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https://www.courtlistener.com/api/rest/v3/opinions/4624064/	GILBERT W. LEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Lee v. CommissionerDocket No. 1408.United States Board of Tax Appeals6 B.T.A. 135; 1927 BTA LEXIS 3573; February 18, 1927, Promulgated 3573 1. In the circumstances of this proceeding, income resulting from sales of real estate should be computed on the installment basis. 2. Overassessments in the circumstances pleaded herein are not subject to review by the Board. H. A. Mihills, C.P.A., for the petitioner. J. D. Foley, Esq., for the respondent. LANSDON 135 The Commissioner asserts the deficiencies here in question for the years 1918 and 1920 in the respective amounts of $9,817.20 and $4,973.91, and overassessments for the years 1917 and 1919 in the respective amounts of $157.31 and $22,280.65. The issues to be determined are (1) whether income resulting from the sale of subdivision real estate is to be determined by the use of the completed transaction or installment sales method, and (2) whether certain losses were sustained in 1917 or at some prior date. A third issue as to whether certain dividends received in 1917 were subject to tax at 1916 or 1917 rates was abandoned at the hearing. FINDINGS OF FACT. The petitioner is an individual residing in Detroit. His principal business is the conduct of a wholesale grocery company, but he is also largely interested in3574 banking, automobile manufacturing, and real estate operations. He keeps his books and makes his income-tax returns on the cash receipts and disbursements basis. 136 In the years 1914 and 1915 the petitioner acquired two acreage tracts of real estate in Detroit known as the Gilbert and Grand River Park subdivisions. He subdivided these tracts into lots, all of which he sold prior to December 31, 1916. All sales were made on contracts that called for an initial cash payment of 10 per cent of the purchase price and 1 per cent monthly thereafter, monthly payments to include accrued interest. In making his income-tax returns during the terms of these sales contracts the petitioner sometimes used the completed transaction and at other times the installment basis. Upon audit of the petitioner's income-tax returns, the Commissioner held that all the income resulting from the sale of lots in the two subdivisions should be reported on the installment basis. The profits on such sales made in 1916 were $10,945.06 and $69,627.79, or a total of $80,572.85, which was income taxable in 1916 if the completed transaction basis of reporting profits is employed. Profits from installments3575 collected during the years 1917 to 1920, both inclusive, were: 1917, $6,205.11; 1918, $3,783.95; 1919, $8,244.17; 1920, $7,887.37. Prior to March 1, 1913, petitioner purchased 1,082 shares of the common stock and 550 shares of the preferred stock of the Lozier Motor Car Co. at $100 per share. The March 1, 1913, value of the common stock was $27 per share and of the preferred stock, $90 per share. On September 23, 1914, the Detroit Trust Co. was appointed receiver in bankruptcy for the Lozier Motor Car Co. and thereafter made trustee in bankruptcy. As receiver the trust company reported that the books of the car company showed total assets of $4,899,972.65, but found that, on the basis of a going concern, the total value of such assets was $2,069,718.50. The total liabilities appearing on the car company's books were $3,214,414.88. Later the receiver appraised the assets, other than land and buildings, for liquidation purposes at $1,366,584.46. The total common stock of the car company outstanding was $2,000,000. The total preferred stock was $1,494,700. The assets of the company were advertised for sale and on February 4, 1915, were sold at auction for $1,000,000. The3576 sale was confirmed by the court in bankruptcy. Under the terms of the sale it was left optional with the purchaser as to whether he should take the lands and buildings. If he decided not to take them, he was to be allowed a deduction of $350,000 on the purchase price. On September 28, 1915, he exercised his option by taking the real estate, and a contract was entered into providing that payments of $75,000 should be made on the plant property on February 15, 1916, 1917, 1918, and 1919, and a payment of $50,000 on or before February 15, 1920. The terms of sale of the personalty required that all payments be made within one year from February 15, 1915. The 137 contract provided that the entire price should immediately become due in the event that the property should pass into the hands of a third party. On June 9, 1917, the referee in bankruptcy entered an order closing the estate and discharging the trustee. The total amount received and disbursed to the creditors of the company was slightly less than 30 per cent of the proved debts, leaving a little more than 70 per cent unpaid. The stockholders received nothing. OPINION. LANSDON: The Commissioner advised the3577 petitioner of deficiencies for the years 1918 and 1920, and of overassessments for the years 1917 and 1919. There is nothing in the record, either in the way of evidence adduced by the petitioner or admissions by the Commissioner, that indicates the basis for the overassessments or that they were made in circumstances that would justify us in redetermining tax liability for the years in which they were found. We hold, therefore, that our only function here is to redetermine the petitioner's tax liability for the years 1918 and 1920, as to which the Commissioner has asserted deficiencies in the amounts set forth supra. ; . The sale contracts of lots in the two tracts of land subdivided by the petitioner provided for an initial cash payment of 10 per cent of the purchase price and 1 per cent monthly payments, including interest, thereafter, until the entire purchase price debt should be discharged. The petitioner contends that he received no taxable income until his receipts from payments exceeded the cost of the land and that he had the option to report such3578 income either on the installment basis or after complete recoupment of his capital investment. This may be true, but the so-called completed transaction basis is another recognized method for reporting income from transactions of the nature here involved. The effect of the first method would be to distribute the taxable income derived from such sales over all the years that elapsed before the final payment was made on the last lot that was sold. The second method would postpone the return of any part of the receipts from sales as income until all capital expenditures were replaced. If the accrual or completed transaction method is used the entire profit was taxable income in 1916 or prior years. In his original income-tax returns for several of the years in question the petitioner computed his taxable income from the sale of lots by what he calls the percentage method. The evidence indicates that such computation was in effect the use of the installment 138 basis. It is apparent, therefore, that the petitioner elected to return the income resulting from the sale of lots on the installment basis. This choice must have been considered and doubtless was made because*3579 it was deemed to best serve the interests of the petitioner. Having once made his election, the petitioner should not be allowed to change to a different basis merely because subsequent legislation or other events made it to his interest so to do. We are of the opinion that the petitioner's income from the sale of lots, in the circumstances set forth in our findings of fact, should be computed, reported, and taxed on the installment basis. The petitioner contends that he sustained a loss on the