No. 12410-81.United States Tax CourtT.C. Memo 1982-716; 1982 Tax Ct. Memo LEXIS 29; 45 T.C.M. (CCH) 313; T.C.M. (RIA) 82716; December 13, 1982. Edmund C. Siekierski, pro se. Russell K. Stewart, for the respondent. DAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: This case was assigned to and heard by Special Trial Judge John J. Pajak pursuant to the provisions of section 7456(c) of the Internal Revenue Code1 and Rules 180 and 181. 2 The Court agrees with the adopts his opinion which is set forth below. 30 OPINION OF THE SPECIAL TRIAL JUDGE PAJAK, Special Trial Judge: Respondent determined a deficiency in petitioner's 1978 Federal income tax in the amount of $715.00. After concessions by petitioner, the sole remaining issue for decision is whether petitioner received interest income in the amount of $2,751.00 from Burroughs Worldwide Corporation during 1978. FINDINGS OF FACT 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. Petitioner Edmund Chester Siekierski (petitioner) resided in Mount Laurel, New Jersey, when the petition in this case was filed. Petitioner and his wife, Valerie, were divorced in May 1973. At the time of their divorce they jointly owned real property in West Chester, Pennsylvania. Petitioner never signed any instrument or deed conveying his interest in the property to Valerie. In 1978, the property was held jointly by petitioner and Valerie and was the residence of Valerie. In April 1978, petitioner's former employer, the Burroughs Worldwide Corporation (Burroughs), received a pre-printed form entitled APPLICATION FOR REFUND OF CONTRIBUTIONS31 (Application). This form was used when a member of the Burroughs Employees' Retirement Income Plan (Retirement Plan) with sufficient service desired a refund of contributions subsequent to termination of employment. The Application requested a refund of all of the contributions made by petitioner to the Retirement Plan, plus any interest thereon, and listed the West Chester, Pennsylvania, address. Acting on the Application, Burroughs issued a check in the amount of $6,732.25 on April 20, 1978. The check, which was made payable to petitioner, represented all of the contributions made by petitioner to the Retirement Plan, plus accrued interest in the amount of $2,751.00. Burroughs issued a Form 1099 indicating that petitioner had received $2,751.00 in interest in 1978. Petitioner did not report any interest income on his 1978 Form 1040A Federal income tax return. Respondent determined that three items of interest income should have been included in petitioner's gross income in 1978. Petitioner conceded two of these items, leaving in question the $2,751.00 amount paid by Burroughs. Petitioner filed an affidavit of forgery with Burroughs. This affidavit of forgery was disputed32 by Burroughs after it discovered that the proceeds of the check were used to satisfy the joint mortgage obligation of petitioner and Valerie on the real property located in West Chester, Pennsylvania. Petitioner has taken no legal action to recover any interest in this real estate. Nor has petitioner taken any legal action to recover the $6,732.25 from Burroughs or Valerie. Petitioner's income in 1978 other than interest was less than $11,000.00. OPINION At the outset, we note that respondent's determination is presumptively correct. Petitioner bears the burden of proving that respondent's determination is incorrect. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a). At trial, petitioner testified that the signature that appeared on the Application requesting the withdrawal of his funds was a forgery. Petitioner also contends that the endorsement on the Burroughs' check was a forgery. He claimed that these acts were perpetrated by his ex-wife, Valerie, and other persons unknown. After carefully reviewing the record, we are not convinced that petitioner's signatures were forged. It is well established that this Court is not required to accept the33 unsupported testimony of an interested witness. Burka v. Commissioner,179 F.2d 483">179 F.2d 483, 485 (4th Cir. 1950), affg. a Memorandum Opinion of this Court dated June 15, 1949. The Application and the check bear signatures which closely resemble those which appear on other documents submitted by petitioner. We have carefully compared all of the signatures available and we are unable to conclude that the Application and the check were not signed by petitioner. At trial, petitioner stated that he did not have"a chance" to get to a handwriting analyst. Yet he claims he first learned of the withdrawal by calling Burroughs in February 1979. 3 We believe that petitioner had ample opportunity to obtain the services of a handwriting expert to protect the $6,732.25 credit in the Retirement Plan and to prove that respondent's determination herein should not be sustained. We also find it surprising, at the least, that petitioner did not bring any legal action against Burroughs or his wife especially since his 1978 income other than interest was less than $11,000.00. 34 Another factor which we must consider is that the Application bears the stamp of a Notary Public. The act of notarization is more than a mere formality. 4The Supreme Court of Pennsylvania has observed that the essence of the act is "that the Notary knows that he is confronted by the signer, and that the signer is asserting the fact of his execution." In Re Bokey's Estate,412 Pa. 244">412 Pa. 244, 194 A.2d 194">194 A.2d 194, 198 (1963). Petitioner was questioned why he did not contact the Notary Public as to who signed the Application. In response he stated that "it just seemed to me that something of that sort had been arranged, that my contacting him probably would not make any difference anyway. I just did not know who else was involved in getting the authorization signed." Petitioner suggests that the Notary Public may have been acting in concert with petitioner's ex-wife in committing a forgery. We refuse to subscribe to the possibility of such illegal activity by the instant Notary Public based solely on petitioner's unpersuasive conjecture. 35 After carefully reviewing the entire record, we find that petitioner has failed to prove that his signatures were forged and that he did not receive the benefit of the check from Burroughs. Welch v. Helvering,supra; Rule 142(a). Accordingly, the $2,751.00 portion of the check representing interest must be included in petitioner's 1978 gross income. Section 61. Assuming, arguendo, that the signatures on the Application and the check were in fact forgeries, the result would still be the same. The application of the Burroughs' check to petitioner's mortgage obligation provided him with an immediate benefit and he received income to the extent of the interest portion of the Burroughs' check. Poczatek v. Commissioner,71 T.C. 371">71 T.C. 371 (1978). Decision will be entered for the respondent.Footnotes1. All section references are to the Internal Revenue Code of 1954 in effect during the taxable year in issue, unless otherwise indicated. All references to Rules are to the Tax Court Rules of Practice and Procedure. ↩2. Pursuant to the order of assignment, on the authority of the "otherwise provided" language of Rule 182, the post-trial procedures set forth in that rule are not applicable in this case.↩3. Although petitioner alleges that he never received the Form 1099 issued by Burroughs, we observe that such a form normally would have been issued by January 31, 1979.↩4. Knowingly certifying a false signature could subject a Notary Public to liability for a resulting loss under Pennsylvania law. Commonwealth v. American Surety Co. of New York,188 Pa. Super. 513, 149 A.2d 515">149 A.2d 515 (1959); Commonwealth v. Maryland Cas. Co.,369 Pa. 300">369 Pa. 300, 85 A.2d 83">85 A.2d 83↩ (1952).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625912/	HOTEL WALDORF COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hotel Waldorf Co. v. CommissionerDocket Nos. 24273, 25037, 36723.United States Board of Tax Appeals22 B.T.A. 430; 1931 BTA LEXIS 2123; February 27, 1931, Promulgated 2123 Thomas O. Marlar, Esq., and Sigmund Sanger, Jr., Esq., for the petitioner. Hartford Allen, Esq., for the respondent. VAN FOSSAN 430 These proceedings were brought to redetermine deficiencies in income and war and excess-profits taxes as follows: Docket No.YearDeficiencyIncome and profits taxes242731919$24,756.23Do24273192013,301.25Income taxes2503719221,312.69Do3672319232,096.22Do3672319243,041.41In Docket No. 24273 the following errors are alleged on the part of the respondent: (1) The disallowance of a deduction for a loss of $43,211.79 in 1919 in connection with the operation of its dining room; (2) the disallowance of a deduction of an additional loss of $4,956.29 in 1919 in connection with the same operation; (3) the disallowance of the cash value of the leasehold as invested capital; (4) the disallowance of depreciation on the leasehold of the Hotel Waldorf; (5) the denial of special assessment under the provisions of section 328 of the Revenue Act of 1918. The issue relating to depreciation was asserted in Docket Nos. 25037 and 36723 and the respondent's denial of2124 the petitioner's affiliation with the Hotel Waldorf Drug Company during 1923 and 1924 was also charged as error in Docket No. 36723. It was stipulated that the petitioner and Hotel Waldorf Drug Company were affiliated and that the drug company sustained deductible losses of $4,193.48 for 1923 and $4,425 for 1924. FINDINGS OF FACT. In 1916, Earl P. Severcool and Eldon B. Edmonds, men of large experience and considerable skill in the management of hotels, were operating the Hotel Waldorf at the intersection of Summit and Madison Streets, one of the principal business corners in Toledo, Ohio. At that time Hotel Waldorf consisted of 200 rooms, about 65 per cent of which were equipped with baths. The Waldorf Realty Company, a corporation, owned the land on which the hotel was built and had leased it under a 15-year lease to Severcool and 431 Edmonds. In the fall of that year Severcool and Edmonds entered into negotiations with the Waldorf Realty Company for the construction of an additional unit of 300 rooms. The terms of the agreement finally concluded were embodied in a letter of proposal dated January 4, 1917, directed to Sidney Spitzer & Company, an underwriting firm, 2125 and signed by Severcool and Edmonds. In the proposal letter Severcool and Edmonds requested the addressee to purchase a bond issue of $750,000, secured by a mortgage executed by the Waldorf Realty Company, and to induce such purchase agreed to organize a hotel corporation with paid-up capital stock of at least $100,000; to transfer to that corporation the present Waldorf Hotel business, good will, etc.; to pay certain cash rentals under a 31-year lease which they agreed to secure from the Waldorf Realty Company, covering the enlarged Waldorf Hotel property; and to pay certain fixed and current operating charges. The following endorsements appear below the signatures of Severcool and Edmonds: It is hereby agreed that the written lease which is hereto attached contains all the covenants, terms and conditions as agreed and refered (sic) to in the above agreement. (Signed) EARL P. SEVERCOOL, ELDON B. EDMONDS, THE WALDORF HOTEL COMPANY. BY GEORGE P. WALDORF, President.TOLEDO, OHIO, January 4, 1917.The undersigned, The Waldorf Realty Company, in consideration of the above, hereby agrees to promptly execute the lease above referred to, as soon as it can be2126 drafted, the covenants, terms and conditions of which have been fully and clearly agreed upon, and deliver the same to Earl P. Severcool and Elden B. Edmonds. THE WALDORF REALTY COMPANY, (Signed) BY GEORGE P. WALDORF, President.On January 29, 1917, pursuant to the above proposal the petitioner corporation, the Hotel Waldorf Company, was organized under the laws of Ohio with an authorized capital stock of $200,000, of which $120,000 was common and $80,000 preferred stock. Severcool and Edmonds were the equal owners of all common stock but four shares of the par value of $100 each were issued to nominal qualifying stockholders who were also directors. On February 19, 1917, Severcool and Edmonds made a formal offer to sell to the petitioner the contract of lease with the Waldorf Realty Company for the old and the proposed units of Hotel Waldorf, together with the assets, business and good will of the hotel. The purchase price was $120,000, to be paid in the common stock of the petitioner, including 432 the four shares issued to qualifying stockholders. The offer was accepted by the directors and stockholders of the petitioner on February 19, 1917, by proper resolutions2127 entered on its records. A formal bill of sale was "issued" March 6, 1917, and the lease between the Waldorf Realty Company and the petitioner bore the date of March 29, 1917. The delay in executing these instruments was caused by the failure of counsel to act promptly, by the necessity of printing the form of lease, and by the unforeseen difficulties which the Realty Company was compelled to adjust in connection with the 99-year lease. As between Severcool and Edmonds and the petitioner the sale was consummated on February 19, 1917. The lease for the hotel property was valued at $56,670.71, an arbitrary amount so fixed as to make up the purchase price of $120,000 paid to Severcool and Edmonds. For bookkeeping purposes that value was retained on the records of the petitioner and formed the basis of its income tax returns for 1917, 1918, and 1919. The printed lease was essentially the same as that attached to the letter to Spitzer & Company, dated January 4, 1917. The term of the lease was from January 1, 1917, to December 31, 1948. The following rentals were fixed in the lease: $32,062.75 per year until the new structure is fully completed and ready for occupancy. $97,500.002128 per year from the time the new structure is fully completed and ready for occupancy, to December 31, 1927. $104,700.00 per year for the last twenty years of the lease. The new hotel unit was completed in November, 1917. It was a 10-story structure of the most modern design and sound construction. The enlarged hotel provided 483 rooms for guests and 22 rooms for offices, storerooms and other necessary administrative purposes. It contained a dining room on the first floor with the usual complement of kitchen and pantries. The petitioner purchased the requisite dining room and kitchen equipment. At that time one Harry T. Foard was operating a cafeteria under a lease from the petitioner. In order to avoid a duplication of working forces and the operation of separate kitchens, an agreement was entered into between the petitioner, through Severcool and Edmonds, its officers, and Foard, whereby a corporation called the Waldorf Catering Company was organized to operate the Foard Cafeteria and the Hotel Waldorf dining room. Foard and the petitioner retained ownership of their respective equipments. Foard and the petitioner each subscribed to one-half of the capital stock of the2129 Waldorf Catering Company, but neither paid the subscription. No other person ever subscribed to or became owners of capital stock. No certificates of stock were ever issued. 433 Under a verbal contract Foard and the petitioner agreed that Foard was to receive $500 per month as a salary for managing both enterprises. The operating losses, if any, were to be borne by the petitioner, which also was to pay certain of Foard's debts. Thereupon, the petitioner opened on its books an account with the Waldorf Catering Company. The monthly rental of $227.18 due under the lease of the Foard Cafeteria was charged against the Catering Company and a charge of $200 per month was made for the use of the hotel dining room, kitchens and equipment. Current items, such as laundry, steam heat, light, electric bulbs and other incidental expenses were charged to the Catering Company. All amounts, including rent, so charged were credited to the petitioner's income and were included in its income tax returns. Payments made to the petitioner by guests whose meals were charged were credited to the Catering Company. No part of the revenue received through the operation of the cafeteria and2130 the dining room was retained by Foard, Severcool, and Edmonds, or the petitioner, but all such receipts were kept by the Catering Company and used in its business. The Catering Company kept its own books, which were neither accessible to nor under the control of the petitioner or its officers. The verbal contract remained in force until April 18, 1919, when, after the repeated and insistent demands of Foard's attorney, a written agreement, bearing date of November 22, 1918, was signed by Foard as party of the first part, by Severcool and Edmonds as parties of the second part, and by the Catering Company as party of the third part. Severcool and Edmonds signed this agreement individually because Foard and his attorney knew nothing about the petitioner corporation but did know that Severcool and Edmonds would pay their obligations and, hence, wanted them as guarantors. Severcool and Edmonds were not represented by counsel at the various conferences preceding or at the time of the execution of the agreement. The agreement contains the following clause: Second parties agree to take any steps necessary or proper to secure the consent or approval, if necessary, of said The Hotel Waldorf2131 Company to the execution of said leases, or any of them. Severcool and Edmonds were not stockholders in the Catering Company nor as owners or lessees of the petitioner did they possess or control the dining room and kitchen and the equipment thereof which they undertook to lease to the Catering Company. The petitioner received all rentals from the Catering Company. After the execution of the agreement dated November 22, 1918, Severcool and Edmonds took no steps to secure the consent of the petitioner to the execution of the lease for the dining room, etc., but continued to treat the Catering Company as the petitioner's own lessee in all 434 respects as it had from the inception of the arrangement made in November, 1917. On December 31, 1919, charges for salaries, rent, supplies, and current expenses appearing on the books of the petitioner against the Catering Company aggregated $43,211.79. The account for supplies arose from bills therefor presented to the petitioner by the Catering Company's bookkeeper, approved by the petitioner's officers and paid by the petitioner's checks. The large amount of indebtedness was due chiefly to a strike lasting for several months2132 in 1919 and a consequent boycott against the dining room. The Catering Company was practically insolvent; it had no assets; it owned no equipment; its bookkeepers were unreliable; its books and records were unobtainable. Foard did not make reports concerning the business when requested and could not pay his own debts or those of the Catering Company when an accounting was demanded from him. Later, a search was instituted for the Catering Company's books, but they could not be found. On April 1, 1920, a notice to terminate the lease of the hotel dining room, etc., mentioned in the contract dated November 22, 1918, was sent to the Catering Company. That document was signed by Earl P. Severcool and Eldon B. Edmonds and by the petitioner. The item of $4,956.29 covered replacements to Foard's cafeteria equipment made pursuant to the verbal contract of November, 1917. The amount was charged off as an operating loss during 1919. It was an expenditure for which petitioner was liable under the contract of November 22, 1918. The respondent disallowed the item of $43,211.79 because the petitioner "was not obligated in any way to make good any deficit which might occur between the2133 Waldorf Catering Company and stockholders of the [petitioner] corporation acting as individuals and creating personal obligations." The respondent disallowed the item of $4,956.29 because the petitioner "was not a party to the contract by virtue of which this amount was advanced to certain individuals." The common stock of the petitioner was held as originally issued to Severcool and Edmonds and the nominal stockholders until April 2, 1920, when all the common stock was sold to James F. Keenan for the sum of $350,000. That sale was occasioned by the ill health of Edmonds' wife, who was ordered by her physicians to live in California. On December 31, 1919, the net worth of the petitioner, excluding the value of the leasehold covering the hotel property, was about $100,000 and was approximately the same at the time of the sale. Outstanding preferred stock amounting to $21,000 was 435 paid by Severcool and Edmonds out of the purchase price of $350,000. In four years of operation Keenan recouped the purchase price of $350,000 out of the profits of the hotel. The petitioner operated a first-class commercial hotel in 1917. It had only one competitor, the Hotel Secor, 2134 and that hotel did not cater to exactly the same class of guests as did the petitioner. At the time of the acquisition of the leasehold by the petitioner there was a great demand for good hotel accommodations in Toledo. The terms of the lease secured by Severcool and Edmonds from the Waldorf Realty Company were extremely advantageous by reason of the fact that the lessor would not erect a hotel building for anyone but Severcool and Edmonds and did not desire to construct an office or commercial building provided Severcool and Edmonds would operate the enlarged hotel. The value of the leasehold as of February 19, 1917, was $200,000. The respondent disallowed the value claimed by the petitioner because satisfactory evidence in substantiation thereof had not been furnished. OPINION. VAN FOSSAN: The first two issues are based on the same principle and may be considered together. The respondent has disallowed the item of $43,211.79, representing a loss claimed by the petitioner in connection with the operation of its dining room by the Waldorf Catering Company. The respondent's action is based on the theory that the contract dated November 22, 1918, between Foard, Severcool2135 and Edmonds and the Waldorf Catering Company was entered into by Severcool and Edmonds in their individual capacity and not as officers or agents of the petitioner. The evidence discloses unquestionably that this conclusion is erroneous. By their signatures to the document Severcool and Edmonds intended to obligate petitioner as a corporation, with secondary liability on themselves as guarantors. The testimony to that effect is amply corroborated. The Foard Cafeteria and the Hotel Waldorf dining room had been conducted previously for many months as a joint enterprise under a verbal contract between Foard and the petitioner. From the inception of that contract in November, 1917, until the notice of termination dated April 1, 1920, all parties thereto recognized that it was not an agreement with Severcool and Edmonds individually but was the obligation of the petitioner and they so treated it. Furthermore, the actions of the petitioner, subsequent to November 22, 1918, exhibit not only a passive acquiescence and admission of its 436 obligations under the contract, but also an active ratification and confirmation of its participation in the rights and privileges enjoyed2136 thereunder. The item of $43,211.79 consisted of charges for unpaid rent of space used by the Catering Company, together with amounts advanced by petitioner for salaries, supplies and other expenses, none of which items could be collected by petitioner due to the insolvency of the Catering Company. Having ascertained the debt to be worthless, petitioner properly charged it off in 1919. The second item of $4,956.29 charged off in 1919 also arose from petitioner's obligation under its contract with Foard. It represented payments by petitioner on account of replacements of equipment. Both sums of $43,211.79 and $4,956.29 should be allowed as deductions in the year 1919. The third issue relates to the valuation of the leasehold covering the improved and enlarged Hotel Waldorf, which Severcool and Edmonds sold to the petitioner on February 19, 1917. We have found that that lease was worth at least $200,000. For the purposes of invested capital and depreciation, the value of $200,000 for the Hotel Waldorf leasehold may be taken as a basis of computation as of February 19, 1917. The fourth issue, relating to special assessment, will be automatically disposed of by the allowances2137 herein made. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625913/	GEORGE YOUELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Youell v. CommissionerDocket No. 20756.United States Board of Tax Appeals18 B.T.A. 599; 1929 BTA LEXIS 2012; December 31, 1929, Promulgated 2012 Raymond G. Wright, Esq., for the petitioner. J. Arthur Adams, Esq., and George Adams, Esq., for the respondent. GREEN599 In this proceeding, the petitioner seeks a redetermination of his liability for income taxes, for the year 1919, for which year the respondent has assessed additional taxes in the amount of $14,185.70. The petitioner alleges that the respondent erred in holding that his income should be increased by the amount of $68,534.16, which amount the Commissioner determined to have been dividends on the stock of the Pacific Fruit & Produce Co. owned by the petitioner. By an amendment to the petition, petitioner asserts that the dividend, if any, was community property and that one-half thereof should be included in his income. Thereafter, the respondent amended his answer to allege affirmatively that the petitioner sold certain stocks of the above-named corporation and thereby derived income within the taxable year in the amount of $73,767.59. FINDINGS OF FACT. The petitioner is a resident of the State of Washington, where he has resided continuously since 1893, with the exception of the period 600 from 1914 to 1920, 2013 when he was a resident of Portland, Oreg. Previous to going to Portland, he was a resident of Tacoma, Wash., and subsequent to his Portland residence, he has been a resident of the City of Seattle, State of Washington. In 1897 he was married to May V. Youell, his present wife. In 1898 he formed a copartnership with Lloyd Garretson, under the name and style of Pacific Fruit & Produce Co., each partner contributing $325 to the partnership. Youell's $325 was earned by him subsequent to his marriage. In 1909, the assets of the partnership were assigned to a corporation organized in the State of Washington, under the name of Pacific Fruit & Produce Co., with a capitalization of $100,000, divided into 1,000 shares of the par value of $100 each. Fifty per cent of the stock was issued to each partner as fully paid. Garretson and Youell remained the only stockholders until 1919, when Garretson sold out in the manner hereinafter set forth. In the latter part of 1918, differences arose between Garretson and Youell. Up to that time, neither had withdrawn any of the earnings of the corporation, except such as might be necessary to pay their respective living expenses. Neither2014 was prepared individually to buy out the other. During the latter part of 1918, Youell and Garretson had various conferences relative to the settlement of their differences, and the purchase of Garretson's stock. Youell saw various employees of the company, in particular, O.J. and H. F. Schumacher, each of whom agreed to purchase 100 shares of the Garretson stock at the book value. Youell also saw other employees during this period, who agreed to purchase various amounts of the Garretson stock at the same price, so that ultimately Youell was able to complete the sale of the Garretson stock, if given sufficient time for the various employees to raise enough money to pay for their respective shares. Garretson was unwilling to deal with the number of employees, or with the corporation, but was willing to deal with Youell, in order to effect the sale. The parties who agreed to buy the 500 Garretson's shares were all employees, with the exception of M. E. Callender, a relative of Youell's wife. Relying upon his arrangement with his employees, on January 21, 1919, Youell signed the following contract: WHEREAS Lloyd Garretson, hereinafter called Garretson, and George Youell, 2015 hereinafter called Youell, are owners in equal part of the capital stock of the Pacific Fruit & Produce Company, a corporation, herein called the corporation, the capital stock of which is One Thousand Shares of the par value of $100 per share, each owning Five Hundred Shares, and the two being the only stockholders and both being trustees of said corporation, now, this AGREEMENT WITNESSETH that Garretson hereby agrees to sell and assign to Youell and Youell hereby agrees to buy from Garretson the entire 500 shares 601 of the capital stock of said corporation, owned by Garretson for the sum of $272,168.32, which said Youell agrees to pay in amounts, at times, and in manner following, to-wit: Youell does hereby sell, assign and warrant to Garretson the sole right to receive all the one-half interest of Youell, being the one-half interest in and to all that portion of the surplus capital of said corporation, this day duly distributed by resolution of said corporation, and consisting of the lands and improvements of the said corporation's ranch on Unit One of the Tieton Project, Yakima, Washington, with all of the machinery, stock, tools, supplies and produce on hand and all2016 equipment of every kind (making special mention of one White Truck and one Ford Automobile) together with the Parker Lease and all other leases and appurtenances and all matters pertaining to said farming industry with the produce undelivered from same and including the residence occupied by Garretson on Chase Hill, Yakima, all of the agreed value of $37,168.32, as shown by the books of said corporation, and also the right to receive from said corporation the sum of $100,000.00 cash specified in said resolution, all of which real estate, leases and appurtenant property shall be deeded and properly conveyed to Garretson by said corporation, by proper deed and conveyances of warranty on or before ten days from the date hereof and said cash shall, at the same time be paid to Garretson and shall be credited on said agreed purchase price as the first payment thereon. That in case it should hereafter be determined by proper Government authority that said surplus capital so set aside is, in fact, a dividend on which income tax shall have to be paid, it is agreed and warranted by and between the parties hereto for themselves and for said corporation, that said income tax shall be paid by2017 said corporation. That at the time of and as a part of the same transaction of delivering the deed and conveyance before specified, and the payment of said cash, Youell shall make a promissory note in usual commercial banking form and substance, agreeing to pay to order of Garrentson, on or before June 15th, 1919, $85,000, with interest at six per cent per annum, and one promissory note in like form and substance agreeing to pay to the order of Garretson the balance of $50,000 on or before January 1, 1919, interest at six per cent, both notes giving five days' grace, and thereupon and as a part of the same transaction, garretson shall execute an assignment in blank of all of said stock, in said corporation, and Youell shall execute an assignment in blank of 167 shares of his said stock in said corporation and all of said stock so assigned in blank shall be deposited in a sealed envelope, with said promissory notes attached outside of said envelope, in the First National Bank of Yakima, Washington, with the escrow agreement attached hereto and marked "A" and made a part hereof, attached to said envelope, filling in the blank in the first note above specified, and the party hereto2018 or the properly authorized assign, heir, administrator or executor of the party hereto to whom said escrow shall be properly delivered according to the true intent thereof, shall have and is hereby given the authority to fill in the blank for the assignee of said stock and shall be the absolute owner thereof. Until the expiration of the five days of grace on the said $50,000 above referred to, that is until and including the 5th day of January, 1920, or until the payment of said notes if same are paid prior to said date Garretson agrees that acting as trustee for the Pacific Fruit & Produce Company he will concur with Youell in whatever legal actions that Youell may designate in the entering of resolutions or otherwise to apply all of the profits on all of the stock of said corporation contained in said escrow or owned by Youell or under his beneficial control in payment of the amount or balance due on said notes and escrow 602 agreement and during all said time Youell shall, for all purposes of profits, be the full beneficial owner of said stock, that is, shall, for the purposes before specified, have the right to all the proceeds and benefits of said stock and until the2019 full payment of said sums or the termination of said escrow according to the terms thereof, none of the profits or surplus of said corporation accruing or accrued on any of the stock of said corporation in escrow or owned or beneficially controlled by Youell, whatsoever, shall be applied to any purpose whatsoever other than the payment of the sum or balance of said notes and said escrow, except to use for capital in ordinary course of business, during the life of this agreement. Garretson shall have the right to vote 500 shares of said stock and it is his right and shall be his duty to so act as trustee of said corporation until the termination of said escrow agreement by delivery of said stock to Youell or the person by him duly authorized to receive the same under said escrow agreement. It being strictly the intention of this agreement that Youell shall make the payments on said escrow agreement, it shall not be considered the duty of said corporation to make the same except as same may be ordered by proper resolution or otherwise, as accruing to Youell for said purpose as the beneficial owner of said stock as aforesaid during said period provided for said payments. If Garretson2020 is required to pay Federal Income Tax by reason of the transactions covered by this agreement, then, Youell agrees to pay one-half of the said tax added by reason of this transaction up to but not exceeding $10,000 said limit referring to the one-half of said additional tax to be paid by Youell, and this liability on the part of Youell is limited to and must be determined by the 1st day of January, 1922, unless the same and the payments of the same and the Government's right to collect the same be in litigation by consent of Youell. In case Garretson shall have to bring suit against Youell for payment of said portion of said tax, then Youell shall pay, in addition to costs, if suit be properly brought, all attorney's fees and such damages as Garretson may sustain in that regard, and if judgment be entered, same shall include said items of recovery. Until the final termination of this agreement, all of said business and its assets shall be carefully conserved for purposes herein provided, and Youell shall keep Garretson fully informed of all transactions he has or contemplates in that regard. This agreement shall be binding upon the parties hereto and on their heirs, executors, 2021 administrators and assigns. This agreement shall take effect as of January 1, 1919. Dated January 21, 1919. (Signed) LLOYD GARRETSON GEO. YOUELL. Attached to said agreement, was the following escrow agreement: On or before the 15th day of June, 1919, there shall be paid to the First National Bank of Yakima, holder hereof, $85,000, and on or before January 1st, 1920, $50,000 shall be paid additionally to First National Bank of Yakima. holder hereof, for Lloyd Garretson, with interest on deferred payments at six per cent per annum and five days grace is allowed on each said sums, but aside from these days of grace, time is of the essence hereof and on failure to make the first payment or either of said payments, as herein prescribed, as time is hereby understood, then the within shall be delivered to Loyd Garretson or his agent or representative duly authorized in writing to receive the same. 603 In case said payments be made, however, as herein provided, then and thereupon, the within escrow shall be delivered to George Youell or to such person as he may designate in writing duly authorized to receive the same. No verbal statement shall alter, vary, modify, 2022 control or in any way affect this agreement of escrow. January 31, 1919. (Signed) GEORGE YOUELL. LLOYD GARRETSON. At a special meeting of the trustees of the Pacific Fruit & Produce Co., held on January 21, 1919, a dividend on the capital stock of said Pacific Fruit & Produce Co. was declared, amounting to $137,168.32, payable $100,000 in cash, and certain property, said property having an agreed value of $37,168.32. Of the total dividend declared, the petitioner was entitled to receive cash and property in the amount of $68,584.16. The minutes of the meeting of the trustees authorizing the payment of the said dividend read as follows: A special meeting of the trustees of the Pacific Fruit & Produce Co. was held at Tacoma, Washington, on Tuesday, January 21st, 1919. There were present at said meeting: Messrs. George Youell, and Lloyd Garretson, the full board of trustees of said corporation, Mr. Youell presiding. From a financial statement submitted, there appeared that there was on hand a surplus in excess of $400,000. The following resolution was thereupon introduced and after full discussion was adopted by the unanimous affirmative vote of the board of trustees. 2023 WHEREAS, this corporation has a surplus in excess of $400,000, and, WHEREAS, this corporation is the owner of the following described real property and leases, to-wit: The Southeast Quarter of Section Eight (8), Township Thirteen (13) North, Range Eighteen (18) E.W.M. The Southwest quarter of the Northwest quarter of Section Nine (9), Township Thirteen (13) North, Range Eighteen (18) E.W.M., containing forty (40) acres, more or less. All of the Southeast Quarter of the Northeast Quarter of Section 8, Township 13 North, Range 18 E.W.M., except the following: Commencing at the Southwest corner of the Southeast Quarter of the Northeast quarter of said Section 8, Township 13 North, Range 18 E.W.M., and running thence East along the South line of the said Southeast Quarter of the Northeast Quarter, a distance of 728 feet; thence North and parallel to the West line of said Southeast Quarter of the Northeast Quarter, a distance of 418.8 feet; thence West and parallel to the South line of said Southeast quarter of the Northeast Quarter, a distance of 728 feet; thence South along the West line of said Southeast Quarter of the Northeast Quarter, a distance of 418.8 feet to point2024 of beginning, containing 7 acres, also except two rights of way for waste water along two draws one leading from the Northwest corner and the other leading from the Northeast corner of above described land, the land conveyed containing 33 acres, more or less. Lot two (2) of the Chase Hill Residence Tracts, according to the official plat thereof now of record in the office of the Auditor of Yakima County, together with one share of water in the Yakima Valley Canal Company; also the privilege to tap the city water main for domestic uses. 604 All of the above property being situated in Yakima County, Washington. And, WHEREAS, this corporation is also the owner of certain machinery, live stock, tools, supplies and produce appertaining to said above described property, and, WHEREAS, this corporation is the owner of certain leases known as the Eversole lease and Parker lease, and, WHEREAS, said real property and leases and $100,000 in cash can be distributed to the stockholders from the surplus of this corporation without impairing its capital and without detriment to its working capital. NOW, THEREFORE, BE IT RESOLVED, that the above described real property and leases2025 and the sum of $100,000 be distributed to the stockholders of this corporation as their interests may appear, and, BE IT FURTHER RESOLVED, that the officers of this corporation be and hereby are authorized to execute and deliver any and all necessary documents to effect the transfer of said real property and leases and to distribute said cash. Thereupon Mr. Youell stated that by reason of a certain personal business transaction between himself and Mr. Garretson he desired his interest or share in the above real property, leases and cash ordered distributed according to the above resolution, should be transferred by the corporation directly to Mr. Garretson. Thereupon the following resolution was adopted: WHEREAS, George Youell has requested that his part or interest in the real property, leases and cash this day ordered distributed to the stockholders of this corporation, be transferred by the corporation direct to Lloyd Garretson. NOW, THEREFORE, BE IT RESOLVED, That the officers of this corporation be and hereby are authorized to transfer the interest of said George Youell in the above described real property, leases and cash direct to Lloyd Garretson upon the said George2026 Youell and May V. Youell, his wife, confirming and ratifying this action on the minutes of this corporation by attaching their signature thereto. There being no further business to come before the meeting, the same was adjourned. (Signed) LLOYD GARRETSON, Secretary.I, George Youell, and I, May V. Youell, his wife, hereby ratify, confirm and approve the action authorized by the above minutes and direct the corporation to transfer the real property and leases and distribute the cash according to the above minutes. (Signed) GEORGE YOUELL MAY V. YOUELL The Pacific Fruit & Produce Co., on January 21, 1919, had a true surplus of over $400,000. The books of the Pacific Fruit & Produce Co. contain the following journal entries dated January 31, 1919, in which are recorded the payments of the Dividend which was declared at the special meeting of the trustees held January 21, 1919: H.O. No. 91, January 31, 1919DebitCreditSurplus$137,168.32Cash Dividend$100,000.00Property Dividend37,168.32Dividend137,168.32Lloyd Garretson68,584.16Geo. Youell68,584.16L. Garretson18,584.16G. Youell18,584.16Ranch Property25,887.55Yakima Property11,280.77L. Garretson50,000.00G. Youell50,000.00Cash100,000.002027 605 Shortly after the making of said agreement, in accordance therewith, the Pacific Fruit & Produce Co. transferred to Garretson certain property of the value of $37,168.32 and paid to him $100,000 in cash, which amount the corporation was enabled to pay to him by negotiating a loan at different banks. Within a short time, Youell had completed his arrangements with the various employees who paid into the corporation the purchase price of the Garretson stock, and, in the early part of March, 1919, the balance of the purchase price was paid to Garretson. His stock was released from the escrow and distributed to the various purchasers listed in petitioner's Exhibit 1. Fifty shares of the Garretson stock were purchased by Youell, who paid the same price to the corporation per share as the other stockholders had paid. The total purchase price paid by the various employees was $285,548.15, which was a little more than the price paid to Garretson, for the reason that the Garretson stock was sold at the book value as of December 31, 1919, while the purchase price paid by the employees to the corporation was based upon the book value at the time they made their payments, in order2028 to offset the profit made by the corporation during the early months of 1919. After the Garretson purchase had been completed, on March 27, 1919, the new board of trustees of the Pacific Fruit & Produce Co. passed the following resolution: WHEREAS up to the 1st day of January, 1919, George Youell and Lloyd Garretson owned the entire issued and authorized stock of the Pacific Fruit & Produce Company in the following amounts, to-wit: George Youell500 sharesLloyd Garretson500 sharesAND WHEREAS for a number of years past George Youell has been in the active management and control of said business, and the said Lloyd Garretson, by reason of sickness has not been active in the management of said business, and WHEREAS differences of opinion and controversies had prior to said 1st day of January, 1919, arisen between the said George Youell and the said Lloyd Garretson, which differences had become so acute as to affect the business and its financial standing, and WHEREAS by the equal division of stock between the two parties and by reason of the fact that each of the parties was on the Board of Trustees there was no possibility of securing a deciding vote on2029 any question at issue, and 606 WHEREAS certain of the employees of the business and others financially able were willing to purchase the stock of Mr. Garretson provided Mr. Youell stayed in the business, and WHEREAS the said Lloyd Garretson refused to sell his stock, or any portion thereof, to anyone save and except George Youell as an individual, and WHEREAS the said Lloyd Garretson refused to sell his said stock to the corporation as such, claiming that it was illegal and that there was no right or authority so to do, and WHEREAS for the purpose of saving his interest in the business as well as saving the business from receivership by reason of the evenly divided voting power in the stockholders' and board of trustees' meetings, the said George Youell, at the request of the said Lloyd Garretson, consented to having declared a cash dividend of $100,000 and consented to the execution of a deed by the corporation conveying certain of its real property as a dividend in kind, all of which dividend after being declared was to go to and did in fact go to Lloyd Garretson as a first payment under a certain contract entered into between Lloyd Garretson and George Youell for2030 the purchase of the stock of this corporation, made by the said George Youell in his own name, but in fact and in trust for the benefit and use of the corporation in order to secure the stock of the said Lloyd Garretson as treasury stock for the purpose of distributing it to employees and others wishing to purchase the same for cash, and WHEREAS it was never the intent on the part of the said George Youell to purchase said stock for his own benefit, or to cause a dividend or distribution of property to be made for his own benefit, and WHEREAS in truth and in fact it was intended that said cash and said property so taken from the business should be used solely for the purpose of transfering the same to Lloyd Garretson in payment for his stock, and WHEREAS it was intended that said capital so removed was to be immediately replaced with said resolution, declaring said dividend, and the contract on which it was based, and WHEREAS various of the employees and others are willing at this time and have in fact paid to the corporation the full value for said stock thereby replacing said capital, NOW, THEREFORE, BE IT RESOLVED, that the proper officers of this corporation be and hereby2031 are allowed to make such entries on the books of this corporation as may be necessary to show said transaction declaring and paying said dividend of $100,000 in cash and the transfer of said real property to be in truth and in fact a delivery of the assets of the corporation to said Lloyd Garretson in payment for said stock for the use and benefit of the corporation for the purpose of securing said stock as treasury stock in order that it might be issued to employees and others willing and able to pay therefor. In accordance with said resolution, any entry having theretofore been made showing dividends was corrected on the books of the corporation. The petitioner did not report in his income-tax return filed for the year 1919, any amount as representing a dividend received by him from the Pacific Fruit & Produce Co. during said year 1919. Lloyd Garretson, who owned one-half of the outstanding capital stock of the Pacific Fruit & Produce Co., on January 21, 1919, reported in his Federal income-tax return, $68,584.16 as representing a dividend received by him from the said Pacific Fruit & Produce 607 Co., and paid in accordance with resolution adopted by the board of2032 trustees on January 21, 1919. OPINION. GREEN: The facts, briefly, are these. Youell and Garretson each owned 50 per cent of the stock of a corporation. They disagreed. Garretson would sell only to Youell and Youell did not have the wherewithal to pay the purchase price. The purchase price was $272,168.32. Certain employees agreed to buy the stock from Youell if he could buy from Garretson. The employees were to pay an amount equal to the amount paid Garretson. The corporation had a substantial surplus and good credit standing. Youell conceived the idea of having the corporation finance the purchase, in the following manner. The corporation was to declare a dividend, so called, in the amount of $137,168.32, all of which was, by agreement between Garretson and Youell, paid to Garretson. Two notes secured by stock of the corporation were to be given for the balance. In only this part of the plan did Garretson have any interest. The remainder of the plan contemplated the sale of the stock, so purchased, to the employees, for cash, which cash was to be paid in to the corporation. The plan was carried out with but one material variation. Youell purchased for cash, for*2033 himself, 50 shares of the Garretson stock. The result of the transactions was that Garretson sold his 500 shares of stock for $272,168.32. This stock was purchased by Youell and the employees of the corporation. The corporation's assets were neither increased nor diminished. Youell received no cash or property for his own use. His situation afterwards was precisely the same as before, except for the purchase of 50 shares for cash. The respondent contends that the petitioner, Youell, was the recipient of a taxable dividend and that he sold the stock at a profit. He computes the petitioner's income from the entire transaction to be $142,301.75, and this regardless of the fact that after the transaction, Youell had only his original stock and 50 additional shares for which he paid full value. It seems clear to us that the petitioner derived no gain from either the dividend or the sale of the stock, or in any other way from the various transactions. Under such circumstances, we can not hold that he had income. Reviewed by the Board. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625914/	ANGIER CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Angier Corp. v. CommissionerDocket No. 25960.United States Board of Tax Appeals17 B.T.A. 1376; 1929 BTA LEXIS 2144; November 8, 1929, Promulgated 2144 1. The petitioner held not liable for the taxes due from Angier Mills for the years 1917 and 1918, and from the Mansfield Co. for the year 1918 and the period January 1 to March 31, 1920. 