stock of the Lozier Motor Car Co. in the year 1917, and asks for the deduction of such loss from his gross income for that year. Since no deficiency is asserted for the year 1917, we are of the opinion, as set forth supra, that we have no authority to redetermine tax liability of the petitioner for that year, and therefore make no decision either as to the fact or date of the alleged loss. Judgment will be entered for the respondent on 10 days' notice, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624065/	CONO A. PECORA, M.D., P.A., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentPecora v. CommissionerDocket No. 22930-80R.United States Tax CourtT.C. Memo 1988-104; 1988 Tax Ct. Memo LEXIS 124; 55 T.C.M. (CCH) 365; T.C.M. (RIA) 88104; 9 Employee Benefits Cas. (BNA) 1656; March 8, 1988. Joseph S. Pecora, for the petitioner. David Mustone, for the respondent. WOLFEMEMORANDUM FINDINGS OF FACT AND OPINION126 WOLFE, Special Trial Judge: This case is before the Court on respondent's motion for summary judgment filed pursuant to Rule 121, Tax Court Rules of Practice and Procedure.1Respondent determined that petitioner's pension and profit sharing plans (plans) failed to meet the qualification requirements of section 401(a) for the taxable year 1978. Pursuant to section 7476, 2 petitioner has invoked the jurisdiction of this Court for a declaratory judgment that its plans satisfy such qualification requirements. Rule 217 provides for disposition of an action for declaratory judgment involving a revocation on the basis of the administrative record alone only where the parties agree that the record contains all the relevant facts and that such facts are not in dispute. In this case respondent127 has asserted that he disputes the truth of some of the alleged facts. Respondent filed a motion for summary judgment pursuant to Rule 121. 3Rule 121(b) provides that a motion for summary judgment is to be granted if "there is no genuine issue as to any material fact and * * * a decision may be rendered as a matter of law." The burden of proof is on the moving party, and we are required to view the factual materials and reference to be drawn therefrom in the light most favorable to the party opposing the motion. Casanova Co. v. Commissioner,87 T.C. 214">87 T.C. 214, 217 (1986). In128 January 1977, the Internal Revenue Service (IRS) issued favorable determination letters for the plans maintained by Cono A. Pecora, M.D., P.A., (petitioner) with respect to the amendments adopted April 29, 1976. These letters determined that the plans complied with the requirements set forth in section 401(a) for favorable tax treatment. The petitioner is a professional corporation on a fiscal year ending January 31 of each year. Both of the plans were also on the same fiscal year. During the plan year ending January 31, 1978, petitioner had three employees, two of whom were eligible to participate in the plans. The two employees eligible to participate were Cono A. Pecora, M.D. and August Leslie Warger. Dr. Pecora participated in both plans and Mr. Warner elected not to participate in either. Mr. Warer elected not to participate in order to receive current cash in lieu of coverage. Dr. Pecora was president, sole shareholder and highest paid employee of petitioner during this time. By letters dated September 29, 1980, the IRS revoked the 1977 favorable determination letters for both plans on the ground that the minimum coverage requirement of section 401 had not been satisfied129 for the 1978 plan year. Respondent determined that petitioner's plans failed to meet the qualification requirements of section 401(a) for the plan year ending January 31, 1978. Pursuant to section 401(a)(3), the plans must satisfy the minimum participation standards contained in section 410. Section 410(b) provides "percentage" and "classification" tests for plan eligibility one of which a plan must satisfy in order to qualify under 401(a). Under these tests a plan will satisfy the eligibility requirements if it benefits either: (A) 70 percent or more of all employees, or 80 percent or more of all employees who are eligible to benefit under the plan if 70 percent or more of the employees are eligible to benefit under the plan, or (B) such employees as qualify under a classification set up by the employer and found by the Secretary not to be discriminatory in favor of employees who are officers, shareholders, or highly compensated. Sec. 410(b)(1)(A) and (B). Of the petitioner's three employees, only Dr. Pecora and Mr. Warger were eligible to participate in the plans. But, of these two employees, only Dr. Pecora participated in either plan. Since Mr. Warger elected not to participate130 in the plans in order to receive more cash currently, he is not considered as covered by either plan. Sec. 1.401-3(c), Income Tax Regs.; Harwood Associates, Inc. v. Commissioner,63 T.C. 255">63 T.C. 255, 262-263 (1974). Consequently, neither 70 percent of all employees nor 80 percent of eligible employees participated in the plans as required by section 410(b)(1)(A). The undisputed facts establish that petitioner fails the percentage test of section 410(b)(1)(A). Petitioner argues that the percentage test of section 410(b)(1)(A) is unconstitutional. Petitioner asserts that section 410(b)(1)(A) sweeps unnecessarily broadly, and violates its due process rights under the 5th Amendment to the Constitution in that it arbitrarily interferes with its right to hire qualified individuals as employees. It is well established that economic legislation is given a presumption of constitutionality, and the burden is on the one complaining of a due process violation to establish that the legislature has acted in an arbitrary and irrational way. Usery v. Turner Elkhorn Mining Co.,428 U.S. 1">428 U.S. 1, 15 (1976). Respondent contends, and we agree, that petitioner's bare assertion131 of unconstitutionality falls far short of the heavy burden petitioner must bear to overcome this presumption of constitutionality. Under section 410(b)(1)(B), qualification of a trust is conditioned on a finding by the employer is not discriminatory in favor of officers, shareholders, or highly compensated employees. To prevail on the issue of whether a trust meets the requirements of section 410(b)(1)(B), petitioner must show that the Commissioner's determination was arbitrary, unreasonable, or an abuse of discretion. Fujinon Optical, Inc. v. Commissioner,76 T.C. 499">76 T.C. 499, 506-507 (1981); Loevsky v. Commissioner,55 T.C. 1144">55 T.C. 1144, 1149 (1971), affd. per curiam 471 F.2d 1178">471 F.2d 1178 (3d Cir. 1973), cert. denied 412 U.S. 919">412 U.S. 919 (1973). Section 1.401-3(c), 4 Income Tax Regs. provides: (c) Since, for the purpose of section 401, a profit-sharing plan is a plan which provides for distributing the funds accumulated under the plan after a fixed number of years, the attainment of a stated age, or upon the prior occurrence of some event such as illness, disability, retirement, death, layoff, or severance of employment, employees who receive the132 amounts allocated to their accounts before the expiration of such a period of time or the occurrence of such a contingency shall not be considered covered by a profit-sharing plan in determining whether the plan meets the coverage requirements of section 401(a)(3)(A) and (B). Thus, in case a plan permits employees to receive immediately the amounts allocated to their accounts, or to have such amounts paid to a profit-sharing plan for them, the employees who receive the shares immediately shall not, for the purpose of section 401, be considered covered by a profit-sharing plan. The Employee Retirement Income Security Act of 1974 (ERISA) Pub. L. 93-406, section 1011, 88 Stat. 900 and section 1016, 88 Stat. 929, recodified sections 401(a)(3)(A) and (B) as sections 410(b)(1)(A) and (B). Therefore, section 1.401-3(c), Income Tax Regs. applies to sections 410(b)(1)(A) and (B).Applying this regulation to petitioner's plans as we previously have applied it in analogous circumstances, we find that in operations the plans did discriminate133 in favor of an officer, shareholder and highly compensated employee. Although two of petitioner's employees are eligible to participate under the plan, only a single highly compensated employee chose to participate. The employee who received a low level of compensation chose to receive a current cash bonus in lieu of coverage. Since the sole participant, the only person covered, in 1978 was an officer and shareholder and the most highly compensated employee, the subject plans unquestionably were discriminatory within the meaning of section 410(b)(1)(B) and petitioner has failed to show that respondent's determination was arbitrary, unreasonable or an abuse of discretion. Sec. 1.401-3(c), Income Tax Regs.; Harwood Associates, Inc. v. Commissioner,63 T.C. at 262-263. The plans failed to meet the requirements of either subparagraph of section 410(b)(1), so they failed to meet the qualification requirements of section 401(a)(3). After careful review of the entire record, we conclude that there are no genuine issues of material fact in dispute and respondent is entitled to judgment as a matter of law. Respondent's Motion for Summary Judgment will be granted. *134 An appropriate order will be entered.Footnotes1. This case was assigned pursuant to section 7456(d) (redesignated as section 7443A(b) by the Tax Reform Act of 1986, Pub. L. 99-514, section 1556, 100 Stat. 2755) and Rule 180 et seq. All section references are to the Internal Revenue Code of 1954, as amended, and as in effect during the year in issue, and all rule references are to the Tax Court Rules of Practice and Procedure. ↩2. Petitioner has satisfied the relevant prerequisites for this declaratory judgment action: petitioner is the employer whose plans' qualifications are at issue, section 7476(b)(1); its exhaustion of administrative remedies is evidenced by respondent's final adverse determination letters dated September 29, 1980, section 7476(b)(3); and a timely petition with this Court was filed on December 29, 1980, after the amendments in issue were put into effect. ↩3. Rule 217(b)(2) provides that an action for declaratory judgment may be decided on a motion for summary judgment under Rule 121↩. 4. Section 1.401-3(c), Income Tax Regs.↩, refers to sections 401(a)(3)(A) and (B) which are the predecessors to sections 410(b)(1)(A) and (B).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624066/	Honeywell Inc. and Subsidiaries, Petitioner v. Commissioner of Internal Revenue, RespondentHoneywell, Inc. v. CommissionerDocket No. 15807-83United States Tax Court87 T.C. 624; 1986 U.S. Tax Ct. LEXIS 49; 87 T.C. No. 37; September 22, 1986, Filed 49 P manufactured, leased, and sold computers and reported depreciation under the Class Life Asset Depreciation Range system described in sec. 1.167(a)-11(d)(3), Income Tax Regs. Literally applying the regulations, P reported sales of leased computers as credits to its depreciation reserve until the appropriate vintage account balance was exceeded, thereby delaying realization of income from sales. R determined that computers held for sale and/or lease were "dual purpose property" not covered by his regulations. Held, P correctly reported income from sales of computers.P's subsidiary issued debentures convertible into stock of P. Held:1. P cannot amortize as original issue discount a portion of the issue price attributable to the conversion privilege.2. P cannot amortize as bond premium the difference between the fair market value of the stock issued on conversion and the face value of the debentures. National Can Corp. v. United States, 687 F.2d 1107 (7th Cir. 1982), followed. Clinton A. Schroeder, David C. Bahls, and Myron L. Frans, for the petitioner.James F. Kidd, for the respondent. Cohen, Judge. COHEN624 OPINIONRespondent determined deficiencies of $ 1,592,852 and $ 9,542,483 in petitioner's Federal income taxes for 1976 and 1977, respectively. Certain of the adjustments in the statutory notice of deficiency have been resolved by agreement, and all of the facts have been 625 stipulated. Three issues remain to be resolved on cross motions for partial summary judgment. They are:(1) Whether sales of leased equipment depreciated under the Class Life Asset Depreciation Range (CLADR) system constitute ordinary retirements under section 1.167(a)-11(d)(3), Income Tax Regs.;(2) Whether amortizable original issue discount arises on the issuance of debentures by a subsidiary, convertible into stock of its parent, to the extent that the issue price is attributable to the conversion privilege; 52 and(3) Whether amortizable bond premium arises upon conversion of debentures, equal to the difference between the fair market value of stock distributed in exchange for the debentures and the face value of the debentures.Honeywell Inc. (petitioner) is a Delaware corporation with its corporate headquarters in Minneapolis, Minnesota. Petitioner and its numerous domestic and foreign subsidiaries engage on a worldwide basis in the design, manufacture, sale, and service of automation equipment and systems, including automation systems and controls for homes and buildings, industrial controls and control systems, aerospace and defense systems, and computer and communication products.Petitioner and its domestic subsidiaries file consolidated Federal income tax returns using the accrual method of accounting with the calendar year as the taxable year. Petitioner timely filed its Federal income tax returns for 1976 and 1977 with the Internal Revenue Service Center at Ogden, Utah. In addition to disputing the amounts determined by respondent in the statutory notice, petitioner contends that it overpaid its Federal income taxes by $ 415,509 and $ 361,591 for 1976 and 1977, respectively.53 Sales of Leased ComputersSince 1957, petitioner has developed and manufactured electronic data processing (EDP) systems. An EDP system, often termed and hereinafter referred to as a computer, is a complex series of equipment consisting of a central processor, input devices, and output devices. Input devices are mechanisms for reading data off punched cards, magnetic tape, and other similar input media, and translating it into 626 a form usable by a central processor. Output devices are mechanisms such as printers and magnetic tape units which transcribe data from the central processor into a form that can be used or stored outside the central processor.Since 1970, petitioner's computer business has been conducted principally by its subsidiary, Honeywell Information Systems Inc. (HIS). For purposes of this action there is no need to differentiate between petitioner and HIS, so reference generally will be made simply to petitioner with the understanding that the activities described are in most instances carried on by HIS.As petitioner's computer business evolved, it came to include both outright sales of new computers to customers, leases of computers to lessees, and54 sales of leased computers to lessees. Petitioner now manufactures, sells, and leases computers.The computer business is capital intensive, requires vast expenditures for research and development, and changes rapidly, with equipment quickly becoming technologically obsolete. This means, on the one hand, that manufacturers are particularly concerned with maximizing the number of units delivered to customers and, on the other hand, that customers are frequently reluctant to purchase