2. The petitioner held liable for the taxes due from Angier Mills for the year 1920, computed on the basis of the net income properly assignable to that company. George T. Weitzel, Esq., for the petitioner. E. J. Tonjes, Esq., for the respondent. MARQUETTE 1376 This proceeding is for the redetermination of deficiencies in income and profits taxes asserted by the respondent against the petitioner under section 280 of the Revenue Act of 1926, as the transferee of the Angier Mills and the Mansfield Co. The deficiencies are as follows: Angier Mills:1917$12,146.33191818,876.19192011,336.2542,388.77Mansfield Co.:1918$1,878.22Jan. 1 to Mar. 31, 19201,921.953,800.17The facts of the case have been stipulated by the parties and we find them to be as follows: FINDINGS OF FACT. The petitioner is a corporation organized under the laws of Massachusetts in the year 1920, with its principal office and place2145 of business at Framingham, Mass. Edward H. Angier is, and has been since its organization, the president and treasurer of the corporation. The Angier Mills was incorporated in 1904 under the laws of Massachusetts, and from 1907 to 1921 was engaged in the manufacture of waterproof and duplex paper and specialized paper products at Ashland, Mass. During the year 1917 Frank E. Ewing was president and Edward H. Angier was treasurer of the corporation, and during the years 1918, 1919, and 1920 the said Edward H. Angier was 1377 a director, president and treasurer of the corporation. His last election as director, president and treasurer was on February 14, 1920, and no election of officers or directors of the corporation has been held since that date. The Angier Mills filed its tax return for the calendar year 1917 on March 27, 1918. Said return showed a total tax liability of $45,960.34, which was fully paid by the taxpayer on or before June 18, 1918. Thereafter the Commissioner examined said return and on April 28, 1924, pursuant to section 250(d) of the Revenue Act of 1921, he sent by mail a 30-day letter addressed to Angier Mills, Framingham, Mass., notifying said2146 Angier Mills of an additional tax of $17,800.98 and granting 30 days within which to file an appeal and to show cause why the said deficiency should not be paid. No appeal was filed by the taxpayer and it took no further action in the matter. On July 17, 1924, the Commissioner assessed said additional tax in the amount of $17,800.98. The said assessment was not intended to be a jeopardy assessment and the assessment list shows that it was not a jeopardy assessment but was a regular assessment. The amount of the assessment was thereafter reduced by $5,654.65 by the Commissioner by office letter dated January 19, 1927. No 60-day letter, or deficiency notice, as provided for by section 274 of the Revenue Act of 1924, was ever sent to Angier Mills with reference to a deficiency in tax for the year 1917. Angier Mills filed its tax return for the calendar year 1918 on April 11, 1919. The return showed a total tax liability of $27,322.74, which was fully paid by the taxpayer on or before December 15, 1919. Thereafter the Commissioner examined said return and on October 31, 1924, pursuant to section 274 of the Revenue Act of 1924, sent by mail a 60-day letter or deficiency notice2147 addressed to Angier Mills, Framingham, Mass., notifying said taxpayer of an additional tax of $25,797.34, but no appeal was filed by the taxpayer with the Board of Tax Appeals and no further action was taken by it with respect to the matter. In March, 1925, said additional tax was assessed by the Commissioner in the amount of $25,797.34. The amount so assessed was thereafter reduced by $6,921.15 by the Commissioner as is shown by his office letter of January 19, 1927. The Mansfield Co., of Mansfield, Mass., was incorporated prior to 1917 under the laws of the State of Massachusetts, and was engaged in the paper-manufacturing business. It filed its tax return for the calendar year 1918 on June 16, 1919. The return showed a total tax liability of $30,916.12, of which $27,228.91 was paid, $1,797.25 credited for 1919, and $1,889.96 abated. Thereafter the Commissioner examined said return and in March, 1921, made an additional assessment of $2,503.53, together with a penalty of $125.18, and in May, 1378 1925, he also made a second additional assessment of $5,560.24. In October, 1921, an overassessment of $1,684.78 was allowed and a net reduction of $3,682.02 was made in2148 said assessments in December, 1923. On January 28, 1925, pursuant to section 274 of the Revenue Act of 1924, the Commissioner sent by mail a 60-day letter or deficiency notice addressed to Mansfield Company, Mansfield, Mass., notifying the said taxpayer of a deficiency in tax in the amount of $5,560.24 for the year 1918, but no appeal was filed by the taxpayer with the Board of Tax Appeals, and no further action in the matter was taken by the taxpayer. The Mansfield Company filed its tax return for the period January 1 to March 31, 1920, on March 30, 1921. The return showed a total tax liability of $1,440.62, which was fully paid on or before December 15, 1921. Thereafter the Commissioner examined said return and on February 12, 1925, pursuant to section 274 of the Revenue Act of 1924, he sent by mail a 60-day letter or deficiency notice addressed to Mansfield Company, Mansfield, Mass., notifying said taxpayer of an additional tax of $1,921.95 for the period January 1 to March 31, 1920, but no appeal was filed by the taxpayer with the Board of Tax Appeals and no further action was taken by the taxpayer with respect to said additional tax. Said additional tax was assessed on2149 the May 1925 List. The Angier Mechanical Laboratories, of Framingham, Mass., was incorporated prior to 1917 under the laws of Maine, and was engaged in the business of manufacturing paper. The Van de Carr Paper Co., of Stockport, N.Y., was incorporated prior to 1917 under the laws of the State of New York, and was engaged in the business of manufacturing paper. On May 22, 1920, Edward H. Angier purchased all of the stock of said corporation an became its sole stockholder. On March 15, 1921, the Angier Mills filed a consolidated tax return for Angier Mills, Angier Mechanical Laboratories, Mansfield Co., and Van de Carr Paper Co. for the year 1920. The return showed a total tax liability of $2,134.98, which was fully paid on or before the due date. Thereafter the Commissioner examined said return and on January 2, 1926, pursuant to section 274 of the Revenue Act of 1924, he sent by mail a 60-day letter or deficiency notice addressed to Angier Mills, Inc., Framingham, Mass., notifying said corporation of an additional consolidated tax liability of $13,900.86 for the fiscal year 1920, but no appeal was filed by said taxpayer with the Board of Tax Appeals and no further action2150 was taken by it with respect to said additional tax. On February 23, 1926, the office of the Commissioner sent a letter addressed to Angier Mills, Inc., Framingham, Mass., notifying said corporation of an 1379 assessment against it in the amount of $13,800.86 and advising that "This letter supersedes Bureau letter dated January 2, 1926." On April 12, 1926, pursuant to section 279(a) of the Revenue Act of 1926, the Commissioner of Internal Revenue sent by mail a 60-day letter or deficiency notice addressed to Angier Mills, Inc., Framingham, Mass., notifying said taxpayer of an assessment against it in the amount of $13,800.86 for the year 1920 and of its right to appeal to the Board of Tax Appeals, and reciting that "This letter supercedes Bureau letter dated February 23, 1926." On March 8, 1926, a jeopardy assessment of said additional tax in the amount of $13,800.86 was made by the Commissioner. Said assessment was subsequently reduced by $2,434.61, as is shown by Bureau letter of January 19, 1927. There was no agreement that the said consolidated tax for the year 1920 should be assessed against Angier Mills instead of being assessed upon the respective affiliated corporations2151 on the basis of net income properly assignable to each, and there was no notice to respondent to assess the whole tax against Angier Mills. The following written consents or waivers were executed by the Commissioner on behalf of Angier Mills: JANUARY 20, 1923. INCOME AND PROFITS TAX WAIVER. In pursuance of the provisions of subdivision (d) of Section 250 of the Revenue Act of 1921, ANGIER MILLS of Framingham, Mass., and the Commissioner of Internal Revenue, hereby consent to a determination, assessment and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of the said ANGIER MILLS for the years 1917 to 1921, inclusive, under the Revenue Act of 1921, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes," approved August 5, 1909, irrespective of any period of limitations. (Signed) ANGIER MILLS, Taxpayer. E. H. ANGIER, President. D. H. BLAIR, Commissioner.JANUARY 31, 1924. INCOME AND PROFITS TAX WAIVER. In pursuance of the2152 provisions of subdivision (d) of Section 250 of the Revenue Act of 1921, ANGIER MILLS, of Framingham, Massachusetts, and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of the said ANGIER MILLS for the year 1918 under the Revenue Act of 1921, or under prior income, excess-profits, or war-profits tax Act, 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) ANGIER MILLS, E. H. ANGIER, Treasurer, Taxpayer.D. H. BLAIR, Commissioner.FRAMINGHAM, MASS., January 25, 1924.INCOME AND PROFITS TAX WAIVER. In pursuance2153 of the provisions of subdivision (d) of Section 250 of the Revenue Act of 1921, ANGIER MILLS of Framingham, Massachusetts, and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of the said Company for the year 1917 under the Revenue Act of 1921, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United 1380 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) ANGIER MILLS, EDWARD H. ANGIER, Treasurer, taxpayer.D. H. BLAIR, Commissioner.On March 31, 1920, all of the assets of the Mansfield Co. were sold and2154 transferred to the Angier Mills, which latter became the sole stockholder of the Mansfield Co. In return for the stock of the Mansfield Co., Angier Mills gave its own preferred stock. Thereafter the Angier Mills reacquired said preferred stock by transferring to the owners thereof the real estate and factory of the Mansfield Co. located at Mansfield, Mass., and by also making a cash payment. The machinery, equipment, etc., of the Mansfield Co. were removed to the plant of the Angier Mills at Ashland, Mass. On January 10, 1922, the said plant of the Angier Mills was destroyed by fire. The mansfield Co. was legally dissolved on May 20, 1922. On December 31, 1920, the petitioner acquired from Deward H. Angier all of the capital stock of the Angier Mills, and in exchange therefor gave its own capital stock. The petitioner thus became the sole stockholder of the Angier Mills and continued to be the 1381 sole stockholder thereof until the dissolution of said Angier Mills on March 31, 1923. On December 30, 1921, the Angier Mills Transferred to the petitioner all of its real estate and buildings located at Ashland, Mass., its contracts, cash, accounts receivable, merchandise, 2155 materials, supplies, tools, implements and machinery, and after said date the Angier Mills ceased to do business and held no further meetings, and on March 31, 1923, it was legally dissolved by an act of the Commonwealth of Massachusetts. The transfer of the property and assets of the Angier Mills to the petitioner was in liquidation of the capital stock of the Angier Mills. The property so transferred to the petitioner was of a net value in excess of the amount of the taxes herein involved. On December 31, 1920, the petitioner purchased all of the outstanding stock of the Angier Mechanical Laboratories. On December 30, 1921, the Angier Mechanical Laboratories transferred all of its assets to the petitioner and thereafter ceased to do business. The said Angier Mechanical Laboratories was legally dissolved on or about February 12, 1922. On February 9, 1927, the Commissioner, pursuant to section 280 of the Revenue Act of 1926, sent by mail a 60-day letter addressed to the petitioner as transferee of the assets of the Angier Mills and the Mansfield Co., Framingham, Mass., for income and profits taxes in the amount of $46,188.94, due from the Angier Mills and the Mansfield Co. 2156 for the years 1917, 1918, and 1920. No suit or proceeding otherwise than has been set forth was ever instituted by the respondent against Angier Mills and its affiliated corporations, or against the petitioner for the collection of any of the taxes herein in controversy. OPINION. MARQUETTE: The respondent proposes to assess against the petitioner as a transferee of the Angier Mills and the Mansfield Company, the taxes claimed to be due from those companies for the years 1917, 1918 and 1920. This action is taken under section 280 of the Revenue Act of 1926 which provides that: SEC. 280. (a) The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this title (including the provisions in case of delinquency in payment after notice and demand, the provisions authorizing distraint and proceedings in court for collection, and the provisions prohibiting claims and suits for refunds): (1) The liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax2157 (including interest, additional amounts, and additions to the tax provided by law) imposed upon the taxpayer by this title or by any prior income, excess-profits, or war-profits tax Act. 1382 (2) The liability of a fiduciary under section 3467 of the Revised Statutes in respect of the payment of any such tax from the estate of the taxpayer. Any such liability may be either as to the amount of tax shown on the return or as to any deficiency in tax. (b) The period of limitation for assessment of any such liability of a transferee or fiduciary shall be as follows: (1) Within one year after the expiration of the period of limitation for assessment against the taxpayer; or (2) If the period of limitation for assessment against the taxpayer expired before the enactment of this Act but assessment against the taxpayer was made within such period, then within six years after the making of such assessment against the taxpayer, but in no case later than one year after the enactment of this Act. (3) If a court proceeding against the taxpayer for the collection of the tax has been begun within either of the above periods - then within one year after return of execution in2158 such proceeding. (c) For the purposes of this section, if the taxpayer is deceased, or in the case of a corporation, has terminated its existence, the period of limitation for assessment against the taxpayer shall be the period that would be in effect had the death or termination of existence not occurred. (d) The running of the period of limitation upon the assessment of the liability of a transferee or fiduciary shall, after the mailing of the notice under subdivision (a) of section 274 to the transferee or fiduciary, be suspended for the period during which the Commissioner is prohibited from making the assessment in respect of the liability of the transferee or fiduciary and for 60 days thereafter. (e) This section shall not apply to any suit or other proceeding for the enforcement of the liability of a transferee or fiduciary pending at the time of the enactment of this Act. (f) As used in this section, the term "transferee" includes heir, legatee, devisee, and distributee. The record herein discloses that the petitioner is a transferee of the property of the Angier Mills, but that it is not an original transferee of the property of the Mansfield Co. Nor is it2159 clear that the Angier Mills was a transferee of the property of the Mansfield Co. On this point the facts as stipulated by the parties are not as clear as might be desired, and it is difficult, if not impossible, to determine from the stipulation the circumstances under which the Angier Mills acquired the property of the Mansfield Co. However that may be, the record wholly fails to show the value of these assets, and for this reason the respondent must fail in his endeavor to hold the petitioner liable for the taxes due from the Mansfield Co. Section 912 of the Revenue Act of 1924, added to that Act by section 602 of the Revenue Act of 1928, provides that: SEC. 912. In proceedings before the Board the burden of proof shall be upon the Commissioner to show that a petitioner is liable as a transferee of property of a taxpayer, but not to show that the taxpayer was liable for the tax. In discussing this provision of the statute, we said in : 1383 We think that the proper interpretation of section 912 of the Revenue Act of 1926, added by section 602 of the Revenue Act of 1928, is that the burden of showing the extent2160 of the liability of a transferee of property of a taxpayer is upon the Commissioner and that the Commissioner has not borne that burden by merely showing that the petitioner, by his own admissions, has received in liquidation the assets of a dissolved corporation, which itself may have been liable for a tax, without showing what value, if any, the assets in question had at that time. See . The respondent has failed to sustain the burden cast upon him by the statute and we must, therefore, hold on the record that the petitioner is not liable for the taxes of the Mansfield Co. for the year 1918 and the period January 1 to March 31, 1920. Coming now to the tax liability of Angier Mills for the year 1917, we find from the stipulation of facts that the return for that year was filed on March 27, 1918. The five-year period for assessment provided by the Revenue Acts of 1918 and 1921 expired on March 27, 1923, but waivers or consents were executed on behalf of the taxpayer and the additional tax was assessed on July 17, 1924. The waiver of January 20, 1923, in so far as relates to the year 1917, expired April 1, 1924 [Proclamation2161 of Commissioner, Mim. 3085, C.B. 11-1-P-174], and the waiver of January 25, 1924, expired April 1, 1925. The deficiency was asserted against the petitioner on February 9, 1927, almost two years after the expiration of the last waiver. Unless the assessment of July 17, 1924, is valid, it is clear that the right of the respondent to assess the tax against the transferee was barred prior to February 9, 1927. The petitioner contends that the waivers or consents executed on behalf of Angier Mills are invalid and that, therefore, the assessment of July 17, 1924, is likewise invalid, it having been made subsequent to the expiration of the five-year period for assessment provided by the Revenue Acts of 1918 and 1921. The petitioner further contends that the assessment is invalid for the reason that no 60-day deficiency notice was ever sent to the taxpayer as required by section 274 of the Revenue Act of 1924. We will first discuss the latter contention. The Revenue Act of 1924, which became effective June 2, 1924, in so far as it is pertinent to this inquiry, provides that: SEC. 274. (a) If, in the case of any taxpayer, the Commissioner determines that there is a deficiency in2162 respect of the tax imposed by this title, the taxpayer, except as provided in subdivision (d) shall be notified of such deficiency by registered mail, but such deficiency shall be assessed only as hereinafter provided. Within 60 days after such notice is mailed the taxpayer may file an appeal with the Board of Tax Appeals established by section 900. (b) If the Board determines that there is a deficiency, the amount so determined shall be assessed and shall be paid upon notice and demand from the collector. No part of the amount determined as a deficiency by the Commissioner but disallowed as such by the Board shall be assessed, but a proceeding 1384 in court may be begun, without assessment, for the collection of any part of the amount so disallowed. The court shall include in its judgment interest upon the amount thereof at the rate of 6 per centum per annum from the date prescribed for the payment of the tax to the date of the judgment. Such proceeding shall be begun within one year after the final decision of the Board, and may be begun within such year even though the period of limitation prescribed in section 277 has expired. (c) If the taxpayer does not file2163 an appeal with the Board within the time prescribed in subdivision (a) of this section, the deficiency of which the taxpayer has been notified shall be assessed, and shall be paid upon notice and demand from the collector. (d) If the Commissioner believes that the assessment or collection of a deficiency will be jeopardized by delay such deficiency shall be assessed immediately and notice and demand shall be made by the collector for the payment thereof. In such case the assessment may be made (1) without giving the notice provided in subdivision (a) of this section, or (2) before the expiration of the 60-day period provided in subdivision (a) of this section even though such notice has been given, or (3) at any time prior to the final decision by the Board upon such deficiency even though the taxpayer has filed an appeal. If the taxpayer does not file a claim in abatement as provided in section 279 the deficiency so assessed (or, if the claim so filed covers only a part of the deficiency, then the amount not covered by the claim) shall be paid upon notice and demand from the collector. The record shows that on April 28, 1924, the respondent mailed to the taxpayer a 30-day2164 letter, notifying it of an additional tax for the year 1917, and granting 30 days within which to show cause why the deficiency should not be paid. No protest or appeal was filed by the taxpayer and no July 17, 1924, which was subsequent to the effective date of the Revenue Act of 1924, the respondent assessed the additional tax mentioned in the 60-day letter, but did not, at any time, mail to the taxpayer the 60-day letter provided by section 274(a) of the Revenue Act of 1924. The assessment was not, and was not intended to be, a jeopardy assessment under authority of section 274(d). Upon the facts as presented to us, considered in the light of the applicable statutes, it is our conclusion that the assessment of July 17, 1924, was made without authority of law and is void and of no force and effect. The 30-day letter of April 28, 1924, was not the final determination contemplated by section 274 of the Revenue Act of 1924. , and . The only evidence of any final determination by the respondent of the taxpayer's liability for 1917 is the fact that an assessment thereof was made2165 in July, 1924. In , we said, in discussing a situation similar to that we are now considering: Section 274 (subdivision (a)) provides that assessment shall be made "only as hereinafter provided." The same section subsequently provides for assessment (except in cases of jeopardy) only after decision by the Board or upon failure to appeal from a determined deficiency within 60 days after notice has been mailed to the taxpayer. In view of these provisions, and our finding that 1385 statutory notice had not been mailed petitioner, the assessment in November was not made in compliance with the statute. Respecting the assessment, suffice it to say that the action did not of itself constitute a determination of deficiency from which petitioner could appeal, for no notice thereof, other than the usual notice and demand for payment, was served upon petitioner. See . We hold that the assessment of July 17, 1924, is invalid and that assessment and collection of the tax against and from the petitioner as a transferee of the taxpayer are barred. With respect to the additional2166 tax claimed by the respondent to be due from Angier Mills for the year 1918, the petitioner urges that assessment and collection against and from it as a transferee are also barred. This contention in brief is that the waivers or consents for the year 1918 were executed by Edward H. Angier; that he had no authority to bind the taxpayer; that the waivers and assessments made thereunder are invalid; and that the right of the respondent to assess the tax against the taxpayer was barred at the time the deficiency notice was mailed. The taxpayer's return for 1918 was filed on April 11, 1919. The five-year period for assessment provided by the Revenue Acts of 1918 and 1921 expired April 11, 1924. Waivers or consents were executed on behalf of the taxpayer, which, if valid, operate to extend the period for assessment, and the additional tax for 1918 was assessed within the waiver period. If the waivers and the assessments made thereunder are valid, the respondent has six years after making such assessment against the taxpayer, but in no case later than one year after the enactment of this Act (the Revenue Act of 1928), to assess against the transferee; if the waivers and assessment2167 are invalid, then the period within which the liability could have been asserted against the transferee of the taxpayer expired prior to February 9, 1927, the date the deficiency letter was mailed to the petitioner. The waivers under consideration were signed by Edward H. Angier as president and treasurer of the taxpayer on January 20, 1923, and January 31, 1924, respectively. Angier had sold his shares of the taxpayer's capital stock on December 31, 1920, and his last election as an officer and director was on February 14, 1920. Section 22 of Chapter 156 of the General Laws of Massachusetts provides that: SEC. 22. Except as otherwise provided in this and the following section, the directors, treasurer and clerk shall be elected annually by ballot, by such stockholders as have the right to vote, and the president shall be elected annually by and from the board of directors. All other agents and officers shall be chosen or appointed, and all vacancies filled, in the manner prescribed in the by-laws, or, in default of such by-law, by the board of directors. Every 1386 director, unless the by-laws otherwise provide, shall be a stockholder. The directors and other officers2168 shall hold office for one year and until their successors are chosen and qualified, except that a corporation may, by its articles of organization or by an amendment to such articles adopted as provided in this chapter, divide its directors into classes and prescribe the tenure of office of the several classes and the class of stock by which each class of directors shall be elected; but no class shall be elected for a shorter period than one year or for a longer period than five years, and the term of office of at least one class shall expire in each year. The Supreme Court of Massachusetts, in discussing the effect of a statute containing practically the same language as "until their successors are chosen and qualified," said, in Chelmsford v. Demarest, 73 Mass. (7 Gray): What then is the legal effect of the added clause "until others are chosen and qualified." To give it the construction contended for by the plaintiffs would annul the previous clause making it annual. But both are embraced in the same sentence, they are equally imperative and obligatory, and if possible both must have their legal effect. * * * The law having directed that such officer must be chosen2169 annually, or at the annual meeting, it assumes and presupposes that such direction will be complied with, and then the words in question must be construed to mean, till the next annual meeting and such reasonable time afterwards as shall be sufficient to enable the officer-elect to procure and deliver his bond, and do whatever else is required to complete his qualification; or if he fails thus to qualify, until the corporation can elect another and cause him to be qualified. In this way both parts of the provision of the statute will have their legal and proper effect. It thus appears that Angier, having last been elected an officer of the taxpayer on February 14, 1920, continued to be such officer, assuming that he could be an officer without at the same time being a stockholder, only until February 14, 1921, and such reasonable time afterward as might have been necessary for his successor to be elected and qualified. We consider that more than "a reasonable time afterward" elapsed before the waivers herein were executed by Angier, and that he was not at the time he executed them an officer of the taxpayer and that he had no authority to act for it. It may be argued that Angier2170 was the president of the petitioner, which was the sole stockholder of the taxpayer, and that his action was binding on the taxpayer. This argument is effectually answered by the decision of the Board in , wherein it was held that a waiver or consent signed by a successor corporation was not valid and did not stop the running of the statute of limitations as to the predecessor corporation. In that case it was said: The respondent's counsel apparently attaches some significance to the fact that the Santee Mills assumed all of the liabilities and obligations of the petitioner. The Santee Mills has not disputed the fact that it assumed the liabilities and obligations of the petitioner, but we are of the opinion that the fact that the Santee Mills was liable for the debts and obligations of the petitioner 1387 does not give it the right to execute consents without the express sanction of the state legislature in such cases, or some authorized delegation of power from the trustees in dissolution. The Santee Mills, even though it was the sole stockholder of the petitioner, has no more right to execute a consent for the2171 petitioner than a stockholder has to bind a corporation by any other form of agreement or contract. We are of opinion that the waivers executed on behalf of the taxpayer for the year 1918 and the assessment made thereunder are invalid and that, therefore, the period within which the tax liability of the taxpayer could have been assessed against the petitioner expired prior to the date of the deficiency letter herein. The last question is whether the respondent may assess against the petitioner the taxes due from the Angier Mills and its affiliated companies for the year 1920. The petitioner contends that the jeopardy assessment of March 8, 1926, is void for the reasons (1) that the 60-day notice required by section 279(b) of the Revenue Act of 1926 was not mailed to the taxpayer within 5 years from the date the return was filed, and (2) because the tax was not apportioned among the affiliated companies on the basis of net income properly assignable to each, and that assessment of the tax against the petitioner is barred. We are of opinion that the first contention is without merit. It is not necessary that the respondent assess the tax against the transferor before proceeding2172 against the transferee. . It is sufficient if he proceeds against the transferee within the period provided by the statute therefor. Assuming that the assessment is invalid as the petitioner urges it is, it does not follow that the respondent is precluded from asserting the liability of the taxpayer against the petitioner. The taxpayer's return for 1920 was filed on March 15, 1921, and the five-year period for assessment of the tax allowed by the Revenue Act of 1918 and subsequent Revenue Acts expired on March 15, 1926, which was after the effective date of the Revenue Act of 1926, and the deficiency notice was mailed to the petitioner within one year from the expiration of the five-year period. Section 280(b) of the Revenue Act of 1926 provides as above set forth that: The period of limitation for assessment of any such liability of a transferee or fiduciary shall be as follows: (1) Within one year after the expiration of the period of limitation for assessment against the taxpayer; * * We are of opinion that the proceeding against the petitioner is timely and that the assessment of the tax is not barred. 2173 We find that in part the second point raised by the petitioner as to the year 1920 is well taken. The record shows that the entire tax liability of the taxpayer and its affiliated companies was assessed 1388 against the taxpayer; that there was no agreement that the tax should be so assessed instead of being assessed against the affiliated companies on the basis of net income properly assignable to each, and that there was no notice to the respondent to assess the whole tax against the taxpayer. In , and , we held that where no agreement was had between corporations as to the apportionment of the tax to be assessed on the basis of a consolidated return, and where the one corporation had not agreed to assume the tax liability of the other, it was mandatory upon the Commissioner to assess the tax upon the basis of the net income properly assignable to each. The facts of this situation bring it squarely within the scope of those decisions. The respondent, therefore, erred in assessing the entire tax of the Angier Mills and its affiliated companies against the Angier Mills. However, *2174 the fact that the respondent erred in this particular does not invalidate this entire proceeding as to 1920. It only makes it necessary to determine that portion of the tax of the affiliated group assessable to the Angier Mills on the basis of the net income properly attributable to it, and the amount so determined may be asserted against the petitioner. Reviewed by the Board. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625915/	LLOYD E. WILSON AND ELSIE M. WILSON, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Wilson v. CommissionerDocket No. 96577.United States Board of Tax Appeals41 B.T.A. 456; 1940 BTA LEXIS 1183; February 21, 1940, Promulgated 1183 Held, an unborn child is not a "person" for the purpose of computing the amount of credit for a dependent. Granville S. Borden, Esq., for the petitioners. T. M. Mather, Esq., for the respondent. VAN FOSSAN 456 OPINION. VAN FOSSAN: Respondent determined a deficiency of $6.18 for the year 1936, consequent on his disallowance in part of a credit for a dependent. The facts are: Petitioners are husband and wife, residing at San Francisco, California. On August 11, 1936, a daughter, Helen Wilson, was born. In their joint return petitioners claimed a credit for a dependent in the amount of $400. Respondent allowed the sum of $166.67, being the prorated amount from the date of birth to the end of the year. Petitioners contend that during the period prior to birth, from January 1 to August 11, 1936, the unborn child was a person, dependent on and receiving her chief support from petitioners, within the intendment of the statute. Respondent held, and here contends, that the period for computing such credit dates from the birth of the child; that an unborn child is not a person within the meaning of that term as used in the revenue act. 1184 We sustain the respondent. The word "person" as used in section 25(b)(2) is to be taken in its normal, everyday sense of a living human being, a man, woman, or child, an individual. In ; , the court stated: "It is not necessary, therefore, to follow counsel in their discussion of the question whether a posthumous child can, under any circumstances, recover for the death of its father occurring before its birth, and 457 when it was only a part of her mother, and not a human being or person." The interpretation which petitioners suggest is so obviously strained as to merit little discussion. Doubtless in this fact is to be found the reason why this question has never heretofore been presented to the Board. It may also account for the paucity of authority in petitioners' brief. Nor is the fact that, by common law and generally by statute, a child en ventre sa mere is deemed to be in esse for the purpose of inheritance for its own benefit persuasive here. The credit here claimed is not for the benefit of the child but of the parents. Decision will be entered for the respondent.*1185	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625917/	AUGUSTUS TRASK ASHTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Ashton v. CommissionerDocket No. 89434.United States Board of Tax Appeals39 B.T.A. 888; 1939 BTA LEXIS 956; May 18, 1939, Promulgated 956 In 1934 taxpayer liquidated certain shares of building and loan association stock and suffered a loss thereby. The shares had been held for more than two years but had not matured. Held, that the transaction constituted a distribution in partial liquidation within the meaning of section 115 of the Revenue Act of 1934 and resulted in a capital loss to the taxpayer and the amount of his deductible loss is limited by section 117:d) of the Revenue Act of 1934. Henderson v. United States,22 Fed.Supp. 206. Dudley T. Easby, Jr., Esq., for the petitioner. T. F. Callahan, Esq., for the respondent. BLACK 888 The Commissioner has determined a deficiency of $946.84 in income tax against petitioner for the year 1934. The deficiency results from the disallowance by the Commissioner of losses of $2,390.10 claimed by petitioner in his 1934 income tax return. The Commissioner in disallowing the losses stated as follows in his deficiency notice: A loss of $2,390.10 claimed under schedule 11 is disallowed. Of this amount $320.00 represents a loss incurred January 18, 1935, and not applicable to the year 1934. The loss of $2,070.10957 resulting from your withdrawal as a shareholder in the Business Men's Building and Loan Association is disallowed as an ordinary loss. It is held that the loss is subject to the limitations of section 117 of the Revenue Act of 1934, which limitation has been claimed under schedule 8, in connection with other transactions. Petitioner by an appropriate assignment of error contests the action of the Commissioner in disallowing the $2,070.10 Business Men's Building & Loan Association loss as an ordinary loss and in holding that it was a capital loss subject to the limitations of section 117:d) of the Revenue Act of 1934. This presents the only issue which we have to decide. 889 FINDINGS OF FACT. The facts were stipulated and we adopt the agreed statement of facts as our findings of fact. We state such of the facts herein as we deem necessary to an understanding of our decision. The petitioner, Augustus Trask Ashton, is an individual residing at Philadelphia, Pennsylvania, who filed his Federal income tax return for the tax year involved with the collector of internal revenue at Philadelphia, Pennsylvania. In April 1920 petitioner became a member of the Business958 Men's Building & Loan Association, a Pennsylvania corporation, at which time book No. 2898, for 10 shares of the 52d series, was issued to him. In April of 1921 book No. 3255 for 6 shares of the 54th series was issued to petitioner, and in October 1923 book N0. 3796 for 20 shares of the 59th series was issued to him. Petitioner continued as a member of the association until 1934, when he voluntarily withdrew. During the term of his membership petitioner paid into the treasury of the association monthly a sum which up to the date of his withdrawal aggregated $5,172. Petitioner's shares were never pledged with the association as collateral for any loan. Building and Loan Code of 1933, and section 6 of article II of the Building and Loan Code of 1933, and section 6 of article ii of the bylaws of the association, petitioner gave written notice of his intention to withdraw voluntarily from the association. Due to depreciation in the value of the association's assets, it was difficult to determine accurately the exact withdrawal value of petitioner's shares, and following negotiations with the secretary of the association petitioner orally signified his willingness to accept959 60 percent of the amount paid in by him in full settlement of his claim as a withdrawing member. This offer was based upon advice from the secretary of the association that an appraisal of the assets would show them to have depreciated approximately 40 percent. Such an appraisal was made as of October 30, 1934, and the report of the accountants showed the capital to be impaired to the extent of 40 percent. This offer was accepted by the association at its meeting held on October 8, 1934, the minutes of which read in part as follows: Augustus T. Ashton has books in for withdrawal and stated that he was very much in need of funds. He stated he would accept 60% of the amount paid in in full settlement of his books if paid at once. After discussion by the Board, they felt that the Assets of the Association, if appraised at this time, would be impaired 40% and the offer, therefore, was accepted. Thereafter, the association delivered its check in the amount of $3,101.90 to petitioner in full settlement of his claim as a withdrawing member. 890 Following the report of the accountants referred to above, the association, at its meeting held on December 10, 1934, unanimously960 resolved to reduce its liability to shareholders in accordance with section 621 of the Pennsylvania Building and Loan Code of 1933. The minutes of that meeting read in part as follows: The report of the accountants shows that after giving effect to the appraisements, as modified above, the capital of the Association which is to bear the loss, will be impaired to the extent of forty :40%) per cent. After full discussion and careful consideration of the entire matter, it was the unanimous opinion of the Directors that the Losses of the Association, resulting from a depreciation of its assets, aggregate such an amount that the fair value of the assets of the Association is less than the total amount due creditors and shareholders; and it was therefore RESOLVED unanimously that the liability of the Association to its shareholders, including all shareholders whose shares have matured and/or who have heretofore given notice of withdrawal, drawal, but who still remain unpaid, shall be reduced by forty (40%) per cent of the amount paid in to the Association by said shareholders and that the officers of the Association be, and they are hereby, directed to do all things necessary to secure961 the approval of the said reduction of the Association's liability to its shareholders by the Department of Banking of the State of Pennsylvania; and thereafter to present on behalf of the Association a petition to the Court of Common Pleas of Philadelphia County, requesting a formal order reducing the Association's liability as aforesaid, in accordance with and as authorized by Sec. 621 of the Building and Loan Code of Pennsylvania. Pursuant to the resolution a petition was filed with the Court of Common Pleas No. 4 for Philadelphia County, as of December Term 1934, No. 4742, praying for a 40 percent reduction in the liability of the association to its shareholders, the prayer of which petition was granted by decree of the court entered March 26, 1935. In his Federal income tax return filed for the year 1934 petitioner subtracted the sum received in settlement of his claim as a withdrawing shareholder, $3,101.90, from the total amount of dues or installments paid by him to the association, $5,172, and claimed the resulting loss of $2,070.10 as an ordinary loss from a transaction entered into for profit. Petitioner entered into the transaction here involved for profit and was962 not compensated by insurance or otherwise for the loss so sustained therein. Petitioner was a shareholder of the Business Men's Building & Loan Association at the time he withdrew and was not a creditor of the association. Petitioner's loss resulting from his withdrawal was a capital loss and not an ordinary loss. OPINION. BLACK: Petitioner, in support of his contention that the loss which he suffered in 1934 by reason of his withdrawal as a shareholder of the Business Men's Building & Loan Association was an ordinary loss 891 and not a capital loss, cites Hale v. Helvering, 85 Fed.:2d) 819; ; . Those cases would undoubtedly sustain petitioner in his claim if his status when he withdrew from the Building & Loan Association had been that of a creditor. To the above cited cases might be added the recent Supreme Court decision in . In the latter case the Supreme Court held that redemption of bonds before maturity by the issuing corporation is not a sale or exchange of capital assets within the meaning963 of section 208:a):1) of the 1926 Act and section 101:c):1) of the 1928 Act. Therefore a bondholder's gain from surrender of bonds for retirement was not capital gain. If petitioner had been a bondholder or otherwise a creditor of the Building & Loan Association the above decision of the Supreme Court and the other named cases would be applicable. But petitioner was not a creditor of the association. He was a shareholder. In ; , the Supreme Court of Pennsylvania, among other things, said: association as that term in usually understood. are ; , and Steinon v. Great Oak Building & Loan Association :Sup. Ct. of Pa.), . Section 1074-5098 of Purdon's Pennsylvania Statutes, title 15, page 458, reads as printed in the margin. 1*964 When shares of stock which are capital assets within the applicable revenue act are redeemed, the resulting gain or loss is a capital gain or loss as the case may be. ; . The identical question which we have here to decide was before the United States District Court for the Eastern District of Pennsylvania in , and was decided for the Government. We think that case was decided correctly. Cf. . Under the authorities above cited, we affirm the Commissioner. Decision will be entered for the respondent.Footnotes1. B. Holders of matured shares, or holders of shares which have been voluntarily or involuntarily withdrawn, or holders of shares who have not assented to or have dissented from a merger or a consolidation, shall be entitled to notice of, and to vote at, any meeting of shareholders, until they shall have been paid in full the amount lawfully due them on account of their shares. The exercise of such right to vote at a meeting shall not constitute waiver of, or in any way affect, any rights granted by law to such shareholders by virtue of the maturing of their shares, or of their withdrawal from the association, either voluntarily or involuntarily, or of their failure to assent to, or their dissent from, a plan of merger or consolidation. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625919/	Charles J. Dinardo and Kathleen B. Dinardo, Petitioners, v. Commissioner of Internal Revenue, Respondent. Clarence B. P. Slaughter and Gertrude Slaughter, Petitioners, v. Commissioner of Internal Revenue, Respondent. Samuel J. Restifo and Valerie R. Restifo, Petitioners, v. Commissioner of Internal Revenue, RespondentDinardo v. CommissionerDocket Nos. 38111, 38112, 38113United States Tax Court22 T.C. 430; 1954 U.S. Tax Ct. LEXIS 192; May 28, 1954, Filed May 28, 1954, Filed 192 Decisions will be entered under Rule 50. In 1947, petitioners formed a partnership for the practice of medicine. They organized a nonprofit corporation which operated a private hospital, Collinwood Hospital. Admissions to the hospital were limited to patients of the petitioners. The petitioners' medical partnership had an accident and industrial injury practice; patients were referred to petitioners because they could provide hospital care at Collinwood Hospital. The medical partnership received fees from patients referred to the hospital for medical services rendered by petitioners as members of the partnership. There was a direct benefit to the partnership's earnings from the existence of the hospital. The partnership's offices were located in the hospital building. Although it was expected that the current expenses of the hospital would be paid out of its current receipts, expenses exceeded receipts. Therefore, in order to keep the hospital in operation and to avoid loss of medical fees, the partnership agreed to pay its operating deficits. The partnership paid the hospital's operating deficits in 1948 and 1949. Held, that the amounts of the payments constituted193 ordinary and necessary business expenses of the medical partnership under section 23 (a) (1) (A) of the Internal Revenue Code. Interstate Transit Lines v. Commissioner, 319 U.S. 590">319 U.S. 590, distinguished. Robert Gaylord, Inc., 41 B. T. A. 1119, and Scruggs-Vandervoort-Barney, Inc., 779">7 T. C. 779, followed. Norman B. Miller, Esq., for the petitioners.Michael J. Clare, Esq., for the respondent. Harron, Judge. HARRON 430 The Commissioner determined deficiencies in income tax for each of the years 1948 and 1949, as follows: 431 DocketNo.Petitioners1948194938111Charles J. and Kathleen B. Dinardo$ 1,677.46$ 2,101.6238112Clarence B. P. and Gertrude Slaughter2,071.442,121.9838113Samuel J. and Valerie R. Restifo1,679.021,916.04The petitioners, Charles J. Dinardo, Clarence B. P. Slaughter, and Samuel J. Restifo, are partners. The Commissioner increased the distributive share of the partnership income of each partner for each taxable year as the result of disallowing deductions claimed by the partnership. The partners concede that certain194 adjustments made by the Commissioner are correct.The only question to be decided is whether the respondent correctly disallowed, in 1948 and 1949, a deduction claimed by the partnership representing amounts paid to reimburse a nonprofit hospital corporation for operating losses incurred by the corporation during the years in question.FINDINGS OF FACT.The facts which have been stipulated are found as facts; the stipulation and the attached exhibits are incorporated herein by this reference.The petitioners are residents of either Shaker Heights, or South Euclid, Ohio. Joint returns were filed with the collector for the eighteenth district of Ohio. Since the question to be decided relates only to Charles J. Dinardo, Clarence B. P. Slaughter, and Samuel J. Restifo, they are referred to hereinafter as the petitioners. The wives of the petitioners are involved only because joint returns were filed.Each of the petitioners is a physician duly licensed in the State of Ohio. Restifo and Dinardo are members of the Cleveland Academy of Medicine. Restifo is on the visiting staff of Huron Road Hospital and enjoys courtesy privileges at Doctors Hospital, both in Cleveland, Ohio. Slaughter195 became a member of the Cleveland Academy of Medicine and of the staff of Doctors Hospital in about June 1950.On July 28, 1947, petitioners formed a partnership for the general practice of medicine at 928 East 152d Street, Cleveland, Ohio.The partnership agreement was made effective as of June 1, 1947, and provided that each of the petitioners was to have an equal interest in the partnership.This partnership was formed as a result of an agreement (hereinafter referred to as the sales agreement) entered into on May 19, 1947, between Emergency Clinic, Inc., first party, Olive S. Hanson, second party, Dr. and Mrs. J. B. Hanson, third party, Dr. J. B. Hanson, fourth party, and petitioners, as fifth parties. Emergency Clinic, Inc., was a nonprofit hospital corporation which Dr. Hanson had operated 432 since 1927. In addition to forming the partnership referred to above, as the successor to a former partnership of Dr. Hanson and Dr. Slaughter, petitioners agreed to purchase the goodwill and certain assets of parties one through four, to lease the premises at 922-928 East 152d Street, Cleveland, Ohio, from the Hansons, to organize a new nonprofit hospital corporation as a successor196 to Dr. Hanson's Emergency Clinic, Inc., and to name Dr. Hanson as a trustee of the new hospital.The Hansons and Emergency Clinic, Inc., also agreed to assign to petitioners an otherwise unidentified contract existing between them and the New York Central Railroad.On May 28, 1947, petitioners organized a nonprofit Ohio corporation for the purpose of conducting a hospital, as they were required to do by the sales agreement. This corporation changed its name to Collinwood Hospital on May 19, 1949, and will be hereinafter sometimes referred to as Collinwood Hospital or Collinwood.The trustees of Collinwood Hospital were Dr. J. B. Hanson, Norman Miller, Norman Cadkin, and Lester Rosenthal. Miller was appointed by Restifo; Cadkin was appointed by Dinardo; and Rosenthal was appointed by Slaughter. These trustees were to look after the respective interests of the petitioners who appointed them.On June 1, 1947, the lease contemplated by the sales agreement was executed by the Hansons, as lessors, and petitioners, as lessees, for the premises at 922-928 East 152d Street. The lease was for a term of 5 years, beginning on June 1, 1947, at a total rental of $ 71,100, payable in monthly197 installments of $ 1,185.On the same day, June 1, 1947, petitioners purchased certain items of personal property from the Hansons, "numerous items of capital property" from Emergency Clinic, Inc., and certain items of chattel property from Olive S. Hanson. On June 2, 1947, petitioners gave a chattel mortgage to the Hansons on the property purchased from Emergency Clinic, Inc., and from Olive Hanson, to secure the unpaid balance of the purchase price. On August 20, 1947, Emergency Clinic, Inc., sold to petitioners all the drugs and medical supplies in and about the premises at 922-928 East 152d Street, Cleveland, Ohio. The petitioners did not make any contributions of assets to the hospital and the hospital acquired no assets except drugs and thermometers.As was contemplated by the sales agreement, Collinwood Hospital became the successor to Dr. Hanson's hospital and petitioners' partnership became the successor to the partnership of Dr. Hanson and Dr. Slaughter from about June 1, 1947, and both organizations occupied the premises leased from the Hansons.During the years in question, there existed in Cleveland hospitals a shortage of hospital beds for emergency cases. In addition, 198 a 433 physician's right to treat a hospitalized patient was conditioned on whether the doctor enjoyed staff privileges at the particular hospital in which his patient was hospitalized.The operation of Collinwood Hospital was controlled by petitioners, and they accordingly had unrestricted access to its facilities. Cases were admitted only as patients of one of the three petitioners, and were treated only by the petitioners or doctors hired by the partnership, except in instances when consultants were called in.The partnership had a large accident and industrial injury practice. A number of companies arranged for the partnership to render medical care for injuries sustained by employees, on the assurance that adequate hospital facilities would be available for any employees requiring hospitalization. In addition, the police authorities brought accident victims to the partnership and to Collinwood. There was no other hospital in the vicinity, and both the partnership and Collinwood remained open 24 hours every day. All fees for medical care rendered to hospitalized patients were paid directly to the partnership. Charges for bed and board were paid to the hospital. Nursing199 fees were included in the hospital's bed charges. The hospital did not operate X-ray or anesthesia facilities, but it did have a pharmacy; however, no profits accrued from the operation of the pharmacy.The existence of Collinwood Hospital and petitioners' unrestricted access to its facilities enhanced the partnership's income from medical fees. In the first place, the partnership received all fees for medical services rendered to hospitalized patients. In addition, patients were attracted to the partnership for medical treatment although they might not have required hospitalization at the time. Immediately after Collinwood closed in 1950, three or four of the larger employers ceased sending employees to the partnership and police authorities ordered that no cases requiring hospital care were to be brought to petitioners for treatment.When Collinwood was organized, it was contemplated that its current expenses would be paid from operating revenue. However, the hospital's income never did approach expenses, primarily due to the failure of patients to pay their bills.On December 9, 1947, Collinwood Hospital (then called Emergency Clinic, Inc., after the predecessor hospital) 200 and the partnership entered into the following agreement:AGREEMENTThis agreement made and concluded at Cleveland, Ohio, this 9th day of December, 1947 by and between Emergency Clinic, Inc. a corporation duly organized under the Laws of Ohio, Party of the First Part, and Dr. Charles J. Dinardo, Dr. Samuel J. Restifo and Dr. Clarence B.-P. Slaughter, partners, trading as Emergency Medical Clinic, Party of the Second Part.434 WITNESSETHWHEREAS, the Emergency Clinic, Inc., a hospital has been operating at a financial loss and,WHEREAS, it is to the benefit and advantage of the Party of the second Part to have a hospital located in the same building as their medical partnershipNOW, THEREFORE, said Party of the First Part in consideration of the promises and agreements of said Party of the Second Part herein set forth, hereby promises and agrees to maintain and keep their hospital at 928 East 152nd Street, Cleveland, Ohio and to always keep and maintain not less than two beds available at all times for patients of said Party of the Second Part.IN CONSIDERATION HEREOF, Said Party of the Second Part hereby promises and agrees to pay all operating deficiencies and obligations of201 said party of the First Part in order that the same can continue in operationIt is mutually agreed by and between the parties hereto upon the considerations aforesaid that this agreement shall be retroactive to June 1, 1947 and that all indebtedness of said Party of the First Part paid by said Party of the Second Part for said hospital whether represented by negotiable instruments or otherwise shall be null and void.IN WITNESS WHEREOF, the authorized representatives of the parties have hereunto set their hands to duplicates hereof the day and year first above written.EMERGENCY CLINIC, INC.by Norman B. MillerNorman B. Miller, SecretaryEMERGENCY MEDICAL CLINICby C. J. DinardoCharles J. Dinardo, Partner.This agreement was not executed in conformity with the terms of Article XII of the partnership agreement, which reads as follows:ARTICLE XII.(a) No partner shall accept or undertake any personal business after being requested in writing by the other two partners not to do so.(b) No partner shall at any time sign the firm name or his own name or pledge the firm's credit or his own personal credit in any manner as surety or guarantor on any paper, bill, bond, note, draft202 or other obligation, whatever.(c) No partner shall employ any person for the partnership on a permanent basis without the consent of the other partners.(d) No partner shall release or cancel any debts or claims due the partnership except on full payment without the consent of the other partners.(e) No partner shall become a candidate for public office without the consent of the partners.The partners approved the payment of Collinwood's operating deficits in order to enable the hospital to continue operating and thereby to avoid a loss to the partnership of patients and income from medical fees.In 1948 and 1949, the partnership reimbursed Collinwood for the latter's operating deficits in the amounts of $ 15,913.73 and $ 21,007.84, respectively. The partnership took deductions for these payments and 435 reported ordinary net income of $ 67,488.78 for 1948 and $ 52,789.81 for 1949.OPINION.The principal question to be decided is whether payments made by petitioners' partnership in 1948 and 1949 to Collinwood Hospital to make up operating deficits sustained by Collinwood, were properly deductible by the partnership under section 23 (a) (1) (A) of the Internal Revenue Code203 as ordinary and necessary business expenses.The respondent disallowed the deductions taken in the partnership returns for these payments and increased the distributive share of partnership income on the individual returns of each petitioner for 1948 and 1949. Respondent's position is that the payments were not incurred in the partnership's business, that is, the practice of medicine, but rather were connected with the business of the hospital, a separate entity, and in any event, that the payments do not constitute ordinary and necessary expenses.We have found that the payments in question were made to keep Collinwood Hospital in operation and thereby to protect the partnership's practice and income from a loss which the partners believed would result if the hospital closed. The petitioners controlled the operation of the hospital and reserved its facilities exclusively for patients admitted in their names. All fees for medical services rendered to hospitalized patients constituted partnership income, and the partnership also earned medical fees from patients who, although not requiring hospitalization, came or were sent to the partnership for medical care because the latter 204 enjoyed unrestricted access to hospital facilities. That the existence of Collinwood did constitute a source of partnership income is illustrated by the refusal of several companies to send their industrial injury cases to the partnership after Collinwood closed in 1950, and a similar reaction on the part of the police with respect to severely injured accident victims.Respondent's first contention is that the deductions are not allowable because the payments were incurred in carrying on Collinwood's business, and not that of the partnership, citing Interstate Transit Lines v. Commissioner, 319 U.S. 590">319 U.S. 590, rehearing denied 320 U.S. 809">320 U.S. 809, affirming 44 B. T. A. 957, affd. 130 F.2d 136">130 F. 2d 136.We think that the facts distinguish this case from Interstate Transit Lines v. Commissioner, supra. The partnership did not pay Collinwood Hospital's operating deficits to enable Collinwood to make profits from the operation of a hospital, thereby to augment the partnership income with hospital income. The payments were made to keep Collinwood in operation205 in order that the medical partnership 436 itself could continue to earn medical fees from patients who would be hospitalized at Collinwood, or who would come, or would be sent to the medical partnership because of the latter's access to Collinwood's facilities.This case also is distinguishable from Deputy v. DuPont, 308 U.S. 488">308 U.S. 488, and Eskimo Pie Corporation, 4 T. C. 669, affirmed per curiam 153 F. 2d 301, which involve disallowance of a stockholder's deductions for expenditures made on behalf of his corporation, where the corporation's business operations are unrelated to any business the stockholder may carry on other than as a source of investment income.Respondent next maintains that the partnership's payment of Collinwood's operating deficits was not an ordinary and necessary business expense. Respondent relies on Welch v. Helvering, 290 U.S. 111">290 U.S. 111. See also Carl Reimers Co. v. Commissioner, 211 F. 2d 66, affirming 19 T.C. 1235">19 T. C. 1235.We disagree with respondent's contentions. The facts in206 this case more closely resemble the situations involved in decisions which allow, as ordinary and necessary business expenses, payments made by a taxpayer to protect or preserve its business income from loss or diminution. See, for example, Robert Gaylord, Inc., 41 B. T. A. 1119; Hennepin Holding Co., 23 B. T. A. 119; First National Bank of Skowhegan, 35 B. T. A. 876; Edward J. Miller, 37 B. T. A. 830; Scruggs-Vandervoort-Barney, Inc., 779">7 T. C. 779; Dunn & McCarthy v. Commissioner, 139 F. 2d 242, reversing a Memorandum Opinion of this Court entered March 19, 1943; Catholic News Publishing Co., 10 T. C. 73; L. Heller & Son, Inc., 12 T.C. 1109">12 T. C. 1109. See also United States v. E. L. Bruce Co., 180 F. 2d 846; B. Manischewitz, 10 T.C. 1139">10 T. C. 1139.In Scruggs-Vandervoort-Barney, Inc., supra, the taxpayer acquired the assets and liabilities of a retail department store named Scruggs-Vandervoort-Barney207 Dry Goods Company in a nontaxable statutory reorganization, and operated the business without changes in personnel or physical properties. The predecessor had owned 97.25 per cent of the stock of a bank, the Scruggs, Vandervoort & Barney Bank. The bank was located in the predecessor's store, and most, if not all, of the bank's depositors were its customers. The bank failed in 1933, and the depositors eventually were paid liquidating dividends aggregating 80.5 per cent of their deposits. The taxpayer undertook to reimburse the depositors in the amount of their 19.5 per cent loss in order to avoid unfavorable customer reaction which would result in a loss of patronage and diminution of business to the department store. To this end the taxpayer forwarded to each depositor, as a "voluntary action," a "voluntary gift offer" of merchandise purchase certificates equal to the depositor's unsatisfied claims against the bank. This 437 Court held that the cost of the goods purchased by the depositors with the certificates was an ordinary and necessary business expense.In Dunn & McCarthy, supra, the taxpayer's president had borrowed a substantial amount208 of money from the firm's top ranking salesmen and had committed suicide, leaving a hopelessly insolvent estate. The corporation paid the loans in order to prevent impairing the salesmen's loyalty toward the company and to avoid the adverse opinion of customers who had learned of the situation. The deduction taken by the corporation for the payment of the former president's indebtedness was allowed as an ordinary and necessary business expense. Similarly, in Catholic News Publishing Co., supra, the taxpayer's business and reputation were threatened by a controversy between the taxpayer's president and a trade association, of which the taxpayer was a member. The dispute grew out of a claim asserted against taxpayer's president, personally, for an alleged mishandling of funds during his tenure as the association's treasurer. The taxpayer's board of directors decided that the claim against its president should be paid to avoid further injury to the taxpayer's business and reputation, and the amount so expended by the corporation to settle the controversy was held by this Court to be an ordinary and necessary business expense. In Hennepin Holding Co., supra,209 the taxpayers leased a large office building for 20 years and much of the surrounding area for 99 years, hoping to create a new retail district in the city of Minneapolis. When the building lease had only 6 years more to run, it became apparent that the business of the taxpayer's principal sublessee, a retail clothing house, was in jeopardy due to a continuing decrease in business. A new tenant could have been secured for the remaining few years only with difficulty and probably only after extensive repairs and remodeling, the cost of which could not be recovered before the termination of the principal lease. The sublessee also was indebted to the taxpayer. The taxpayer spent substantial sums in advertising the sublessee's business in an effort to rehabilitate the latter's sales. This expenditure was undertaken to avert the injury to the taxpayer's rental income which would have resulted from the sublessee's vacation of the premises and from the adverse affect of the sublessee's failure on the taxpayer's other tenants in the vicinity. The sums so spent by the taxpayer were held to be properly deductible as business expense.These decisions, and the other cases previously cited, 210 allow, as ordinary and necessary business expenses, expenditures made by a taxpayer seemingly on another's behalf, to prevent injury to its own business income. We think the expenditures made by petitioners' partnership to preserve the source of medical fees provided by Collinwood's existence should be accorded similar treatment.438 The payments were not capital advances made to finance a new enterprise, such as were involved in Kenneth Carroad v. Commissioner, 172 F. 2d 381, affirming a Memorandum Opinion of this Court. Respondent also relies on A. Giurlani & Bro. v. Commissioner, 119 F. 2d 852, affirming 41 B. T. A. 403. The taxpayer's income was derived principally from the sale of Star Brand olive oil, which it purchased from an Italian corporation, the principal stockholders of which were two brothers of the taxpayer's two principal stockholders. The taxpayer compromised and paid certain claims against the Italian corporation, which had been placed in bankruptcy and whose assets were to be auctioned. It claimed that the payment was made to protect its source of supply of211 Star Brand olive oil, which allegedly had a distinctive and unusual blend. The payment was held not to constitute an ordinary and necessary business expense.Concededly there is a similarity between the two cases. However, we observe several factors adverted to by the Court of Appeals in the Giurlani case which we consider of importance and which are not present in this case. Among the distinctions noted in the Giurlani case, supra, p. 854, was the taxpayer's failure to attempt to establish that it would have beenimpossible to do business with the successor of the Italian corporation had the latter's creditors forced its stockholders out of control; or that it would have been impossible for it to specify to other producers of olive oil in the Lucca district of Italy, a blend which would approximate that which is known as "Star Brand."In the instant case, we have found that the medical practice of the partnership would have been adversely affected if Collinwood closed. Respondent claims that the partners could obtain privileges at other Cleveland hospitals, but the evidence establishes that even though petitioners did enjoy such privileges, the closing of Collinwood212 was attended by an immediate loss of part of the partnership's industrial accident practice, and also the loss of income it had derived from treating cases of severe injury brought in by the police. On this aspect, the present case is more similar to Robert Gaylord, Inc., supra, which this Court decided shortly after the Giurlani case. In the Gaylord case, the taxpayer, whose principal office was in St. Louis, manufactured and sold shipping containers. It executed a guaranty in favor of the First National Bank of St. Louis against any loss the latter might sustain in taking over the assets and liabilities of the Franklin-American Trust Company, also of St. Louis. The taxpayer was not a depositor or stockholder of the Franklin-American Trust Company. It executed the guaranty to prevent the failure of the latter bank and a potential financial crisis in St. Louis, which according to the evidence, would have jeopardized the taxpayer's accounts 439 receivable, paralyzed its current business, particularly the Christmas trade then at its height, and cut down its prospective orders. The amount the taxpayer was required to pay under its guaranty213 was held to be deductible as a business expense.Respondent also contends that the agreement of December 9, 1947, in which the partnership undertook to pay the hospital's deficits, should not be regarded as creating a legal obligation on the partnership's part in favor of the hospital, since the transaction was between closely related parties and the terms were such that the partnership would not have undertaken the agreement if dealing with a hospital at arm's length. Further, respondent maintains that the agreement was not binding on the partnership, inasmuch as it was signed by one of the three partners, contrary to an express prohibition contained in the partnership articles. We agree with respondent in part. The record does not support petitioner's explanation that the agreement merely formalized an obligation, implicit in the sales agreement of May 19, 1947, whereby the partnership was required to keep the hospital operating. We also agree that the hospital's promise to keep two beds available for the partnership at all times was without substance and should not be regarded as supporting an obligation to pay the deficits. The hospital's purported promise gave the partnership214 nothing it did not in fact enjoy previously, inasmuch as the partners exercised control of the hospital's operations and the facilities had always been maintained for their exclusive use.Similarly, it is apparent that the agreement was not executed as required by the partnership articles, inasmuch as it was executed by only one partner. On the other hand, it is equally apparent from the evidence that all three partners did approve the payment of Collinwood's deficits both in 1948 and in 1949. We regard these payments as having been made voluntarily by the partnership without consideration from the hospital. The fact that the partnership was under no obligation to make up Collinwood's operating deficits is not decisive, in view of the benefits to the partnership medical practice which the hospital's continued existence afforded. L. Heller & Son, Inc., supra;Ray Crowder, 19 T.C. 329">19 T. C. 329. See also Dunn & McCarthy v. Commissioner, supra; Scruggs-Vandevoort-Barney, Inc., supra.It is held that the partnership is entitled to deduct the payments to Collinwood of $ 15,913.73 in 1948 and $ 21,007.84215 in 1949 as ordinary and necessary business expenses, and that the respondent erred in disallowing these deductions and in increasing the petitioners' shares of distributive partnership income in 1948 and 1949. The petitioners have conceded the correctness of several other adjustments made by respondent. Accordingly,Decisions will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625921/	ITEN BISCUIT COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Iten Biscuit Co. v. CommissionerDocket Nos. 43667, 45164.United States Board of Tax Appeals25 B.T.A. 870; 1932 BTA LEXIS 1458; March 15, 1932, Promulgated 1458 1. The petitioner sold the greater part of its products in can containers, so-called "returnable packages," and included a separate and uniform charge for such containers in the invoices to its customers. Such sales were made with the understanding that containers would be repurchased upon the return of the empty cans. Held, upon the evidence, that there was an actual transfer of such ownership and that the containers, not being owned by the petitioner or used in its trade or business, are not assets on which taxpayer is entitled to deductions for depreciation. 2. Respondent's claim for an increased deficiency for 1922, and the alternative claim for an increased deficiency for 1926, denied; the former, because of failure to prove the affirmative allegations of the claim, the latter, because the item of income claimed to have been received in that year is determined to have been income for 1922. Ferdinand Tannebaum, Esq., for the petitioner. W. Frank Gibbs, Esq., for the respondent. LANSDON 870 The respondent determined deficiencies in income taxes for the years and in amounts as follows: Docket No.YearDeficiency1922$32,222.5345164192318,936.6719249,440.694366719257,975.15192628.531459 871 While the petitions set forth several assignments of error, they all relate to the single question of whether the petitioner is entitled to deductions for depreciation of can containers, so-called "returnable cans," the amounts of the several deductions, if allowable, not being in controversy. The respondent claims an increased deficiency for 1922, alleging that he allowed an excessive deduction for that year for a loss sustained by the petitioner in the liquidation of a subsidiary corporation, or, alternatively, an increased deficiency for 1926, alleging that he failed to include in income for the latter year the amount of income taxes of the same subsidiary corporation refunded to the petitioner in such year. The proceedings were consolidated for hearing and decision. FINDINGS OF FACT. 1. The petitioner, a Nebraska corporation, with its principal office at Omaha, is, and was during the taxable years in controversy, engaged in the business of manufacturing and selling biscuits, cakes, cookies and crackers. 2. With the inception of the business in 1908, the petitioner began the practice of selling and shipping its products in can containers, so-called "returnable1460 cans." In the years under review herein approximately 95 per cent of petitioner's products were sold and shipped in this fashion. 3. The returnable cans are of metal construction, square or rectangular in shape, with two horizontal oval openings in the front. In the top opening there appear, in bold white letters on a green background, the words "ITEN BISCUIT CO. - QUALITY PRODUCTS - SNOW WHITE BAKERIES." The bottom opening contains a plain glass, through which part of the contents of the can may be seen. On the bottom of the can the name "ITEN" is stamped, in large letters, within an oval. There are no markings on these cans designating them the property of the petitioner. They differ from the cans used by the petitioner's competitiors in that the openings in the front are of different shape. 4. These returnable cans used by petitioner afford several advantages over other containers of different, but less substantial, construction. The contents keep in better condition and are more exposed for display; they are a better facility for shipment of petitioner's products, which they help to advertise and, when returned empty to the petitioner and the retail grocer, by the1461 retailer and the consumer, respectively, for credit for or refund of the charges thereon, of which more will be stated later, they serve to put the former on notice that the latter are out of the particular products which had been contained therein. 872 5. One of the mediums of advertising used by the petitioner during the years in controversy is a printed circular, distributed to the trade, entitled "Ten Good Reasons for Returnable Cans of Fairy Crackers." This circular contains, in heavy type letters, the following statement: Returnable cans are not sold outright, but in order to simplify accounting and to safeguard against loss of cans, we require a deposit of 50 cents each for them regardless of size. Therefore, always get a similar deposit from your customers when selling in can lots. * * When empty, the cans are returned to us in the carrier by freight at our expense. We credit your account for full amount or give you a check in full - whichever you prefer. 6. The petitioner furnished its salesmen with two booklets, entitled "Instructions to Salesmen" and "Suggestions to Salesmen." These booklets contain, under the heading "Policy," the following instructions: 1462 We charge 50c each, net, for cans (blind fronts for crackers and three sizes of full and half size brass fronts for sweet goods), 10c each, net, for two-can crates, and $2.00 each, net, for 12-can carriers, all of which must be paid for the same as other merchandise. Deductions from invoices for cans and crates are never allowed. Cans and crates are returnable to us at invoice prices. We pay the freight charges and credit the customer's account with the full value immediately upon receipt of bill of lading. 7. In taking orders for the petitioner's products, the salesman informs the customer that a charge of 50 cents will be made for each returnable can; that the customer is not buying the can, but merely making a deposit thereon, which may be returned to the petitioner, at the latter's expense, for credit for, or refund of, such charge. 8. In billing merchandise to customers, in can lots, it has been the petitioner's consistent practice to include, in the invoice, a separate and uniform charge for cans of 50 cents per can. The following is a sample of all invoices containing such a charge, and constitutes the entire written contents thereof: ITEN'S QUALITY PRODUCT 1463 ITEN BISCUIT COMPANY Snow White Bakeries Reg. U.S. Pat. Off. Omaha Agency1224 Capitol Avenue Omaha, Nebraska. Date Mr. Jack West, Braddyville, Iowa. Terms 30 days net One per cent for cash in ten days QUANTITYPRICEAMOUNT2 Cans FAIRY salt 1211 1/21 382 Can 1 Crt1 102 48873 9. There are no signed written agreements between the petitioner and its customers purporting to set forth their understandings as to the rights and duties of each in respect of returnable cans and the charges made therefor. The charges to customers for such cans conform with a trade custom of several years, adhered to by twelve or fourteen competitors of the petitioner, and they are made with the understanding that credit therefor, or refund thereof, will be made, if and when the customers return the cans. 10. During the years in controversy the petitioner encountered considerable resistence from the trade to the making of these charges for returnable cans, due mainly to propaganda spread by its competitors. The latter were incessantly pointing out to the trade, including the petitioner's customers, the disadvantage of having money "tied1464 up" in cans while on the store floor. To meet the situation, the salesmen were directed to, and did, advise the petitioner's customers that they were not purchasing the cans; that they were merely making deposits thereon; and that their deposits were as good as bank deposits, because the cans were returnable at full value. The petitioner did not pay interest on customers' deposits. 11. The petitioner always accepted a returned can, regardless of its condition, whether usable or not, and gave full credit for the charge thereon. It did not accept cans returned by persons not engaged in the retail grocery business, who were instructed to take the cans to a retail grocer. If cans were returned by a retail grocer who had no account, past or present, with the petitioner, he was allowed a credit or was paid in cash, at his option, at the rate of 50 cents per can. These practices were adopted as a matter of good business policy, from a sales standpoint, as they frequently enabled salesmen to establish new contacts and open new accounts. 12. The petitioner used every effort to secure the prompt return of cans, in order to avoid the necessity of acquiring new ones and the resulting1465 increased investment beyond the actual necessities of the business. Salesmen were instructed and constantly reminded by circular letters to check up on empty cans in customers' stores and endeavor to have the customers return them promptly. Frequently, in country districts, salesmen would obtain the services of draymen to collect and haul the cans to the freight stations. Trucks were sent out from petitioner's branch plants to pick up empty cans. Drivers of petitioner's trucks, when making deliveries, always looked over the store premises in search of empties and, after giving receipt therefor, returned them to the plants. The petitioner bore all expenses incident to the return of empty cans to its plants. 13. If a customer was slow in paying his account, or information was obtained indicating his failure or probable failure in business, the petitioner would make special effort to secure the return of any 874 cans in his possession. If a city account was involved, the petitioner sent a truck for the cans. No attempt was ever made by the petitioner to secure the return of cans through legal proceedings. 14. There have been infrequent instances of customers of1466 petitioner using these returnable cans for purposes other than as containers for petitioner's products. Whenever an instance of this sort was observed a salesman took the matter up with the customer, but never pressed it to the extent of risking loss of an account. As a rule, petitioner's customers returned the empty cans for credit. 15. The petitioner encouraged its customers to press the sale of its products in full-can lots. It also encouraged them to advise consumers of its products that they paid only for those products when buying them in can lots, that they were merely leaving a deposit on, and not buying, returnable cans. This advice was followed, in some instances, by the use of small printed stickers which the petitioner's customers would place inside of the can. Substantially the same advice was contained in advertising literature sent to customers, for distribution to consumers, during the years in controversy. 16. The petitioner did not carry any insurance on returnable cans in the possession of its customers. 17. The cost to the petitioner of the returnable cans was approximately 50 cents per can. 18. The petitioner has always regarded the returnable1467 cans, whether in its possession or in the possession of its cutomers, as its property; and it never considered that it had sold returnable cans to its customers. 19. On its books of account the petitioner accounted for returnable cans in the following manner: Two accounts were maintained in the general ledger, namely, "Returnable Package Account" (an asset account), and "Can Liability Account" (a liability account). The costs of new cans were charged to the returnable package account. When merchandise was shipped to a customer in can lots the customer's account was charged, and the returnable package account credited, with an amount equal to 50 cents per can; and when the customer returned the empty cans, the entry was reversed. At the end of every quarter an inventory was taken of the cans on hand, the cans being valued at 50 cents each. If, at this time, the debit balance in the returnable package account was greater than the inventory value of the cans on hand, the excess was credited to that account and charged to can liability account; and if the debit balance in the returnable package account was less than the inventory value of the cans on hand, the difference was charged1468 to that account and credited to can liability account. No entries were ever made transferring any portion of the balances in the can liability account to 875 profit and loss account. The credit balances in the can liability account, at January 1 of each of the years 1918 to 1931, inclusive, were as follows: Jan. 1Credit balances1918$192,674.941919180,420.321920250,464.891921287,933.351922354,856.991923$357,150.961924426,036.581925433,363.231926452,356.281927382,287.851928$141,382.69192992,748.21193066,453.36193160,383.2620. In computing taxable net income for each of the years in controversy the respondent has not allowed any deduction for depreciation of returnable cans. 21. At the hearing the parties filed a stipulation setting forth certain facts which they agreed the Board may find. Some of the stipulated facts we have already included in our findings, in the interests of a clear presentation; the remainder are as follows: IV. If the Board concluded from the evidence that there was no sale on so-called Returnable Packages, then it is agreed that the Petitioner is entitled to depreciation1469 on said packages and that the consolidated net income for the year 1922, shown on page 4 of the deficiency letter (Docket #45164), to- wit, $812,217.18, should be reduced by $93,116.91, and that the net income for the year 1923 as shown on page 5 of said letter, to- wit, $960,990.44, should be decreased by $115,907.39. V. If the Board finds from the evidence that there was a sale of these so-called Returnable Packages, then the net income as shown in the deficiency notice aforesaid is correct, so far as depreciation allowances are concerned, because, it being a sale, the Petitioner is entitled to no depreciation. However, it is agreed that for the year 1922, if the Board finds there was a sale of these Returnable Packages, then the Petitioner is entitled to deduct a loss of $22,454.82, which amount represents the net debit to the Can Liability account for that year, which loss the Respondent has not allowed in his deficiency notice, and for the year 1923, the Petitioner is entitled to deduct a loss of $43,114.28, representing the net debit to the Can Liability account for that year, which loss the Respondent has not allowed in his deficiency notice for that year. VI. 1470 It is also agreed that in any event, whether there was a sale or not of Returnable Packages, the Respondent erred in his determination of deficiencies in adding to income for the years 1922 and 1923 the item shown on page 1 of the schedule attached to the deficiency notice and styled "Adjustment Can Liability Account $42,293.97," and on page 5 of said deficiency notice the item styled "Increase in Can Liability $28,885.72." 876 VII. If the Board concludes from the evidence that there was no sale of so-called Returnable Packages, then it is agreed that the Petitioner is entitled to depreciation on said packages and that the net income for the year 1924, as shown on page 4 of the deficiency letter (Docket #43667), to- wit, $909,324.44 should be reduced by $113,572.92; that the net income for the year 1925, as shown on page 4 of said letter, to- wit, $938,330.00 should be reduced by $92,204.02, and for the year 1926 the net income as shown on page 6 of said deficiency letter, to- wit, $693,019.60 should be reduced by $64,114.45. VIII. If the Board finds from the evidence that there was a sale of these so-called Returnable Packages, then the net incomes as shown in1471 the deficiency notices, as aforesaid, are correct, because it being a sale the petitioner is entitled to no depreciation in those years, and the Respondent in his determination of net income has allowed the net debits shown in the Can Liability account and accordingly, the deficiencies as proposed for the years 1924, 1925, and 1926 are correct. IX. However, if the Board finds from the evidence that there was no sale of Returnable Packages in the years 1924, 1925 and 1926, it is agreed that the Respondent has erred in his computation of net income for said years in that when he disallowed depreciation he did allow the net debits shown in the Can Liability account, in the following amounts: 1924$64,673.45192553,005.98192670,069.40And if the Board concludes that there was no sale, the amounts shown about [above] as depreciation sustained on Returnable Packages should be allowed and there should be added the amounts allowed in each of the years as the net debits to the Can Liability account. X. On January 1, 1920, the Iten Biscuit Co., acquired the entire capital stock of the Shelby Biscuit Co., of Memphis, Tenn., by exchanging 2,750 shares of1472 its capital stock, of a par value of $100 per share, for the entire capital stock of the Shelby Biscuit Co. The Iten Biscuit Co., then operated the Shelby Biscuit Co., as a subsidiary until April 30, 1922, at which time all the usable assets of the Shelby Biscuit Co., were brought on to the books of the Iten Biscuit Co., and the Shelby Biscuit Co., was dissolved by the Iten Biscuit Co., some time later during the year 1922. In 1922 when the assets of the Shelby Biscuit Co. were taken over by the Iten Biscuit Co., and at the time of dissolution of the Shelby Biscuit Co., the Iten Biscuit Co., assumed all the liabilities of the Shelby Biscuit Co., one of which was a payment of additional Federal income taxes due the Federal government by the Shelby Biscuit Co. In filing its consolidated income tax return for the year 1922, the Iten Biscuit Co. claimed a loss on account of said dissolution of $20,713.93, which 877 loss was allowed by the Respondent in his determination of deficiency for said year 1922. In the year 1926, based upon certain claims for refund filed by the Iten Biscuit Co., on behalf of the Shelby Biscuit Co., the Respondent refunded during said year to1473 the Iten Biscuit Co., a total of $7,657.73, on income taxes paid by the Shelby Biscuit Co. for prior years, which amount has not been returned nor has it been included by the respondent as taxable income in either the years 1922 or 1926. OPINION. LANSDON: The first and most important question for consideration is whether the petitioner is entitled to a deduction, in computing taxable net income of each of the years in controversy, for depreciation of returnable cans in which its products are sold and shipped to its customers. If so, the amounts of such deductions have been agreed upon and stipulated by the parties. The pertinent provisions of the Revenue Acts of 1921, 1924 and 1926 are as follows: SEC. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: * * (7) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. The depreciation allowance is limited, by the express provisions of the statutes, to property used in the trade or business. 1474 "It represents the reduction, during the year, of the capital assets through wear and tear of the plant used." . Merchandise held for sale, and, therefore, constituting a part of the taxpayer's stock in trade, is not property used in the business and a taxpayer is not entitled to a deduction for depreciation, specifically as such, in respect thereof. ; and . Obviously, a taxpayer is not entitled to a deduction for depreciation in respect of property disposed of through sale, and in which it has no further capital investment. The petitioner contends that, whether in or out of its physical possession, the returnable cans in which it sold and shipped its products to customers are its property, are used in the business, and that it is entitled to the depreciation deductions provided by the statutes, in respect thereof. The respondent says that the returnable cans are a part of the petitioner's stock in trade; that the petitioner actually sells the cans as well as their contents, obligating itself only to repurchase the cans, 1475 if and when they are returned by the customers; and, therefore, the petitioner is not entitled to the depreciation deductions contended for. 878 A sale is the "transfer of the property in a thing for a price in money." 35 Cyc. 25; Mansinger v. Steiner-Medinger Co., 4 Nebr.(unoff.) 392; . It involves "an agreed price, a vendor, a vendee, an agreement of the former to sell for the agreed price and of the latter to buy for and to pay the agreed price, are essential elements in a contract of sale." . The transactions here involved were either bailments or sales, the distinction between which is stated in , as follows: The recognized distinction between bailment and sale is that when the identical article is to be returned in the same or in some altered form, the contract is one of bailment and the title to the property is not changed. On the other hand, where there is no obligation to return the specific article, and the receiver is at liberty to return another thing of value, he becomes a debtor to make the return and the title1476 to the property is changed; the transaction is a sale. In all cases involving the distinction between bailment and sale the courts have endeavored to determine and give effect to the intention of the parties as expressed in their agreements. In our opinion the facts herein fail to support the petitioner's theory. The so-called returnable packages were billed to the customers to be paid for as "other merchandise." There was no reservation or stipulation in the invoice that title remained in the seller, which parted with the article at an agreed price. When the returnable package was paid for by the purchaser his rights of ownership were complete. He could sell it for cash or retain it in his store for the display of crackers or other merchandise not purchased from the petitioner. He could, and the testimony is that in some cases he did, include it in his own inventory at the price paid the petitioner. The returnability of the package was a right conceded by the petitioner, but was in no sense an obligation enforceable at law. Every essential element of a sale and transfer of title is present in the practice of the petitioner and every attribute of ownership exists in the purchaser1477 upon his receipt of the containers and payment therefor. On the other hand the characteristics of bailment as defined by the Supreme Court in , are not in the transaction here involved. There is no obligation to return the identical article in same or altered form. Any old container originally sold by the petitioner will do, even if it is picked out of a junk heap or acquired by purchase from another dealer. "There is no obligation to return the specific article." "The receiver is at perfect liberty to return another thing of value," namely, 50 cents in money, and when he has done so his title as owner is complete. 879 Petitioner relies on the evidence that it was always anxious to have the containers returned as soon as possible. Doubtless this is true, and for the very obvious reason that it was highly undesirable to increase its investment in the returnable packages while so many were outstanding under an agreement to repurchase. The returnable cans were a convenience, a method of advertising, and a means for retaining the trade of customers once secured, but the petitioner, very properly, through its efforts to secure1478 returns, sought to minimize appropriations from its operating funds for such purposes. It was also necessary to stress returnability to overcome sales resistance created by competitors who, doubtless, often pointed out the wastefulness of paying almost as much for the cans as for the merchandise they contained. All this theory, however, is in no way overcome by the facts. The returnable package was invoiced and sold to the customer at an agreed price, with an understanding by petitioner to repurchase at the same price. Since the returnable packages, while out of the possession of the petitioner, were not its property and not at such times in use in its trade or business, the claim for depreciation thereon is disallowed. Cf. ; . The conclusion reached above in no wise prevents the petitioner from recovering, without tax, his entire investment in returnable cans that became worthless and unusable in its hands. This recovery is effected not through depreciation, but by charges against the returnable package account, each year, of the cost of the cans that have become useless. 1479 The parties have stipulated that for the years 1922 and 1923 the petitioner is entitled to deduct losses on such account in the respective amounts of $22,454.82 and $43,114.28, which have not been allowed in the respondent's computation of the deficiencies for such years, and that for the years 1924, 1925 and 1926 such losses have heretofore been deducted in the respective amounts of $64,673.45, $53,005.98, and $70,069.40. The parties have also stipulated that the respondent erred in his determinations as to 1922 and 1923 in adding to the net income of those years the sums of $42,293.97 and $28,885.72, respectively, representing adjustments in the can liability account. In view of this stipulation, the net income shown in the deficiency notice for those years should be reduced accordingly. The respondent claims an increased deficiency for 1922, or, alternatively, for 1926, alleging that he either allowed an excessive deduction for 1922 for a loss sustained by the petitioner in the liquidation of a subsidiary corporation, or that he has understated the net income for 1926, the allegation being predicated upon the fact that in 1926 there was refunded to the petitioner an overpayment1480 of income 880 taxes by the Shelby Biscuit Company, in the sum of $7,657.73, a fact which he failed to take into consideration in determining the amount of the loss sustained in 1922 or in computing the net income for 1926. The hearing developed nothing in addition to the stipulated facts. We see no reason for holding that the petitioner realized income in 1926 as the result of the refund which it received in that year of an overpayment of taxes by its subsidiary which had been dissolved. If it was income at all, it was income for 1922, in which year the petitioner, through the liquidation and dissolution of its subsidiary, succeeded, by virtue of being the sole stockholder thereof, to all the assets, rights and choses in action of the Shelby Biscuit Company. Though making an earnest attempt to do so, the respondent failed to prove that in determining the amount of the loss, which he allowed for 1922, as the result of the liquidation of the Shelby Biscuit Company, he did not give proper effect to this item. The respondent's claim for an increased deficiency for 1922, and the alternative claim for an increased deficiency for 1926, must be denied. Decision will be entered*1481 under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625922/	JOSEPH J. DELANEY AND JANE H. DELANEY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentDelaney v. CommissionerDocket No. 3387-94.United States Tax CourtT.C. Memo 1995-378; 1995 Tax Ct. Memo LEXIS 372; 70 T.C.M. (CCH) 353; August 8, 1995, Filed 372 Decision will be entered for respondent. Justin S. Holden, for petitioners. Carmino J. Santaniello and Bradford A. Johnson, for respondent. WELLS, Judge WELLSMEMORANDUM FINDINGS OF FACT AND OPINION WELLS, Judge: Respondent determined a deficiency in petitioners' Federal income tax for taxable year 1991 in the amount of $ 20,580. The issues to be decided are: (1) Whether a portion of certain proceeds received by Joseph J. Delaney (petitioner) in settlement of a tort action is excludable from gross income under section 104(a)(2)1 as "damages received on account of personal injuries", or whether such portion is includable in gross income as interest under section 61(a)(4); and (2) if a portion of the settlement proceeds is taxable as interest, whether petitioners are entitled to a miscellaneous itemized deduction under section 212(1) for attorney's fees paid with respect to such portion. 373 FINDINGS OF FACT Some of the facts and certain documents were stipulated for trial pursuant to Rule 91. The parties' stipulations are incorporated in this Memorandum Opinion by reference and are found accordingly. Petitioners resided in Smithfield, Rhode Island, at the time they filed their petition in the instant case. During October 1984, petitioners purchased condominium unit No. 7 (the condominium) in a development of condominiums known as Apple Valley in Smithfield, Rhode Island. On June 22, 1985, petitioner was injured when the railing on the deck of his condominium collapsed. Petitioner tumbled to the ground and broke his back as a result of the fall. During 1988, petitioner commenced a lawsuit in the Superior Court of Rhode Island against Apple Valley Associates, Inc. (Associates), Apple Valley Condominium Association, Inc. (Condominium), and Condominium Management, Inc. (Management), for damages (the tort action). Associates, a Rhode Island business corporation, developed petitioners' condominium. Condominium, a Rhode Island nonbusiness corporation, was an association of owners of the condominiums at Apple Valley. Management, a Rhode Island business corporation, was 374 retained by Condominium to manage the property at Apple Valley. Associates was uninsured against liabilities for injuries such as those sustained by petitioner. Condominium and Management were both insured against liabilities for personal injuries by American International Adjustment Co. Dennis J. McCarten represented petitioner in the tort action. George E. Healey of the law firm of Olenn & Penza represented Condominium and Management in the tort action. On October 12, 1990, the jury in the tort action returned a verdict in favor of petitioner against the three defendants in the amount of $ 287,000, consisting of $ 175,000 in damages and $ 112,000 in statutory interest under R.I. Gen. Laws section 9-21-10 (1985). In rendering its verdict, the jury assigned the following percentages of fault among the three defendants: Condominium andManagement75% jointAssociates25%Under the laws of the State of Rhode Island, each of the three defendants in the tort action was jointly and severally liable for the entire $ 287,000 judgment. Each defendant in the tort action appealed the verdict to the Rhode Island Supreme Court. During the pendency of the appeal, on May 31, 1991, 375 Mr. McCarten proposed to settle the tort action with Condominium and Management. During subsequent settlement negotiations, Condominium and Management agreed to pay petitioner $ 250,000 in return for petitioner's release and discharge of all claims against the two defendants. Pursuant to a settlement agreement (the Settlement Agreement and Joint Tortfeasor Release), Condominium issued a check in the amount of $ 250,000 to Mr. McCarten. On June 12, 1991, petitioner, Condominium, and Management entered into a stipulation which stated in pertinent part: Plaintiffs' claims against Apple Valley Condominium Association, Inc. and Condominium Management Co. are hereby dismissed with prejudice. No interest. No costs.The parties to the stipulation did not consider the tax consequences of such a stipulation. After deducting $ 85,866 in legal fees and costs, Mr. McCarten issued a check to petitioner in the amount of $ 164,134. Petitioners did not report any portion of the $ 250,000 settlement on their Federal income tax return for taxable year 1991. Petitioners did not deduct any legal fees associated with the tort action on their Federal income tax return for taxable year 1991. 376 Respondent determined a deficiency in petitioners' Federal income tax for taxable year 1991 in the amount of $ 20,580 based on the inclusion of 39 percent of the settlement proceeds (or $ 97,561) as prejudgment interest. The 39 percent figure was based on the fact that 39 percent (or $ 112,000) of the original award made by the jury was prejudgment interest. Additionally, respondent allowed petitioners a miscellaneous itemized deduction for legal fees in the amount of $ 33,509 based on the formula set forth in Church v. Commissioner, 80 T.C. 1104">80 T.C. 1104, 1111 n.8 (1983). OPINION We must decide whether a portion of the $ 250,000 settlement proceeds constitutes taxable interest. Petitioners contend that the entire $ 250,000 is excludable from gross income as damages from tortlike personal injuries pursuant to section 104(a)(2). Respondent concedes that the portion of the settlement proceeds attributable to petitioner's tort claim is excludable under section 104(a)(2) as damages received on account of personal injuries. Respondent, however, contends that the settlement agreement does not contain any specific allocations regarding interest. Additionally, respondent377 contends that because the original judgment included statutory prejudgment interest in the amount of $ 112,000, the portion of the proceeds received in lieu of such interest is not excludable under section 104(a)(2). Respondent's determination in the notice of deficiency is presumptively correct, and petitioners have the burden of proving that no part of the amounts received constituted interest. Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933). Section 61 defines gross income to include "all income from whatever source derived." Section 61(a)(4) specifically provides that gross income includes "interest." Section 104(a)(2) provides for the exclusion of "the amount of any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries". The regulations broadly interpret this language as encompassing damages received "through prosecution of a legal suit or action based upon tort or tort type rights, or through a settlement agreement in lieu of such prosecution." Sec. 1.104-1(c), Income Tax Regs. Statutory interest imposed on tort judgments, however, must be included in gross income 378 under section 61(a)(4) even under circumstances in which the underlying damages are excludable under section 104(a)(2). Robinson v. Commissioner, 102 T.C. 116">102 T.C. 116, 126 (1994); Kovacs v. Commissioner, 100 T.C. 124">100 T.C. 124, 128-130 (1993), affd. without published opinion 25 F.3d 1048">25 F.3d 1048 (6th Cir. 1994); Aames v. Commissioner, 94 T.C. 189">94 T.C. 189, 192 (1990); Burns v. Commissioner, T.C. Memo. 1994-284. We have often been asked to decide the proper allocation of the proceeds of a settlement agreement in the context of section 104(a)(2). See McKay v. Commissioner, 102 T.C. 465">102 T.C. 465, 481-482 (1994). In cases involving a settlement agreement which contains an express allocation, such allocation is generally the most important factor in deciding whether a payment was made on account of a tortious personal injury for purposes of exclusion under section 104(a)(2). It is well settled that express allocations in a settlement agreement will be respected to the extent that the agreement is entered into by the parties at arm's length and in good379 faith. Id. at 482; Robinson v. Commissioner, supra at 127; Threlkeld v. Commissioner, 87 T.C. 1294">87 T.C. 1294, 1306-1307 (1986), affd. 848 F.2d 81">848 F.2d 81 (6th Cir. 1988); Fono v. Commissioner, 79 T.C. 680">79 T.C. 680, 694 (1982), affd. without published opinion 749 F.2d 37">749 F.2d 37 (9th Cir. 1984). In cases involving a civil damage action which has been settled, in order to characterize settlement proceeds as income which is taxable under section 61 or as income which is excluded from taxation under section 104(a)(2), we must ascertain "'in lieu of what were damages awarded'" or paid. McKay v. Commissioner, supra at 482 (quoting Bent v. Commissioner, 87 T.C. 236">87 T.C. 236 (1986), affd. 835 F.2d 67">835 F.2d 67 (3d Cir. 1987)). In deciding such questions, we must consider all of the facts and circumstances. McKay v. Commissioner, supra at 482. If no lawsuit was instituted by the taxpayer, then we must consider any relevant documents, 380 letters, and testimony. E.g., Fitts v. Commissioner, T.C. Memo. 1994-52, affd. 53 F.3d 335">53 F.3d 335 (8th Cir. 1995). If a lawsuit was filed but not settled, or if a lawsuit was settled but no express allocations were made in the settlement agreement, we must consider the pleadings, jury awards, or any court orders or judgments. McKay v. Commissioner, supra at 483; Robinson v. Commissioner, supra; Miller v. Commissioner, T.C. Memo. 1993-49, supplemented by T.C. Memo 1993-588">T.C. Memo. 1993-588, affd. F.3d (4th Cir., June 30, 1995). If a taxpayer's claims were settled and express allocations are contained in the settlement agreement, we must carefully consider such allocations. See Byrne v. Commissioner, 90 T.C. 1000">90 T.C. 1000, 1007 (1988) (quoting Metzger v. Commissioner, 88 T.C. 834">88 T.C. 834, 837 (1987), affd. without published opinion 845 F.2d 1013">845 F.2d 1013 (3d Cir. 1988)), revd. and remanded 883 F.2d 211">883 F.2d 211 (3d Cir. 1989); 381 Bent v. Commissioner, supra at 211, Glynn v. Commissioner, 76 T.C. 116">76 T.C. 116, 120 (1981), affd. without published opinion 676 F.2d 682">676 F.2d 682 (1st Cir. 1982). As we stated above, however, we are not required to respect the express allocations unless they were negotiated at arm's length between adverse parties. Petitioners contend that the instant case is indistinguishable from McShane v. Commissioner, T.C. Memo. 1987-151, in which we held that none of the settlement proceeds received by the taxpayers were includable in gross income as interest, taking into account express language in a settlement agreement. Respondent contends that the instant case is distinguishable from McShane because petitioner's "Settlement Agreement and Joint Tortfeasor Release" did not contain express language as to the allocation of the settlement proceeds. Respondent also contends that the language found in the stipulation is ambiguous. In McShane, the taxpayers were seriously injured by a gas explosion and a fire occurring in a railroad yard. Subsequently, the taxpayers initiated negligence actions, and the jury 382 awarded the taxpayers compensatory damages totaling $ 1,275,000. Additionally, each taxpayer was entitled to statutory interest under State law. While the case was on appeal, the taxpayers and the defendants settled the lawsuit. As part of the written settlement agreements, the taxpayers agreed to accept lump-sum payments in settlement of the negligence suit. At the insistence of one of the defendants, the settlement agreements further provided that the proceeds were to be paid "without costs and interest." In negotiating the settlement amounts, the parties never addressed the tax consequences of settling the case without interest, but instead considered their respective risks in continuing the appeal. In McShane, we were required to decide whether any portion of the settlement proceeds received by each taxpayer was includable in income as interest. After a careful review of the record, we concluded that none of the settlement proceeds were attributable to interest. Our decision was based on the express language in the settlement agreements that payments were made "without costs and interest" as well as other evidence in the record which established that the inclusion of the language383 in the settlement agreements was the result of bona fide arm's-length negotiations. In the instant case, in contrast to McShane, the jury verdict identified statutory interest as a specific component of the sum awarded to petitioner. The jury awarded petitioner $ 287,000, which consisted of $ 175,000 in tort damages and $ 112,000 in statutory prejudgment interest. The parties later settled for $ 250,000. Although the stipulation expressly provided that the settlement amount did not include interest, the record in the instant case, unlike McShane, is devoid of evidence that such provision of the stipulation was the product of arm's-length negotiations between the parties. The only evidence in the record is that the parties did not discuss the tax implications of such aspect of the stipulation. Accordingly, we conclude that petitioners have failed to establish that there was no interest component to the settlement. McKay v. Commissioner, 102 T.C. 465">102 T.C. 465 (1994); Robinson v. Commissioner, 116">102 T.C. 116 (1994). Petitioners also contend that we are conclusively bound as to the characterization of the settlement proceeds384 by Factory Mut. Liab. Ins. Co. of America v. Cooper, 262 A.2d 370">262 A.2d 370 (R.I. 1970). In Factory Mutual, the Supreme Court of Rhode Island was called upon to analyze the plaintiff insurance company's liability to persons (the defendants) for injuries caused by the insured party in an automobile accident. The defendants had appealed judgments entered by the trial court. The narrow issue raised by the appeal was whether the plaintiff was obligated to pay, in excess of its policy limit, interest added to the verdicts in accordance with the mandate in R.I. Gen. Laws sec. 9-21-10. The court held that the plaintiff was not liable for such payment in excess of the policy limit. In so holding, the court construed the word "damages" as used in the insurance policy to include prejudgment statutory interest. Consequently, the plaintiff was liable for prejudgment interest included in the verdicts up to the policy limit. Respondent contends that petitioners' reliance on Factory Mutual is misplaced. We agree. The court in Factory Mutual did not hold that interest awarded under R.I. Gen. Laws sec. 9-21-10 is an element of damages as a general matter. Instead, 385 the court interpreted the word "damages" as used in the insurance policy in issue and held that interest was a part of the plaintiff's liability to which the policy limits applied. Consequently, we find that Factory Mutual is inapplicable to the instant case. All other arguments made by petitioners have been considered and found to be without merit. 2Based on petitioners' failure to meet their burden of proof, we sustain respondent's determination in the notice of deficiency with respect to the 386 inclusion of $ 97,561 as statutory prejudgment interest. 3In the notice of deficiency, respondent allowed petitioners a deduction under sections 212(1) and 265 for legal fees allocable to the interest portion of the settlement proceeds. Petitioners have failed to make any arguments or to offer any evidence with respect to the deductibility of their attorney's fees. Section 212(1) permits a deduction of all ordinary and necessary expenses paid for the production or collection of income. Section 265, however, disallows deductions for amounts which are allocable to tax-exempt income. Consequently, only the attorney's fees attributable to interest are deductible. In Church v. Commissioner, 80 T.C. 1104">80 T.C. 1104 (1983), we used the following formula to calculate the 387 correct deduction: Total attorney's fees x Nonexempt income/Total award = Deductible expenses In the instant case, respondent utilized the Church formula in the notice of deficiency. Because we have held that a portion of the settlement proceeds is interest and is includable in income, we sustain respondent's determination with respect to the deductibility of attorney's fees. Stocks v. Commissioner, 98 T.C. 1">98 T.C. 1, 18 (1992); Metzger v. Commissioner, 88 T.C. at 860; Church v. Commissioner, supra at 1110-1111. To reflect the foregoing, Decision will be entered for respondent.Footnotes1. All section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. Petitioners also argue against the allocation of any portion of the settlement proceeds to statutory interest based on rule 62(d), Rules of Civil Procedure of the Superior Court of Rhode Island, which renders the execution of a judgment unenforceable during the pendency of an appeal from such judgment. Even if that rule had the effect of staying collection of the judgment pending appeal, as we have stated above, petitioners have failed to prove that no portion of the settlement proceeds was allocated to interest.↩3. Petitioners only argue that none of the settlement proceeds should be allocated to interest, and do not alternatively argue that, if the settlement includes interest, the allocation should be calculated under a particular method.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625924/	HARRY T. SILVERMAN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentSilverman v. CommissionerDocket Nos. 7140-73, 9190-74.United States Tax CourtT.C. Memo 1985-515; 1985 Tax Ct. Memo LEXIS 116; 50 T.C.M. (CCH) 1226; T.C.M. (RIA) 85515; September 30, 1985. Michael D. Hess and David B. Stern, for the petitioners. David M. Brandes and Robert A. Wagner, for the respondent. CLAPPMEMORANDUM FINDINGS OF FACT AND OPINION CLAPP, Judge: In these consolidated cases, respondent determined deficiencies in petitioner's 1969 and 1970 Federal income taxes in the amounts of $418,814.94 and $416,135.63, respectively. After concessions, the issue for our decision is whether capital gains and losses arising from security accounts are to be attributed to petitioner117 or to his relatives in whose names the accounts were carried. FINDINGS OF FACT Some of the facts have been stipulated. The stipulations of facts and the exhibits attached thereto are incorporated herein by this reference. Petitioner resided in New York, New York, at the time he filed his petition in these cases. In 1969, petitioner received approximately $6 million from the liquidation of Dorset Products. After the liquidation, he was financially content and wanted to give financial aid to his four sons: Richard, Jeffrey, Barry, and Kenneth. During the years at issue, Richard was married to Heather, Jeffrey was married to Pamela, and Kenneth was married to Ginger. From the latter part of 1968 through the early part of 1970, petitioner transferred to his sons' and their wives' ("the Silverman children") brokerage accounts the following amounts: TransfereeAmountHeather$1,884,707Pamela834,790Barry882,357Kenneth and Ginger715,883He did not consult with lawyers or accountants and no documents were drafted. Furthermore, he did not charge interest on the principal, fix a date for repayment, or obtain security. The understanding between118 petitioner and the Silverman children was that the money in the brokerage accounts would be used to purchase securities. Richard, a successful broker, would manage the accounts. Petitioner would retain ownership of the assets in the accounts and the Silverman children would receive, at sometime in the future, any profits earned. During the years in issue, petitioner maintained a tie-line to Richard's office and was in frequent contact with him regarding the investments. Petitioner from time to time withdrew funds and securities. On one occasion, he used approximately $260,000 of securities from Heather's account as collateral for a demand note. Conversely, the Silverman children had little contact with Richard regarding the activity in the accounts, made no deposits or withdrawals, and could not obtain any of the assets. Their only involvement with the accounts was the receipt of brokerage statements. Richard held a power of attorney allowing him to manage the accounts. His decisions, however, were subject to petitioner's approval. Petitioner expected Richard to enter into profitable transactions and no one ever considered the possibility of losses. Unfortunately, large119 losses were incurred. During 1969 and 1970, the following gains and losses were incurred and reported on the Silverman children's income tax returns: 1969SalesGain orLong-Term orSecurityPriceCost(Loss)Short-TermHeather's AccountAmk stock$ 50,098$ 49,706$ 392 Short-TermAMK bonds68,52867,925603 Short-TermAMK warrants53,51452,5001,014 Short-TermArmour stock2,846,9962,742,012104,984 Short-TermHost warrants203,954358,334(154,380)Short-TermHost Bonds1,234,1151,464,970(230,855)Short-TermHost warrants225,073930,207(705,134)Long-TermUF stock1,927,7241,875,64552,079 Short-TermPamela's AccountArmour stock$ 729,561$ 697,066$32,495 Short-TermHost bonds318,549387,030(68,481)Short-TermBarry's AccountArmour Stock$ 834,034$ 795,256$38,778 Short-TermHost bonds272,080331,172(59,092)Long-TermHost Warrants36,91237,968(1,056)Short-TermHost Warrants17,202101,760(84,558)Long-TermUF stock317,211301,44315,768 Short-TermKenneth's AccountArmour stock$1,137,427$1,060,008$77,419 Short-TermHost bonds346,900399,000(52,100)Long-TermHost warrants76,32286,786(10,464)Short-TermHost warrants7,59537,969(30,374)Long-TermUF Stock171,458166,1955,263 Long-Term1970Barry's AccountHost warrants$ 23,751$ 173,031(149,280)Long-TermKane stock2,3254,731(2,406)Short-TermS stock2,3116,456(4,145)Short-TermKenneth's AccountHost warrants$ 46,847$ 332,226(285,379)Long-TermS stock2,09120,747(18,656)Long-Term120 On their income tax returns for 1969 and 1970, the Silverman children also reported interest and dividend income from the accounts. On his income tax return for the year 1970, petitioner included the following gains and losses from securities held in the names of Heather and Pamela: Claimed per returnShort-TermLong-TermSecurities SoldCapital Gain (Loss)Capital (Loss)71,015 General Host Warrants$ (12,573.01)200 United Dollar81.68 2,600 Corp S(35,360.28)4,300 Anthony Kane(27,955.21)50,000 General Host Warrants(5,923.61)1,700 Corp S(44,193.00)2,000 Anthony Kane$ (13,115.04)Total$ (125,923.43)$ (13,115.04)By the end of 1970, the Silverman children had transferred back to petitioner the following amounts: TransfereeAmounts Transferred to PetitionerHeather$620,034Pamela351,499Barry616,102Kenneth and Ginger396,562On the advice of petitioner's accountant and an attorney whom petitioner's accountant consulted, petitioner took nonbusiness bad debt deductions relating to the transferred funds as follows: 1969Heather Silverman$1,114,672.44Pamela Silverman408,291.001970Barry Silverman$ 211,829.43Kenneth Silverman300,374.94121 Petitioner did not misrepresent or conceal material facts and respondent had knowledge of all relevant facts. Respondent denied both the bad debt deductions and net capital loss in 1970. Petitioner now contends that all the deductions in question should have been reported as capital losses. OPINION We must determined the Federal income tax consequences of monetary transfers from petitioner to accounts in the names of the Silverman children and the subsequent loss of that money from security transactions. If the transfers were loans, petitioner may be entitled to nonbusiness bad debt deductions. See section 166(d). 1 If the transfers were gifts, petitioner is not entitled to any deduction. If, despite the Silverman children's nominal ownership, petitioner remained the owner of the money for Federal income tax purposes, he is entitled to capital loss deductions. See section 165(a). Petitioner contends that he retained control over the transferred money and, therefore, is entitled to capital loss deductions. Conversely, respondent contends that122 petitioner is not entitled to such deductions because he relinquished control. Respondent further contends, and petitioner does not dispute, that the transfers were not loans. We conclude that the transfers were neither loans nor gifts. For Federal income tax purposes, petitioner owned the money and, therefore, is entitled to deductions for the capital losses. Prerequisites for a bad debt deduction are a clear showing that the parties intended to create a debtor-creditor relationship and further that a debt in fact exists. , affd. per curiam . Indicia of a debtor-creditor relationship are a note or other written evidence of the transaction, interest charged on the principal, a fixed date for repayment, , and a provision for security. . Here, no debtor-creditor relationship existed; neither the necessary intent nor enumerated indicia is present. The transfers also were not gifts. Essential elements of a valid gift are donative intent and a transfer123 relinquishing the right to control. , affd. . Cf. . Here, petitioner did not intend to transfer the money as a gift. Furthermore, as discussed below, he did not relinquish the right to control. Petitioner intended to retain ownership of the money, have Richard invest it, and then, at some time in the future, give the Silverman children the profits. The right to control an account is evidenced by withdrawals. Petitioner from time to time made withdrawals and, on one occasion, used $260,000 of securities as collateral for a demand note. The Silverman children made no withdrawals. Petitioner had frequent contact with Richard regarding the investments and the Silverman children had little involvement with the accounts. Transferring legal title to property to the name of another does not, of itself, control the question of ownership. Here, the nominal owners' receipt of brokerage statements and inclusion of gains, losses, and income from the accounts fails to convince us that they are to be124 regarded as the true owners of the accounts for income tax purposes. Because of petitioner's control over the accounts, we find that he was the owner of the funds for Federal income tax purposes. , affd. ; . Indeed, the facts in Taylor are strikingly similar to the present facts. In Taylor, a generous taxpayer advanced sums to establish commodity accounts in the names of three relatives. It was an informal arrangement with no written agreement. The taxpayer intended to trade in the accounts and turn them over to the nominal owners when each account had a profit of $100,000. Under powers of attorney granted by the nominal owners, the taxpayer exercised control over the accounts and, during 1946 and 1947, the taxpayer executed numerous commodity transactions. Although the relatives received the brokerage statements, the taxpayer included the profits and losses from two of the accounts on her income tax return for 1946. The net profits earned in 1947 were reported by the relatives. In125 1948, the accounts were wiped out because of a drastic drop in the price of commodities. At that time, the taxpayer had withdrawn a total of $10,200 and the relatives had not reimbursed the taxpayer for the losses. Respondent determined that the profits and losses from the accounts for the years 1946 and 1947, were reportable by the taxpayer. We agreed with respondent. The facts showed merely an intent to make a gift to the relatives at some future time, and until that time arrived, the property was for tax purposes, that of the taxpayer. Respondent attempts to distinguish Taylor by stating that the nominal owners in Taylor were "completely subservient." Respondent supports his contention by noting that the taxpayer in Taylor had a power of attorney and Mr. Silverman did not. We do not agree with respondent that the taxpayer in Taylor had a greater degree of control than petitioner in the present case. Petitioner had complete control over the accounts. The Silverman children's involvement with the arrangement was negligible and, even though Richard held powers of attorney allowing him to manage the accounts, his managerial decisions were subject to petitioner's126 approval. Respondent also argues that only the taxpayer in Taylor deposited funds into the accounts, whereas in the present case, the nominal owners deposited and withdrew funds. We, however, have found that the Silverman children did not make deposits or withdrawals. Respondent's final distinction is that the Silverman children were more than nominal owners because they received brokerage statements and reported the tax consequences of the accounts as their own. In Taylor, the nominal owners received brokerage statements and reported transactions from the accounts in at least one year. Alternatively, respondent contends that petitioner is not entitled to claim the losses because he had no objective of profit from the transactions. See , affd. . This argument bears no relation to the question of ownership and control which is the central issue here. Profits and losses follow control. Petitioner, however, did intend a profit which would have been turned over to his children. Losses were never considered. If the contemplated scenario had happened, 127 the parties would have been on opposite sides of the fence and respondent would be the winner as in Taylor and Applestein.Finally, respondent contends that petitioner is estopped from claiming capital losses because he claimed nonbusiness bad debt deductions on his tax return. The elements usually required for equitable estoppel to be applied are: (1) Conduct amounting to a misrepresentation or concealment of a material fact; (2) actual or imputed knowledge of the misrepresentation by the party to be estopped; (3) absence of knowledge of facts by the party in whose favor estoppel is applied; (4) intention or expectation of the party to be estopped that the representation or concealment will be acted upon by the other party; (5) reliance by the party seeking the estoppel; and (6) detriment to the party seeking the estoppel resulting from his reliance. [.] In the present case, estoppel is inapplicable. It requires a misrepresentation or concealment of a factual matter, rather than a mistake in applying the law. .128 Here, no facts were misrepresented or concealed, and respondent had knowledge of all material facts. To reflect the foregoing, Decisions will be entered under Rule 155.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625927/	Ralph Ferguson, Transferee, et al. 1 v. Commissioner. Ferguson v. CommissionerDocket Nos. 20340, 20341, 20342, 20343.United States Tax Court1952 Tax Ct. Memo LEXIS 300; 11 T.C.M. (CCH) 213; T.C.M. (RIA) 52066; March 7, 1952300 Held: 1. Respondent did not err in determining that the net income of the Independent Beverage Corporation, transferor, should be increased by increasing sales in the amount of $2,086.39 and disallowing purchases in the amount of $905.75. 2. The amounts which the Independent Beverage Corporation, transferor, is entitled to deduct as ordinary and necessary business expenses, representing "quantity discounts", bar spending and miscellaneous items paid and incurred in the taxable year 1943, determined. 3. The amounts which the Independent Beverage Corporation, transferor, is entitled to deduct as ordinary and necessary business expense, representing legal and professional fees paid and incurred in the taxable year 1943, determined. Lucian L. 301 Dunbar, Esq., 925 Circle Tower, Indianapolis, Ind., for the petitioners. Hugh F. Culverhouse, Esq., for the respondent. HILL Memorandum Findings of Fact and Opinion These consolidated proceedings involve the liability of each of the petitioners as transferees of the Independent Beverage Corporation for deficiencies in income and excess profits tax liabilities and penalties determined against that corporation for the taxable period January 1, 1943 to May 31, 1943, in the following amounts: DeficiencyPenaltyIncome tax$ 434.24$ 183.33Excess profits tax7,907.311,976.83The contested issues are: 1. Did the respondent err in determining that the net income of the Independent Beverage Corporation, transferor, should be increased by increasing sales in the amount of $2,086.39 and disallowing purchases in the amount of $905.75? 2. Did the respondent err in disallowing a deduction of $3,675.51 claimed by the Independent Beverage Corporation, transferor, as advertising, travel and miscellaneous expenses for the taxable period involved? 3. Did the respondent err in disallowing a deduction of $3,500 claimed by the Independent Beverage302 Corporation, transferor, as legal and professional expenses? In their respective petitions each petitioner assigned additional errors, as follows: (a) That respondent erred in asserting a 25 per cent penalty under section 291 (a) of the Internal Revenue Code because of the failure of the Independent Beverage Corporation, transferor, to file timely income and excess profits tax returns for the taxable period involved. (b) That respondent erred in computing the excess profits net income of the Independent Beverage Corporation, transferor, on the basis of a short taxable year beginning January 1, 1943, and ending May 31, 1943. (c) That respondent erred in increasing the income of the Independent Beverage Corporation by disallowing a deduction for capital stock tax in the amount of $225. On brief the respondent concedes error with respect to the assignments of error set forth in (a) and (b) above. With respect to the assignment of error set forth in (c) above, the petitioners offered no proof and make no argument on brief as to such assignment and we, therefore, consider such assignment of error as having been abandoned by petitioners. The petitioners303 have stipulated that each is liable, as transferee, for any tax deficiency determined against the Independent Beverage Corporation, transferor. Findings of Fact Some of the facts were stipulated and are so found. Petitioners, Ralph Ferguson, Josephine Ferguson, Howard Brown and Iva Brown, were equal shareholders and transferees of the Independent Beverage Corporation (hereinafter referred to as the Corporation), an Indiana corporation, organized in 1939 and having its principal office at Anderson, Indiana. Its authorized capital stock consisted of 1,000 shares of no par value. Its issued capital was 100 shares of which each of the petitioners owned 25 shares, for which each paid $2,500. The officers of the Corporation were Josephine Ferguson, president; Ralph Ferguson, secretary and treasurer; and Frank Johns, vice-president. From its organization until June 1, 1943, the Corporation was engaged in the wholesale distribution of alcoholic malt beverages in Madison County, Indiana. The Corporation kept its books and filed its tax returns on an accrual method of accounting. Its tax returns for the taxable period involved were filed with the collector of internal revenue for the district304 of Indiana, at Indianapolis. On May 27, 1943, the stockholders of the Corporation authorized its board of directors to proceed with the dissolution of the Corporation in conformity with the laws of Indiana. On May 31, 1943, the board of directors adopted a resolution providing in substance that the assets of the Corporation be distributed among the stockholders as of May 31, 1943. On August 2, 1943, the Corporation executed an assignment reading as follows: "ASSIGNMENT "WHEREAS, the Independent Beverage Corporation has heretofore assigned and distributed equally all of its assets to Ralph R. Ferguson, Mary Josephine Ferguson, Howard H. Brown, and Iva I. Brown: and "WHEREAS, the Corporation in order to protect its stockholders makes this general assignment: "NOW, THEREFORE, the Independent Beverage Corporation of Anderson, Indiana does hereby assign equally to Ralph R. Ferguson, Mary Josephine Ferguson, Howard H. Brown, and Iva I. Brown all right, title and interest in all property, whether real, personal or mixed, including but not in limitation thereof, the post-war refund of Excess Profits Taxes as provided for in Section 780 (a) of the Internal Revenue Code305 , United States Bonds issued under authority of 780 (b) of the Internal Revenue Code, and all refunds due the Corporation because of the overpayment of Federal or State Income Taxes, Declared Value Excess Profits Taxes, and Excess Profits Taxes. "Executed this 2nd day of August 1943. "INDEPENDENT BEVERAGE CORPORATION By "Josephine Ferguson, Pres." All of the assets and liabilities of the Corporation, as of May 31, 1943, were assigned to the Independent Beverage Company, a co-partnership, composed of the above named individuals. At no time subsequent to May 31, 1943, did the Corporation make any sales of beer. On March 1, 1944, the Corporation filed its Articles of Voluntary Dissolution with the Indiana Secretary of State, who approved them and issued to the Corporation a certificate of dissolution on the same date. The Corporation deposited with brewers, from whom it bought its products, a certain sum for containers, which transactions the Corporation, on its books, did not treat as income or expense deductions. The identical amount of the deposit with each brewery was received from the Corporation's customers when such containers were distributed306 to such customers. These transactions were likewise treated by the Corporation on its books and records as resulting in neither income nor expense. It was the policy of the Corporation to allow a discount to customers purchasing 300 or more cases of beer per month. The rate of discount started at 300 cases and was graduated up to 500 cases. The maximum rate was a flat 10 cents per case. The "quantity discount" was available alike to all customers purchasing the minimum quantity of 300 cases per month. In the taxable year 1943 only three customers became entitled to discounts. In determining the deficiency for 1943 the respondent adjusted the net income by increasing sales in the amount of $2,086.39 and disallowing purchases in the amount of $905.75. The Corporation, on its 1943 Federal income tax return, claimed among others, the following deductions: Advertising$2,819.90Travel Expense711.00Miscellaneous2,033.60$5,564.50 The respondent disallowed $3,657.51 of the above amount claimed. In the taxable year 1943, as to the above items, the Corporation made expenditures in the amounts and for the purposes as follows: Quantity discounts to customers$1,198.33Telephone, bottles, advertising,supplies1,037.39Travel215.00Bar spending511.50Indiana Beer Wholesalers' Assn.dues50.00Gas and oil42.28$3,054.50307 The sum of $3,054.50 constitutes ordinary and necessary business expenses incurred and paid by the Corporation in the taxable year 1943. In its income tax return for 1943, the Corporation claimed the amount of $5,342.53 as a deduction for legal and professional expenses. The respondent disallowed the amount of $3,500. Of the amount disallowed, $3,000 was for legal fees of the firm of Dunbar & Dunbar, and $500 was the amount paid to Samuel Johnson, an attorney and State Senator. In the taxable year 1943 the Corporation made expenditures for legal and professional services as follows: Paul Caldwell, accountant$ 40Frederick C. Albershardt, accountant326Walter Vermillion, legal975Sam Johnson, legal500Dunbar & Dunbar, legal1,500$3,341The above sum of $3,341 constitutes ordinary and necessary expenses incurred and paid by the Corporation in the taxable year 1943. As of December 31, 1943, the Corporation accrued on its books the sum of $2,750 as attorneys' fees to Dunbar & Dunbar. On the same date a check in the amount of $750 was issued to such firm, the balance of $2,000 remaining as an accrual item. Under date of January 24, 1944, the308 officers of the Corporation executed Articles of Voluntary Dissolution. Paragraph VIII purports to set forth "A complete itemized list of all the corporate debts and liabilities of the corporation existing at the time of the adoption of such resolution and thereafter incurred, and the date and manner of payment of each such debt and liability." In such schedule the payment $750of to Dunbar & Dunbar on December 31, 1943, is shown, but there is no mention of any additional unpaid liability to such firm. At some undisclosed date after the Corporation ceased doing business, the amount of $2,000 was paid to Dunbar & Dunbar by Ralph Ferguson, Josephine Ferguson, Howard Brown and Iva Brown. Opinion HILL, Judge: The first issue involves the propriety of the respondent's action in increasing the income of the Independent Beverage Corporation, transferor, by increasing sales in the amount of $2,086.39 and disallowing purchases in the amount of $905.75. The correctness of the amounts by which the respondent increased sales and decreased purchases with respect to containers is not in dispute. The respondent contends that the deposits the Corporation received from its customers for containers309 were in reality sales and the refunds paid to customers were a repurchase or a reduction in sales. But the deposits which the Corporation made with the breweries for containers and the amounts received for containers returned constituted purchases and sales and should be accounted for as adjustment to cost of goods sold. Petitioners disagree with the respondent's theory and contend that since the Corporation received from its customers the identical amount it deposited with the breweries neither income nor expense resulted from the transactions. The evidence discloses that the deposit charge was billed as other merchandise was billed. The vendors did not retain title to the containers but the vendees had complete title and were not required to return them. The obligation on the vendors was to repurchase the containers if and when the containers were returned in good condition. It has been repeatedly held that where charges for deposits are made for returnable containers, income is more clearly reflected where such deposits are included in income as sales in the year the charges are made, and refunds made on returned containers are charged to expenses the year the refunds are made. 310 LaSalle Portland Cement Co., 4 B.T.A. 438">4 B.T.A. 438; Beadleston & Woerz, Inc., 5 B.T.A. 165">5 B.T.A. 165; Plymouth Brewing & Malting Co., 16 B.T.A. 123">16 B.T.A. 123; Okonite Co., 4 T.C. 618">4 T.C. 618, affirmed on other issues 155 Fed. (2d) 248. Petitioners rely on Farmers Creamery Co. of Fredericksburg, Va., 14 T.C. 879">14 T.C. 879. In that case the taxpayer in 1942 was required by O.P.A. to obtain from its wholesale customers for 1943 and subsequent years deposits of three cents per bottle delivered to them, which deposits were to be returned to the customers with the return of the bottles. The taxpayer kept a record of the deposits in a liability account and debited the refunds as made. The bottles were not sold to the customers. It was held that the respondent could not require the taxpayer to report the deposits as income and deduct the refunds. We think the instant case is distinguishable on its facts since it appears that the containers here were sold to the customers, whereas in the Farmers Creamery Co. case the bottles on which the O.P.A. required a deposit were not sold to its customers. We, therefore, conclude that petitioners have not sustained311 the burden of showing error in respondent's adjustments to the income of the Corporation, transferor, on account of its transactions relating to the deposits on containers. On this issue the respondent is sustained. The second issue involves the disallowance of certain deductions claimed by petitioners as ordinary and necessary expenses of the Corporation in the taxable year. In its 1943 Federal tax returns the Corporation, transferor, claimed a deduction of a total sum of $5,564.50, for advertising expenses in the amount of $2,819.90, travel expenses of $711, and miscellaneous expenses in the sum of $2,033.60. At the hearing petitioners attempted to justify expenditures in the total amount of $4,342.31. In our findings we have allowed as ordinary and necessary expenses the aggregate amount of $3,054.50, classified as follows: Quantity discounts$1,198.33Telephone, bottles, advertising,supplies1,037.39Travel315.00Bar spending511.50Indiana Beer Wholesalers' Assn.dues50.00Gas and oil42.28$3,054.50The difference between the amount of $4,342.31, which petitioners on brief now claim, and the amount of $3,054.50, found by us, results312 from the disallowance in part of the amounts claimed as "bar spending" and "quantity discounts" to customers. The record discloses that it was the practice of the Corporation to draw checks to cash. In some instances the check stubs in evidence indicate the entire amount was charged to either advertising or travel or miscellaneous expenses. In some instances these stubs indicate an allocation of the amount to two categories and in other instances there is an allocation to all three categories. We are unwilling to accept the testimony of the witness, Josephine Ferguson, who kept the Corporation's books and drew the checks to cash, that certain amounts of cash withdrawals constituted expenditures for "bar spending" and "quantity discounts", where the check stubs do not indicate that the money was used for such purposes. We think it highly improbable that any person could recall the fact that such a cash withdrawal was for a specific purpose after a lapse of seven years, where the only available record is a check stub which carries no notation of that specific purpose. Especially do we believe this to be so where there were such a large number of checks drawn to cash. On a number of313 the check stubs the purpose of the cash withdrawal is indicated. We therefore reject petitioner's Exhibit No. 5, as having no weight in so far as, we think, it can not be fully supported by the underlying records. We have carefully examined the check stubs and our finding with respect to the amount of the expenditures for "bar spending" and "quantity discounts" is determined on the basis of the notations on the check stubs with respect to checks drawn to cash. No adequate records having been maintained, petitioners have no ground to complain of our refusal to give full credence to testimony which we think is not supported by the underlying records in evidence. The respondent, on brief, challenges the right of petitioners to a deduction for expenditures designated as "quantity discounts" on the ground that such payments were in violation of the laws of Indiana and therefore contrary to public policy. Commissioner v. Heininger, 320 U.S. 467">320 U.S. 467; Polley, et al. v. Westover, 77 Fed. Supp. 973; Thomas B. Lilly, 14 T.C. 1066">14 T.C. 1066, affirmed 188 Fed. (2d) 269. The particular statute of the State of Indiana which the respondent argues has been314 violated is set forth in the margin. 1 That statute prohibits a permittee engaged in the sale of alcoholic beverages from engaging in certain discriminatory practices, such as "granting any price, discount, allowance or service charge which is not available to all purchasers at the same time." [Italics supplied.] The record establishes that the Corporation's policy was to allow a discount to customers purchasing 300 or more cases of beer per month. 315 The rate of discount started at 300 cases and was graduated up to 500 cases. The maximum rate was a flat 10 cents per case. The "quantity discount" was available alike to all customers purchasing the minimum quantity of 300 cases per month. The evidence shows that in the taxable year 1943 only three customers became entitled to the discounts. Since the discount was available to all purchasers alike, we think it clear there was no violation of the Indiana statute above quoted. The record reveals that the "quantity discounts" were allowed to meet competition and preserve the Corporation's business, since other operators were granting discounts to customers. In general, expenses paid or incurred in earning income and which benefit the business are allowed as ordinary and necessary expenses of the business unless the payment frustrates sharply defined national or state policies prescribing particular types of conduct. Commissioner v. Heininger, supra.The case of Polley, et al. v. Westover, supra, relied upon by the respondent, rather supports the petitioners. It was there held that quantity cash discounts allowed by wholesaler liquor dealers to retail buyers316 in accordance with trade custom were not in violation of the California Beverage Control Act and were deductible as ordinary and necessary business expense. The case of Thomas B. Lilly, supra, has no application since it was there held that the so-called "trade discounts" violated public policy. We have found as a fact that the amounts paid in the taxable year by the Corporation as "quantity discounts" constitute ordinary and necessary business expenses and, therefore, we hold they are proper deductions under section 23 (a) (1) (A) of the Code. The final issue involves the amount of deductions to which the Corporation, transferor, is entitled in the taxable year for expenditures for legal and professional fees. The respondent disallowed $3,500 of the total amount of $5,342.50 claimed on its tax returns. Of the amount disallowed, $3,000 was for legal fees of the firm of Dunbar & Dunbar, and $500 was the amount paid to Samuel Johnson, an attorney and State Senator. The contention of the respondent with respect to the sum of $500 paid to Samuel Johnson is that such payment was made for political influence and not for legal services, and is therefore not deductible. 317 The evidence as to the purpose of the payment to Johnson is somewhat conflicting. The testimony of Wesley Vosburgh, the revenue agent who made an examination of the return of the Corporation, is that Ralph Ferguson stated to him that the payments were "shakedowns" and that Johnson did not render any real legal services. Ferguson categorically denied making such statement. He testified that Johnson had handled the collection of an account and at different times had rendered legal assistance to some of the Corporation's customers at his request. Josephine Ferguson testified that Johnson had helped with getting permits for different customers and also suing on bad debts. On the state of this record we can not find that the payments to Johnson were for political influence. Accordingly, we have found the payment of $500 to Johnson was made for legal services rendered the Corporation and constituted an ordinary and necessary business expense. With respect to the further item of $2,750 claimed as a deduction for professional services rendered by Dunbar & Dunbar, the evidence is likewise conflicting. The record reveals that as of December 31, 1943, there was accrued on the books of the Corporation318 the sum of $2,750 as attorneys' fees to Dunbar & Dunbar. On the same date a check in the amount of $750 was issued to such firm, the balance of $2,000 remaining as an accrual item. The witness Vosburgh testified that at the time he made his examination of the Corporation's returns, Ralph Ferguson stated to him that the legal services of Dunbar & Dunbar were on a contingency fee basis. Petitioners did not offer in evidence any supporting voucher, nor was any explanation given, why only $750 of the total amount of $2,750 alleged to be due such firm was paid on December 31, 1943. The Corporation had ceased doing business on May 31, 1943, and was closing its accounts as of the close of the year. Furthermore, the record shows that the balance of $2,000 was paid by the petitioners in individually at some later undisclosed date. We think the testimony of the witness Vosburgh is corroborated by other documentary evidence. Under date of January 24, 1944, the officers of the Corporation executed Articles of Voluntary Dissolution. Paragraph VIII therein purports to set forth "A complete itemized list of all the corporate debts and liabilities of the corporation existing at the time of the adoption319 of such resolution and thereafter incurred, and the date and manner of payment of each such debt and liability." In such schedule the payment of $750 to Dunbar & Dunbar on December 31, 1943, is shown, but there is no mention of any additional unpaid liability to such firm. We, therefore, hold that the item of $2,000 has not been shown to be properly accruable in the taxable year. We hold that the Corporation expended in the taxable year 1943 for legal and professional fees the sum of $3,341, which constitutes ordinary and necessary business expense deductible under section 23 (a) (1) (A) of the Code. The petitioners have stipulated that each is liable, as transferee, for any tax deficiency determined against the Corporation, transferor. Decisions will be entered under Rule 50. Footnotes1. Proceedings of the following petitioners are consolidated herewith: Josephine Ferguson, Transferee, Docket No. 20341; Howard Brown, Transferee, Docket No. 20342; Iva Brown, Transferee, Docket No. 20343.↩1. Burns Indiana Statutes - Annotated - 1933 (1942 Replacement): 12-402. Excise administrator - Duties - Commission - Functions - Duties and powers - Rules and regulations. - * * *No permittee engaged in the sale of alcoholic beverages shall be a party to or assist in any transaction of sale or contract to sell alcoholic beverages which discriminates between purchasers by granting any price, discount, allowance, or service charge which is not available to all purchasers at the same time: Provided, however, That the foregoing shall not be construed to authorize or require any permittees to sell to any person or to any other permittee to whom he is not expressly authorized to sell under other provisions of this act.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625929/	FREDERICK J. TASSINARI, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentTassinari v. CommissionerDocket No. 31440-81.United States Tax CourtT.C. Memo 1984-445; 1984 Tax Ct. Memo LEXIS 226; 48 T.C.M. (CCH) 915; T.C.M. (RIA) 84445; 5 Employee Benefits Cas. (BNA) 2020; August 21, 1984. Frederick J. Tassinari, pro se. Mae J. Lew, for the respondent. RAUMMEMORANDUM FINDINGS OF FACT AND OPINION RAUM, Judge: The Commissioner determined a $4,085 deficiency228 in petitioner's 1978 Federal income tax. The sole issue for decision is whether a distribution from a profit-sharing plan is currently taxable. FINDINGS OF FACT 1Some of the facts have been stipulated and are incorporated herein by this reference. Petitioner Frederick J. Tassinari resided in West Peabody, Massachusetts, when he filed his petition herein. 229 From at least 1968 until the summer of 1981, petitioner was an employee of the Cutter Fire Brick Co., Inc. (Cutter), 2 and, from 1968 through 1977, a participant in its profit-sharing plan (Plan). On December 31, 1977, Cutter terminated the Plan. The Internal Revenue Service was notified of such termination and approved it by letter "issued" September 21, 1978. Pursuant to the Plan's termination, petitioner received the following distributions during 1978 from "The Cutter * * * Profit Sharing Trust" (Trust): April 28, 1978$ 2,000.00June, 19781,300.00October 18, 197811,271.95TOTAL$14,571.95All of these proceeds resulted from employer contributions. The $1,300 distributed in June 1978 constituted the proceeds of life insurance policies. The $14,571.95 total represented petitioner's entire interest in the Trust. A letter dated September 30, 1978, explaining the termination230 of the Plan, was apparently sent to each of the employee-participants in the Plan, and was signed by petitioner and C. Thomas Cutter, each as "Trustee". 3 One copy of that letter was addressed to petitioner. The letter set forth certain considerations relating to the taxability of the distributions. In this connection, the letter stated: To avoid the tax on your interest in the Plan you may: a) "roll over" [i.e., reinvest] the distribution within sixty (60) days from receipt into an Individual Retirement Account [IRA] (the attached booklet explains all details of an IRA); or b) have the Trustees purchase a deferred annuity which will not be taxable until you begin to receive payments from the annuity. In addition, the letter "strongly" urged the employee-participant to consult his "tax advisors", and offered the assistance of Cutter's attorney and accountant. 231 Petitioner was unable to reinvest the entire $14,571.95 of Trust distributions since he had already spent or disposed of the $3,300 representing the first two payments and he "did not [then] have" such funds available. He therefore made inquiries to ascertain whether he could make a tax-free rollover 4 of only a portion of the payments into an IRA. Although he made many inquiries along these lines, he was unable to obtain any satisfactory assurances that he could make a tax-free partial rollover. Accordingly, notwithstanding that he was aware of the 60-day limitation, 5 as shown in the foregoing letter signed by him as Trustee, he did not make any attempt to transfer any portion of the distributed funds to an IRA within 60 days of the last distribution (October 18, 1978). 232 Thereafter, on December 27, 1978, petitioner invested $11,000 of the distributions in a six-month certificate of deposit at the Framingham Trust Company, Framingham, Massachusetts. This certificate matured in the amount of $11,535.04 on June 27, 1979. Petitioner used $2,159.55 of this amount to pay his 1978 Federal and State tax "deficiency", and, on July 13, 1979, he deposited the remaining $9,375.49 in the Waltham Savings Bank, Waltham, Massachusetts. On February 15, 1980, he placed $11,119 in a six-month certificate of deposit at the First East Savings Bank, Peabody, Massachusetts, and subsequently, at six-month intervals, at least until the date of trial, has reinvested all proceeds with respect to this investment in similar six-month certificates. Petitioner had not reached age 59-1/2 nor was he self-employed during 1978. In reporting the $14,571.95 of distributions on his 1978 Federal income tax return, petitioner apparently elected to utilize the special ten-year averaging formula found in section 402(e)(1), I.R.C. 1954. In his deficiency notice herein, the Commissioner disallowed this election on the ground that petitioner continued to work233 for Cutter, and increased petitioner's 1978 taxable income by the amount of the distributions. The parties now agree that petitioner's use of the ten-year averaging formula was inappropriate. The issue at present is whether petitioner may escape paying tax currently on that portion of the distributions which he invested in the six-month certificate of deposit. OPINION Congress has provided special tax advantages for employers and employees relating to qualified pension, profit-sharing and stock bonus trusts. See generally sections 401 through 415, I.R.C. 1954. In the main, the foregoing comprehensive and detailed legislative scheme affords deductions to employers for contributions to such trusts, section 404(a), but allows the employee-beneficiaries of the trusts to postpone until a later date paying a tax not only in respect of such contributions, but also in respect of the earnings of the trusts. Section 402(a)(1). Moreover, the trusts themselves are tax exempt. Section 501(a), I.R.C. 1954. We must deal here with the $14,571.95234 distributions made by a qualified profit-sharing trust to petitioner in 1978. The general rule is set forth in section 402(a)(1), and provides that any amount "actually distributed" by an employees' trust that is exempt from tax under section 501(a) shall be taxable to the employee-distributee. However, an exception is made to the general rule in section 402(a)(5) relating to "rollovers", and the relief which petitioner seeks is based on the contention that his purchase of an $11,000 certificate of deposit on December 27, 1978, qualified for exclusion from gross income within the meaning of the statute. We hold otherwise. Section 402(a)(5)(A) provides that where the balance to the credit of an employee in a qualified trust is paid to him in a "qualifying rollover distribution", and the employee "transfers any portion 6 of * * [the] distribution to an eligible retirement plan * * * then such distribution (to the extent so transferred) shall not be includible in gross income for the taxable235 year in which paid". At the outset, we have no doubt, and the Government does not contend otherwise, that the distributions here satisfy all the preliminary requirements that must be met in order to come within section 402(a)(5)(A) and the definition of "qualifying rollover distribution" in section 402(a)(5)(D)(i). Thus, petitioner's entire balance in the profit-sharing plan was paid to him within one taxable year upon the termination of the plan and there was a complete discontinuance of contributions under the plan. However, petitioner's claim founders upon the further requirement in section 402(a)(5)(A)(ii) that the employee's transfer of the distribution (or any portion thereof) be made to "an eligible retirement plan". He made no such transfer in this case. He merely invested $11,000 on December 27, 1978, in a certificate of deposit. Such a transfer plainly was not to an eligible retirement plan, as will shortly appear. 