computers outright. Leasing is a way to accommodate both sets of concerns and, consequently, the leasing of computers has become a significant economic activity.A willingness to lease computers is a vital part of the business of computer manufacturers such as petitioner. Many potential customers either cannot afford to purchase the equipment or prefer to lease the equipment for financial, tax, or accounting reasons. From the manufacturer's point of view, the ability to lease computers enables it to reach more customers, which permits the generation of additional revenue to offset the massive overhead involved in the development and manufacture of computers. In the computer industry, leasing is so 55 important that a failure to offer leasing as an option would seriously circumscribe a manufacturer's business by substantially reducing the volume of computers that it could ship to customers, thereby reducing its potential revenue and making it more difficult to operate profitably.627 The computer business is a significant part of petitioner's business. Petitioner's revenue from its computer business in 1976 and 1977 was approximately 36 percent of its total revenues. More than 30 percent of total inventories as of December 31, 1977, related to its computer business. As of December 31, 1977, more than 70 percent of petitioner's investment in tangible property (land, buildings and improvements, machinery and equipment, and construction in progress), net of accumulated depreciation, was invested in property used in its computer business. During the years in issue, petitioner's investment in equipment leased by it to third parties was in excess of 60 percent of its total investment in tangible property, whether measured by cost or net book value.Petitioner's revenues from computer rental and service were as follows in 1976 and 1977, which were typical of other years:19761977Computer rental revenue$ 304,000,000$ 323,000,000Computer service revenue218,000,000 275,000,000 Total 522,000,000 598,000,000 Percentage of information systems(computer business) revenue 57.1% 57.7% Percentage of total revenue20.9 20.5 56 The computer service category includes maintenance service income on computers that have been leased as well as sold.Petitioner must supply the capital to finance its costs of owning leased computers either through retention of earnings, issuance of stock, or borrowing. Petitioner borrows substantial amounts of capital in order to finance its computer business in general, and its ownership of leased computers, in particular.All leases of computers by petitioner were subject to written lease contracts. Various forms of contracts were used from time to time, depending upon the length of the lease and other factors, and the forms in use were changed from time to time. Such contracts generally granted the lessee an option to purchase the leased equipment and provided that a portion of the rentals paid would be 628 credited against the sales price upon the exercise of the option.Some of the computers initially leased to customers in 1976 ultimately were sold in 1976. The total sales proceeds from the sale of such computers were $ 4,978,492. Some of the computers initially leased to customers in either 1976 or 1977 ultimately were sold in 1977. The total sales proceeds from57 the sales of such computers were $ 26,002,110.Petitioner's cost of new computers originally placed in service by lease in each of the years 1976 through 1980, and the percentage, by cost, of those leased computers which were sold in each of the years 1976 through 1983 are as shown on page 629.No lessee was under any obligation to purchase the equipment being leased. If a lessee decided to consider purchasing the equipment, that was a voluntary choice on the lessee's part over which petitioner did not exercise control.Petitioner was engaged in the trade or business of leasing computers and of selling computers within the meaning of the Internal Revenue Code at all times relevant to this action. For all times material and up to the time that the equipment was sold, respondent has allowed petitioner to treat the computers manufactured by it and leased to its customers as section 1245 1 property for which a depreciation deduction was allowable and as section 1231 property by reason of being used in petitioner's trade or business as soon as they were held for the time required by section 1231(b)(1).58 Petitioner elected to depreciate all of its computers that it placed in service by leasing to customers in 1976 and 1977 under the CLADR system pursuant to section 167(m) and section 1.167(a)-11, Income Tax Regs., which provides in pertinent part as follows:(a) In general -- (1) Summary. This section provides an asset depreciation range and class life system for determining the reasonable allowance for depreciation of designated classes of assets placed in service after December 31, 1970. The system is designed to minimize disputes between taxpayers and the Internal Revenue Service as to the useful life of 629 Year placed in service1976 1977 1978 Cost of computers placed onlease during the year $ 127,784,092$ 110,978,436$ 120,875,786Percentage of cost of computersplaced on lease during the year, subsequently sold in -- 1976 1.9% 1977 3.4 5.7% 1978 3.8 4.9 1.2% 1979 4.3 4.8 12.2 1980 3.3 4.6 4.4 1981 4.4 4.9 5.8 1982 2.6 4.0 4.0 1983 2.9 4.0 4.4 Total percentage by cost ofcomputers initially leased and subsequently sold 26.6 32.9 32.0 59 Year placed in service1979 1980 Cost of computers placed onlease during the year $ 131,715,222$ 129,113,569Percentage of cost of computersplaced on lease during the year, subsequently sold in -- 1976 1977 1978 1979 3.4% 1980 5.7 1.9% 1981 6.4 5.9 1982 5.4 5.1 1983 4.2 5.0 Total percentage by cost ofcomputers initially leased and subsequently sold 25.1 17.9 630 property, and as to salvage value, repairs, and other matters. The system is optional with the taxpayer. The taxpayer has an annual election. * * * Generally, the taxpayer must establish vintage accounts for all eligible property included in the election, must determine the allowance for depreciation of such property in the taxable year of election, and in subsequent taxable years, on the basis of the asset depreciation period specified in the election, and must apply the first-year convention specified in the election to determine the allowance for depreciation of such property. This section also contains special provisions for the treatment of salvage value, 60 retirements, and the costs of the repair, maintenance, rehabilitation or improvement of property. In general, a taxpayer may not apply any provision of this section unless he makes an election and thereby consents to, and agrees to apply, all the provisions of this section. A taxpayer who elects to apply this section does, however, have certain options as to the application of specified provisions of this section. A taxpayer may elect to apply this section for a taxable year only if for such taxable year he complies with the reporting requirements of paragraph (f)(4) of this section.(2) Definitions. For the meaning of certain terms used in this section, see paragraphs * * (d)(3)(ii) ("ordinary retirement" and "extraordinary retirement") * * (b) Reasonable allowance using asset depreciation ranges -- * ** * * (3) Requirement of vintage accounts -- (i) In general. For purposes of this section, a "vintage account" is a closed-end depreciation account containing eligible property to which the taxpayer elects to apply this section, first placed in service by the taxpayer during the taxable year of election. The "vintage" of an account refers to the taxable61 year during which the eligible property in the account is first placed in service by the taxpayer. * * ** * * (d) Special rules for salvage, repairs and retirements -- * ** * * (3) Treatment of retirements -- (i) In general. The rules of this subparagraph specify the treatment of all retirements from vintage accounts. * * An asset in a vintage account is retired when such asset is permanently withdrawn from use in a trade or business or in the production of income by the taxpayer. A retirement may occur as a result of a sale or exchange, by other act of the taxpayer amounting to a permanent disposition of an asset, or by physical abandonment of an asset. A retirement may also occur by transfer of an asset to supplies or scrap.(ii) Definitions of ordinary and extraordinary retirements. The term "ordinary retirement" means any retirement of section 1245 property from a vintage account which is not treated as an "extraordinary retirement" under this subparagraph. * * *631 (iii) Treatment of ordinary retirements. No loss shall be recognized upon an ordinary retirement. Gain shall be recognized only to the extent specified in this subparagraph. 62 All proceeds from ordinary retirements shall be added to the depreciation reserve of the vintage account from which the retirement occurs. See subdivision (vi) of this subparagraph for optional allocation of basis in the case of a special basis vintage account. See subdivision (ix) of this subparagraph for recognition of gain when the depreciation reserve exceeds the unadjusted basis of the vintage account. * * ** * * (ix) Recognition of gain or loss in certain situations. (a) In the case of a vintage account for section 1245 property, if at the end of any taxable year after adjustment for depreciation allowable for such taxable year and all other adjustments prescribed by this section, the depreciation reserve established for such account exceeds the unadjusted basis of the account, the entire amount of such excess shall be recognized as gain in such taxable year. * The parties agree that the subject sales are not extraordinary retirements.Petitioner established vintage accounts for the computers leased during 1976 and 1977, respectively; established a depreciation reserve for each vintage account; and properly depreciated the computers in accordance with its63 CLADR election in 1976 and 1977 prior to their sale.In accordance with its view of section 1.167(a)-11, Income Tax Regs., petitioner did not recognize gain on the sale of the computers initially leased during 1976 and subsequently sold during 1976 or 1977 or on the sale of the computers initially leased during 1977 and subsequently sold in 1977. The proceeds from the sales of such computers were added to the depreciation reserve of the appropriate vintage account. Because the depreciation reserve of the vintage account, after the addition of such sales proceeds, was less than the cost basis of the vintage account, petitioner recognized no gain in the year of the sale.Petitioner continued after 1977 to add the proceeds from the sale of leased computers to the depreciation reserve for the vintage account in which the cost of the computers sold had been recorded. Once the depreciation reserve for a vintage account equaled the cost basis thereof, petitioner reported the entire sales proceeds as ordinary income.The history of petitioner's reporting for the 1976 and 1977 vintage accounts and the sale of leased computers, the 632 cost of which had been recorded in those accounts, 64 was as follows:19761977Initial cost basis$ 153,250,489 $ 154,190,709 Additions to depreciation reserve:1976: Depreciation19,759,916 Sales of leased computers7,815,338 1977: Depreciation35,556,975 19,215,607 Sales of leased computers13,030,248 23,082,890 1978: Depreciation30,938,502 36,110,302 Sales of leased computers10,830,263 20,109,302 1979: Depreciation24,519,632 30,221,378 Sales of leased computers12,120,412 12,552,129 1980: Depreciation15,727,953 Sales of leased computers0 1981: Depreciation(1,320,797)(2,828,852)Sales of leased computers0 Total: Depreciation109,454,228 98,446,388 Sales of leased computers43,796,261 55,744,321 Total153,250,489 154,190,709 Proceeds of sales of leased computerstaken directly into income: 1979806,854 19806,242,226 7,119,515 19811,881,645 6,455,575 19822,466,743 4,699,248 19835,266,865 6,465,110 Total through 198316,664,333 24,739,448 The credit to depreciation in 1981 was an internal audit adjustment to correct earlier errors.Respondent's position is that sales of computers that are leased65 to customers of petitioner are not "retirements" and that they are not governed by the CLADR regulations. Respondent determined that petitioner's income should be adjusted by adding to sales revenues the selling price of the computers; adding to cost of sales the original cost basis of the computers less depreciation taken; reducing depreciation expense by removing the unadjusted basis of the property sold from the vintage account; and reducing the reserve for depreciation by removing the accrued depreciation for the property sold from the reserve account. The dispute between the parties is over the propriety of the adjustments; the amounts of the adjustments are not in dispute.633 Petitioner contends that it followed precisely respondent's regulation set forth above and that, therefore, it is entitled to have its method of treating sales of computers approved. Respondent acknowledges that the regulations have been followed by petitioner but contends that the regulations were not intended to cover the computers sold by petitioner because such computers are "dual purpose property," i.e., property held both for sale and for lease. Thus, argues respondent, sales of the computers66 by petitioner are not "retirements" under the regulations, and gain on such sales must be computed and reported as they occur.The concept of "dual purpose property" has been recognized in a series of cases relied on by respondent. Hollywood Baseball International Shoe Machine Corp. v. United States, 491 F.2d 157 (1st Cir. 1974); Association v. Commissioner, 423 F.2d 494 (9th Cir. 1970); Continental Can Co. v. United States, 190 Ct. Cl. 811">190 Ct. Cl. 811, 422 F.2d 405">422 F.2d 405; Recordak Corp. v. United States, 163 Ct. Cl. 294">163 Ct. Cl. 294, 325 F.2d 460">325 F.2d 460. These cases stand for the proposition that a manufacturer regularly engaged in the dual business of selling and renting the equipment it manufactures can claim depreciation on property that is at all times available for sale. Proceeds from the sale, however, are treated as ordinary income even though the property might otherwise qualify for capital gain treatment under section 1231. Respondent argues:The logical result of this is that sales of dual purpose property are not sales of depreciable property at the 67 time of sale even if the property was under lease just before the sale. Capital gains treatment is unavailable because at the time of the sale the equipment is deemed to have been held primarily for sale to customers in the ordinary course of business. This is the distinguishing factor between the type of retirements involved in petitioner's case and any other sale or exchange of an asset that is not dual purpose property, which would fairly be treated as an "ordinary retirement" under the regulations.It is respondent's position that those sales that should be treated as ordinary retirements are sales of assets that would not be treated as being held primarily for sale to customers when they are sold. * * Because "dual purpose property" may be treated as being held for sale at the time of sale, argues respondent, the property is not as of that moment in time held for the production of income or eligible for depreciation. Respondent concludes "accordingly, removal of petitioner's computers 634 