236 The term "eligible retirement plan" is defined in section 402(a)(5)(D)(iv), as follows: 7(iv) Eligible Retirement Plan.--The term 'eligible retirement plan' means-- (I) an individual retirement account described in section 408(a), (II) an individual retirement annuity described in section 408(b) (other than an endowment contract), (III) a retirement bond described in section 409, (IV) a qualified trust, and (V) an annuity plan described in section 403(a). Petitioner's purchase of an $11,000 certificate of deposit cannot by any stretch of the imagination come within any of the five types of reinvestment that could qualify as an "eligible retirement plan". We consider each of them briefly. 1. Individual retirement account,237 familiarly known as an IRA. Here, the IRA must be one described in section 408(a). But section 408(a) defines an "individual retirement account" as a "trust * * for the exclusive benefit of an individual * * * but only if the written governing instrument creating the trust" (emphasis supplied) meets seven separately enumerated conditions. The certificate of deposit purchased by petitioner certainly could not be characterized as a "trust" on any theory, and we need not even undertake any study of the seven highly specific requirements, although a casual inspection persuades us that most, if not all, of them would defeat any contention that they were satisfied here. The certificate of deposit was not an IRA. 2. Individual retirement annuity. Clearly the certificate of deposit was not an annuity of any kind. 3. Retirement bond described in section 409. A retirement bond is defined in section 409(a) as emaning a bond issued under the Second Liberty Bond Act, as amended, which238 by its terms or by regulations prescribed by the Secretary of the Treasury satisfies a number of highly specific conditions. The certificate of deposit in this case is certainly not a retirement bond described in section 409. 4. Qualified trust. The certificate of deposit was not a trust of any kind. 5. Annuity plan. The certificate of deposit did not involve any annuity or "annuity plan" whatever. We accordingly must hold that petitioner's purchase of the certificate of deposit did not qualify as an "eligible retirement plan", and he therefore fails to satisfy the requirements of section 402(a)(5)(A) for exclusion of his distribution from taxable income. However, petitioner contends that there is a special provision in the amendatory legislation of October 14, 1978, that calls for a different result. He argues that since he "attempted" to comply with the provisions of section 402(a)(5) he should be deemed to have actually complied with such provisions by reason of section 4(d)(2) of Pub. L. 95-458, 92 Stat. 1255, 1260 (1978), referred to in fn. 6, supra.Section 4 of Pub. L. 95-458 is captioned "PARTIAL ROLLOVERS OF LUMP SUM DISTRIBUTIONS". It was intended239 to deal primarily with partial rollovers of trust distributions, by including partial rollovers within the section 402(a)(5) exception to section 402(a)(1). The purpose of the new provisions was made clear by the Senate Finance Committee, as follows (S. Rept. No. 95-1127, 95th Cong., 2d Sess. 2 (1978), 2 C.B. 369">1978-2 C.B. 369, 370): 4. Partial rollovers of lump-sum distributions.--Under present law, an individual who is eligible to make a tax-free rollover contribution of amounts distributed from a qualified retirement plan is required to contribute the entire amount of the distribution to an IRA or to another qualified plan. The committee amendment allows an individual to make a rollover contribution of any portion of the distribution. And, in recognition of the fact that section 402(a)(5)(C) requires that a rollover be made within 60 days of the receipt of a distribution, it was thought necessary to extend that period in the case of taxpayers who had theretofore unsuccessfully "attempted" to make a partial rollover. In this respect, the Senate Finance Committee further stated240 (S. Rept. No. 95-1127, 95th Cong., 2d Sess. 2 (1978), 1978-2 C.B. at 370): In addition, the amendment provides a special "makeup" rule for individuals who, prior to enactment of the bill, attempted to make a rollover contribution but failed to transfer the entire amount of the distribution. Such persons are allowed to make a rollover contribution of any portion of the distribution to an IRA or to a qualified retirement plan on or before December 31, 1978 or 60 days after enactment of the amendment, whichever is later. The "special 'makeup' rule" just referred to by the Senate Finance Committee emerged as section 4(d)(2) of Pub. L. 95-458, which reads as follows: (d) Effective Dates.-- * * (2) Validation of Certain Attempted Rollovers.--If the taxpayer-- (A) attempted to comply with the requirements of section 402(a)(5) or 403(a)(4) of the Internal Revenue Code of 1954 for a taxable year beginning before the date of the enactment of this Act, and (B) failed to meet the requirements of such section that all property received in the distribution be trasnferred, such section (as amended by this section) shall be applied by treating241 any transfer of property made on or before December 31, 1978, as if it were made on or before the 60th day after the day on which the taxpayer received such property. In short, section 4(d)(2) of Pub. L. 95-458 provided relief for those taxpayers who had attempted but failed to comply with the requirement of section 402(a)(5) that the entire distribution be rolled over to an eligible retirement plan, and it extended the time within which such taxpayers could make a permissible rollover to December 31, 1978. Accordingly, assuming that petitioner had otherwise complied with these new provisions, he did not in fact make any partial rollover within the period as thus extended. His investment in the certificate of deposit which was made on December 27, 1978, did not qualify as a permissible partial rollover to an eligible retirement plan, as we have already explained. Section 4(d)(2) of Pub. L. 95-458 was obviously intended merely to validate attempted partial rollovers theretofore made and to extend through December 31, 1978, the 60-day period within which to make a partial rollover. Cf. Smithsi v. Commissioner,42 T.C.M. (CCH) 1638">42 T.C.M. 1638, 1641, 50 P-H Memo T.C. par. 81,652 (1981).242 It was never intended to dispense with all the other requirements of section 402(a)(5), particularly that the rollover be made to an "eligible retirement plan". That petitioner may not have learned about the new provisions until it was too late for him to take advantage of them is indeed unfortunate, but we are without power to authorize a departure from the precise and detailed requirements of the statute. Decision will be entered for the respondent.Footnotes1. In his brief filed after the trial petitioner presented certain evidence, including some documents, which neither party had introduced at trial. Because such documents were proffered ex parte and petitioner's recitations of alleged facts were not made under oath at the trial, we may not take such evidence into account in making our findings of fact. Rule 143(b); West 80th Street Garage Co., Inc. v. Commissioner,12 B.T.A. 798">12 B.T.A. 798, 800 (1928); Wisconsin Butter & Cheese Co. v. Commissioner,10 B.T.A. 852">10 B.T.A. 852, 854↩ (1928). Indeed, petitioner was explicitly cautioned at the conclusion of the trial when the Court was setting the dates for the filing of briefs that the materials dealt with in his brief "may not include any facts other than the facts that have been produced at this hearing".2. As part of his testimony, petitioner submitted a "Statement of Circumstances" in which he stated that he ceased working for Cutter in 1980, not "the Summer of 1981" as stipulated by the parties. This inconsistency is immaterial with respect to our decision herein.↩3. We note, but do not find, that a copy of this letter was among those documents offered by petitioner with his brief (see fn. 1, supra) and that this copy was in all respects identical to the original which the parties had submitted at trial except↩ that petitioner no longer appeared as a signatory, that his signature and designation as "Trustee" appears to have been completely blanked out, and that the copy was signed only by C. Thomas Cutter as "Trustee".4. The term "tax-free rollover" is used merely as a convenient locution to indicate that the distribution would be tax-free by reason of the rollover. ↩5. The 60-day limitation was based upon a requirement to that effect that was specifically set forth in sec. 402(a)(5)(B) of the Internal Revenue Code as in effect at the time of the letter of September 30, 1978, and in sec. 402(a)(5)(C) of the Code as amended on October 14, 1978. See fn. 6, infra.↩6. The provision permitting a tax-free rollover in respect of only a portion of the distribution was introduced into the Code by section 4 of Pub. L. 95-458, which was enacted on October 14, 1978. 92 Stat. 1255,1257. We will comment more fully hereinafter upon this amendatory legislation and its retroactive effect. It will sometimes be referred to as the Act of October 14, 1978, or as Pub. L. 95-458.↩7. The quoted provision is from the amendatory Act of October 14, 1978, see fn. 6, supra,↩ but the substance of this language had already been in the Code, and we regard the newer formulation merely as clarifying in character. Section 4(d)(1) of that amendatory legislation made it applicable to "taxable years beginning after December 31, 1974".	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625933/	Opelousas-St. Landry Securities Company, Inc. v. Commissioner.Opelousas-St. Landry Sec. Co. v. CommissionerDocket No. 49459.United States Tax CourtT.C. Memo 1955-240; 1955 Tax Ct. Memo LEXIS 98; 14 T.C.M. (CCH) 961; T.C.M. (RIA) 55240; August 30, 1955Isom J. Guillory, Sr., Esq., Box 151, Eunice, La., and Isom J. Guillory, Jr., Esq., for the petitioner. Jackson L. Bailey, Esq., for the respondent. OPPERMemorandum Findings of Fact and Opinion OPPER, Judge: Respondent determined a deficiency in income tax for the calendar year 1949 in the amount of $723.72. The only issue is whether petitioner realized ordinary income or long-term capital gains from the sale of certain real estate during 1949. Findings of Fact Petitioner was incorporated on June 24, 1925 under the laws of Louisiana. Its return for 1949 was filed with the collector of internal revenue for the district of Louisiana. Its99 returns are filed and books kept on the basis of cash receipts and disbursements. Capital stock of petitioner consists of 1,200 shares of preferred stock, par value $100, and 8,000 shares of common stock, par value $10. Each of petitioner's fourteen directors owns one share of common stock, endorsed in blank and in custody of the St. Landry Bank & Trust Company, hereafter referred to as the bank. The remaining 7,986 shares of common, and all the preferred stock are held in the name of Allen Dezauche as trustee for the bank. Dezauche is one of the fourteen directors of petitioner and is president of the bank as well as of petitioner. All the directors of petitioner are directors of the bank except for the cashier of the bank who is not a director of the bank. The same persons serve as officers of petitioner and of the bank. Board meetings for the bank and for petitioner are held jointly. The State Banking Department and the Federal Deposit Insurance Corporation examined petitioner's real estate holdings in their periodic audits of the bank, and commented thereon in their reports to the bank. Louisiana statutes (Acts 1902, No. 45, sec. 1) allowed banks to hold real estate acquired100 by certain specified means for no longer than 10 years. An amending act (Acts 1924, No. 229, sec. 3) reduced the limitation on such holdings to 5 years. The bank held an accumulation of real estate acquired on foreclosure or in satisfaction of loans, or by other means specified in the Acts of 1902 and 1924. Prospects were that real estate holdings would increase due to depressed business conditions. The poor real estate market precluded selling off the real estate holdings. Petitioner was organized to enable the bank to comply with the amended statute without financial injury. Petitioner's charter sets forth numerous permissible activities including "To buy, sell and deal in, for its own account and * * * or as agent or broker, real estate, * * ." On its return for 1949, it characterizes its principal activity as "Realty Holding." From 1925 to 1954, petitioner acquired more than 400 tracts of land, amounting to about 15,000 acres. Petitioner's real estate holdings ranged from a high of $482,112.41 in 1933 to a low of $164,435.95 in 1951. On December 31, 1949, the real estate account showed a balance of $175,985.95. The bank had loans on all land acquired from it. Sometimes the101 land itself was transferred from the bank. Sometimes the note was transferred to petitioner, which foreclosed. Two land acquisitions were made by purchase from other than the bank. One was a strip 30 by 1,000 feet to be used as a road to make petitioner's other property accessible. The other was 30 acres scattered throughout a 450-acre tract previously acquired by petitioner. This purchase was to prevent trespassing from the scattered plots. Cost of these outside purchases aggregated about $2,000. Petitioner attempted to derive income from the lands it held. Farm land was farmed, town property rented, timber sold from woodlands, oil and mineral lands leased. Land was sold when an advantageous offer was received. A large amount of land was sold pursuant to such offers. The land in controversy was part of the John Hidalgo farm. The farm was acquired by the bank for debt on July 25, 1932 and transferred to petitioner on August 8, 1932 along with two other tracts of land. The land was under cultivation then and continued to be operated entirely as a farm until 1945. The property contained a 7- or 8-room farmhouse and two or three cabin type residences. During the years from 1932 to102 1945, parcels from the farm were sold reducing the acreage from 188 acres to about 65 acres. By 1945, the town of Opelousas, Louisiana, had grown to within a short distance of the farm. Directors of petitioner considered it advantageous to subdivide part of the land. Eighteen acres of the land were surveyed and platted. The St. Landry Subdivision, consisting of 59 lots, came into being. The remainder of the tract is still farmed. Petitioner spent $16,195.67 on improving and developing the subdivision. Streets were laid and graded, a water main and some extensions installed, an electric line built, and a gas line installed. Restrictions were set as to race and character of prospective residents, and as to type and cost of dwellings to be built. Petitioner constructed a house on one of the lots. This house was to be representative of the type petitioner hoped to have erected on the property. The house was rented for about 1 year and then sold during 1949 along with its lot. A sign, 4 by 6 feet, was erected on the subdivision in an earlier year bearing words to the effect: "St. Landry Subdivision - Apply at St. Landry Bank & Trust Company." The sign was broken down by a storm several103 months later and never replaced. No sign was displayed during 1949. Aside from that one sign, no advertising was used by petitioner. Petitioner had no license to act as a broker nor did it hire any salesmen. It never listed any lots with a real estate dealer. All sales were made to people who applied at the bank. Sales were refused to certain persons who did not conform to character standards set by petitioner. It had no office separate from the bank, and had no listing in the telephone directory or in the business directory for Opelousas. All sales were made by petitioner's president at his desk at the bank. It was a matter of general knowledge in the neighborhood that the bank was the place to inquire about these lots. The real estate market in Opelousas during the years 1946 to 1953 was favorable. The public was not aware of the existence of petitioner nor were inquiring persons advised as to the real owner except in connection with actual sales. Sales have been made in the subdivision as follows: NumberYearof SalesLots Sold1946351947121948231949710195078195111195222195368 Profit on 1949 sales totaled104 $5,567.09 which petitioner reported as long-term capital gain. In its return for 1949, petitioner reported income from interest of $1,925.99; rents, $80,306.21; royalties, $23,319.81; livestock, $50; and capital gain from sales of real estate as follows: SaleProfit onTotalPriceCostSale of LotsProfit$ 2,800.00$ 1,050.00$1,750.008,500.007,532.91967.09850.00350.00500.00650.00350.00300.001,800.00700.001,100.001,000.00350.00650.00650.00350.00300.00$ 5,567.09126.35126.35322.60322.605,487.005,487.002,298.752,298.755,420.625,420.62120.00120.002,000.002,000.00162.00162.00496.40496.40$32,683.72$10,682.91$22,000.81 Included in the capital gain was the profit from the 10 lots sold in "St. Landry Subdivision." Petitioner reported ordinary net income of $50,236.23 for the year 1949. During 1949, petitioner sold lots which were held by it primarily for sale to customers in the ordinary course of its business. Opinion We are once more confronted with the familiar question whether property acquired, subdivided, developed and sold is105 the source of ordinary income. Under the present circumstances we think it is. Petitioner was organized as a business corporation. It was created to acquire and make money out of the real property it owned. . Unlike such cases as , it did not intend to develop these parcels for rent, and the only means it had for making a profit was to sell them. This it did, employing the method apparently considered most appropriate for that purpose. It undertook the activity of subdividing, improving, and displaying its property, presumably in the manner and with the purpose of making the transactions as profitable as possible. See . It had no need of an advertising or selling campaign since the evidence shows that those in the neighborhood knew the property and were aware how to make inquiries concerning it. Had the bank itself retained these lots it is possible that its liquidation of forced acquisitions might bring it within the doctrine of such cases as . But petitioner was organized106 for the very reason that it could do what the bank could not. Its separate existence, activity and purpose may not be ignored. . And it cannot be said here, as it was in the Kanawha Valley case (at p. 256) that "We think it unreasonable to conclude that petitioner, forbidden by state law to carry on a real estate business, was actually engaged in that business and selling real estate to customers in the regular course thereof, merely because it had acquired and sold three parcels of real estate over a period of two years * * incident to the collection or recovery of money loaned by it in the transaction of its regular banking business. * * " The fact that lots were not sold repreatedly to the same persons does not exclude the actual purchasers from the class of "customers." Under the circumstances, anyone who bought from petitioner was its customer. . While the sales might have been more frequent, their continuity, as shown by our findings, cannot be questioned. And it would be difficult to say that transactions involving 10 lots in the year in issue and107 8 in the following constituted such an infrequency of dealings as to overcome all the other factors. Cf., e.g., We consequently dispose of the issue of fact, as set forth in our findings, in accordance with respondent's determination. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625934/	Associated Patentees, Inc. v. Commissioner.Associated Patentees, Inc. v. CommissionerDocket No. 112051.United States Tax Court1943 Tax Ct. Memo LEXIS 135; 2 T.C.M. (CCH) 718; T.C.M. (RIA) 43407; August 31, 1943135 Howe P. Cochran, Esq., 705 Colorado Bldg., Washington, D.C., and Margaret F. Luers, Esq., for the petitioner. Jonas M. Smith, Esq., for the respondent. LEECHMemorandum Findings of Fact and Opinion LEECH, Judge: This proceeding involves deficiencies in income tax in the amount of $10,350.66, declared value excess-profits tax of $964.78, and personal holding company surtax of $34,603.05, for the calendar year 1940. The petitioner filed its returns for those taxes for the period involved with the collector of internal revenue for the fifth district of New Jersey. The issues are (1) whether royalties received by petitioner in the tax year are properly includable in its gross income for that year, and, if so, (2) whether amounts paid by petitioner from those royalties are deductible by petitioner as ordinary and necessary expenses in the form of royalties paid by it and, if not so deductible, (3) whether petitioner is entitled to a dividends paid credit for the amount thus paid under section 27, Internal Revenue Code, and (4) whether petitioner was a personal holding company as defined by section 501 of the Internal Revenue Code. Findings of Fact The petitioner is a business corporation136 organized in 1933 under the laws of the State of New Jersey. Its principal place of business was in East Orange, New Jersey. Its authorized capital stock consisted of 100 shares of common without par value. All shares were issued. In about 1928 or 1929, Alwyn E. Borton, Frederick Koch, Walter P. Powers, all inventors and holders of patent rights, together with Cecil Todd, a financier, entered into an oral agreement to pool the patents and inventions on an equal share basis of one-quarter to each. They caused the petitioner to be formed. Each became an officer and director of the corporation. At the first meeting of the directors held on January 14, 1933, the aforementioned individuals made an offer to sell, assign and transfer to the petitioner all of their right, title and interest in and to twenty patents in exchange for the 100 shares of the capital stock of the petitioner. The directors, by resolution, accepted the offer. On January 16, 1933, these individuals executed and delivered to the petitioner a written assignment of twenty patents, designated therein by number, date of issue, and a brief description thereof. Thereupon the petitioner caused to be issued to each of these137 assignors twenty-five shares of its capital stock of no par value. On January 16, 1933, the individuals trusteed their respective shares of said capital stock to one William Dunkel. Subsequent to the incorporation of the petitioner and pursuant to their pooling arrangement, certain other patents were similarly assigned from time to time to the petitioner without fixing the consideration therefor because it was then impossible to approximate their value since they had not yet been used commercially. Under date of October 15, 1934, the petitioner entered into a written agreement with the U.S. Tool Co., Inc., which agreement contains, inter alia, the following provisions: WHEREAS, The U.S. TOOL is desirous of using certain patents, trade marks, etc. now owned by the ASSOCIATED PATENTEES: and WHEREAS, The ASSOCIATED PATENTEES are willing to grant to the U.S. TOOL exclusive right to use the patents, trade marks, etc. in question; * * * 1. In consideration of the complete payment of all expenses in connection with the obtaining and development of the said patents. trade marks, etc., the ASSOCIATED PATENTEES agree that the U.S. TOOL shall have the exclusive use of the said138 patents, trade marks, etc. for a period of five (5) years from the date of this agreement subject to the following provisions. 2. It is understood that the U.S. TOOL shall in no way transfer, assign or sell its right to use said patents, trade marks, etc. herein granted. On November 23, 1938, a modification was made to paragraph 2 of this agreement allowing U.S. Tool, Inc., to permit the General Electric Company the use of certain of the patents. On October 10, 1939, the petitioner entered into a new and more comprehensive general licensing agreement with the U.S. Tool Company, Inc. This agreement contained, inter alia, the following provisions: WHEREAS, said Licensee has been and is now manufacturing and selling various articles manufactured under the terms of a license agreement involving various patents, inventions, etc., trademarks, etc., dated October 15, 1934, granted by Licensor, which said license agreement expires October 15, 1939; and WHEREAS, in order to encourage the building up of a market for products manufactured under the patents, etc. as set forth in the said agreement, and others subsequently included under the same terms by oral agreement, said Licensor139 did not, under the terms of the existing license, require the payment of any royalties on the said license other than the payment of development expenses, as set forth in the said agreement, but it is now apparent to both Licensor and Licensee that there are prospects of substantial business from the sale of articles produced under the patents, etc. covered by the said license, said Licensee has agreed that a royalty of five per cent (5%) on the gross sales of products manufactured under such license is fair in addition to the continued payment of any development expenses on patents, inventions, etc. covered by the present license or which may hereafter be included in a future license; and WHEREAS, Licensor is willing to grant a new license covering all the patents, inventions, trademarks, etc. including in the present agreement, as well as any that may be subsequently added by mutual agreement, either in writing or orally, on the terms hereinafter set forth; NOW, THEREFORE, in consideration of the sum of One Dollar ($1.00) paid to each other, receipt of which is hereby acknowledged, and of the mutual covenants and agreements hereinafter set forth, said parties have agreed as follows:140 1. LICENSE AND RENEWAL PROVISION. Licensor hereby gives and grants unto the Licensee, subject to the conditions hereinafter set forth, the exclusive right and license to manufacture, have manufactured for it, and sell, and sell to others for use or sale throughout the United States, its territories and colonial possessions, the various products referred to above under the patents or applications or inventions, etc. as listed in the Schedule annexed to this agreement and under any patent or patents that may hereafter issue for inventions set forth in any applications now pending or which may hereafter be pending, or any reissue thereof, and under any patent or patents for such articles that may hereafter be acquired, obtained or controlled by the Licensor in anywise related to the aforesaid patents, provided that any such after-acquired patents, inventions, or trademarks not specifically set forth in this agreement may be covered by the terms of this agreement if mutually agreed to by the parties hereto, either in writing or orally. Such license shall extend from October 15, 1939 to October 15, 1941 unless earlier terminated as hereinafter provided. It is mutually agreed that141 unless notice is given by either party to the other, as hereinafter provided, on or before April 15, 1941 that such party does not desire to renew the agreement, then this agreement shall automatically be renewed for a period of one year from October 15, 1941, and thereafter shall automatically renew itself each year unless and until such six months' prior notice is served by either party in any year that such party does not desire to renew the agreement. Any such notice shall be sent by registered mail to the above addresses unless a new address shall have been furnished prior to the sending of such notice. This provision for automatic renewal is subject to the other provisions hereinafter referred to in this agreement relating to cancellation or termination. All of the rights covered by this license are hereinafter collectively referred to as "license rights". 2. ROYALTIES. Said Licensee agrees that during the continuance of this agreement it will pay to the said Licensor. its successors or assigns, royalties on the devices or products manufactured and/or sold by Licensee, or anyone deriving rights through Licensee, which royalty shall be at the rate of five per cent (5%) 142 of the gross sales of products manufactured by any of such parties under the said license rights; the said payments or royalties shall become due and be paid on the 15th of each month for shipments made or paid for up to and including the last day of the preceding month, to which royalty dates the accounts hereinafter provided for are to be made up. The period in which the said royalties shall be computed shall begin on October 15, 1939. The gross sales price hereinabove referred to shall not be interpreted to include customary discounts allowed by Licensee on sales of articles covered by this agreement. In addition to the above mentioned percentage on the gross sales, Licensee agrees that as part of the consideration for the said license, it will, during the continuance of this agreement, continue to make complete payment of all expenses in connection with the obtaining and developing of any patents, inventions, trademarks, etc. covered by this agreemet, as set forth in the annexed Schedule, or which shall hereafter be brought within the terms of this license by mutual agreement of the parties, either orally or in writing. On September 1, 1939, a special meeting of the Board of 143 Directors of petitioner adopted the following resolution: A special meeting of the Board of Directors of the Associated Patentees, Inc. was held at the Office of the Company, 19th Street and Springdale Avenue, Ampere (East Orange), New Jersey, on Friday, September 1, 1939 at 2 P.M., proper notice having been sent to the Directors in accordance with the By-Laws. The following directors were present: C. Todd, Alwyn E. Borton, F. Koch and W. P. Powers. The meeting was called to order by the President, Mr. Borton. On motion duly made and seconded it was unanimously RESOLVED, that the Secretary be, and hereby is authorized and directed to rent a safe deposit box from the Ampere Bank and Trust Company, East Orange, N.J. it being understood that access to said box shall be granted to any two of the present Directors of the Company who are C. Todd, Alwyn E. Borton, F. Koch and W. P. Powers. On motion duly made and seconded it was unanimously RESOLVED, that the President and Secretary of this Company be and hereby are authorized to negotiate and enter into a new license agreement with the U.S. Tool Company, Inc., to succeed the present agreement which expires on October 15, 1939, providing144 for the licensing of the manufacture and sale of products covered by patents, inventions, trademarks, etc. owned or controlled by this Company on terms of 5% royalty on gross sales plus development expenses as at present, the other terms to be as approved by said officers, it being the understanding of this Company with its four stockholders, C. Todd, Alwyn L. Borton, F. Koch and W. P. Powers, that as partial compensation for patents, inventions, ideas, etc. turned over to this Company by them since the incorporation of this Company, one-fifth of any cash royalties actually received by this Company is to be paid over to each of said individuals, and that each of said individuals, while acting as an officer of this Company, is to receive a salary of $1,500.00 per year as compensation for such services, if the cash income received by this Company during any such year is sufficient to pay such salaries after the payment of 80% of said royalties, and that in case such income is insufficient to pay such salaries in full, any reduction shall be pro-rated among the four officers. On motion duly made and seconded the meeting adjourned. /s/ W. P. Powers Secretary At a special meeting of145 the directors of the petitioner held on December 16, 1940, the following resolutions were adopted: On motion duly made and seconded, it was unanimously RESOLVED: 1. That the salaries of the officers for the year 1940 in the amount of $1500.00 each be paid before the close of business December 31, 1940. On motion duly made and seconded, it was unanimously RESOLVED: 2. That the Treasurer be, and hereby is instructed to distribute on or before December 31, 1940 as dividends all available income after paying salaries and other obligations. Mr. Todd brought up the fact that in reviewing the Minutes of previous Meetings, that the Minutes of the Special Meeting of the Board of Directors of September 1, 1939 did not clearly express the arrangement between the four Officers of the Company and the Company regarding patents turned over to the Company by them. The arrangement was that the payment to them of 80% of the Annual Royalties received from the patents, inventions, etc. that were turned over to us by them was to pay them for the use of such patents, etc. during the year in which such royalties are received, and for keeping such patents, etc. active and up to date, and such 80% was146 not paid to them in whole or in part as purchase money for such patents and inventions, etc. It was also understood that the 80% of royalties received on such patents was to continue for the life of the patents, and any extensions thereof. Mr. Todd said that at the time he noticed this ambiguity he made notations on the Minutes accordingly, and now wishes to have this properly stated in these Minutes. On motion duly made and seconded, it was therefore RESOLVED: That these statements be included in these Minutes. The following instrument was executed by the petitioner and the four individuals: WHEREAS, since January 14, 1933, C. Todd, A. E. Borton, F. Koch and W. P. Powers have made certain inventions and have obtained numerous patents, and WHEREAS, the said C. Todd, A. E. Borton, F. Koch and W. P. Powers are now working on numerous inventions and are applying for and seeking numerous patents, and WHEREAS, the patents as obtained have been turned over to Associated Patentees, Inc., from time to time without any arrangement being made as to compensation, and WHEREAS, the understanding was that the parties would arrive at the matter of compensation in due time, and WHEREAS, Associated147 Patentees, Inc., have licensed certain patents and inventions to others, and are obtaining certain royalties from time to time, and WHEREAS, almost the entire income of Associated Patentees, Inc., consists of royalties received from licensing others to use these patents and inventions, and WHEREAS, a verbal arrangement was made earlier this year to the effect that the Associated Patentees, Inc., would pay to each C. Todd, A. E. Borton, F. Koch, and W. P. Powers, 20% of all royalties received for the use of the patents and inventions turned over by them since January 14, 1933, to Associated Patentees, Inc., and WHEREAS, it is thought wise, because of the volume of business being done, and for other reasons, to reduce the whole arrangement to writing. NOW THIS CONTRACT WITNESSETH: That in consideration of one dollar, and other good and valuable considerations, the receipt whereof is hereby acknowledged, and in consideration of the use of numerous patents and inventions as listed on attached Schedule A, and in further consideration of the promise on the part of C. Todd, A. E. Borton, F. Koch and W. P. Powers to keep such patents and inventions current in so far as they can do so, 148 and in further consideration of the promise on the part of C. Todd, A. E. Borton, F. Koch, and W. P. Powers to turn over any inventions they may make to the Associated Patentees, Inc., the Associated Patentees, Inc. this 31st day of December, 1940, agrees to pay to each of the said C. Todd, A. E. Borton, F. Koch, and W. P. Powers, as royalties for the use of the patents and inventions turned over to Associated Patentees, Inc. since January 14, 1933, as shown in Exhibit A attached, an amount of cash equal to twenty (20) per cent of all royalties received by the said Associated Patentees, Inc.; and Further, the Associated Patentees, Inc. agrees to pay to each of the said C. Todd, A. E. Borton, F. Koch and W. P. Powers as royalties for the use of the patents and inventions turned over to the Associated Patentees, Inc., since January 14, 1933, as shown on Exhibit A attached, and as royalties for the use of patents and inventions to be turned over by the said C. Todd, A. E. Borton, F. Koch, and W. P. Powers, to the Associated Patentees, Inc. in the future, an amount of cash equal to twenty (20) per cent of all royalties that Associated Patentees, Inc. hereafter receives. This contract149 shall continue in full force and effect during the entire life of said patents and inventions, including the life of any patents and inventions that may be turned over to the Associated Patentees, Inc., in the future. ASSOCIATED PATENTEES, INC. By /s/ A. E. Borton, President /s/ C. Todd /s/ A. E. Borton /s/ W. P. Powers Secretary /s/ Frederick Koch /s/ W. P. Powers Prior to the end of 1940 petitioner paid $42,209.76 to the four individuals in equal amounts. Opinion The controversy revolves around the question of the proper treatment for tax purposes of the sum of $42,209.76 received by the petitioner from the U.S. Tool Co., Inc. in the taxable year. On its 1940 income and declared value excess profits tax returns the petitioner deducted that sum as an ordinary and necessary expense paid by it as royalties to four individuals, its stockholders, Messrs. Borton, Koch, Todd and Powers, in equal amounts. Section 23 (a) (1), Internal Revenue Code. The respondent disallowed this deduction and so determined the contested deficiencies. The determination of fact upon which these deficiencies apparently rest is that the petitioner, prior to the taxable year, bought the legal and equitable150 title to certain patents, the consideration for which was 80 percent of the royalties received by petitioner for the use of those patents and that those royalties received by petitioner from the U.S. Tool Co., Inc. in the taxable year then constituted gross income to petitioner. The petitioner argues alternatively that the above-mentioned sum of $42,209.76 was improperly included in its income for the tax year since it was received by petitioner as trustee for the four individuals, stockholders of petitioner, to whom it was paid by petitioner, but if properly includable in its income for the tax year it was deductible by petitioner as an ordinary and necessary expense in the form of royalties paid by it in the tax year. Petitioner takes another alternative position and urges that, in any event, it is entitled to a dividends paid credit for the amount of that payment to its stockholders under section 27, Internal Revenue Code. It also contends that it was not a personal holding company within the purview of section 501 of the Internal Revenue Code. Of course the petitioner has the burden of showing error in the determination of respondent. The least that can be said of the evidence151 here is that it is incomplete, conflicting and unconvincing on the pertinent questions. None of the assignments of the patents by the individuals to petitioner were put in evidence. It is admitted that the assignment of twenty patents on January 16, 1933, to petitioner by the four individuals who owned them, included both legal and equitable title. It is likewise conceded that the patents transferred by these four individuals to petitioner subsequent to January 16, 1933 on their face were just as absolute and unconditioned. The royalties with which we are concerned were paid on these later patents. It is argued, however, that the four transferors reserved the beneficial interest and equitable title in the last mentioned patents by an oral contract. It may be that such a title could have been reserved in those later transfers. F.L.G. Straubel, 29 B.T.A. 516">29 B.T.A. 516. But this record is woefully wanting in convincing evidence supporting such a reservation. It is true that the oral testimony of Powers and Todd attempts to sustain this alleged fact. But none of the contracts between petitioner and the U.S. Tool Co., Inc., all of the stock of both of which companies152 was owned by the four individuals, evidence in any way a beneficial interest in any other than petitioner. In fact, all the indications from those contracts are that petitioner was dealing with the patents as their absolute owner. The payments to be made thereunder to petitioner for the license are called "royalties" and are those made payable to petitioner. Although obviously possessing the power continuously to do so, no change or modification in such contracts was ever made conforming these contracts to the position the petitioner now takes. Although we do not know the date of assignment and transfer of any of the patents the royalties on which are here involved, the substance of the testimony is that they were assigned from time to time after January 16, 1933. But there is no written evidence of the existence of the reservation of equitable title in any of them until the minutes of the meeting of directors of petitioner bearing date of December 16, 1940. The minutes of that meeting, upon which petitioner relies, purport to reflect an event long after its occurrence, and at a time when its tax consequences may have been in mind. It was there attempted to correct the resolution 153 of September 1, 1939. That earlier resolution contradicts the position of petitioner here. It authorized the execution of a modified contract between petitioner and U.S. Tool Co., Inc. for the use of the patents. In so doing it expressely denominated as "royalty" the payments due thereunder to petitioner for the license so granted. Then "as partial compensation" to the four individuals "for patents, inventions, ideas, etc. turned over to this Company by [the individuals] * * since the incorporation of this Company * * " it provided that one-fifth of the cash royalties received by the petitioner was "to be paid over to each of said individuals * ." No intimation of the reservation by the individuals of any beneficial interest in the patents is apparent. In view of the fact that all of the stock in petitioner was owned by the four individuals equally no ready explanation occurs to us as to why any consideration should have been paid by the petitioner for these patents. Tax consequences, however, are determined by what is done not by what might or should have been done. Weiss v. Weiner, 279 U.S. 333">279 U.S. 333. It was about the date of this earlier resolution154 when the commercial returns to petitioner on some of these patents became substantial and the value of such patents therefore possible of approximation. The oral testimony of at leat one of the two of the original owners who testified stated that the absence of this condition of determination of commercial value prevented the fixing of a value for the patents when assigned to petitioner. Moreover, following the minute entry of December 16, 1940 purportedly correcting this earlier resolution, on December 31, 1940 the petitioner and the four individuals executed a "contract," which incorporates the corrected minute entry of December 16, 1940. Not only were the latter minute entry and "contract" made long after the fact they purport to evidence but the "contract" contains these two significant clauses which, we think, contradict the correction upon which petitioner relies and support the determination of respondent. The contract provides: WHEREAS, the patents as obtained have been turned over to Associated Patentees, Inc., from time to time without any arrangement being made as to compensation, and WHEREAS, the understanding was that the parties would arrive at the matter of compensation155 in due time, and * . It is true that in March 1942, some time after the present controversy arose and expressly referring to its existence, the petitioner and the four individuals executed two other instruments designated therein as "Declaratory Statement" and "Agreement and Clarifying Statement Re Ownership and Licensing of Patents, Inventions, Ideas, Etc." Both these instruments attempt again and in greater detail to set out the relationship between the petitioner and the four individuals with reference to these patents. In view of all the circumstances, however, these instruments have little or no evidentiary value. We conclude that petitioner has failed to sustain its burden of establishing error in respondent's determination. In fact, we think this record supports that determination. From this conclusion several consequences necessarily follow which dispose all the issues except the last. The transfers to petitioner of the patents here involved must necessarily have been either (1) transfers of a mere license to use; (2) transfers of title without expectation of payment and consequently contributions to capital by the four stockholders of petitioner; (3) transfers of the156 legal title with reservation of the equitable ownership by the four individuals or (4) transfers of legal and equitable title with expectation of payment of a consideration therefor, the amount to be determined later. Facts established and set out in our findings fail to justify, in our opinion, a finding that the transactions fall within either of the first three classes mentioned. Respondent has determined the transactions to be of the fourth class mentioned and we think that determination not negatived but supported by the record. It follows that the payments received by petitioner from the U.S. Tool Co., Inc. must be held to represent royalties paid it for use of its patents and consequently income to it and the $42,209.76 paid over to its four stockholders and former owners of the patents not to be royalties deductible by petitioner as business expenses nor dividend distributions for which it is entitled to credit under section 27, I.R.C., but payment of the consideration for assets acquired, such payment not being subject to reflection by it in computing net taxable income. The last issue is whether petitioner in 1940 was a personal holding company. The petitioner in 1940*157 filed a personal holding company return. The petitioner was a business corporation. Its capital stock was wholly owned by four stockholders. All of its gross income was "royalties" received under an agreement granting the exclusive use of patents and trade-marks which it owned. It meets all the tests of a holding company within the meaning of the Revenue Acts. Internal Revenue Code, §§ 501, 503. Cf. Commissioner v. Affiliated Enterprises, 123 Fed (2d) 665; cert. denied, 315 U.S. 812">315 U.S. 812. On this issue the petitioner fails. The discussion of petitioner in reference to depreciation deductions disallowed by respondent is not relevant to any issue submitted here. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625935/	Professional Services, Petitioner v. Commissioner of Internal Revenue, Respondent; Eugene F. and Patricia J. Morton, Petitioners v. Commissioner of Internal Revenue, RespondentProfessional Services v. CommissionerDocket Nos. 2674-80, 2675-801United States Tax Court79 T.C. 888; 1982 U.S. Tax Ct. LEXIS 13; 79 T.C. No. 56; November 23, 1982, Filed 13 Decisions will be entered under Rule 155. 1. In 1976 Eugene Morton, pursuant to a prearranged plan, borrowed $ 47,400 from Greenwich Trust, signed a promissory note for this amount, and transferred the $ 47,400 to International Tax & Business Consultants in exchange for a package of written materials relating to the creation and operation of "business trust organizations." Prior to filing his 1976 return, the above promissory note was returned to Eugene Morton's control pursuant to the overall plan. Held, Eugene Morton's transfer of $ 47,400 to International Tax & Business Consultants was a payment merely in form and not in substance and will therefore not support a deduction under either sec. 162 or sec. 212, I.R.C. 1954. Held, further, the underpayment of tax in 1976 was due to fraud, and Eugene Morton is liable for additions to tax under sec. 6653(b), I.R.C. 1954.2. In 1977, Eugene Morton paid $ 11,000 to ATES for information, assistance, written materials, and travel to be used to establish certain foreign and domestic "business trust organizations." Subsequently, Eugene Morton established and transferred the assets of his dental practice to one such trust (Professional Services), 14 and leased those assets back from Professional Services. Eugene Morton's relationship to the property transferred to Professional Services was unchanged by virtue of the transfer. Held, petitioners have failed to prove that any part of the $ 11,000 payment to ATES was an ordinary and necessary expenditure paid for the management, conservation, or maintenance of property held for the production of income or for tax advice. Sec. 212(2) and ( 3), I.R.C. 1954. Held, further, Professional Services was devoid of economic reality and is to be treated as a nullity for Federal income tax purposes. Held, further, a portion of the underpayment of tax in 1977 was due to fraud, and Eugene Morton is liable for additions to tax under sec. 6653(b), I.R.C. 1954. Jean S. Schanen, for the petitioner.Jeannette A. Cyphers, for the respondent. Korner, Judge. KORNER889 Respondent determined deficiencies of income tax plus additions to tax under section 6653(a)215 as follows:PetitionerYearDocket No.DeficiencySec. 