from their vintage account can be construed to have been necessitated not by a 'retirement,' but by the failure of the asset to qualify generally as depreciable property under the68 statute."In support of his interpretation of the regulations, respondent describes the substantial deferral of recognition of income from sales of property to customers in the ordinary course of business and the basic purpose of the statute and regulations establishing the CLADR system to provide simplicity and ease of application. He argues that section 167(m) was not intended to reverse prior case law defining dual purpose property.Petitioner relies on its adherence to the literal terms of the regulations and the absence of anything in the regulations supporting respondent's position. According to petitioner, the cases relied on by respondent deal only with the character of the gain recognized and not with the timing of the gain; because the gain ultimately recognized on sale of petitioner's computers will undisputably be ordinary gain, these cases do not provide the authority that respondent seeks. Respondent counters that the cases in question establish a "concept" that we should recognize as inherently keeping petitioner's computers outside of the scope of the regulations.Answering respondent's arguments about the purposes of the statute and regulations establishing the69 CLADR system, petitioner argues that its application of the system is consistent with the history and policy of the statute and regulations. Simplicity is served, and because a taxpayer is required to defer recognition of loss as well as gain, the system is not inherently unfair. To the extent that the system is intended to encourage capital investment in depreciable property by providing favorable tax treatment for the property, there is no reason to deny that treatment to petitioner's property. Finally, petitioner asserts "a taxpayer's right to rely on clear and unambiguous regulations." Petitioner argues:The IRS drafted the detailed regulations and did not choose to provide for any special treatment for such leased property. The IRS did not publicly state that its position was that a portion of the CLADR regulation would not apply to this leased property until the issuance of 635 Revenue Ruling 80-37, 1980-1, C.B. 57 [sic], in 1980. Of course, as is discussed below, a revenue ruling cannot overrule a regulation, so the revenue ruling has no effect, but taxpayers were not even put on public notice until 1980 of the possibility70 the IRS would not follow its own regulations. Even if the revenue ruling did have effect for years after it was issued, it would be an abuse of discretion to apply it retroactively to the years in question since it is a change of position.Petitioner cites a series of Internal Revenue Service memorandum documents issued in 1979 as indicating that the question of dual purpose property was not considered by the drafters of the regulations, and consideration was given to amending the regulations to expressly cover the situation of dual purpose property. Technical Advice Memorandum 7950005 (Aug. 13, 1979); G.C.M. 38116 (Sept. 28, 1979); see Rowan Companies, Inc. v. United States, 452 U.S. 247">452 U.S. 247, 261 n. 17 (1981). Rather than amending the regulations, however, the Internal Revenue Service issued Rev. Rul. 80-37, 1 C.B. 51">1980-1 C.B. 51, containing the arguments now relied on by respondent.On this issue we conclude that petitioner is entitled to summary judgment in its favor. Respondent's reliance on cases defining dual purpose property as establishing a "concept" to71 override the express language of his regulations is unpersuasive. Section 1.167(a)-11(d)(3), Income Tax Regs., on its face is comprehensive as to "all retirements from vintage accounts," i.e., permanent withdrawal of the asset "from use in a trade or business or in the production of income by the taxpayer," and "may occur as a result of a sale or exchange, by other act of the taxpayer amounting to a permanent disposition of an asset, or by physical abandonment." Petitioner has not challenged, nor do we, respondent's right to amend the regulations to make the distinction between property held solely for use in its leasing business and property held either for lease or for sale. He cannot, however, achieve this result by a revenue ruling or by judicial intervention. See Woods Investment Co. v. Commissioner, 85 T.C. 274">85 T.C. 274, 281-282 (1985).Convertible Debenture IssuesOn January 31, 1968, Honeywell Overseas Finance Co. (HOFC) was incorporated under the laws of the State of 636 Delaware as a 100-percent owned subsidiary of petitioner, with capital of $ 6 million. HOFC has functioned at all times since its incorporation as a separate corporate 72 subsidiary of petitioner. It was included in the consolidated Federal income tax returns filed by petitioner and its subsidiaries for years beginning in 1968, including 1976 and 1977.HOFC is what is commonly referred to as an international finance subsidiary. It was formed for the principal purpose of obtaining funds (eurodollars) from overseas sources to be lent to or invested in foreign subsidiaries of petitioner. Petitioner formed the subsidiary in order to avoid subjecting the foreign lenders to (i) U.S. income tax of 30 percent of the interest paid, which tax would have been collected by withholding from the interest otherwise payable to the lenders, and (ii) U.S. estate tax. To avoid withholding and estate taxes, the borrowing corporation must receive less than 20 percent of its income from U.S. sources. (See generally National Can Corp. v. United States, 687 F.2d 1107">687 F.2d 1107, 1108-1109 (7th Cir. 1982).)On February 15, 1968, HOFC offered and sold at par $ 30 million of 15-year, 5-percent debentures. The debentures were exchangeable for petitioner's common stock at $ 103.25 per share (with cash payable in lieu of fractional shares) from August 15, 73 1968, through February 15, 1983.Petitioner engaged Eastman Dillon, Union Securities & Co., to render an opinion with respect to the amount of "discount" attributable to the "conversion" feature of the debentures. In a letter dated July 15, 1969, resulting from that engagement, Eastman Dillon, Union Securities & Co., by a general partner, stated:We do not regard the amount of each "discount" as precisely determinable and are unable to make such determination. However, if Honeywell Overseas had in February 1968 sold a non-convertible debenture issue, guaranteed by Honeywell, Inc., we estimate that the issue could have been sold at a 7.35% yield. Using such a yield for computing the discount on the Convertible Debentures, they would have had to be sold at a price of 78.86% to produce a similar yield to maturity. Assuming the maximum value allocated to the conversion feature is the difference between that price and the price at which the Convertible Debentures were sold, the "discount" would be $ 6,342,000.637 Petitioner claims that it is entitled to amortize the sum of $ 6,342,000 over the 15-year life of the debentures, i.e., deductions of $ 422,796 per year.The indenture74 provided that the debenture holders seeking to exchange their debentures for petitioner's stock would notify and deliver their debentures to the trustee, which would deliver the petitioner's stock in exchange. The stock was to be provided by HOFC unless otherwise agreed by HOFC and petitioner. The indenture also provided that petitioner was required to have stock available to make the exchanges.Prior to any exchanges, HOFC and petitioner arranged for the exchanges to be made by petitioner using newly issued stock of petitioner. All exchanges were accomplished by a debenture holder exchanging his debenture with petitioner for petitioner's stock and perhaps cash in lieu of fractional shares. HOFC had the use of the capital raised by the debentures from their issuance on February 15, 1968, until their retirement on February 15, 1983. HOFC continued to pay interest on exchanged debentures following the exchanges through February 15, 1983. On February 15, 1983, all debentures not previously exchanged were retired by payment of the face amounts thereof by HOFC to the holders thereof.Following each exchange, the debentures exchanged were held by petitioner until the February 15, 75 1983, maturity date of the debentures. On February 15, 1983, the debentures previously exchanged were delivered by petitioner to HOFC in exchange for the payment by HOFC to petitioner of the face amounts thereof.