6653(a)Eugene and Patricia Morton19762675-80$ 29,048$ 1,45219772675-8088,5904,430Professional Services19772674-8040,6692,033By amended answers in docket No. 2675-80, respondent alleged that the underpayments attributable to Eugene and Patricia Morton for the years 1976 and 1977 were due to fraud and accordingly asserted that these petitioners were liable for additions to tax under section 6653(b) with respect to those years.Numerous issues raised in the pleadings and amended pleadings have been conceded by the parties and can be given effect in the Rule 155 computations. After these concessions, the remaining issues for decision are as follows: (1) Whether Eugene and Patricia Morton are entitled to deduct, under section 162 or section 212, amounts they purportedly paid in 1976 to purchase certain materials relating to "business trust organizations"; (2) whether Eugene and Patricia Morton are entitled to deduct, under section 162 or section 212, amounts they paid in 1977 to purchase certain materials relating to "business trust organizations," and for assistance in establishing these organizations; 16 (3) whether certain payments purportedly made in 1977 by Eugene and Patricia Morton to Professional Services are nondeductible either because Professional Services was totally devoid of economic substance and is therefore not entitled to be recognized for Federal tax purposes, or because the purported payments themselves were without substance; or (4) alternatively, if Professional Services represents a valid, recognizable entity for Federal tax purposes, whether Eugene and Patricia Morton are taxable on any portion of the income of that entity in 1977 under the 890 grantor trust provisions of sections 671 through 677; (5) if Professional Services represents a valid, recognizable entity for Federal tax purposes, whether it is entitled to deduct, under section 162, amounts it purportedly paid in 1977 as a management fee; (6) whether Eugene Morton is liable for additions to tax under section 6653(b) with respect to his 1976 and 1977 tax years; or (7) alternatively, if Eugene Morton is not liable for additions to tax under section 6653(b), whether Eugene and Patricia Morton are liable for additions to tax under section 6653(a) for their 1976 and 1977 tax years; and (8) whether Professional 17 Services is liable for additions to tax under section 6653(a) for 1977.FINDINGS OF FACTSome of the facts have been stipulated and are so found. The stipulations of facts, together with the exhibits attached thereto, are incorporated herein by this reference.Eugene F. Morton (hereinafter referred to as petitioner) and Patricia J. Morton (hereinafter referred to as Patricia) were husband and wife during the years in issue and on the date of the filing of the petition in this case. Their legal residence on the date the petition was filed was Anchorage, Alaska. They filed joint Federal income tax returns for calendar years 1976 and 1977 with the Office of the Internal Revenue Service at Ogden, Utah. (Hereinafter, when "petitioners" is used it will refer to both petitioner and Patricia.) During the years involved herein, petitioner was a licensed dentist, practicing in Anchorage, Alaska.Petitioner Professional Services (hereinafter Professional Services) purports to be a "business trust organization" and was created in the State of Alaska on September 2, 1977. This entity 3 filed a fiduciary income tax return (Form 1041) for its short year beginning September 2, 1977, and ending December 18 31, 1977, with the Office of the Internal Revenue Service at Ogden, Utah.891 I. 1976 Tax YearCharles H. Bumpus and Glenn A. Huff were business associates and friends residing in Alaska. Through their investment partnership, Minn-Arctic Development Co. (MADCO herein), Mr. Bumpus and Mr. Huff were mutually involved in various real estate partnerships. They had offices in the same building and shared a single secretary. In mid-1976, Mr. Bumpus and Mr. Huff developed concerns about the effect that the death of a partner would have upon the operation of their various partnerships and consulted an attorney in an attempt to resolve these concerns. However, before Mr. Bumpus and Mr. Huff received what they considered 19 to be satisfactory advice from their attorney in this regard, Mr. Bumpus was approached by one Hiram Conley, a representative of the American Law Association (hereinafter A.L.A.). Mr. Conley represented that there was a way for Mr. Bumpus and Mr. Huff to eliminate their income tax and estate tax liability and to avoid probate upon the death of a partner through the use of a certain kind of foreign trust organization. Mr. Conley further represented that the subject had been throughly researched by one Karl Dahlstrom, and that this information would be presented to members of A.L.A. at a 2-day seminar in mid-November 1976, for a fee of $ 6,600.The prospect of achieving the above-asserted advantages was particularly attractive to Mr. Bumpus and Mr. Huff. Accordingly, through their partnership, MADCO, Mr. Bumpus and Mr. Huff joined A.L.A., paid a single seminar fee of $ 6,600, 4 and attended the seminar which was presented by Karl Dahlstrom in mid-November 1976 in Alaska. At the seminar, Mr. Bumpus and Mr. Huff, as MADCO partners, received one package of materials (hereinafter referred to as the tax package). The tax package included preprinted forms for establishing "business trust 20 organizations," preprinted minutes and trust certificates, and numerous excerpts from cases, legal commentary, newspaper articles, and other materials regarding trusts.Mr. Bumpus and Mr. Huff were very impressed by the information which was presented at the seminar. In fact, they 892 decided that they would disseminate the information they received at the seminar to all of their partners and partnerships so that they could alter their organizational format and henceforth conduct their affairs in the form of "business trust organizations," rather than partnerships. Mr. Bumpus wanted this structural change to occur by January 1 of the following year in order to avoid complexities which might arise from a mid-year closing of the partnerships' books.Mr. Bumpus and Mr. Huff decided that the best method by which the tax package materials could be disseminated to their partners and partnerships was through the utilization of their newfound knowledge relating to foreign business trust organizations. Accordingly, shortly after the Dahlstrom seminar in November 1976, they traveled to the country of Belize (formerly British Honduras). 21 They took with them the numerous forms for establishing trust organizations which they received as part of the tax package. While in Belize, Mr. Bumpus and Mr. Huff arranged for documents to be executed which purported to establish a number of trust organizations, over some of which Mr. Bumpus intended to, and did, exercise complete control, and over others of which Mr. Huff intended to, and did, exercise complete control. The trust organizations over which Mr. Bumpus exercised complete control were named Continental Trust Association (hereinafter Continental), Worldwide Marketing & Tax Consultants (hereinafter Worldwide), and Greenwich Trust (hereinafter Greenwich). The trust organizations over which Mr. Huff exercised complete control included Universal Trust Association (hereinafter Universal), International Tax & Business Consultants (hereinafter ITBC), and Zurich Trust (hereinafter Zurich).Upon the formation of these organizations, Mr. Bumpus purportedly transferred the tax package materials to Worldwide, while Mr. Huff purportedly transferred the same materials to ITBC. Thus, the tax package materials purportedly formed part of the corpus of one entity controlled by Mr. Bumpus, 22 and one entity controlled by Mr. Huff.Having thus established these organizations, Mr. Bumpus and Mr. Huff returned to Alaska and began to implement their plans to disseminate the tax package materials to their other partners and partnerships through their newly created foreign organizations. Additionally, the tax package materials 893 were made available to certain individuals who were not partners in any of the various partnerships in which Mr. Bumpus and Mr. Huff were partners.The transactions by which the tax packages were made available to the various partners, partnerships, and third parties were cast in the form of sales. The prices purportedly paid for the tax package by each purchaser varied as follows:PurchaserPrice Woody Lake Estates partnership$ 6,725Knollwood Heights partnership17,800Big Lake Heights partnership23,000Blair Estate partnership6,750Contracting Engineers & Associatespartnership31,800Skyline Estates partnership8,750Wasilla Estates partnership15,900Northern Lights Estate partnership3,600Wasilla Developments partnership41,900Eve Watson8,750George Simon17,800Charles E. Bumpus11,000Ralph Jokela14,500Norville Rich10,675Johnson Investments or Eugene Johnson31,800Johnson Investments or Eugene Johnson26,500Charles Bumpus Real Estate10,675Glenn a. Huff3,825Donald Saur23,000Ralph Huff14,500Christopher Bumpus8,750Eugene F. Morton47,400W. Kirk Marvin26,500Either 23 Mr. Bumpus or Mr. Huff or both were partners in each of the above-listed partnerships. Except for Eve Watson, W. Kirk Marvin, Ralph Huff, Christopher Bumpus, and petitioner, all of the above-listed individuals were partners in one of the partnerships to which Mr. Bumpus or Mr. Huff belonged.Although each of the purchasers of a tax package received 894 similar materials, 524 the prices they purportedly paid for such materials, as indicated above, varied from $ 3,600 to $ 47,400. At trial, neither Mr. Bumpus nor Mr. Huff offered any credible explanation as to how these varying prices were determined. Each purported sale of a tax package was preplanned and structured similarly. 625 A prospective purchaser would borrow the tax package purchase price from one of Mr. Bumpus' controlled entities and then buy a tax package from one of Mr. Huff's controlled entities, or vice versa, using the proceeds of the loan to pay the purchase price. Mr. Bumpus and Mr. Huff were careful to structure each purported purchase so that a tax package would not be purchased from the same or commonly controlled entity that loaned the purchase price to the buyer. This was done because Messrs. Bumpus and Huff thought that it would not "look right" to have a purchaser both borrow the money and purchase the tax package from entities controlled by the same individual. At the time the loans were made to prospective purchasers of tax packages, the parties intended that the borrowers would not ultimately be required to repay the loan to the original lender. Two methods were subsequently devised by which the above preconceived plan was implemented. One method was applied to notes signed by the individual purchasers, while the other method was applied to notes signed by the partnerships which purchased tax packages. With respect to the former, substantially all of the individual purchaser's promissory notes were given by the lending entity to entities controlled by the individual purchaser or a relative of that purchaser. Each note signed by a partnership, on the other hand, was repaid with partnership funds. However, each of 895 these repayments was then immediately transferred in proportionate shares by the "lender" to entities controlled by each partner. Thus, these repayments, in fact, resulted in a distribution of partnership funds to each partner's controlled entity.Petitioner's purported 26 purchase of a tax package followed the structure outlined above. Petitioner first borrowed $ 47,400 from Greenwich (a Bumpus-controlled foreign business trust organization), and signed a promissory note, bearing interest at a rate of 8 percent, under date of December 27, 1976. Both interest and principal on this note were to fall due in December 1999. Then, pursuant to a written contract, petitioner transferred the $ 47,400 to ITBC (a Huff-controlled foreign business trust organization) and received the tax package materials in exchange. On April 22, 1977, the promissory note representing petitioner's indebtedness to Greenwich was transferred to Swiss International, Ltd., by Greenwich. Swiss International, Ltd., purports to be a foreign business trust organization which was created by, and entirely controlled by, petitioner. 7 In fact, the note was physically delivered to petitioner, who was the only individual authorized to act on behalf of Swiss International, Ltd., by Mr. Bumpus, who was the only person authorized to act on behalf of Greenwich. The transfer of this note to Swiss International, Ltd., was made to effectuate the parties' preconceived intention to relieve petitioner 27 of all liability on the note to Greenwich. Petitioner in effect paid nothing for the tax package which he received in 1976. 828 896 On his 1976 tax return, petitioner deducted the $ 47,400 purportedly paid for the tax package as legal and professional fees. Petitioner signed his 1976 return on May 21, 1977, which was after the date (April 22, 1977) when the note for this amount had been returned to him, ostensibly acting for Swiss International, Ltd. (see note 7 supra). Petitioner claimed said deduction fraudulently, with intent to evade part of his 1976 tax. In his statutory notice of deficiency, respondent disallowed this deduction 29 on the ground that petitioner had neither established that such amounts were ordinary and necessary business expenses nor that such amounts were actually expended for the purpose designated. Additionally, respondent determined that petitioners were liable for additions to tax under section 6653(a). By way of amended answers, respondent now contends that petitioner is liable for additions to tax under section 6653(b) and only alternatively contends that petitioners are liable for additions to tax under section 6653(a).II. 1977 Tax YearIn late December 1976, Mr. Bumpus and Mr. Huff created another business trust organization called ATES and established themselves as co-trustees. Apparently, ATES was created as a vehicle through which Mr. Bumpus and Mr. Huff could market the tax package materials to interested parties, as well as provide such purchasers with other assistance relating to business trust organizations. Mr. Bumpus and Mr. Huff then formulated the package which was later marketed through ATES. This package (hereinafter referred to as the ATES package) was made available for purchase at a cost of $ 11,000. Mr. Bumpus and Mr. Huff, as co-trustees of ATES, established an 30 office and hired Wesley J. Milton, an accountant, to assist purchasers of ATES packages with any problems which might develop after their purchases.In January 1977, petitioner paid $ 11,000 to ATES for the 897 ATES package. This $ 11,000 price purchased for petitioner copies of all of the tax package materials and forms which he had purportedly purchased from ITBC for $ 47,400 in December of 1976 as set out hereinabove. The price additionally included membership in A.L.A. travel expenses to Houston, Tex., a Dahlstrom seminar, 9 travel expenses to Belize, and assistance in establishing and maintaining trust organizations, as well as return expenses to Alaska.Mr. 31 Bumpus and Mr. Huff escorted their first group of ATES package purchasers to Houston, Tex., and on to Belize in early 1977. This group consisted of 10 or 11 people, and included petitioner.On February 1, 1977, while in Belize, petitioner executed preprinted documents that he had received as part of the ATES package, which purported to establish three business trust organizations. Petitioner named these newly created organizations Professional Management Organization (hereinafter referred to as Professional Management); Swiss International, Ltd. (hereinafter referred to as Swiss International); and National Service Organization (hereinafter referred to as National Service).The documents which purportedly created Professional Management name petitioner as trustee of that entity. The same documents recite that petitioner, on February 1, 1977, transferred $ 100 to Professional Management in exchange for 100 "trust certificate units." These documents also list one Julian Thompson as "creator" of the organization, and list petitioner as "transferor." On the same day, petitioner then purported to transfer the 100 trust certificate units of Professional Management to Julian Thompson, who 32 held the certificates thereafter as nominee for petitioner. 10898 The documents which purport to create Swiss International list Professional Management as the "transferor." These documents name Professional Management as first trustee 33 of Swiss International and also recite that Professional Management transferred $ 50 of the $ 100 it had received upon its creation, to Swiss International in exchange for 100 Swiss International trust certificate units. On the same day that this entity was created, petitioner, acting as trustee of Professional Management, appointed Swiss International "advisory trustee" of National Service (the third trust organization established by petitioner on February 1, 1977, as set out below). This document recited that Swiss International would receive $ 10,000 per year as compensation for services to be rendered to National Service as advisory trustee.The documents which purport to establish National Service name Professional Management as first trustee of that entity. Petitioner ostensibly transferred $ 200 to National Service and received 100 trust certificate units in exchange. Simultaneously, petitioner purported to give the 100 trust certificate units to Swiss International. 11 The 34 preprinted documents which purportedly established these three business trust organizations each provided:The named Trustee(s), for themselves and their successors in trust irrevocable do hereby accept the conveyance and acknowledge delivery of all the property specified, together with all the terms of the Trust Organization herein set forth, agreeing to conserve and improve the Trust Organization, to invest and reinvest the funds of said Trust Organization, in such manner as will increase the financial rating of the Trust Organization exercising their best judgment and discretion, in accordance with the Trust minutes, making distribution of portions of the proceeds and income as in their discretion, and according to the minutes, and upon the final liquidation distributing the assets to the existing certificate holders as their contingent rights may appear; and in all other respects administering said Trust Organization in good faith, strictly in conformity hereto.899 The named trustees (i.e., petitioner) of these organizations could be removed only by a unanimous resolution of the board of trustees, 12 or by a court. The trustees were empowered to appoint or elect successor trustees 35 upon the death or removal of another trustee by unanimous vote of the remaining trustees.The trustees were provided with extremely broad powers over the trust. Each trust instrument provided:Trustees' powers shall be construed as general common-law powers of citizens of the Country of Belize, Central America to do anything any citizen may do in any state or country. They shall, but not be limited to continue in business, conserve the property, commercialize the resources, extend any established line of business in industry or investment, as herein specially noted, at their discretion for the benefit of this Trust Organization such as, viz: buy, sell or lease land for surface or mineral rights; buy or sell mortgages, securities, bonds, notes, leases of all kinds, contracts or credits of any form, patents, trademarks or copyrights; buy, sell, or conduct mailorder [sic] business, or branches thereof; operate stores, shops, factories, warehouses, or other trading establishments or places of business of any kind; allocate funds derived from any source for charity, 36 religion, education, research, accumulating or other purposes, whether for immediate or future application to be managed by specified Trustee, Trustees, or others as designated by the Trustee's minutes; construct, buysell, [sic] or lease or rent any type of real estate, improved or unimproved; advertise different articles of business projects; borrow money for any project, pledging the Trust Organization property for the payment thereof; hypothecate assets, property, or both; own stock in, or entire charters of corporations, or other properties, companies or associations as they may deem advantageous.Resolutions of the Board of Trustees authorizing a special thing to be done shall be evidenced [sic] that such act is within its power. Anyone lending or paying money to the Board of Trustees shall not be obligated to see the application thereof. All funds paid into the treasury are and become a part of the corpus of the Trust Organization.As to its duration and termination, each trust instrument provided: This Trust Organization shall continue for a period of twenty-five years from date, unless the Trustees shall unanimously determine upon an earlier date. The Trustees may at their 37 discretion, because of threatened depreciation in values, or other good and sufficient reason, liquidate the assets, distribute and close the Trust Organization at any earlier date determined 900 by them. The Trust shall be proportionately and in a pro rata manner distributed to the Certificate Holders.The rights of the certificate holders of each of the business trust organizations were defined as follows:Ownership of certificates shall not entitle the holder to any legal title or equitable title in or to the Trust Organization property, nor any undivided interest therein, nor in the management thereof, nor shall the death of a holder entitle their [sic] heirs or legal representatives to demand any partition or division of the property of the Trust Organization, nor any special accounting. The rights of the certificate holders in personam are limited to merely a claim against the trustees to carry out this Declaration of Trust.Petitioners returned to Alaska from Belize on February 2, 1977. The above three organizations remained dormant until September 1977. At all times since the execution of the documents purportedly creating the organizations, all trust records and assets have 38 been kept under petitioner's control in Alaska.In September of 1977, petitioners executed documents which purportedly established, under Alaska law, two more business trust organizations. The documents creating these new entities were executed in Anchorage, Alaska, and the entities were named Professional Services and Alaska Rentals. The trustees' powers and the trusts' durations as well as the rights of the certificate holders, were substantially similar to those of petitioners' three previously created trusts, except that, under these documents, the broad trustees' powers were to be construed as general common law powers of citizens of the United States, rather than citizens of Belize.According to the documents which purportedly created Alaska Rentals, petitioner was named first trustee of that entity and his wife, Patricia, was named second trustee. 1339 Petitioner and Patricia then named petitioner "executive trustee" of Alaska Rentals. Additionally, this document indicates 901 that petitioner transferred $ 100, together with some real property and certain partnership interests, to Alaska Rentals, loaned it $ 15,000, and received 100 trust certificate units in exchange.On September 2, 1977, petitioner executed documents which purported to create Professional Services. These documents name petitioner and his wife, Patricia, as first and second trustees, respectively. Petitioner and Patricia then named petitioner executive trustee of this entity. These documents indicate that, on September 2, 1977, petitioner transferred all of the dental equipment and supplies that he used in his practice of dentistry, as well as the real property used by petitioner as his dental office, to Professional 40 Services. The conveyance of the real property is evidenced by a quitclaim deed, executed on September 2, 1977. However, this transfer was not recorded until late in 1979.In exchange for the above-purported transfers, petitioner received 100 Professional Services trust certificate units. On the same date, petitioner purportedly transferred 50 of those units to Patricia.Although petitioner and Patricia were named first and second trustees, respectively, of both Alaska Rentals and Professional Services, petitioner exercised exclusive control over both of these entities, since he was also named executive trustee of these entities, and the respective trust instruments each provided that:The Executive Trustee shall have the sole authority acting in behalf of all other Trustees. This authority includes the power to execute contracts of any description, buy and sell property of all kinds, direct the management concerning any affair that will benefit the trust or any other powers provided for in the Trust Indenture.The avowed purpose of the trust was to --provide for a sane and economical administration by natural persons acting in a fiduciary capacity, to begin at once and that the Trustees 41 act solely within their constitutional rights as based upon their common law rights and immunities vouchsafed to citizens of the United States of America and defined in Article IV, Section 2, providing that "Citizens of each state shall be entitled to all privileges and immunities of citizens in several states:" and Article VI, Section 2, providing that "The Constitution of the United States and the laws made in pursuance thereof shall be the supreme law of the land;" and the 14th amendment thereof, providing, that "No state shall 902 make or enforce any law which shall abridge the privileges or immunities of citizens of the United States."Thus, after all of the above-purported trust organizations had been created, the relationship among petitioner and his various organizations was as shown in the chart on page 903.Because of the way the purported business trust organizations were structured, and because petitioner was the only trustee, or the only trustee with power to act, petitioner was at all times in complete control of the five organizations he had established. Any contract, loans, or other transactions among these entities were executed or performed by petitioner, either in his 42 capacity as a trustee or executive trustee of one or more of the purported trust organizations. No individual other than petitioner had any proprietary, beneficial, or equitable interest in any of the organizations or their assets.In purchasing the ATES package, and in establishing the above organizations pursuant to its guidance, petitioner's purposes were to reduce his Federal tax liabilities, to protect his assets from potential malpractice claims, and to eliminate probate costs in his estate with respect to assets placed in the business trusts.Bank accounts were opened for Professional Services, Alaska Rentals, Swiss International, and National Service in September 1977. No account was opened for Professional Management.On September 5, 1977, Professional Services entered into a "contract" with National Service wherein National Service agreed to supply dental practice management services to Professional Services (hereinafter the management contract). Professional Services agreed to pay National Service $ 16,000 per month for the rest of 1977 for these services. This contract was signed for Professional Services by petitioner as executive trustee of Professional Services and 43 for National Service by petitioner as trustee of Professional Management, which was trustee of National Service. As the trusts were actually structured, petitioner, himself, was to render all management services to his dental practice, ostensibly in his capacity as trustee of Professional Management, which was trustee of National Service.On September 10, 1977, petitioner, in his capacity as executive trustee of Professional Services, entered into a903 [SEE ILLUSTRATION IN ORIGINAL]904 "contract" with himself, in his individual capacity, wherein Professional Services agreed to supply petitioner with all equipment, clinic and supplies, as well as management and other services, which were necessary in the conduct of his dental practice. Under the specific terms of the contract, petitioner in his individual capacity agreed to pay Professional Services the following:1. Rent$ 2,500 per month2. Utilities1,000 per month3. Personnel5,333 per month4. Equipment3,000 per month5. Accounting2,000 per month6. Management (special study)9,000 per month7. Collections1,000 per monthPayments under the above contract were, by the contract terms, to commence in September 1977, except with respect to payments 44 for personnel, which were to commence in October 1977. Thus, total payments required under the contract amounted to $ 89,999 in 1977.Petitioner wrote checks against his own account payable to Professional Services in 1977 as follows:DateAmountOct. 7, 1977$ 10,000Oct. 28, 197710,000Nov. 28, 197715,000Dec. 12, 197710,000Dec. 27, 197730,000Dec. 27, 197710,000Total85,000Thus, although total payments due to Professional Services on the above "contract," as indicated above, amounted to $ 89,999, only $ 85,000 was actually paid to that entity in 1977. 14 Moreover, the contract required that payments were to be made on a per-month basis. Total monthly payments due under the contract were $ 18,500, $ 23,833, $ 23,833, and $ 23,833 905 for the respective months of September, October, November, and December. However, as indicated above, the total dollar amount of the checks written by petitioner to Professional Services for the respective months of September, October, November, and December, were $ 0, $ 20,000, $ 15,000, and $ 50,000. Thus, neither the total dollar amount actually transferred to Professional Services nor the amounts transferred in each of the last 4 months of 1977, coincided 45 with the amounts due according to the contract terms.The record does not disclose the precise nature of "management" and "collection" services which were to be rendered by Professional Services under the above "contract," and for which it charged $ 10,000 per month. It is clear, however, that any such services were rendered by petitioner, either in his capacity as executive trustee of Professional Services, or as trustee of Professional Management, which was trustee of National Service and which had a "management contract" with Professional Services. There is no indication that petitioner received any compensation whatsoever in exchange for his performing these services.Petitioner, in his capacity as executive trustee of Professional Services, wrote checks in 1977 against Professional Services' account which totaled as follows:PurposeAmount1. Taxes on business property$ 3,1502. Salaries and wages7,2463. Insurance3474. Interest on business indebtedness8065. Supplies3,2466. Lab fees6,6407. Utilities$ 5158. Licences30Subtotal21,9809. Payable to National Service64,000Total1546 85,980906 These amounts were deducted by Professional Services on its 1977 fiduciary income tax return against its disclosed gross income of $ 85,000. Professional Services reported a net loss of $ 2,735 and paid no Federal income tax in 1977. 16According to the terms of the management contract between Professional Services and National Service, payments were required to be made in the amount of $ 16,000 per month. However, the checks which were issued to National Service, although totaling $ 64,000 in 1977, 47 did not coincide with the monthly payment requirements set out in the management contract. To the contrary, no amounts were transferred to National Service in September 1977. For the months of October, November, and December, checks in the amounts of $ 10,000, $ 10,000, and $ 44,000, respectively, were written to National Service by Professional Services. The record does not establish what services, if any, were rendered by National Service under the management contract. It is clear, however, that any services which were rendered were performed by petitioner, since he was the only individual authorized to act on behalf of National Service, in his capacity as trustee of Professional Management, which was trustee of National Service. It is also clear that petitioner in his individual capacity received no compensation from either Professional Management or National Service in consideration of his performance of these services.907 Of the $ 85,000 petitioner paid to Professional Services, $ 64,000 remained there only for a theoretical instant. The checks totaling $ 64,000 which were made payable to National Service, as listed above, were written on the same date that petitioner transferred 48 these funds to Professional Services. The same amounts were, on the same date, transferred to Swiss International, and, on the same date, were then transferred to Alaska Rentals. Finally, on the same date that the original checks were written to Professional Services, National Service, Swiss International, and Alaska Rentals, checks totaling $ 59,000 were written on Alaska Rentals, payable to petitioner. Before the close of the 1977 taxable year, Alaska Rentals transferred $ 3,500 more of this amount to petitioner. Thus, of the total amount of $ 85,000 originally transferred by petitioner to Professional Services, $ 62,500 was passed through petitioner's business trust organizations and returned to him either on the same day of the original transfer, or before the close of the taxable year. The sequential flow of these funds is detailed in the footnote below. 17 All of the checks involved were personally prepared by petitioner, in his individual capacity or in his capacity as trustee or executive trustee of the various trust organizations, although petitioner employed a bookkeeper to prepare all of the checks which were used to pay the normal expenses of his dental practice in 49 1977. Exactly what services, if any, were rendered by Swiss International as advisory trustee to National Service is not disclosed on the record. It is, however, clear that any services 908 rendered were performed by petitioner, ostensibly in his capacity as trustee of Professional Management, which was trustee of Swiss International. It is equally clear that petitioner received no compensation for services so rendered. 1850 In January 1978, petitioner's accountant prepared six documents which are labeled "promissory notes" and purport to evidence loans totaling $ 64,000 from Swiss International to Alaska Rentals. These documents were backdated to make it appear that they had been prepared on the same date that the funds were transferred in 1977 (see findings in note 17 supra). Thus, the six purported promissory notes were dated October 7, 1977, October 28, 1977, November 28, 1977, December 12, 1977, December 27, 1977, and December 27, 1977, respectively. Each of these documents was signed by petitioner in 1978.The due dates of the six purported loans from Swiss International to Alaska Rentals, as reflected in this set of documents, were respectively as follows: January 6, 1978; January 27, 1978; February 26, 1978; March 10, 1978; March 25, 1978; March 25, 1978. These six documents also indicate that, simultaneously with the making of the purported loans to Alaska Rentals by Swiss International, the latter entity transferred the promissory notes evidencing those "loans" to petitioner by gift. Petitioner, according to this first 51 set of documents, thereby became payee under these notes without assuming any liability thereon.A second set of documents which relate to four of the above six "loan" transactions was prepared by petitioners' accountant in March or April of 1978, at or after the due dates of the original notes, and alters the first set of documents in two respects. First, the due dates for each of four of the original "loans" from Swiss International to Alaska Rentals were changed. According to this set of documents, the respective due dates on the "loans" were as follows: October 7, 1982; November 28, 1982; December 27, 1982; and December 27, 1982. Second, these documents indicate that petitioner, simultaneously with the transfer of funds from Swiss International to Alaska Rentals, and from Alaska Rentals to petitioner, undertook to assume liability on the loans from Swiss International 909 to Alaska Rentals. This set of documents covers $ 54,000 of the total transfer of $ 62,500 to petitioner.This second set of documents was also backdated to make it appear that the documents were prepared in 1977 when the original checks were drafted. Petitioner signed these documents in March or April, 1978. 52 19Yet a third set of documents was prepared covering the above transactions. This third set of documents was prepared by petitioner's accountant in 1981, after petitioner's attorney herein criticized the language contained in the second set. This set of documents reflects that petitioner assumed liability on four of the purported promissory notes totaling $ 54,000, evidencing the "loans" from Swiss International to Alaska Rentals, and contains the same due dates as the second set of documents. Additionally, this third set of documents indicates that Swiss International gave to petitioner one of the promissory notes with a face amount of $ 5,000. According to this set of documents, Alaska Rentals remained indebted to Swiss International on one of the notes with a face amount of $ 5,000. This set of documents was also backdated and signed by petitioner. This set of documents was presented to respondent's agent as copies of the original, correctly dated 53 notes.Petitioner did not reflect these "loans" on any of the three financial statements he prepared during the years 1978, 1979, and 1981. Two of these financial statements were submitted as "full, true, and correct [statements] of his financial condition on the date stated." The other financial statement was submitted as "true and [representing] a total disclosure of all information requested." Moreover, petitioner did not list these "loans" as liabilities on a petition for a dissolution of his marriage which was filed with the Alaska Superior Court in Anchorage on December 5, 1980.On January 2, 1980, petitioner, in his capacity as trustee of Professional Management, which was trustee of Swiss International, executed documents in Alaska which purported to create Anchorage Investments (hereinafter Anchorage), another business trust organization. The relevant trust's terms 910 and duration were substantially similar to those of petitioners' previously created organizations. Upon creation of this purported entity, Swiss International transferred to Anchorage the four promissory notes totaling $ 54,000, on which petitioner contends that he assumed liability. Anchorage was also completely 54 controlled by petitioner.No repayments had occurred on any of these purported loans up to July 1980. Prior to that time, the statutory notice of deficiency in this case had been issued, the petition had been filed, and respondent had begun pretrial discovery herein. Beginning in July 1980, petitioner wrote checks to Anchorage which purportedly represented payment on the above "loans."On their 1977 joint return, petitioners deducted the entire amount transferred to Professional Services as ordinary and necessary business expenses. As noted in note 14 supra, petitioners deducted $ 88,000 as amounts paid to Professional Services in 1977. They now concede that only $ 85,000 was actually transferred to that entity in 1977. The deductions for payments to Professional Services were not identified as such in petitioners' return, but were part or all of claimed deductions in various amounts on Schedule C (relating to petitioner's dental practice) labeled as "rent," "utilities," "commissions," "legal and professional fees," etc. Respondent disallowed these deductions in full on the grounds that the payments were neither ordinary and necessary business expenses nor actually expended for 55 the purposes designated. Additionally, respondent determined that the income of Professional Services, as found by respondent (except that entity's claimed deduction for amounts paid to National Service as management fees, which respondent disallowed), 20 were attributable to petitioners under the grantor trust provisions of sections 671 through 677. Moreover, respondent determined that petitioners were liable for additions to tax under section 6653(a). By way of amended answers, respondent now contends that petitioner is liable for additions to tax under section 6653(b) and only alternatively contends that petitioners are liable for additions to tax under section 6653(a).911 In their petition herein, petitioners claimed that the amounts paid to Professional Services were, in fact, deductible as ordinary and necessary business expenses. Petitioners also claimed that the grantor trust provisions are inapplicable 56 to Professional Services, as a basis of taxing its income to them. At trial, with respondent's consent and by leave of this Court, petitioners orally amended their petition herein to conform to the evidence and to claim an additional deduction, in the amount of $ 11,000, for the ATES package purchased in 1977. Although petitioners have not formalized such amendment in writing, the issue is treated as properly raised by petitioners and denied by respondent. Rule 41(b).With respect to Professional Services, respondent determined a deficiency, and an addition to tax under section 6653(a), based upon disallowing certain deductions claimed in its 1977 fiduciary tax return. After concessions, the only remaining issue regarding deductions claimed by Professional Services is the deductibility of the claimed "advisory trustee fees" of $ 64,000 transferred by Professional Services to National Service, and the issue of addition to tax under section 6653(a).Petitioner, a dentist, is an educated man and, at time of trial, had operated and managed his own dental practice for 17 or 18 years. By 1977 he had engaged in at least three different real estate or rental ventures and a commercial fishing 57 operation. He knew, prior to the time he became involved with business trust organizations, that the overall plan here involved was questionable, at least from the perspective of the Internal Revenue Service. However, he nonetheless failed to seek advice of competent legal counsel prior to entering into these transactions. Petitioner was somewhat less than cooperative when the Internal Revenue Service attempted to examine his 1976 and 1977 tax years. Petitioner repeatedly delayed meetings requested by respondent's agent. Only after this Court ordered petitioner to produce his records was such information forthcoming. Petitioner's 1977 return was filed fraudulently, with intent to evade tax.912 OPINIONI. 1976The first issue for decision is whether petitioners are entitled to deduct $ 47,400 in 1976 which they purportedly paid for the purchase of materials relating to business trust organizations. If we decide that petitioners are not entitled to deduct this $ 47,400, we must also decide whether Eugene Morton is liable for additions to tax under section 6653(b) or, alternatively, whether Eugene and Patricia Morton are liable for additions to tax under section 6653(a). 2158 Respondent contends that no portion of the $ 47,400 purported payment is deductible by petitioners. This contention is grounded on two alternative theories. First, respondent argues that petitioner's "purchase" of the tax package materials was devoid of economic reality in that no amounts were, in substance, paid by petitioners. Alternatively, respondent maintains that even assuming that the $ 47,400 was, in substance, paid by petitioner, such payment represented merely a personal expense of petitioner and is therefore rendered nondeductible by section 262. Petitioners, on the other hand, contend that $ 47,400 was in substance, as well as in form, paid in 1976, and further argue that this payment represented a deductible expenditure under sections 162 and/or 212.Section 162 provides in pertinent part:SEC. 162(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 * Section 212 provides:In the case of an individual, 59 there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year -- (1) for the production or collection of income;(2) for the management, conservation, or maintenance of property held for the production of income; or(3) in connection with the determination, collection, or refund of any tax.Petitioners herein are on the cash method of accounting, 913 and are therefore entitled to deduct allowable items of expense under either section 162 or section 212 in the year in which the expenses are paid in cash or its equivalent. Sec. 1.461-1(a)(1), Income Tax Regs.; Eckert v. Burnet, 283 U.S. 140">283 U.S. 140 (1931). However, in order to support a deduction under these provisions, the requisite "payment" must be one in substance, and not merely in form. As we have stated in Golsen v. Commissioner, 54 T.C. 742">54 T.C. 742, 754 (1970), affd. 445 F.2d 985">445 F.2d 985 (10th Cir. 1971), cert. denied 404 U.S. 940">404 U.S. 940 (1972):It has repeatedly been held that the substance of a transaction rather than the form in which it is cast is determinative of tax consequences unless it appears from an examination of the statute and its purpose that form was intended to govern * In determining 60 whether petitioners truly paid $ 47,400 in 1976 for the purchase of the tax package, petitioners would have us focus our attention solely on the fact that this amount was transferred by petitioner to ITBC in exchange for the tax package materials. However, the true substance of a particular transaction may not always be gleaned from a myopic examination of a single event. Where a formally separate transaction is merely one step in a series of integrated and interdependent steps which are focused on a particular end result, an examination of that individual event, in isolation from the several integrated steps, and a determination of Federal tax consequences based on such an isolated examination, could lead to results which do not comport with economic reality. In such a case, the incidence of Federal taxation must be determined by reference to the overall economic result of the series of interrelated transactions; and the ostensibly separate steps leading to this overall result will not be afforded independent significance. As we have stated in Lazarus v. Commissioner, 58 T.C. 854">58 T.C. 854, 864 (1972), affd. 513 F.2d 824">513 F.2d 824 (9th Cir. 1975):"Technical considerations, niceties of the law 61 of trusts or conveyances, or the legal paraphernalia which inventive genius may construct" must not frustrate an examination of the facts in light of the economic realities. Helvering v. Clifford, [309 U.S. 331">309 U.S. 331] at 344. Moreover, in ascertaining such realities, a series of related transactions may not be broken into bits and pieces but must be viewed as a whole. Minnesota Tea Co. v. Helvering, 302 U.S. 609">302 U.S. 609, 613 (1938); Kanawha Gas & Utilities Co. v. Commissioner, 214 F.2d 685">214 F.2d 685, 691 (5th Cir. 1954).914 In the present case, it is abundantly clear that petitioner's transfer of $ 47,400 to ITBC was only one step in a series of interdependent steps which was focused on a particular end result. Mr. Bumpus and Mr. Huff conceived the overall tax package purchase and sale plan in November 1976. According to their plan, Mr. Bumpus, Mr. Huff, and the prospective purchaser would first decide on an appropriate "price" to charge the prospective purchaser. Once this price was established, the purchaser would "borrow" the tax package purchase price from one of Mr. Bumpus' controlled entities and then purchase a tax package from one of Mr. Huff's controlled entities, or vice versa, using the proceeds 62 of the "loan" to pay the purchase price. At the time the transactions were entered into, the parties intended that the "purchaser-borrower" would not be required to repay the "loan" to the original "lender." In fact, substantially all individual purchasers' promissory notes were given by the lending entity in the above plan to a relative of, or an entity controlled by, the individual purchaser.Prior to entering into the purchase of the tax package in 1976, petitioner was approached by Mr. Bumpus and informed about the planned sale. Pursuant to this prearranged plan, petitioner "borrowed" the tax package purchase price from Greenwich, a Bumpus-controlled foreign "entity," and simultaneously used the "loan" proceeds to purchase the tax package materials from ITBC, a Huff-controlled "entity." Although petitioner signed an unsecured deferred interest and principal note as evidence of the above "loan," it was understood from the outset that no amounts would ever be required to be repaid to the lending entity (i.e., Greenwich) on this note. In fact, only 5 months after petitioner signed this note, and before any principal or interest was paid by petitioner, Greenwich gave the note to Swiss 63 International, an entity entirely controlled by petitioner.The above series of transactions was thus entirely prearranged, and there is little doubt that petitioner would not have 915 agreed to the purchase if any one of the integrated steps in the overall plan had been omitted. 22 It is therefore clear that the loan and petitioner's transfer of the loan proceeds to ITBC in exchange for the tax package materials, together with the gift by Greenwich of the promissory note to Swiss International, must be amalgamated and the Federal tax effect of this series of transactions determined by reference to their end result. When viewed in this light, it is apparent that petitioner's "payment" of $ 47,400 to ITBC was a payment merely in form and not in substance. In terms of economic reality, petitioner's "purchase" cost him nothing.Petitioners would argue that, even viewed from this perspective, the "payment" of $ 47,400 represented 64 real economic cost. In support of this contention, petitioners point out that petitioner signed a promissory note when he "borrowed" the purchase price from Greenwich and that, although this note was thereafter given to Swiss International, it nonetheless represents bona fide indebtedness.Petitioners' view of things is, of course, tenable only if a genuine debt in fact existed. "Whether a transfer of money creates a bona fide debt depends upon the existence of an intent by both parties, substantially contemporaneous to the time of such transfer, to establish an enforceable obligation of repayment." Delta Plastics Corp. v. Commissioner, 54 T.C. 1287">54 T.C. 1287, 1291 (1970). The burden of proof of establishing the requisite intent is on petitioners (Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933)), and "formal evidences of indebtedness are at best clues to proof of the ultimate fact." C. M. Gooch Lumber Sales Co. v. Commissioner, 49 T.C. 649">49 T.C. 649, 656 (1968).We hold that petitioners have failed to meet their burden of proof on this point. In fact, the substantial weight of the evidence leads directly to the conclusion that no true liability ever existed. The terms and circumstances of the "loan," 65 itself, clearly demonstrate that the "loan" was not bona fide. Mr. Bumpus testified to the effect that, from the outset, it was intended that petitioner would not be required to pay any 916 amounts to the lending entity on the note. Rather, it was intended that the "promissory note" would be placed within the "borrower's" control prior to any payments falling due on the "note." In fact, this "note" was given to Swiss International, an entity entirely controlled by petitioner, only 5 months after the date of the original "loan" and before any amounts of principal or interest fell due on the "loan." No business purpose whatsoever has been shown for this gift, nor for Mr. Bumpus' apparent largesse, and it is quite clear from all of the facts and circumstances in this case that the parties never intended to impose any real liability on petitioners to repay this "loan." The transfer of the "promissory note" was simply the manner which the parties chose to effectuate their preconceived plan to return the "note" to petitioner's control before any payments fell due.This lack of intent "to establish an enforceable obligation of repayment" at the time of the original transfer is, itself, enough 66 to lead us to conclude that no bona fide debt was created. Delta Plastics Corp. v. Commissioner, supra. However, other factors lend further support to our ultimate finding in this regard. The promissory note, itself, was unsecured and no payment of principal or interest was to fall due for 25 years. It is highly unlikely that terms such as these would be offered in arm's-length lending. Moreover, while petitioner contends that he truly owes and intends to repay the note to Swiss International, he did not treat it as a true liability. He did not list this amount on any of the three financial statements he prepared in 1978 or 1981 in attempting to secure personal loans from banks. Two of these financial statements were submitted by petitioner as "full, true and correct [statements] of his financial condition on the date stated." The third financial statement was submitted as "true and [representing] a total disclosure of all information requested." Moreover, petitioner did not list this amount as a liability in the divorce petition that he filed with the Alaska Superior Court on December 5, 1980.Against the above factual backdrop, we have no difficulty in concluding that no genuine 67 debt was ever created. Petitioner's "liability" was at all times, and continues to be, a mere paper liability without substance. Cf. Karme v. Commissioner, 73 T.C. 1163 (1978), affd. 673 F.2d 1062">673 F.2d 1062 (9th Cir. 1982).917 Since we find that petitioner's "liability" on the $ 47,400 "promissory note" was without substance, it necessarily follows that, at the end of the integrated series of steps which constituted the tax package "purchase," petitioner's economic position remained exactly the same as it had been at the outset. There was, in fact, no "payment" of $ 47,400 by petitioner, and the deduction under either section 162 or section 212 will therefore be disallowed. 