(1) Original issue discount.Section 1.163-3(a)(1), Income Tax Regs., provides:(a) Discount upon issuance. (1) If bonds are issued by a corporation at a discount, the net amount of such discount is deductible and should be prorated or amortized over the life of the bonds. For purposes of this section, the amortizable bond discount equals the excess of the amount payable at maturity * * over the issue price of the bond (as defined in paragraph (b)(2) of sec. 1.1232-3).Section 1.1232-3(b)(2)(i), Income Tax Regs., provides in part:638 In the case of an obligation which is convertible into stock or another obligation, the issue price includes any amount paid in respect of the conversion privilege. * These regulations reflect the longstanding principle that when a note, bond, or other form of payment obligation is issued in an amount exceeding the proceeds actually received by the borrower, the difference between the two, referred to as the "discount," 76 is deductible as interest. Helvering v. Union Pacific Railroad Co., 293 U.S. 282 (1934).The above regulations were promulgated on December 23, 1968, to apply to obligations issued after December 31, 1954. T.D. 6984, 1 C.B. 38">1969-1 C.B. 38, 40. Petitioner contends that the regulations cannot be retroactively applied to the HOFC debentures issued February 15, 1968. Rather than dealing directly with the retroactivity question, respondent relies on various cases that, independent of the regulations, have held that a conversion privilege in a debenture does not give rise to an amortizable discount. Chock Full O'Nuts Corp. v. United States, 453 F.2d 300">453 F.2d 300 (2d Cir. 1971); AMF Incorporated v. United States, 201 Ct. Cl. 338">201 Ct. Cl. 338, 476 F.2d 1351">476 F.2d 1351; Hunt Foods & Industries, Inc. v. Commissioner, 57 T.C. 633">57 T.C. 633 (1972), affd. per curiam 496 F.2d 532">496 F.2d 532 (9th Cir. 1974). Petitioner contends that the cited cases are distinguishable because each one involved a situation in which the debentures were convertible into77 the stock of the issuer, whereas here the debentures were convertible into the stock of the parent of the issuer.Petitioner argues that there has been a discount from the purchase price received by the issuer, attributable to the conversion feature, whether the debentures consist of two separate property rights or constitute a single property. In its argument, petitioner refers to the conversion feature as an "exchange privilege," that it purports to distinguish from the usual conversion feature where the issuer of the debenture and the issuer of the stock are the same corporation. In support of this distinction, petitioner argues:When a corporation issues debentures that may be converted to the issuing corporation's stock, the debentures may be either exchanged for stock or retained until redeemed or retired. In other words, the debenture has two potential uses; one in the case of the exchange for stock in which 639 the debenture holder converts his debt instrument into an equity instrument; and the second, when the debenture holder retains the debt instrument until it is redeemed or retired. This dual-purpose feature of a debenture with a conversion feature for the issuing78 corporation's own stock is not present in the petitioner's case. HOFC has issued its debentures which may be converted into the stock of its parent, Honeywell. Therefore, even though the original HOFC debenture holder may exchange the debenture for stock of the parent (Honeywell), the parent holds the debenture as a debt instrument until it is redeemed or retired. Thus, at no time does the conversion feature relate to any equity position in the issuing corporation, HOFC. In this situation, the debenture issued by HOFC at a discount represents a cost or expense in acquiring the use of capital to the issuance of the debentures.We are unpersuaded by petitioner's attempted distinction. Although the debt may remain outstanding even after conversion by the debt holder, the position of the issuer, HOFC, remains the same. HOFC has received the full amount of the proceeds. That the parent may have to comply with the conversion privilege, and that the full amount of the debentures will be due from the issuer, does not reduce the consideration actually received by the issuer. Petitioner argues that the conversion privilege was not sold by the issuer of the debentures "for its own account," 79 but there is no indication that the parent received a part of the proceeds, rather than the issuer.The rationale in Chock Full O'Nuts Corp. v. United States, supra, and the cases following it applies a fortiori where, as here, the issuer pays no more upon redemption of a debenture than was received on the issuance of the debenture. HOFC does not face any economic loss at the time of conversion, as contrasted to the issuer who may be required to redeem or to convert at the option of the debenture holder. See Chock Full O'Nuts v. United States, 453 F.2d at 304. Moreover, the amount deemed to be paid for the conversion feature is not in the nature of interest, i.e., the cost of obtaining capital. See Chock Full O'Nuts v. United States, 453 F.2d at 305-306. Thus, the rationale of these cases was extended to the issuance of debentures by a subsidiary convertible into stock of its parent in National Can Corp. v. United States, 520 F. Supp. 567">520 F. Supp. 567, 574-576 (N. D. Ill. 1981), affd. on other issues 687 F.2d 1107">687 F.2d 1107 (7th Cir. 1982). Although80 it may be true, as petitioner argues, that where the same corporation is the issuer of the debentures 640 and of the stock, the total consideration to be paid on conversion is uncertain as of the time of the issuance, the distinction does not undermine the rationale of the controlling authorities.We therefore conclude that respondent is entitled to prevail as a matter of law on this issue, and that petitioner has no amortizable original issue discount arising from issuance of the HOFC debentures.