23II. 1977A. Deduction for Cost of ATES PackageWe must next decide whether petitioners are entitled to deduct the $ 11,000 they paid for the purchase of the ATES package. Petitioners contend 68 that these amounts are deductible under section 212(2) as costs incurred to manage, maintain, and conserve income-producing property, or under section 212(3) as costs incurred for tax advice. Respondent contends that the $ 11,000 payment represented a personal expenditure and is therefore rendered nondeductible by section 262. Additionally, respondent contends that, even assuming that a portion of the expense was incurred to secure tax advice under section 212(3), petitioners have failed to show what portion of the cost was incurred specifically for that purpose and, therefore, argues that the entire deduction must be disallowed. Moreover, respondent maintains that the deduction should be denied in any event because the expenditures cannot be considered "ordinary and necessary" as required by section 212.We will initially consider petitioners' argument under section 212(2). Section 212(2)allows a deduction for all ordinary and necessary expenses paid for the management, conservation, or maintenance of property held for the production of income. Petitioners have the burden of proving that the amounts in dispute were both "ordinary and necessary" and were expended for the purposes 69 designated in the statute. Rule 918 142(a); Welch v. Helvering, supra.Since we think petitioners have failed to establish that the $ 11,000 expenditure in any way related to the management, conservation, or maintenance of income producing property, we need not consider whether the expenditure was "ordinary and necessary" within the meaning of section 212(2).Initially, it is clear that the $ 11,000 payment did not relate to the management or conservation of income producing property. The materials and assistance petitioners received in exchange for the $ 11,000 purchase price related solely to restructuring the form in which their property was to be held. Petitioners' actual transfers of property to the "business trust organizations" did not, in substance, alter the management or economic ownership of the property. It is well established that expenses paid for advice and assistance which concerns merely rearranging title to property relates neither to the management nor conservation of such property under section 212(2). Schultz v. Commissioner, 50 T.C. 688">50 T.C. 688, 699-700 (1968), affd. per curiam 420 F.2d 490">420 F.2d 490 (3d Cir. 1970); Epp v. Commissioner, 78 T.C. 801">78 T.C. 801 (1982); Luman v. Commissioner79 T.C. 846">79 T.C. 846 (1982).Nor 70 is petitioner's testimony that he was motivated to purchase the tax package materials and create the "business trust organizations" by his desire to minimize probate expenses and isolate his assets from potential malpractice liability sufficient to sustain petitioners' burden of proving that the expenditure related to the maintenance or conservation of income producing property. 24 Petitioners have completely failed to show what, if any, probate expenses could be saved by the creation of these "entities," and have also failed to show that the creation of these "entities" would, in fact, serve to insulate the assets transferred thereto from potential malpractice liability. Moreover, the deduction provided by section 212(2) applies to expenditures for protection or maintenance of the property, itself, not to expenditures relating to a taxpayer's retention of ownership of the property. Epp v. Commissioner, supra; United States v. Gilmore, 372 U.S. 39">372 U.S. 39, 44919 (1963); Reed v. Commissioner, 55 T.C. 32">55 T.C. 32, 42 (1970). Thus, even assuming petitioners are correct when they argue that the transfers of property to the "business trust organizations" would serve to insulate such property from any 71 liability arising from petitioner's practice of dentistry, expenses incurred to transfer title to property to protect it against potential malpractice claims are not deductible under section 212(2). Epp v. Commissioner, supra.See also Wallace v. Commissioner, 56 T.C. 624">56 T.C. 624, 632 (1971); Cobb v. Commissioner, 10 T.C. 380 (1948), affd. 173 F.2d 711">173 F.2d 711 (6th Cir. 1949), cert. denied 338 U.S. 832">338 U.S. 832 (1949). The deduction must therefore be disallowed under section 212(2).Section 212(3)allows a deduction for ordinary and necessary expenses paid or incurred in connection with the determination, collection, or refund of any tax. Once again, petitioners have the burden of proving that the disputed payment was both "ordinary and necessary" and expended for the purposes designated in the statute. Rule 142(a); Welch v. Helvering, supra.Petitioners 72 contend that the cost of the ATES package is deductible under section 212(3) since it was paid, at least in part, for Federal tax planning. It is true that ordinary and necessary expenses paid for Federal tax planning are deductible under section 212(3). See Merians v. Commissioner, 60 T.C. 187 (1973); Collins v. Commissioner, 54 T.C. 1656 (1970); Schultz v. Commissioner, supra.However, the ATES package was marketed as a device by which a purchaser thereof could isolate his assets from liability, avoid probate costs (exclusive of estate taxes), as well as reduce his Federal tax liability. Moreover, petitioner has testified that he was motivated, in part, to purchase the package by his desire to isolate his assets from malpractice liability and reduce probate costs. To the extent that the amount in dispute was paid for these purposes, they clearly fall outside of the scope of section 212(3).Where a petitioner sustains his burden of proof only with respect to a portion of a particular expenditure, and the record contains sufficient evidence so that a reasonable allocation between the deductible and nondeductible portions of a particular expense can be made, we will make an allocation, 73 and allow the deduction in part. Cohan v. Commissioner, 39 F.2d 540">39 F.2d 540 (2d Cir. 1930). Where, however, the record provides no 920 reasonable basis upon which we can make such an allocation, the deduction must be disallowed in full. Epp v. Commissioner, supra; Luman v. Commissioner, supra; Zmuda v. Commissioner, 79 T.C. 714">79 T.C. 714 (1982).Petitioners have failed to provide any rational method by which the $ 11,000 payment could be allocated between what they contend to be the deductible portion of the expenditure and the nondeductible portion. Thus, even assuming that a portion of the expense in issue falls within the provisions of section 212(3), no portion of the expense can be allowed. Epp v. Commissioner, supra; Luman v. Commissioner, supra; Zmuda v. Commissioner, supra.Respondent's disallowance of the deduction relating to the $ 11,000 ATES package purchase price will therefore be sustained.B. Payments to Professional Services, Adjustments to Professional Services' Income, Reallocation of Professional Services' Income to PetitionersA synopsis of the facts and the parties' respective legal arguments with respect thereto will aid in placing the disputed issues in their proper perspective.Early 74 in 1977, petitioners traveled to Belize in Central America and executed documents which purportedly created three "business trust organizations," namely: Professional Management, National Service, and Swiss International. These organizations were allegedly funded with a total of $ 300 and, by their specific terms, were subject to total, unrestricted dominion and control exercisable by petitioner. No other individual had authority to act on behalf of these organizations, nor had any beneficial interest therein. They remained dormant until September 1977.On September 2, 1977, petitioner executed documents in Alaska which purportedly created two more "business trust organizations." These organizations were likewise, by their specific terms, subject to the total and unrestricted control of petitioner and no other individual was vested with authority to act on behalf of these organizations. With respect to all five of these organizations, petitioner, by the specific terms of the establishing documents, was empowered to deal with the trust property without restraint. In fact, all of the transactions 921 which occurred among these organizations in 1977 were conceived of, executed by, and 75 performed solely by petitioner either in his individual capacity or ostensibly in his capacity as trustee or executive trustee of one or more of the organizations. The establishing documents make it clear that no attempt was made to separate legal and equitable title in the property transferred to these organizations.On September 2, 1977, the same date the documents were executed which purportedly established Professional Services, petitioner executed documents, including a quitclaim deed, which purported to transfer to himself as executive trustee of Professional Services, all of the real property and equipment which he was then using in his practice of dentistry. This quitclaim deed was not recorded until late in 1979. Shortly thereafter, petitioner, in his capacity as trustee of Professional Management, which was trustee of National Service, entered into a contract with himself, as trustee of Professional Services, whereby National Service promised to provide management services to Professional Services for a fee of $ 16,000 per month during the remaining months of 1977. Then, on September 10, 1977, petitioner, as executive trustee of Professional Services, executed a lease 76 agreement under which he leased back to himself, individually, for his use in the practice of dentistry, the building and equipment that he had previously conveyed to Professional Services. Additionally, Professional Services agreed to provide petitioner with "management services." These services were to be rendered by petitioner, either in his capacity as executive trustee of Professional Services, or in his capacity as trustee of Professional Management, which was trustee of National Service, which had a contract to provide management services to Professional Services. After petitioner's purported transfer of his property to Professional Services, he continued to use that property in the same manner as he had prior to the transfer.Although payments required under the contract between Professional Services and petitioner totaled $ 89,999 in 1977, petitioner transferred only $ 85,000 to Professional Services in that year, and the monthly transfers did not comply with those required under the contract terms. Of the $ 85,000 transferred to Professional Services, $ 64,000 remained in Professional Services only for a theoretical instant. Checks totaling $ 64,000 922 were written against 77 Professional Services' account payable to National Service on the same day as the original transfers of checks totaling $ 85,000 to Professional Services. This same $ 64,000 was then transferred by petitioner from National Service to Swiss International, and from Swiss International to Alaska Rental on the same day that the funds were originally transferred to Professional Services. Of this $ 64,000 circulated through these entities, $ 59,000 was transferred from Alaska Rentals to petitioner on the same day as the original transfer of the funds to Professional Services. An additional $ 3,500 of the amount circulated to Alaska Rentals was transferred to petitioner several weeks after the original transfer, but before the close of the 1977 tax year.Petitioners claimed $ 88,000 of the amounts due under their contract with Professional Services as deductible business expenditures in various ways on their 1977 joint income tax return, but now concede that only the $ 85,000 actually paid is allowable. Respondent, in his statutory notice of deficiency, disallowed these claimed deductions in their entirety. In addition, respondent added to petitioners' income the adjusted taxable income 78 of Professional Services, as determined by respondent.Respondent accepted the gross income of $ 85,000 reported by Professional Services (the amount paid to it by petitioners), but disallowed certain deductions claimed in its return, including the $ 64,000 fee paid to National Service.After concessions, the only remaining adjustment to Professional Services' income which is in issue is the claimed deduction of $ 64,000, and it is this same amount (plus the allowable trust exemption of $ 100) which respondent also added to petitioners' income, as noted in the preceding paragraph. 25 In support of the above determinations, respondent proffers two alternative legal arguments. First, and primarily, respondent contends that Professional Services is a sham and is not entitled to be recognized for Federal tax purposes. Respondent argues that Professional Services, in conjunction with petitioner's 923 other controlled "business trust organizations" was created solely for the purpose of enabling petitioner 79 to manufacture deductions in excess of those normally generated by the operation of his dental practice, based on "payments" which were totally devoid of economic substance. It is therefore respondent's primary position that petitioner's Federal income tax liability should be determined as though Professional Services had never been created.Alternatively, respondent contends that, if we should find that Professional Services is entitled to be recognized for Federal tax purposes, and further if we determine that petitioner's payments to that "entity" were payments in substance as well as in form, then the income of Professional Services should be attributed to petitioners under the grantor trust provisions of sections 671 through 677.In either event, respondent maintains that the income of Professional Services and petitioners should be computed without allowing a deduction for $ 64,000 paid by petitioners to Professional Services, and, by that entity, to National Service.Petitioners, on the other hand, maintain that by petitioner's formation of the business trust organizations, he "restructured his entire manner of doing business," that the entities thus created were not shams, and 80 that all payments made to Professional Services were payments in substance as well as in form. Accordingly, petitioners contend that they are entitled to deduct the full amount of $ 85,000 paid in 1977.Additionally, petitioners contend that the income of Professional Services should not be attributed to them under the grantor trust provisions. In support of this contention, petitioners argue, for the first time on brief, that Professional Services is not taxable as a trust and is therefore not subject to the grantor trust rules. Petitioners maintain that Professional Services constitutes a Massachusetts business trust, and, as such, should be classified as an association taxable as a corporation rather than as a trust for Federal tax purposes. Furthermore, petitioners argue that Professional Services' "payments" of $ 64,000 to National Service constitute an ordinary and necessary business expense, and are therefore properly deductible by that "entity" under section 162.Before moving to the parties' substantive arguments, a preliminary procedural point must be addressed. As noted 924 above, in their original brief, petitioners for the first time contended that Professional Services81 is a State law/Massachusetts business trust, and should therefore be classified as an association taxable as a corporation for Federal tax purposes. Although this contention was raised in response to respondent's alternative assertion that the grantor trust rules apply with respect to Professional Services, a resolution of this issue in favor of petitioners would completely alter the posture of this case as it was pleaded and tried. Petitioners had consistently taken the position that Professional Services is taxable as a trust until their argument on brief. That entity filed fiduciary returns, and no indication that petitioners had changed their position in this regard was presented in their pleadings or amended pleadings.We have consistently held that since the primary purpose of pleadings is the joinder of issue between the parties, issues attempted to be raised by brief will be disregarded. Factor v. Commissioner, 281 F.2d 100">281 F.2d 100, 122 (9th Cir. 1960), affg. a Memorandum Opinion of this Court, cert. denied 364 U.S. 933">364 U.S. 933 (1961); Gregg v. Commissioner, 18 T.C. 291">18 T.C. 291 (1952), affd. per curiam 203 F.2d 954">203 F.2d 954 (3d Cir. 1953); H.D. & J.K. Crosswell, Inc. v. Commissioner, 6 B.T.A. 1315 (1927). 82 See also Rules 31(a), 34(a). Thus, as a procedural matter, we would be free to decline to consider this issue. In any event, however, we do not think it is necessary for us to determine whether Professional Services falls within a particular classification under State law. Since, as explained below, we believe that Professional Services was without real substance and is therefore not entitled to be recognized for Federal tax purposes, it is unnecessary for us to consider whether Professional Services falls within a particular State law niche. See, e.g., Furman v. Commissioner, 45 T.C. 360">45 T.C. 360, 364 (1966), affd. per curiam 381 F.2d 22">381 F.2d 22 (5th Cir. 1967); Markosian v. Commissioner, 73 T.C. 1235">73 T.C. 1235 (1980). It is equally unnecessary for us to determine how Professional Services would have been taxed if it, in fact, had any real substance.The "sham" theory requires that we examine not only the surface transactions and entities involved, but also requires that we examine their reality. Weyl-Zuckerman & Co. v. Commissioner, 23 T.C. 841">23 T.C. 841, 847 (1955), affd. per curiam 232 F.2d 214">232 F.2d 214 (9th Cir. 1956). We must, that is, look beyond "superficial formalities of a transaction to determine the 925 proper tax 83 treatment." Blueberry Land Co. v. Commissioner, 361 F.2d 93">361 F.2d 93, 101 (5th Cir. 1966), affg. 42 T.C. 1137">42 T.C. 1137 (1964). Labels, semantic technicalities, and formal written documents do not necessarily control the tax consequences of a given transaction. Rather, we are concerned with economic realities and not the form employed by the parties. Frank Lyon Co. v. United States, 435 U.S. 561">435 U.S. 561, 572 (1978). Transactions which are devoid of economic substance and are engaged in solely to acquire tax benefits will be disregarded. Knetsch v. United States, 361">364 U.S. 361 (1960); Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C. 1221">77 T.C. 1221(1981); Derr v. Commissioner, 77 T.C. 708">77 T.C. 708 (1981). Additionally, the fact that all of the entities involved herein are controlled, either directly or indirectly, by petitioner requires that we closely scrutinize transactions occurring among these entities and petitioner in determining their substance. Investors Diversified Services, Inc. v. Commissioner, 39 T.C. 294">39 T.C. 294, 306 (1962), affd. 325 F.2d 341">325 F.2d 341 (8th Cir. 1963); Bixby v. Commissioner, 58 T.C. 757">58 T.C. 757, 776 (1972). Moreover, whether the transactions and entities lack economic substance is a factual question which must be decided 84 within the unique parameters of this case. United States v. Cumberland Public Service Co., 338 U.S. 451 (1950).When viewed in the above light, it becomes clear that no substantial change in economic ownership of the assets or income of petitioner's dental practice was effected by his purported transfer of those assets, and subsequent "payments," to Professional Services (and onward to other entities), and it therefore necessarily follows that Professional Services is not entitled to be recognized as a separate entity for Federal tax purposes. As we have stated in Markosian v. Commissioner, supra at 1241: "When the form of a transaction has not, in fact, altered any cognizable economic relationships, we will look through the form and apply the tax law according to the substance of that transaction." Cf. Bixby v. Commissioner, supra; Miles v. Commissioner, 41 T.C. 165 (1963); Burde v. Commissioner, 352 F.2d 995 (2d Cir. 1965), affg. 43 T.C. 252">43 T.C. 252 (1964), cert. denied 383 U.S. 966">383 U.S. 966 (1966).Initially, the documents which purport to establish Professional Services as an entity separate and distinct from petitioners, themselves, fail to alter "any cognizable economic relationship" between 85 petitioner and the property purportedly 926 transferred. That is, the specific terms and conditions (or, rather, lack of conditions) contained in these documents left petitioner in exactly the same relationship to the property after the "transfer" that he was in prior to the "transfer."These documents named petitioner "executive trustee" of Professional Services. As executive trustee, petitioner was entrusted with:sole authority acting in behalf of all other Trustees. This authority includes the power to execute contracts of any description, buy and sell property of all kinds, direct the management concerning any affair that will benefit the trust or any other powers provided for in the trust indenture. [Emphasis supplied.]Moreover, the documents vested the trustee with absolute and unrestricted authority to act in any manner with respect to trust property. The documents provided that: "Resolutions of the Board of Trustees authorizing that a special thing to be done shall be evidence that such act is within its powers."Additionally, petitioners owned all of the trust certificate units of Professional Services during the years in issue and were therefore entitled to all of the trust 86 assets upon its termination, and such termination could occur at any time in the sole discretion of petitioner as executive trustee. 26We therefore cannot perceive any economic interest which passed to anyone other than petitioners under the specific terms of the trust instrument. Petitioner continued to possess unlimited power to deal with the trust property (and its income) in any manner he chose. Cf. Markosian v. Commissioner, supra.In addition to the failure of the documents which established Professional Services to vest that entity with substantial incidents of economic reality, other factors in 87 the totality of facts convince us that Professional Services must be treated as a nullity for Federal tax purposes. First, although petitioner 927 executed a quitclaim deed in favor of Professional Services as evidence of the transfer of his dental office and building in September 1977, that deed was not recorded until late in 1979. The trust instruments were never recorded. See Furman v. Commissioner, supra.Second, petitioner contends that he reacquired the right to use the property transferred to Professional Services only by virtue of the lease agreement which he signed in both his individual capacity and in his capacity as executive trustee of Professional Services. However, the property was purportedly transferred to Professional Services on September 2, 1977, and the leaseback "agreement" was not executed until September 10, 1977. Moreover, no funds were "transferred" to Professional Services until October 7, 1977, although, under the terms of the lease agreement, $ 18,500 was due in September. Additionally, although total payments due under the lease agreement in 1977 were $ 89,999, only $ 85,000 was actually transferred to Professional Services in 1977. Thus, petitioner 88 continued to use the property purportedly transferred to Professional Services in his dental practice in exactly the same manner as he had prior to the "transfer" until September 10, 1977, although no formal lease had been executed. Moreover, petitioner's use of this property continued unrestricted after the execution of a formal lease, although the terms of the lease were not strictly complied with, and petitioner, as executive trustee, made no effort to enforce the lease according to its terms. Cf. Audano v. United States, 428 F.2d 251 (5th Cir. 1970).Finally, although the avowed purpose of the trust was to --provide for a sane and economical administration by natural persons acting in a fiduciary capacity, to begin at once and that the Trustees act solely within their constitutional rights as based upon their common law rights and immunities vouchsafed to citizens of the United States of America and defined in Article IV, Section 2, providing that "Citizens of each state shall be entitled to all privileges and immunities of citizens in several states:" and Article VI, Section 2, providing that "The Constitution of the United States and the laws made in pursuance thereof shall 89 be the supreme law of the land;" and the 14th Amendment thereof, providing, that "No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States."it is clear that, in reality, Professional Services, as well as petitioner's other "business trust organizations," acted solely 928 as conduits in non-arm's-length, prearranged transactions which were designed to generate tax deductions in excess of those legitimately generated in petitioner's practice of dentistry, at zero economic cost to petitioner. Cf. Plunkett & Co. v. Commissioner, 42 B.T.A. 464">42 B.T.A. 464 (1940).In this regard we note that, of the $ 85,000 transferred to Professional Services in 1977, only $ 21,000 remained within that entity for more than a theoretical instant. This amount was used to pay certain ordinary and necessary expenses of petitioner's dental practice, and the funds, themselves, were generated by petitioner's dental practice. 27 The remaining $ 64,000 was circulated through petitioner's other controlled "business trust organizations," the majority of these funds (i.e., $ 59,000) were redeposited in petitioner's personal account on the same day as the original 90 transfer of the funds to Professional Services, and $ 3,500 of this amount was redeposited in petitioner's personal account shortly thereafter.Although the circulation of these funds was variously camouflaged as payments for "management fees" and "advisory trustees fees," petitioner has failed to establish what, if any, services were rendered in consideration of these "payments." Moreover, although petitioner attempted to retroactively camouflage, as gifts and loans, the retransfers of funds to himself at the end of the circular flow, it is apparent that these transfers were merely the final step of petitioner's overall plan to generate deductions at no out-of-pocket cost, and that petitioner did not assume any real liability at any point with respect to any alleged loans. The salient fact is that, irrespective of the form in which petitioner attempted to cast the various transfers of funds, at all times, by the specific terms of the documents which created the entities through which the funds were passed, petitioner maintained absolute and unrestricted control over the funds, as well as the "promissory 91 notes" which petitioner purportedly signed, and no one other than petitioners ever had any legal or beneficial interest therein. 28 Cf. Plunkett v. Commissioner, supra.929 In summary, we find that petitioners' creation of Professional Services failed to alter any cognizable economic relationships, and we therefore hold that Professional Services is totally devoid of economic reality and is to be treated as a nullity for Federal tax purposes. Markosian v. Commissioner, supra; Furman v. Commissioner, supra; Zmuda v. Commissioner, supra.Professional Services was formed and operated as a mere paper entity, and served solely as a conduit through which petitioner manufactured deductions based upon payments which were without substance. Petitioners' taxable income for their 1977 tax year will therefore 92 be determined as though Professional Services was never created. Only those deductions claimed by petitioners or by Professional Services which have been conceded or allowed by respondent will therefore be allowed. Having so held, it follows that respondent's determination of additional income against Professional Services, and the further attribution of that same income to petitioners, is disapproved.Our holding makes it unnecessary for us to consider the application of sections 671 through 677 to the facts herein.III. Additions to Tax -- 1976 and 1977The final issues presented for decision involve respondent's determinations of additions to tax. Respondent contends that petitioners' underpayment of tax was due to fraud in both years in issue. Accordingly, respondent maintains that petitioner Eugene Morton (alone) is liable for additions to tax under section 6653(b). Alternatively, if petitioner is not liable for additions to tax under section 6653(b), respondent contends that both petitioners are liable for additions to tax under section 6653(a). Respondent also determined additions under section 6653(a) against Professional Services.Section 6653(b)imposes a 50-percent addition 93 to tax on an underpayment of tax for a year in which any part of the underpayment is due to fraud. The burden of proving fraud is on respondent, and he must do so by clear and convincing 930 evidence. Rule 142(b); sec. 7454(a); Stone v. Commissioner, 56 T.C. 213">56 T.C. 213, 220 (1971); Miller v. Commissioner, 51 T.C. 915">51 T.C. 915, 918 (1969). When fraud is asserted for more than 1 taxable year, respondent must show that some part of the underpayment was due to fraud for each taxable year in issue for the corresponding addition for fraud for each such year to be upheld. Otsuki v. Commissioner, 53 T.C. 96">53 T.C. 96, 105 (1969). Fraud is defined as an intentional wrongdoing designed to evade tax believed to be owing. Mitchell v. Commissioner, 118 F.2d 308">118 F.2d 308, 310 (5th Cir. 1941); Powell v. Granquist, 252 F.2d 56">252 F.2d 56, 60 (9th Cir. 1958); Estate of Pittard v. Commissioner, 69 T.C. 391">69 T.C. 391, 400 (1977).Whether fraud exists with respect to a particular tax year is a factual question which must be resolved by an examination of the entire record. Mensik v. Commissioner, 328 F.2d 147">328 F.2d 147, 150 (7th Cir. 1964), affg. 37 T.C. 703">37 T.C. 703 (1962), cert. denied 379 U.S. 827">379 U.S. 827 (1964); Otsuki v. Commissioner, supra.Since fraud can seldom be established 94 by direct proof, the requisite intent may be inferred from a showing by respondent that petitioner's conduct was intended to conceal, mislead, or otherwise prevent the collection of taxes that petitioner knew or believed he owed. Stoltzfus v. United States, 398 F.2d 1002">398 F.2d 1002, 1004 (3d Cir. 1968), cert. denied 393 U.S. 1020">393 U.S. 1020 (1969); Acker v. Commissioner, 26 T.C. 107">26 T.C. 107 (1956). Moreover, fraud may be established, in a proper case, by showing an overstatement of deductions as well as by an omission of income. Neaderland v. Commissioner, 52 T.C. 532">52 T.C. 532, 540 (1969), affd. 424 F.2d 639">424 F.2d 639 (2d Cir. 1970), cert. denied 400 U.S. 827">400 U.S. 827 (1970). However, since respondent's assertion of fraud requires an inquiry into the taxpayer's frame of mind, seldom can a single act or omission prove determinative of the requisite fraudulent intent. Rather, such intent, or lack thereof, must generally be determined by surveying a taxpayer's whole course of conduct. Stratton v. Commissioner, 54 T.C. 255">54 T.C. 255, 284 (1970).As we consider the facts bearing on respondent's assertion of fraud, we keep in mind that a taxpayer's attempt to avoid paying taxes does not necessarily establish fraud. As petitioners point out, it is well 95 settled that a taxpayer is entitled to arrange his affairs so as to minimize his tax liability. Gregory v. Helvering, 293 U.S. 465 (1935). No wrongful intent is inherent in a taxpayer's attempts in this regard. Thus, if 931 petitioner was of the honest although mistaken opinion that the transactions involved were legally sufficient to support the claimed deductions, no fraudulent intent was present. As we have stated in Mayock v. Commissioner, 32 T.C. 966">32 T.C. 966, 974 (1959):Although petitioner may have been mistaken as to the legal consequences of the transaction, we are satisfied he had no intention of evading a tax believed to be owing. A mistake of law, if it was a mistake, is not equivalent to the fraud with intent to evade tax * Upon careful review of the record in this case, we conclude that the underpayments of tax for the years in issue resulted from something more than petitioner's honest mistake as to the legal consequences of the various transactions involved. In fact, petitioner's whole course of conduct clearly and convincingly shows that the underpayments of tax were due to fraud. It is clear that petitioner claimed deductions on his 1976 and 1977 returns which he knew 96 were based on "payments" which were without substance and thereby attempted to evade taxes he knew to be owing.In 1976, petitioner, pursuant to a prearranged plan, "borrowed" $ 47,400 from an entity controlled by one of the promoters of the scheme here involved, immediately turned this money over to another entity controlled by the other promoter, and signed a "promissory note" to the entity from which he "borrowed" the money. This "promissory note" was not intended to impose any real liability on petitioner, but rather was executed in an attempt to conceal the real substance (or, rather, lack of substance) of the transaction. At the time the note was signed, it was intended that petitioner would never have to repay any amounts on the note. In fact, the note was returned to petitioner's unrestricted control prior to the time he filed his 1976 return. He therefore knew, when he filed that return, that he had not incurred the cost for which he was claiming a deduction. In the circumstances, his conduct constituted fraud within the meaning of section 6653(b). Compare Schallman v. Commissioner, 102 F.2d 1013">102 F.2d 1013 (6th Cir. 1939), affg. a Memorandum Opinion of this Court; Clarke v. Commissioner, 22 B.T.A. 314">22 B.T.A. 314 (1931).That 97 petitioner knew that no real debt was created by the above series of transactions is clearly demonstrated by his subsequent actions. He failed to acknowledge this "debt" on financial statements he prepared in attempting to secure 932 personal loans from banks. Additionally, he did not include this amount in a divorce petition filed with the Superior Court of Alaska. Petitioner's execution of the "promissory note" was merely his attempt to add superficial legitimacy to a transaction which he knew was totally devoid of economic result.In 1977, petitioner again claimed deductions, to the extent of $ 64,000, based on "payments" which represented no real economic cost to him. All of the checks in the circular flow of funds were personally prepared by petitioner. All of the "entities" through which the funds were passed were subject to the unrestricted control of petitioner. Petitioner was never deprived of control over the money which formed the basis of the claimed deduction. In fact, the majority of these funds were withdrawn from his DDS account and redeposited in his personal account on the same day. Obviously, petitioner knew he incurred no real economic cost by virtue of these 98 transfers.The manner in which petitioner has attempted to characterize the retransfers of funds to himself as loans, rather than adding any legitimacy to the purported payments, is further evidence of his fraudulent intent. Three sets of "promissory notes" were prepared to cover this same retransfer of funds. All of the notes were prepared after the close of the taxable year the retransfer occurred. All of the notes are backdated to make it appear that they had been prepared simultaneously with the retransfer of funds. All of the notes were signed by petitioner. The second and third sets of notes were prepared after the due dates had expired on at least some of the notes in the first set. Additionally, the second and third sets of notes indicate that petitioner was assuming liability on the notes, while the first set indicates that the funds were given to petitioner. This third set of notes was represented to respondent as the original and correctly dated notes representing the transactions as they occurred in 1977. Petitioner's retrospective and belated attempt to add legitimacy to the transactions which he knew were without economic result, as well as his attempt to mislead 99 respondent by presenting these notes as original and correctly dated evidences of the transactions as they occurred in 1977, is an indication that petitioner knew what he was doing was wrong when he claimed the deduction on his 1977 return.Additionally, petitioner was somewhat less than cooperative 933 when the Internal Revenue Service attempted to examine his 1976 and 1977 tax years. Petitioner repeatedly delayed meetings requested by respondent's agent. Only after this Court ordered petitioner to produce his records was such information forthcoming. This failure to cooperate with respondent's agents is an additional indication of guilty knowledge on petitioner's part. Millikin v. Commissioner, 298 F.2d 830">298 F.2d 830, 836 (4th Cir. 1962), affg. a Memorandum Opinion of this Court; Baumgardner v. Commissioner, 251 F.2d 311">251 F.2d 311, 323 (9th Cir. 1957), affg. a Memorandum Opinion of this Court.Under these facts, we are convinced that petitioner, a well-educated individual with substantial business dealings, knew that the transactions involved herein in 1977, involving the payment of $ 64,000 to Professional Services, were insufficient to support the claimed deduction. Cf. Iley v. Commissioner, 19 T.C. 631">19 T.C. 631 (1952); 100 Schallman v. Commissioner, supra; Weyl v. Commissioner, 38 B.T.A. 850">38 B.T.A. 850 (1938).Accordingly, we hold respondent has met his burden of proving that some part of petitioner's underpayment of tax for both 1976 and 1977 was due to fraud, and the section 6653(b) additions to tax will therefore be sustained. This result automatically eliminates the additions to tax for both years against petitioners under section 6653(a), under the specific provisions of section 6653(b).Having concluded that respondent's entire determination of income and resulting deficiency against Professional Services is to be eliminated, it follows that the imposition of additions to tax against it under section 6653(a) is also to be eliminated.To give effect to the above, as well as other issues which the parties have conceded,Decisions will be entered under Rule 155. Footnotes1. These cases have been consolidated for purposes of trial, briefing, and opinion as to the issues decided herein.↩*. These cases were tried before Judge Cynthia Holcomb Hall who subsequently resigned from the Court. By order of the Chief Judge, these cases were reassigned to Judge Jules G. Korner III.↩2. All statutory references herein are to the Internal Revenue Code of 1954 as in effect during the years in issue, and all Rule references are to the Rules of Practice and Procedure of this Court, unless otherwise noted.3. The use of the following words and derivatives thereof in our findings of fact is for narrative convenience only, following the form in which the various transactions involved herein were cast, and is not intended to indicate any legal conclusions concerning the actual substance or legal effect of the transactions: "purchase," "sale," "loan," "note," "promissory note," "tax package," "trusts," "paid," "borrowed," "gift," "transfer," "contract," "liability," "entity," "business trust."↩4. This was the standard fee charged for the Dahlstrom seminar.↩5. When one of Mr. Bumpus' or Mr. Huff's related partnerships purchased a tax package, a copy of the tax package materials was not actually given to the partnership. Rather one set of the seminar materials was made available to the partnership at the office of Mr. Bumpus and Mr. Huff. However, all materials were made available to each purchasing partnership regardless of the price each paid. With respect to the individual purchasers of the tax packages, Mr. Bumpus and Mr. Huff suggested at trial that certain pages were removed from some of the packages when they were sold to these individuals. However, they failed to specify which pages were removed, and it is apparent from the record that, to the extent there was a variance in materials received by individual purchasers, that variance was insignificant.6. All of the purchasers involved herein, except Eugene Johnson and/or Johnson Investments, borrowed money from a Bumpus- or Huff-controlled entity to effect the purchase of their tax packages. With respect to Mr. Johnson and/or Johnson Investments, checks were exchanged on the same day with Mr. Bumpus and Mr. Huff, and the money was immediately returned to an entity controlled by Mr. Johnson.7. The factual details relating to the creation of, and the operation of, Swiss International, Ltd., are discussed infra↩.8. Petitioner contends that he was not aware of a prearranged plan to relieve him of liability to Greenwich on this note. Petitioner effectively would have us believe that the gift of the note to his controlled entity in April of 1977 came as a complete surprise to him. We find petitioner's position inherently incredible under the facts of this case. The testimony of petitioner's own witnesses makes it clear that, prior to selling the tax packages, Mr. Bumpus and Mr. Huff intended that, one way or another, the borrowers would not have to repay the "loans" to the lending entity. That Mr. Bumpus and Mr. Huff did not communicate this obviously attractive aspect of the overall transaction giving rise to the purchase of the tax package is simply not believable, especially when considered in light of the fact that petitioner's tax package purchase price was $ 43,475 in excess of the lowest price charged by Mr. Bumpus and Mr. Huff for the tax package. Moreover, although petitioner contends that he truly owes and intends to repay the loan of $ 47,400, he did not list this amount as a liability of his on any of the three financial statements he prepared for banks in attempting to secure personal loans in 1978, 1979, or 1981. Two of these financial statements were submitted by petitioner as "full, true and correct [statements] of his financial condition on the date stated." The other financial statement was submitted as "true and [representing] a total disclosure of all information requested." Nor did petitioner list this amount as a liability on the divorce petition which he filed with the Alaska Superior Court on Dec. 5, 1980.9. Apparently, Mr. Dahlstrom resided and kept his office in Houston, Tex. A portion of each $ 11,000 purchase price was transferred to Mr. Dahlstrom by Mr. Bumpus and Mr. Huff as a seminar fee. Mr. Bumpus and Mr. Huff apparently made a deal with Mr. Dahlstrom that ATES would be charged between $ 2,100 and $ 3,100 less than the customary $ 6,600 seminar fee for each person whom ATES brought to a seminar. The record does not show the portion of the $ 11,000 attributable to A.L.A. membership, nor the benefits received therefrom.↩10. All of the documents which purport to create the three organizations under discussion list Julian Thompson as their creator, and further list Mr. Thompson as the individual who appointed the trustees of the respective entities. However, Mr. Thompson did not transfer anything to the trusts, and it is clear from the record that Mr. Thompson merely signed his name to these documents at the request of petitioner. Mr. Thompson appears to have been a tourist guide or taxi cab driver in Belize who drove the Bumpus and Huff group from the airport in Belize to the place the trust documents were executed. His participation in executing the trust documents appears to be without any real significance except, perhaps, to comply with the technical requirements of Belize law concerning the creation and organization of trusts. Thus, actions ostensibly taken by Mr. Thompson as "creator" of these trusts will be treated as if they were, in fact, taken by petitioner.↩11. Throughout this complicated paper trail, no party in interest was involved, other than petitioner.↩12. In other words, no matter how many trustees, petitioner could not be removed by action of the trustees without his consent.↩13. The documents which purport to establish Alaska Rentals and Professional Services list Wesley Milton, petitioner's accountant, as the "creator" of those two trusts. However, just as Julian Thompson, the purported creator of the trusts established by petitioner in Belize, did not transfer anything to those trusts (see note 10 supra↩), neither did Mr. Milton transfer anything to Professional Services or Alaska Rentals. The record makes it clear that Mr. Milton was acting as a mere agent or nominee of petitioner in signing his name to these documents. Accordingly, actions ostensibly taken by Mr. Milton as "creator" of these trusts will be treated as they were, in fact, taken by petitioner.14. Although petitioners deducted $ 88,000 as amounts paid to Professional Services in 1977, they now concede that they were only entitled to deduct $ 85,000.↩15. The total amount paid out by Professional Services in 1977 (i.e., $ 85,980) exceeds the amount transferred from petitioner to Professional Services in 1977 (i.e., $ 85,000), because checks were written on Professional Services' account late in 1977 in excess of the balance in Professional Services' account. Additional amounts were deposited in Professional Services' account early in 1978 to meet the overdraft.16. Professional Services reported $ 85,000 as gross receipts and deducted the $ 85,980 noted above. Additionally, Professional Services claimed $ 1,655 as a depreciation deduction and claimed a $ 100 exemption. Thus, Professional Services reported negative taxable income of $ 2,735.↩17. Petitioner drew checks on his professional or business bank account (hereinafter DDS account) to Professional Services, and the funds were further transferred and received by other entities, on the dates and in the amounts shown by the following table:Received by --ProfessionalNationalSwissAlaskaDateAmountServicesServiceInt'lRentalsPetitionerOct. 7, 1977$ 10,000$ 10,000$ 5,000$ 5,000$ 5,000$ 5,000Oct. 28, 197710,00010,0005,0005,0005,000Deposited Dec. 12, 1977.1↩ 3,500Nov. 28, 197715,00015,00010,00010,00010,00010,000Dec. 12, 197710,00010,0005,0005,0005,0005,000Dec. 27, 197730,00030,00030,00030,00030,00030,000Dec. 27, 197710,00010,0009,0009,0009,0009,000Totals85,00085,00064,00064,00064,00062,50018. When questioned as to how the $ 10,000 fee figure was determined, petitioner could offer no explanation other than that the $ 10,000 was "just a figure."19. When questioned as to why he wanted these transfers to be cast in the form of loans rather than gifts, petitioner stated that he could not think how to explain "getting a large sum of money as a gift from a nonresident alien."↩20. Respondent also disallowed amounts claimed by Professional Services as paid for lab fees ($ 6,640), salaries and wages ($ 7,246), and taxes ($ 3,150). Respondent now concedes that these amounts are properly deductible, but contends they are deductible only by petitioners.↩21. For the sake of convenience, the asserted additions to tax for both tax years 1976 and 1977 will be considered together under a single subheading infra↩.22. This conclusion is reinforced when we consider that the price of the package for which petitioner was allegedly obligating himself was grossly disproportionate to the price others were paying for the same materials at about the same time. See our findings of fact supra↩.23. Our resolution of this issue makes it unnecessary for us to consider respondent's alternative contention that petitioners would not be entitled to a deduction for this amount in any event since even if petitioners, in fact, paid such amount, the expense represented a personal expense and is therefore rendered nondeductible by sec. 262.↩24. Petitioner's testimony, upon which our findings in this regard are partially based, was actually given in connection with the acquisition of the 1976 materials. Although he did not testify concerning his motivations in connection with the 1977 purchase of the same materials, we assume that his motivations were the same, nothing appearing, to the contrary.↩25. Respondent's obviously inconsistent and overlapping determinations must be eliminated by our resolution of the issues herein, and can be given effect in the resulting Rule 155↩ computations.26. As indicated in the findings of fact, the documents which established Professional Services provided:"This Trust Organization shall continue for a period of twenty-five years from date, unless the Trustees shall unanimously determine upon an earlier date. The Trustees may at their discretion, because of threatened depreciation in values, or other good and sufficient reason, liquidate the assets, distribute and close the Trust Organization at any earlier date determined by them. The Trust shall be proportionately and in a pro rata manner distributed to the Certificate Holders."↩27. Respondent has now conceded the deductibility of these items by petitioners.↩28. The above analysis applies with equal force to petitioner's purported "repayment" of the liabilities to Anchorage Investments in 1980. Petitioner maintained absolute control over these funds both before and after the "repayments," and it is clear that these transfers were merely an attempt by petitioner to add superficial legitimacy to transactions which were, in fact, without substance.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625937/	WILLIAM I. NASH and MARJORIE NASH, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentNash v. CommissionerDocket No. 5888-77.United States Tax CourtT.C. Memo 1980-53; 1980 Tax Ct. Memo LEXIS 534; 39 T.C.M. (CCH) 1105; T.C.M. (RIA) 80053; February 27, 1980, Filed 534 Truman Clare, for the petitioners. J. Anthony Hoefer, for the respondent. HALL MEMORANDUM FINDINGS OF FACT AND OPINION HALL, Judge: Respondent determined deficiencies in petitioners' Federal income tax as follows: YearAmount1969$15,234.231970882.6819719,207.90Due to petitioners' concessions, the issues remaining are: 1. Whether petitioners' realized in 1969 and 1971 from sales of certain real property are taxable as ordinary income or capital gains.2. Whether petitioners are entitled to depreciation deductions on certain real property in excess of those determined by respondent. FINDINGS OF FACT Some of the facts have been stipulated, and are found accordingly. William I. Nash (hereafter "petitioner") and Marjorie Nash, husband and wife, resided in Omaha, Nebraska when they filed their petition. Petitioner is a graduate aeronautical engineer whose major study was structures. From approximately 1948 to 1961 he was employed by the Corps of Engineers as a structural engineer. In 1961 he entered the real estate business as a self-employed individual. His federal income tax returns for 1966 through 1971535 list his occupation as "building contractor," "investor-builder" or similar designation. Petitioner is not a licensed real estate broker. While in the real estate business, petitioner's principal activity was the construction and sale of multi-family housing units. He bought old houses, razed them, constructed apartment buildings in their place, and sold them. The following schedule shows the dates when real properties, usually with single-family dwellings, were acquired by petitioners, when wrecking permits to raze the existing structures were obtained, when building permits for construction of multi-family apartment buildings were issued, when certificates of occupancy for the new buildings were issued, and when the buildings were sold by petitioners (all properties are located in Omaha, Nebraska): DateWreckingBuildingPropertyAcquiredPermitPermit3903 Cass Street19544903 Caldwell Street8/20/5711/10/611302 North 49th Ave.3/28/601304 North 49th Ave.10/06/6019634729 California St.12/30/602/23/622/20/624723-25 California St.1/03/612/23/622/20/623128-30 Chicago St.5/05/612/23/622/21/626628 Pratt St.9/25/6110/18/61817 North 47th St.5/10/6219624801 Underwood St8/09/637/20/657/28/6510/06/6610/06/664620 Wakeley St.6/27/6412/02/647/28/657/20/654702 Wakeley St.6/29/642/26/656/10/664715 Wakeley St. 3/22/669/25/678/04/674719 Wakeley St. 3/25/669/25/678/04/67527 Park Ave.3/31/664615 Wakeley St. 6/02/668/11/69)4617 Wakeley St. 6/02/668/11/69)3/25/694619 Wakeley St. *6/02/6612/08/66)4708 Davenport St.6/24/68536 DateCertificate ofApartmentPropertyOccupancySold3903 Cass Street4903 Caldwell Street6/15/626/26/621302 North 49th Ave.4/10/621304 North 49th Ave.19643/20/724729 California St.4/12/654723-25 California St.2/11/713128-30 Chicago St.5/21/651/27/666628 Pratt St.2/20/62817 North 47th St.19633/31/664801 Underwood St5/04/675/19/724620 Wakeley St.4/15/665/24/674702 Wakeley St.4/11/666/30/694715 Wakeley St. 4/22/687/23/694719 Wakeley St. 4/22/687/23/69527 Park Ave.19664615 Wakeley St. 4617 Wakeley St. 4/15/7010/31/724619 Wakeley St. *4708 Davenport St.1/06/69On January 3, 1961, petitioner purchased a parcel of real estate described as 4723-25 California Street on which was locatted a frame house. Petitioner rented the house for a short period and on February 23, 1962, razed it. After obtaining a building permit, petitioner constructed an eight-unit apartment537 building on the property. When construction was completed in March, 1964, the individual units were rented. Thereafter, petitioner began offering the apartment for sale, advertising it in the Omaha World-Herald Newspaper on December 20, 1964, and on January 24, February 7 and 14, and April 11, 1965. These ads stated that the property "grosses $895 monthly." Petitioner was not successful in selling the apartment and withdrew it from the market and thereafter held it as an investment. Five years later, petitioner decided again to sell this apartment. He advertised it on December 6, 13, and 20, 1970, noting that the "rents are below market." Petitioner sold the property on February 11, 1971, for $69,889. On February 14, 1966, petitioner entered into an agreement to purchase property located at 4619 Wakeley Street on the condition that he was able to acquire title to the adjacent properties at 4615 and 4617 Wakeley Street. On June 2, 1966, petitioner purchased 4615, 4617 and 4619 Wakeley Street. Each property contained an old dwelling. Petitioner paid $9,092 for 4615 Wakeley Street, of which $5,492 was allocated to the house and $3,600 to the land. Petitioner paid $10,742 for538 4617 Wakeley Street, of which $6,700 was allocated to the house and $4,042 to the land. The home at 4615 and 4617 Wakeley Street were rented by petitioner at a loss until August 11, 1969, when he acquired permits to wreck them. Petitioners reported the following rental receipts, expenses and depreciation for 4615 Wakeley Street: YearReceiptsExpensesDepr.Loss1966$171$478$320.39($627.39)1967720765517.16( 562.16)1968798745465.45( 412.45)1969560603418.89( 461.89)Petitioners reported the following rental receipts, expenses and depreciation for 4617 Wakeley Street: YearReceiptsExpensesDepr.Loss1966$ 475$467$390.81($382.81)1967990997630.92( 637.92)19681,080779567.83( 266.83)1969270671511.04( 912.04)In July and August, 1966, petitioner advertised 4619 Wakely Street for rent, but the property was not rented. An inspection by city officials revealed that the property was unfit for human habitation. Notice of the undesirable conditions was given to petitioner but he failed to abate them, and on December 20, 1966, the property was condemned. 539 On December 8, 1966, petitioner obtained a permit to wreck the dwelling and demolished it that month. We held in Nash v. Commissioner, 60 T.C. 503">60 T.C. 503, 515 (1973), that petitioner acquired the house at 4619 Wakeley Street with the intention of demolishing it. He also acquired the houses at 4615 and 4617 Wakeley Street with the intention of demolishing them. After the old homes were removed from 4615, 4617 and 4619 Wakeley Street, petitioner constructed a twenty-unit apartment building on the three lots. The address of the new building was designated 4621-23 Wakeley Street. The certificate of occupany was issued April 15, 1970, and petitioner began renting units in the building that year. In December, 1970, petitioner began advertising 4621-23 Wakeley Street for sale. At least fifteen such advertisements appeared in the Omaha World-Herald newspaper from December 6, 1970, through June 25, 1972. The advertisements often stated the amount of the gross rentals for the building. Petitioners sold the property in 1972. Petitioners reported the following rental receipts, building depreciation and other expenses for 4621-23 Wakeley Street: YearReceiptsBldg. Depr.Other Exp.Income (Loss)1970$17,205$6,736.64$15,632.98($5,164.62)197135,1988,801.0021,973.004,424197227,4816,900.0022,774.00( 2,193)540 On June 24, 1968, petitioner purchased property at 4708 Davenport Street on which a house was located. Petitioner paid $17,555 for the property, which was rented in 1968 at a loss. Petitioner sold the property on January 6, 1969, for $17,839. For 1968, petitioners reported the following rental receipts, expenses and depreciation for 4708 Davenport Street: ReceiptsExpensesDepr.Loss$875$1,215$577.75($917.75)On August 9, 1963, petitioner purchased property at 4801 Underwood Street, which contained a frame house, for $13,500. He allocated $8,750 of the purchase price to the house and $4,750 to the land. Petitioner rented the house until its demolition in 1966. Thereafter petitioner constructed an 8-unit apartment building on the property. A certificate of occupancy was issued on May 4, 1967. Petitioner rented the apartments until he sold the building on May 19, 1972. Petitioner's cost for the building constructed at 4801 Underwood Street was $47,753. Petitioner used the double declining balance method of depreciating this building over its 33-1/3 years projected life. The depreciation allowable for this building over the years 1967 through541 1970 is as follows: YearUnused BasisDepreciation1967$47,753.00$2,148.89196845,604.112,736.25196942,867.862,572.07197040,295.792,417.75Depreciation for various properties as claimed by petitioners and as allowed by respondent is as follows: YearPropertyReportedAllowedAdjustment19694615 Wakeley$ 418.89$ 0$ 418.8919694617 Wakeley511.040511.0419694801 Underwood2,941.412,572.07369.34$1,299.2719704623 Wakeley6,736.641,572.02$5,164.6219704801 Underwood2,762.102,417.75344.35$5,508.97After 1969 petitioner was primarily an investor in stocks traded on the public stock exchange. Petitioner began in 1970 to spend more time in the stock market than in the real estate business. In December, 1970, petitioner decided to sell off his remaining real properties and move to Florida. Petitioner also decided to withdraw from the real estate business because zoning laws in Omaha were becoming very restrictive and land costs were skyrocketing. Petitioner did not move to Florida in 1971 or 1972, and in 1973 he changed his mind about moving to Florida542 and decided to remain in Omaha. In 1975 petitioner took a position with the John Hancock Company as a representative for career improvement programs for home and industry, and remained employed in that capacity for two years. Petitioner is presently employed as a financial planner for the John Hancock Company. OPINION The first issue is whether gain realized in 1971 from the sale of the apartment building at 4723-25 California Street, Omaha, Nebraska, constituted long-term capital gain or ordinary income. This in turn depends on whether petitioner held the property for investment or primarily for sale to customers in the ordinary course of his trade or business. Section 1221(1). "Primarily" means "of first importance" or "principally." Malat v. Riddell, 383 U.S. 569">383 U.S. 569 (1966). Whether petitioner held the property primarily for sale to customers in the ordinary course of his trade or business is a question of fact to be determined from all of the relevant facts and circumstances. Kelley v. Commissioner, 281 F. 2d 527 (9th Cir. 1960). The burden of543 proof is on petitioner. Rule 142(a), Tax Court Rules of Practice and Procedure.This is not the first time this petitioner has brought this issue to the Tax Court. His taxable years 1966, 1967 and 1968 were before us in Nash v. Commissioner, 60 T.C.. 503 (1973). In that case we held petitioner was in the business of building and selling apartment houses. We stated that his business consisted of "buying single family dwellings, razing the structure and constructing on the vacant land multi-family apartment buildings which he, in most instances, attempted to sell." Typically he rented new apartments before he offered the buildings for sale, and advertised the property as income-producing. Petitioner alleges, however, that he got out of the real estate business in 1968 (even though he built another apartment building in 1969 and even though he conceded that the apartment buildings sold in 1969 were held primarily for sale to customers in the ordinary course of his business) and decided to sell off his real estate holdings when he decided in December 1970 that he would move to Florida. He did not move to Florida in 1971 or 1972, and in 1973 he abandoned the idea544 of moving to Florida and decided to stay in Omaha. Since respondent has not pleaded collateral estoppel, we need not consider its possible applicability here. See Commissioner v. Sunnen, 333 U.S. 591">333 U.S. 591 (1948).We are not persuaded that petitioner got out of the real estate business until some time in 1972 when he sold his last apartment building. Granted that he did not buy any property after 1968 (land costs skyrocketed) and did not build any apartment houses after 1969 (zoning became very restrictive); however through October 1972 he did continue to sell the buildings he had already built. Generally, he continued to hold these apartment buildings for sale to customers in the ordinary course of his business until he had sold them all. He has conceded that he held 4717-19 Wakeley Street and 4702 Wakeley Street for sale to customers when he sold them in 1969. See Mauldin v. Commissioner, 16 T.C. 698">16 T.C. 698 (1951), affd. 195 F. 2d 714 (10th Cir. 1952) (taxpayer who was once actively engaged in subdivision was still engaged in that business when, after devoting himself to another business, he sold the remaining parcels with very little545 activity). However, a taxpayer may hold some real property for sale to customers and other real property for investment. Nash v. Commissioner, supra at 519; Mieg v. Commissioner, 32 T.C. 1314">32 T.C. 1314 (1959). We conclude that petitioner held 4723-25 California Street for investment at the time he sold it in 1971. He purchased this parcel in 1961, demolished the frame house which was on the property when he bought it, built and rented an 8-unit apartment building, completed in March, 1964, and in December, 1964 through April, 1965 he advertised the apartment for sale. However, he was unsuccessful in selling the apartment. For five years thereafter he held the apartment building as an investment. It wasn't until December, 1970, when he decided to leave Omaha and move to Florida, that he again advertised the apartment for sale. He sold the apartment building on February 11, 1971, for $69,889. In view of the length of time he held the apartment as an investment property, we hold that when he ultimately sold the property in 1971 the property was still held546 by him for investment and not primarily for sale to customers in the ordinary course of his business. It was, of course, held for sale immediately after he decided to attempt once again to sell it. But this is true of any property which is sold. The relevant question here is whether he had a dominant sale motive not on the eve of sale but throughout the holding period. Tibbals v. United States, 176 Ct. Cl. 196">176 Ct. Cl. 196, 362 F.2d 266">362 F. 2d 266, 273 (1966). 1 In view of the lengthy period of holding between 1965 and 1971 with no evidence of any sales activity in the form of advertisements or otherwise, we believe the evidence suffices to carry petitioner's burden of persuading us of the absence of the dominant sales motive during the period after April 1965. Respondent also denied capital gains treatment on the sale by petitioner in 1969 of 4708 Davenport Street. Petitioner purchased the property in 1968, rented it at a loss, held it for six months without547 any improvements, and sold it. Unlike other properties, petitioner did not demolish the structure on the property and construct a new building. Petitioner testified that this property was held for investment and there is no evidence in the record to the contrary. We hold that this property was not held for sale to customers in the ordinary course of petitioner's business. The next issue is whether petitioner is entitled to depreciation deductions in excess of the amount allowed by respondent in 1969 and 1970 for 4615 Wakeley Street, 4617 Wakeley Street, 4801 Underwood Street and 4621-23 Wakeley Street. We have found as a fact that the homes at 4615 and 4617 Wakeley Street were purchased by petitioner with an intent to demolish them. These homes were rented at a loss until petitioner demolished them in 1969. Upon the destruction of these homes and also the home at 4619 Wakeley Street (which was unfit for human habitation), petitioner constructed a 20-unit apartment building on the sites. In Nash v. Commissioner, supra at 517, this Court held that in the case of houses petitioner acquired with the intention of demolishing them, depreciation for the period548 prior to demolition is limited to net rental income from the property. Since petitioner's expenses other than depreciation exceeded gross rents from 4615 and 4617 Wakeley Street in 1969, respondent correctly disallowed all 1969 depreciation on these two homes. Respondent determined that the apartment building at 4621-23 Wakeley Street (built on the site of the demolished houses at 4615, 4617 and 4619 Wakeley Street) was held by petitioner primarily for sale to customers in the ordinary course of his trade or business, and therefore, in accordance with Nash v. Commissioner, supra at 519, petitioner was entitled to depreciation only to the extent of net rental income. We agree. As was petitioner's business custom, he purchased lots with old houses on them. In this case he purchased 4615, 4617 and 4619 Wakeley Street in 1966. He demolished the buildings, constructed a 20-unit apartment building on the property (which became known as 4621-23 Wakeley Street), rented the apartments in 1970, advertised the apartment building for sale beginning in December 1970, and eventually sold the apartment building as income-producing property in October 1972. He advertised549 the apartment building at least 15 times in a local paper during the period he was attempting to sell it. The fact that petitioner was no longer actively in the real estate construction business does not prevent petitioner from still being in the real estate business with respect to this apartment building, even though he was also in another business by the time the apartment building was offedred for sale and sold. See Mauldin v. Commissioner, 16 T.C. 698">16 T.C. 698 (1951), affd. 195 F. 2d 714 (10th Cir. 1952). As to the property at 4801 Underwood Street, respondent claims he used the basis for the building as determined in Nash v. Commissioner, supra, and utilized petitioner's depreciation method and useful life in determining allowable depreciation for 1969 and 1970. Since petitioner did not argue to the contrary, we conclude that respondent's allowance for depreciation is correct. Decision will be entered under Rule 155. Footnotes. The apartment building constructed on these two lots is referred to as 4717-19 Wakeley St. * The apartment building constructed on these three loets is referred to as 4621-23 Eakeley St.↩1. See also Scottwood Development Co. v. Commissioner, 26 T.C.M. 855↩, 36 P-H Memo. T.C. par. 67,175 (1967).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625938/	Ewing Hymers v. Commissioner.Hymers v. CommissionerDocket No. 3342.United States Tax Court1944 Tax Ct. Memo LEXIS 3; 3 T.C.M. (CCH) 1326; T.C.M. (RIA) 44407; December 28, 19443 In the years 1928 and 1930 petitioner made loans to his brother-in-law who was in the business of selling advertising novelties manufactured of leather, metal, wood and paper materials. The debtor paid the interest on some of the loans but nothing on the principal. In 1931 the loans were consolidated in one note due January 2, 1932. The debtor has never paid any interest or any of the principal of this note, although he has from time to time acknowledged the validity of the debt and has expressed to petitioner his intention to pay it. He has continued in the same business of selling advertising novelties but the success of his business has not improved. The statute of limitations has not barred the collection of the debt. In 1941 on account of war conditions the sort of advertising novelties which the debtor had been selling were no longer obtainable in quantities and his business fell to such small proportions that he was compelled to seek employment elsewhere. Held, the loans which petitioner made to his brother-in-law were bona fide loans and not gifts and the promissory note which the debtor executed to petitioner represented a valid debt. Held, further, that this debt4 became worthless in the year 1941 and petitioner is entitled to the bad debt deduction which he claims under the provisions of section 23 (k) of the Internal Revenue Code, as amended by section 124 of the Revenue Act of 1942. Ewing Hymers, The Emlen Arms, 6733 Emlen St., Philadelphia, Pa., pro se William H. Best, Jr., Esq., for the respondent. BLACK Memorandum Findings of Fact and Opinion The Commissioner has determined a deficiency in petitioner's income tax for the year 1941 of $2,510.87. The petitioner assigns error as follows: The determination of tax set forth in the said Notice of Deficiency is based upon the following error: 1. Disallowance by the Commissioner as a Bad Debt an amount of $7.000.00. Findings of Fact The petitioner is an individual whose legal residence is in Philadelphia, Pennsylvania. The petitioner filed with the Collector of Internal Revenue for the First District of Pennsylvania an individual income tax return, Form 1040, for the taxable year 1941 which return is introduced in evidence. The petitioner claimed as a deduction from gross income for the taxable year 1941 the amount of $7,000 alleged by the petitioner to be a bad debt. This deduction5 the Commissioner has disallowed and the deficiency is determined solely upon that ground. The petitioner during the years 1928 to 1930 transferred to his brother-in-law, Carl Oscar Robinson, of St. Louis, Missouri, certain sums of money as evidenced by notes executed by Carl Oscar Robinson in favor of the petitioner as follows: $3,000.00Dated August 13, 1928, due in 6 monthsfrom date; interest at 6% per annum.$1,000.00Dated November 17, 1928, due in 90days from date; interest at 6% perannum.$1,000.00Dated December 5, 1928, due on demand;interest at 6% per annum.$1,000.00Dated January 25, 1930, due in 6months from date; interest at 6% perannum.$1,000.00Dated July 25, 1930, due on demand;interest at 6% per annum.Interest to April 1929 was paid to the petitioner by Robinson on the first three notes listed above and the petitioner included the sum so received in his individual income tax return as income for the taxable year 1929. In January 1931, in order to consolidate into one note the five notes listed above, the petitioner surrendered the said five notes to Robinson and received in return a note in the face amount of $7,605 which sum represented6 $7,000 principal, plus interest accrued to January 31, 1931, in the amount of $605, said note being in words and figures as follows: "$7605.00 St. Louis, Mo., Jan. 2nd, 1931 Twelve Months AFTER DATE, FOR VALUE RECEIVED, I PROMISE TO PAY TO THE ORDER OF EWING HYMERS SEVEN THOUSAND SIX HUNDRED FIVE DOLLARS ONLY DOLLARS negotiable and payable at MERCANTILE-COMMERCE BANK AND TRUST COMPANY, St. Louis, Mo., with interest after maturity at the rate of six per cent per annum until paid, and in case payment be not made at maturity,… agree to pay in addition all costs of collection and ten per cent (10%) attorney's fee. "Demand for payment, protest and notice of dishonor are hereby waived by all parties. C. Oscar Robinson Due Jan. 2, 1932 Robinson has not paid the note described above, or any part thereof, and not interest has been paid thereon. On May 16, 1928, Robinson became indebted to the Mercantile-Commerce Bank and Trust Company of St. Louis, Missouri, in the sum of $17,000 as evidenced by his promissory note of May 16, 1928, bearing interest at the rate of 5 1/2 per cent per annum, payable semiannually, the principal sum being payable $1,000 on May 16, 7 1931; $1,000 on May 16, 1932; and $15,000 on May 16, 1933. This obligation was secured by a deed of trust on the home of Robinson, said dwelling being located in St. Louis County, Missouri. Robinson was not financially able to pay off his indebtedness to the Mercantile-Commerce Bank and Trust Company of St. Louis, Missouri, and was unable to pay the property taxes on said dwelling after 1931, and in 1931 the bank foreclosed its deed of trust on the dwelling house. The petitioner was at all times aware of the facts stated in this paragraph. The business in which Robinson was engaged at the time petitioner made him the loans and prior thereto, was selling advertising novelties in partnership with his brother, W. S. Robinson, under the firm name of "Robinson Brothers, Advertising Novelties". The novelties sold were made of leather, metal, wood and paper. Prior to the depression years the business of "Robinson Brothers, Advertising Novelties" was good and the firm made profits from year to year. However, when the depression came the business was hard hit, its volume of sales greatly decreased, and the firm became financially embarrassed. Prior to the general depression in 1929, the firm8 of Robinson Brothers came into some financial difficulties and C. O. Robinson appealed to his brother-in-law, who is the petitioner here, for financial assistance. It was under these circumstances that the loans described above were made. Because of the debtor's earlier business successes the petitioner believed that Robinson Brothers' business would improve when general business conditions improved and that Robinson would repay the loan. Voluminous correspondence between the dates of August 13, 1928 and May 10, 1931, between C. O. Robinson and petitioner was introduced in evidence and shows that the money advancements made by petitioner to Robinson were bona fide loans which Robinson was morally and legally obligated to pay and which he did promise to pay. It is unnecessary to set out in these finding of facts, in detail, this correspondence. The following quotation from Robinson's letter to petitioner dated May 10, 1931, is typical of other letters in the record: "If there was any way of figuring out to cancel my obligation to you Ewing by payments it would have been done. * * * I feel that my obligation of $7,500 to you will be taken care of but under present conditions it has9 been impossible." The debtor Robinson continued in business after the execution of the promissory note dated January 2, 1931, and after the writing of the letters to which we have above referred, but with no substantial improvement in success and did not pay anything on either the principal or the interest of the note. The debtor's business, as has already been stated, was sales agent for advertising novelties made principally of metallic and plastic metals. In 1941 both materials were considered strategic materials for the prosecution of the war and the resultant priorities prevented the companies which Robinson Brothers represented from continuing to manufacture the advertising novelties which the firm had hitherto sold. The firm of Robinson Brothers ceased business and Robinson secured a position as a workman in a war plant. Petitioner in 1941 became convinced that the debtor, C. O. Robinson, would never be able to repay the indebtedness represented by the note dated January 2, 1931, and he determined same to be worthless and took as a bad debt deduction under item 15 in his return $7,000 which represented the principal which he had originally loaned to Robinson. In a schedule10 attached to his income tax return he explained this deduction as follows: "My brother-in-law, Carl Oscar Robinson, R.R. 5, Box 5, North Woodlawn Avenue, Kirkwood, Missouri, being in difficulty starting with 1928, appealed to me for assistance, and I made him loans from time to time between the years 1928 and 1930, both inclusive. "This indebtedness originated by loans as follows, for which I took notes, all bearing 6 per cent interest, signed by the individual, but without an endorser or other security. "[Here follow the several advancements set out in our findings above which aggregate $7,000.] "Along about December, 1930, I concluded to bring the item up to date by surrendering the above five notes and taking a new note, or, in other words, centering the entire indebtedness in one note. "At that time the unpaid interest on the above notes was $605.00 up to January 1, 1931. Adding this to the principal of the notes made the amount due January 1, 1931, as $7,605.00. "I then had the following note made: - "[Here follows the note for $7,605 heretofore set out in these findings.] * * * * "Constantly over the years I have seen this individual and urged payment of something11 on the principal of the last note, but he was even unable to pay the interest. Promise of payment was always made, and this promise continues as of recent date. I happen to know that the individual has not been in position to pay. The individual right along took position that his business would improve and that he would be able eventually to discharge this indebtedness, which he greatly desired to do. Now the priority situation has again affected his business, and I have lost all hope of his ever being able to pay this indebtedness. "Only this year, 1941, because of war conditions, do I regard this debt as uncollectible. His business is the sale of advertising novelties. Owing to scarcity of materials and priorities, he is unable to obtain novelties, and his customers, again account war conditions, are no longer purchasing novelties for advertising purposes to the same extent as formerly." The debt in question did become worthless sometime in the year 1941. Opinion BLACK, Judge: The statement attached to the deficiency notice is not in the record and we do not know what reason the Commissioner gave for his disallowance of the $7,000 bad debt deduction which petitioner had claimed12 in his income tax return. However, regardless of the reasons given in the deficiency notice, the determination of the Commissioner is presumed to be correct and the burden of proof is on petitioner to show that the determination of the Commissioner is in error. The Commissioner's counsel stated at the hearing that respondent's position was two-fold: (1) That the advancements which the petitioner made to his brother-in-law Robinson and which were the foundation for the execution by Robinson to petitioner of the January 2, 1931, note for $7,605 were gifts and not loans. Therefore, the note did not really represent a debt and cannot be taken as a bad debt deduction under the applicable provision of the I.R.C. (2) Respondent contends that even though it be held that the $7,605 note did represent a valid debt from Robinson to petitioner it did not become worthless within the taxable year 1941 but became worthless in some year prior thereto. The evidence at the hearing completely refuted respondent's contention that the note in question from Robinson, as maker, to petitioner did not represent a valid debt. In the first place, the promissory note which is in evidence is an unconditional13 promise to pay. There are no strings whatever attached to the written promise and petitioner testified at the hearing that there were none. The correspondence between Robinson and petitioner which was introduced in evidence shows that Robinson recognized his unconditional obligation to pay the note and reiterated his intention to do so. It is true, of course, that at the time petitioner made Robinson the loans his financial condition was bad and it is not likely that a commercial bank would have made him a loan without having the loan secured by collateral security. However, Robinson was still in business and the very purpose which petitioner had in mind when he made him the loans was to enable him to meet obligations which were very pressing and the meeting of which was necessary to enable him to continue in business. True enough, the loans when made were hazardous but we do not understand that a debt which under all other conditions and circumstances is a valid debt is rendered invalid because at the time the loan is made its collection at maturity would seem hazardous. If the lender has good reason to believe that notwithstanding the apparent hazards which surround the loan that14 the debtor will repay, then the debt is valid. We hold against respondent's contention that there was no valid debt from Robinson to petitioner. (2) Respondent's next contention is that even though our Court should hold that there was a valid, existing debt that nevertheless it did not become worthless in the taxable year 1941. This latter contention of respondent presents a much more difficult question than the first. The statute which was in force when petitioner filed his return for the taxable year 1941 was section 23 of the I.R.C. which reads in part as follows: SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * * * (k) * * (1) * * * Debts ascertained to be worthless and charged off within the taxable year * * . In making the ascertainment of worthlessness which the above statute required as a precedent to a charge-off of the debt and the taking of it as a deduction, the taxpayer was allowed "a fair degree of latitude". See Blair et al. v. Commissioner, 91 F.2d 992">91 F.2d 992. The above quoted statute was amended by section 124 of the Revenue Act of 1942 which amendment, so far as 15 applicable here, reads: (a) General Rule. - Section 23 (k) (relating to bad debts and securities becoming worthless) is amended to read as follows: "(k) Bad Debts. - (1) General rule. - Debts which become worthless within the taxable year, * * * The foregoing amendment was made effective with respect to taxable years beginning after December 31, 1938. The effect of this amendment is to allow a deduction for a debt which has become worthless in the taxable year when it actually became worthless, without reference to the year in which the charge-off was made or worthlessness ascertained. Therefore, the issue which we have to decide in the instant case is not "when did petitioner ascertain the debt to be worthless and charge it off" but when did the debt actually become worthless? There seems to be but little, if any, doubt but that the debt was actually worthless in the taxable year. We do not understand respondent to contend otherwise. His contention is that the debt became worthless in some year prior to 1941. If respondent is correct in that contention, then his determination must be sustained for under the present statute it is the burden of petitioner to prove that16 his debt against Robinson actually became worthless in the taxable year. As we have already indicated, we find some difficulty in saying, when all the evidence is considered, that petitioner has proved that the debt became worthless in 1941. However, all things considered, for reasons which we shall presently state, we think we should decide this issue in petitioner's favor. One of our first inquiries in deciding this issue is to determine whether the statute of limitations had run against the collection of the note in some year prior to 1941. The fact that the statute of limitations appears to have run in a prior year, unless something has tolled it, places the burden upon the taxpayer to show that the statute has not run or that he had some substantial reason to think he might nevertheless eventually receive payment so as to justify charging off the debt as worthless in the latter year. See Mertens Law of Federal Income Taxation, Vol. 5, Sec. 30.49; Duffin v. Lucas, 55 F.2d 786">55 F.2d 786; Sabath v. Commissioner, 100 F.2d 569">100 F.2d 569. The promissory note involved in this proceeding was payable at Mercantile-Commerce Bank and17 Trust Company, St. Louis, Missouri. The debtor's place of business was St. Louis, Missouri, and he resided there. Therefore, whether the statute of limitations has run against the collection of the note is to be determined by the laws of the State of Missouri. Sections 860 and 861 of Missouri Statutes Annotated provide: § 860. Period of limitation prescribed Civil actions, other than those for the recovery of real property, can only be commenced within the periods prescribed in the following sections, after the causes of action shall have accrued: * * * § 861. What actions shall be commenced within ten years * * * First, an action upon any writing, whether sealed or unsealed, for the payment of money or property; * * * Clearly promissory notes such as the one we have in the instant case are governed by the foregoing ten-year statute of limitations. The note in question became due and payable January 2, 1932, under its express terms. Therefore, its collection was not barred by the Missouri statute of limitations until January 2, 1942. It follows that in the year 1941, which is the taxable year we have before us, the collection of the note was not barred. It would not be barred*18 until January 2, 1942. However, a taxpayer does not have to wait until the statute of limitations has barred the collection of his debt to claim the deduction granted by section 23 (k) if other facts show the worthlessness of the debt prior to the running of the statute. It is his privilege as well as his duty to claim the deduction when the debt actually becomes worthless, regardless of the date when the statute of limitations has run. Cf. Ralph H. Cross, 20 B.T.A. 929">20 B.T.A. 929; Leo Stein, 4 B.T.A. 1016">4 B.T.A. 1016. We think that when all the facts are considered the debt became worthless in 1941 and that the Commissioner erred in disallowing the deduction claimed. Decision will be entered for the petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625939/	Katharine T. Hyde, Petitioner, v. Commissioner of Internal Revenue, RespondentHyde v. CommissionerDocket No. 78999United States Tax Court36 T.C. 507; 1961 U.S. Tax Ct. LEXIS 129; June 12, 1961, Filed 129 Decision will be entered for the respondent. Pursuant to separation agreement and divorce decree H transferred to W (his wife) certain life insurance policies of which she became the absolute owner; thereafter, pursuant to the agreement and decree, H paid premiums on such policies. Held, such premiums represented alimony payments to W under section 71(a), I.R.C. 1954. Anita Quinby Stewart, 9 T.C. 195">9 T.C. 195, followed. Florence H. Griffith, 35 T.C. 882">35 T.C. 882, distinguished. George A. Burrell, Esq., for the petitioner.Warren S. Shine, Esq., for the respondent. Raum, Judge. RAUM507 OPINION.Respondent determined deficiencies in petitioner's income tax in the amounts of $ 814.87 in 1954 and $ 873.16 in 1955. The only issue is whether the annual premiums of $ 1,892.99 paid by petitioner's former husband in each of the taxable years on four life insurance policies previously assigned to her are includible in her gross income as periodic payments under a decree of divorce or written instrument incident thereto as provided in section 71(a)(1) of the Internal Revenue Code of 1954. The facts have been stipulated. 130 Petitioner resides at 1192 Park Avenue, New York, New York. She filed her individual income tax returns for the years 1954 and 1955 with the district director of internal revenue, Upper Manhattan District, New York, New York.Petitioner and Gordon E. Hyde were married on January 31, 1925. There were three children of this marriage: Donald R., born in 1926; Barbara L., born in 1929; and Harriet, born in 1934.On December 1, 1947, petitioner and Gordon E. Hyde entered into a written separation agreement providing for, among other things, the support and maintenance of the petitioner and the two younger children. In addition to provisions for annual cash alimony, the agreement provided in paragraph Second (b) as follows:SECOND: The Husband shall provide as and for the exclusive and personal support and maintenance of the Wife during her lifetime, or until the Wife shall remarry, as follows: * * (b) Pay to the Wife, or, at her direction to the insurance companies direct, all insurance premiums on life insurance policies referred to in Paragraph THIRD (a) during his lifetime, as and when such premiums become due and payable, (exclusive of grace period) and when paid by Husband 131 direct deliver to the Wife, at least 15 days after such due date, the insurance companies' receipts evidencing such payments, with the limitation however, that if the Wife shall subsequently be divorced and shall remarry, then the obligation for the Husband to pay premiums shall cease upon such remarriage.508 Paragraph Third (a), referred to in paragraph Second (b), provided as follows:THIRD: The Husband does hereby convey, transfer, assign and set over to the Wife, the following:(a) Whole or straight existing life insurance policies, payable to Wife as beneficiary without limitation or reservation, presently in the face amount of $ 51,500.00, enumerated and listed in Schedule A, attached hereto and made a part hereof, which policies Husband represents are free of loans, claims, or other adverse interests.Schedule A of the separation agreement listed the four life insurance policies referred to in paragraph Third (a) and described them by the name of the insurer, the policy number, the amount of the insurance, the date of the policy, and the annual or quarterly premium. The total life insurance represented by the four policies amounted to $ 51,500.Pursuant to the separation132 agreement, Gordon formally assigned all his right, title, and interest in the insurance policies to petitioner during 1947 and 1948. These assignments were endorsed or noted by the respective insurance companies on the four policies. As assignee, petitioner's rights in these policies include, among others, the right to change the beneficiary, to obtain cash loans, to receive dividends, to assign the policies, and to surrender the policies for their cash value. Petitioner has at all times since 1948 been in possession of the four life insurance policies.In paragraph Twelfth of the separation agreement, petitioner and her former husband agreed that in any divorce proceedings instituted by either party the provisions of the agreement would be offered in evidence and, if received, would be incorporated in any order or decree that might be rendered. On April 21, 1948, she instituted divorce proceedings in the Supreme Court of the State of New York, Bronx County, and on July 28, 1948, the court entered an interlocutory divorce decree which became final 3 months thereafter. The third paragraph of page four of the divorce decree provides as follows:Ordered, Adjudged and Decreed that133 the defendant pay to the plaintiff, or, at her direction to the insurance companies direct, all insurance premiums on the life insurance policies attached to and designated Schedule "A" of agreement dated December 1, 1947 between the parties, which agreement hereinbefore referred to and marked plaintiff's Exhibit 1 in evidence, as and when such premiums become due and payable, (exclusive of grace period) and when paid by defendant direct deliver to the plaintiff, at least 15 days after such due date, the insurance companies' receipts evidencing such payments, with the limitation however, that if the plaintiff shall subsequently be divorced and shall remarry, then the obligation for the defendant to pay premiums shall cease upon such remarriage * Pursuant to the separation agreement and the divorce decree, Gordon paid the annual premiums of $ 1,892.99 due on the four life insurance 509 policies to the respective insurance companies in each year from 1948 to the present. Petitioner has never requested that premium payments be made directly to her.By reason of the payment of the annual premiums, the cash surrender value of the four life insurance policies increased in the134 amount of $ 1,071.06 in 1954 and $ 963.98 in 1955.The annual premiums of $ 1,892.99 paid by petitioner's former husband in 1954 and 1955 have been determined by respondent to be additional alimony received by petitioner during each of those years, taxable to her under section 71(a)(1) of the 1954 Code. 1We think that the Commissioner's determination must be135 sustained. Pursuant to the separation agreement and decree petitioner, the beneficiary, became the absolute owner of the policies. 2 Were the premium payments "received" by her within the meaning of the statute? Not only were they paid on her behalf to the insurance companies, but she could have required that they be paid to her in the first instance. The husband had no interest whatever in the policies. The case is controlled by Anita Quinby Stewart, 9 T.C. 195">9 T.C. 195, where the wife did not even have the right to have the premiums paid directly to her. The Court said (p. 198):It is difficult to see on what theory it could be successfully contended that the payments of insurance premiums * * * did not constitute petitioner's income * * . The policies in question were her property and all payments made were at her instigation, for her account, and designed to redound to her benefit. * Cf. Estate of Boies C. Hart, 11 T.C. 16">11 T.C. 16; Lemuel Alexander Carmichael, 14 T.C. 1356">14 T.C. 1356, 1362-1365.136 This case is to be distinguished from Florence H. Griffith, 35 T.C. 882">35 T.C. 882, where the tax consequences were determined on the basis of the agreement between the spouses rather than by actual transfers (pp. 888, 889) and where, under the agreement, the husband was thought to have retained "a substantial interest in the policy." In view of what it regarded as the rights retained by the husband, the Court concluded that (p. 890):it cannot be held that * * * [the wife] received the full benefits of ownership of the policy, and hence, the full benefits of the premiums paid.Also clearly distinguishable is the entire line of cases upon which petitioner relies where the wife was not the complete owner of the 510 insurance policies in issue. Seligmann v. Commissioner, 207 F. 2d 489 (C.A. 7), reversing a Memorandum Opinion of this Court; James Parks Bradley, 30 T.C. 701">30 T.C. 701; Carl G. Ortmayer, 28 T.C. 64">28 T.C. 64, modified without discussing this issue 265 F. 2d 848 (C.A. 7); Beulah Weil, 22 T.C. 612">22 T.C. 612, affirmed on137 this issue sub nom. Charles S. Weil v. Commissioner, 240 F. 2d 584 (C.A. 2), certiorari denied 338 U.S. 821">338 U.S. 821.Petitioner seeks in the alternative to limit the amount of taxable gain to the annual increase in the cash surrender value of the policies. The Court did not apply any such limitation in the Anita Quinby Stewart case, 9 T.C. 195">9 T.C. 195, and we see no reason to do so here. Petitioner's right to cash surrender was merely one of a number of rights in the policies, and as the sole owner of the policies she benefited to the full extent of the premiums. The value of all the various rights represented by the policies is most accurately measured by the cost of procuring them, that is, by the premiums. Cf. Guggenheim v. Rasquin, 312 U.S. 254">312 U.S. 254; Powers v. Commissioner, 312 U.S. 259">312 U.S. 259.We conclude that respondent correctly determined that petitioner realized income in the full amount of the annual premiums paid by her former husband in 1954 and 1955.Decision will be entered for the respondent. Footnotes1. SEC. 71. ALIMONY AND SEPARATE MAINTENANCE PAYMENTS.(a) General Rule. -- (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.↩2. To be sure, the husband's duty to pay premiums might cease upon the wife's remarriage, but that circumstance would not deprive her of any rights under the policies of which she would continue to remain the absolute owner.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625940/	PORFIRIO DE JESUS CALLO AND SOCORRO RODRIGUEZ CALLO, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentCallo v. CommissionerDocket No. 4969-80.United States Tax CourtT.C. Memo 1982-712; 1982 Tax Ct. Memo LEXIS 36; 45 T.C.M. (CCH) 299; T.C.M. (RIA) 82712; December 7, 1982. 36 Petitioner was a medical doctor who was licensed to practice in the State of Louisiana and who had graduated from the University of Santo Tomas, located in the Philippines. In 1977, several Philippine organizations sponsored conferences and invited petitioner to attend. Petitioner deducted $2,349 on his 1977 return for expenses allegedly incurred during his trip to attend such conferences. Held, pursuant to sec. 274(h), I.R.C. 1954, petitioner is not entitled to a deduction for expenses incurred in connection with the foreign conventions since he failed to satisfy the explicit requirements for deductibility imposed by the statute. Porfirio de Jesus Callo and Socorro Rodriguez Callo, pro se. Linda J. Bourquin, for the respondent. STERRETTMEMORANDUM FINDINGS OF FACT AND OPINION STERRETT, Judge: By notice of deficiency dated February 12, 1980 respondent determined a deficiency in petitioners' Federal income tax for the taxable year 1977 in the amount of $1,395. After concessions, the sole issue for decision is whether petitioners are entitled to a deduction of $2,446 for the 1977 taxable year on account of employee business expenses incurred in foreign travel. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference. Petitioners Porfirio J. Callo and his wife, Socorro R. Callo, were residents of Jackson, Louisiana at the time of filing the38 petition herein. They timely filed a joint Federal income tax return with the Internal Revenue Service Center, Austin, Texas for the taxable year ended December 31, 1977. Socorro R. Callo is a party to this proceeding solely by reason of having filed a joint income tax return with her husband (hereinafter petitioner). During 1977, petitioner was a medical doctor licensed to practice in the State of Louisiana. He graduated from the University of Santo Tomas, located in the Philippines. Prior to coming to the United States in 1969, Petitioner had been one of the officers of a dermatological association located in the Philippines. He also worked for the National Skin Clinic in that country. In 1977, these organizations sponsored conferences and invited petitioner to attend and appear as a guest lecturer. The business expenses at issue herein were incurred in connection with petitioner's attendance at such conferences in May and June of 1977. On his 1977 Federal income tax return, petitioner deducted $2,446 as employee business expenses incurred during the year. Of this amount, $94 was allowed by respondent in his statutory notice. Respondent disallowed $2,349 of the deduction, 39 the amount allegedly expended by petitioner as a result of his trip to the Philippines, on the ground that the express requirements of section 274(h), I.R.C. 1954, had not been met. 1OPINION The sole issue for decision is whether petitioner is entitled to deduct the expenses allegedly incurred in connection with his trip to the Philippines during 1977. Respondent asserted that the expenses in issue were incurred in connection with a foreign convention and petitioner apparently has not contested such assertion. Petitioner simply contends that the expenses were incurred, and therefore are deductible. During the taxable year in question, the deductibility of expenses incurred in connection with a foreign convention was governed by section 274(h), which provided in pertinent part as follows: SEC. 274. DISALLOWANCE OF CERTAIN ENTERTAINMENT, ETC., EXPENSES. 40 (h) Foreign Conventions.-- (1) Deductions with respect to not more than 2 foreign conventions per year allowed.--If any individual attends more than 2 foreign conventions during his taxable year-- (A) he shall select not more than 2 of such conventions to be taken into account for purposes of this subsection, and (B) no deduction allocable to his attendance at any foreign convention during such taxable year (other than a foreign convention selected under subparagraph (A)) shall be allowed under section 162 or 212. Section 274(h)(7) requires that as a condition to the deductibility of "transportation and subsistence expenses" incurred while attending a foreign convention, the taxpayer claiming the deduction must attach "to the return of tax on which the deduction is claimed" two written statements verifying specific information with respect to the convention activities. 2 The parties stipulated that the income tax return filed by petitioner for 1977 was not accompanied by the statements required by section 274(h)(7). 41 There are no clarifying regulations accompanying section 274(h)(7). However, the legislative history makes it clear that the strict reporting requirements imposed by that section were enacted in order to prevent taxpayers from deducting what were primarily vacation expenses simply because a foreign "convention" established a business nexus. See H. Rept. No. 94-658, to accompany H.R. 10612, 94th Cong., 1st Sess. 168 (1975), 1976-3 C.B. (Vol. 2) 860; S. Rept. No. 94-938, to accompany H.R. 10612, 94th Cong., 2d Sess. 156 (1976), 1976-3 C.B. (Vol. 3) 194. The expenses deducted on petitioner's return for 1977 in connection with the Philippines trip were all either transportation or subsistence expenses within the meaning of section 274(h)(7). See H. Rept. No. 94-658, to accompany H.R. 10612, 94th Cong., 1st Sess. 170 (1975), 1976-3 C.B. (Vol. 2) 862, wherein "subsistence expenses" are defined as "lodging, meals, and other necessary expenses for the personal sustenance and comfort of the traveler, including tips and taxi and similar transportation expenses." Under the plain language of the statute, petitioner has failed to meet the requirements42 of deductibility for expenses incurred in connection with attendance at a foreign convention. The language of the statute is unambiguous. The written statements must be attached to the return for the year in which the deductions are taken. Based on the record, we find that the expenses deducted by petitioner were transportation and subsistence expenses incurred in connection with his attendance of a foreign convention. Accordingly, the deductibility of such expenses is governed by section 274(h)(7). Since petitioner failed to comply with the requirements of that section, his deduction must be denied. 3To reflect the foregoing, Decision will be entered for the respondent.Footnotes1. The foreign travel expenses claimed were as follows: Plane fare$ 952Lodging675Meals375Laundry80Taxi150Tips50Phone67$2,349The remaining $3, also disallowed by respondent, was deducted by petitioner as automobile depreciation and apparently has been conceded by petitioner.↩2. Sec. 274(h)(7) provides as follows: (7) Reporting Requirements.--No deduction shall be allowed under section 162 or 212 for transportation or subsistence expenses allocable to attendance at a foreign convention unless the taxpayer claiming the deduction attaches to the return of tax on which the deduction is claimed-- (A) a written statement signed by the individual attending the convention which includes-- (i) information with respect to the total days of the trip, excluding the days of transportation to and from the site of such convention, and the number of hours of each day of the trip which such individual devoted to scheduled business activities, (ii) a program of the scheduled business activities of the convention, and (iii) such other information as may be required in regulations prescribed by the Secretary; and (B) a written statement signed by an officer of the organization or group sponsoring the convention which includes-- (i) a schedule of the business activities of each day of the convention, (ii) the number of hours which the individual attending the convention attended such scheduled business activities, and (iii) such other information as may be required in regulations prescribed by the Secretary. Sec. 274(h)(7)↩, which was added by sec. 602(a) of Pub. L. 94-455, Oct. 4, 1976, 90 Stat. 1572, effective for conventions beginning after Dec. 31, 1976, was repealed by sec. 4(a) of Pub. L. 96-608, Dec. 28, 1980, 94 Stat. 3552.3. The respondent made every reasonable effort to settle this matter.By refusing to accept the proferred settlement, petitioner gambled and, under our holding required by the clear language of the statute itself, has lost.↩	01-04-2023	11-21-2020

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