(2) Bond premium.Petitioner seeks to deduct as bond premium expense under section 171 the difference between the market value of petitioner's stock at the time of a conversion and the face value of the debentures converted. Again, the theory of deductibility is that the amount, i.e., the premium, is a cost of using the capital. Section 171(b)(1), however, provides that the amount of amortizable bond premium on a convertible bond shall not include any amount attributable to the conversion features of the bond.The parties agree that this issue was decided adverse to the taxpayer in National Can Corp. v. United States, 687 F.2d 1107">687 F.2d 1107 (7th Cir. 1982).81 Petitioner argues, however, that National Can Corp. was wrongly decided in view of Commissioner v. Korell, 339 U.S. 619 (1950).In Korell, the Supreme Court concluded that amortizable bond premium arose under an earlier statutory provision from payment for convertible bonds in excess of the face value of the bonds as a result of a conversion feature in the bonds. The Supreme Court stated:We adopt the view that "bond premium" in section 125 means any extra payment, regardless of the reason therefor, in accordance with the firmly established principle of tax law that the ordinary meaning of terms is persuasive of their statutory meaning.We conclude that Congress made no distinctions based upon the inducements for paying the premium. Congress delimited the bond premium it wished to make amortizable in terms of categories of bonds, and there is no doubt that respondent purchased bonds which are included within the purview of section 125. * * [Commissioner v. Korell, 339 U.S. at 627-628. Fn. ref. omitted.]Following Korell, Congress amended the statutory provision to exclude from amortization of bond premium82 the 641 amount of a premium paid by the purchaser "attributable to the conversion feature of the bond." This rule was continued as section 171(b)(1) of the Internal Revenue Code of 1954. In Hanover Bank v. Commissioner, 369 U.S. 672">369 U.S. 672, 683 (1962), the Supreme Court commented:The decision in Korell led to congressional re-examination of Section 125, and the enactment of Section 217(a) of the Revenue Act of 1950 (64 Stat. 906), which eliminated amortization of bond premiums attributable to a conversion feature. However, response to the Korell decision was specifically limited to the convertible bond situation; no further change was made in the statute which would reflect on its interpretation in the case before us. 17Petitioner argues 83 that, as a result of the Supreme Court opinions, the term "bond premium" in the applicable statutes is defined as "any extra payment, regardless of the reason therefor." Petitioner would define the exception in section 171(b) as inapplicable here because the debentures are not convertible in the hands of Honeywell, so that Honeywell paid nothing "attributable to" the conversion feature. Petitioner argues that the Court of Appeals for the Seventh Circuit erred in interpreting the phrase "attributable to" to convertible bonds before or after conversion, whereas the intention of the drafters of the legislation responding to Korell was merely to differentiate between premium attributable to interest rate considerations and premium attributable to a conversion feature.Respondent's primary argument is that the amount in question cannot be amortizable bond premium because it did not arise on issuance of the bond, and the payment by the parent must be treated as a contribution of capital from petitioner to HOFC. In resolving the contentions of the parties, it is thus helpful to determine the true nature of the payment. Respondent argues that the amount in question, i.e., the excess84 of the fair market value of the stock over the 642 par value of the converted debenture, was created and "paid," not because of a variation in the interest rate market, but solely on account of the conversion feature as a function of the stock market. In National Can Corp v. United States, supra, the Court of Appeals reasoned that congressional purpose in enacting section 171(b)(1) was to preclude an interest deduction for a stock conversion. 687 F.2d at 1114-1115.On careful analysis, we believe that respondent's theory more accurately describes the feature to which the payment in question is attributable. At the time of issuance of the debentures, the interest rate market would have affected the determination of the conversion price. After that date, the decision of the holder of a debenture to continue to hold it or to convert it to stock would be affected by both changes in the interest rate and changes in the stock value. But once the stock was worth a sufficient amount in excess of the conversion price, the holders were likely to redeem the debentures. Stock could thereafter be held or converted into interest-bearing assets at the then85 current market rate. Although the converted debentures were no longer convertible in the hands of the parent, the amount paid by the parent to the redeeming holder was in satisfaction of the holder's conversion privilege and logically is attributable to that privilege and not to additional interest necessary to secure the proceeds of the original issue.Thus we cannot disagree with the reasoning or the holding of the Court of Appeals in National Can Corp. v. United States, supra. Whether the amount in question is described as bond premium but limited by the exception contained in section 171(b) or is not bond premium in the first instance, respondent is entitled to summary judgment as a matter of law on this issue.An appropriate order will be entered. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 as amended and in effect during the years here in issue.↩17. The legislation simply provided:"In no case shall the amount of bond premium of a convertible bond include any amount attributable to the conversion features of the bond."Where, as in the case before us, a question of interpretation of Section 125 is presented lying outside the scope of the 1950 Amendment, Korell retains its full vitality. * * *[369 U.S. at 683↩.]	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624067/	Globe-News Publishing Company, Inc., Petitioner, v. Commissioner of Internal Revenue, RespondentGlobe-News Publishing Co. v. CommissionerDocket No. 107223United States Tax Court3 T.C. 1199; 1944 U.S. Tax Ct. LEXIS 74; August 4, 1944, Promulgated 74 Decision will be entered for the respondentUnder plan of recapitalization, old preferred stock of petitioner, on which were dividends in arrears, was exchanged for new preference stock, common stock, and dividend scrip of petitioner, plus cash. Held, under the facts, that "dividend scrip" is not a taxable dividend, and that petitioner is entitled to a dividends paid credit only to the extent of the cash paid. George S. Atkinson, Esq., for the petitioner.William G. Ruymann, Esq., for the respondent. Turner, Judge. TURNER 1199 The respondent determined a deficiency in income tax against petitioner for the year 1937 in the amount of $ 10,863.95. The sole issue 1200 presented is whether petitioner is entitled to a dividends paid credit on account of issuance to its stockholders of dividend scrip pursuant to a plan of recapitalization.FINDINGS OF FACT.Some of the facts have been stipulated and are found as stipulated. Petitioner is a Delaware corporation, having received it charter under the name of Lindsay-Nunn Publishing Co. in 1929, for the purpose of carrying on a general newspaper publishing business. The change to its present name occurred 75 in 1934. During the times material hereto petitioner's office was in Amarillo, Texas. It filed its corporation income and excess profits tax return for the taxable year with the collector of internal revenue for the second district of Texas, at Dallas.The original authorized stock of petitioner was 250,000 shares of no par value stock, 100,000 being preference stock and 150,000 being common stock. Prior to 1937 there had been issued and outstanding 40,000 shares of preference stock and 50,000 shares of common stock. The former was called two-dollar dividend series convertible preference stock, and it provided for accumulation of preferred dividends at the rate of $ 2 per share per annum from March 1, 1929. This stock will hereinafter be referred to as old preferred stock.Up to and including December 31, 1937, petitioner was in arrears in the payment of dividends on the old preferred stock in the amount of $ 13.50 per share. The last dividend paid on this stock was in the amount of $ 18,350.96, and covered the period up to March 1, 1931.Pursuant to the powers given under its original charter, petitioner's directors, on July 9, 1937, formally adopted a plan of reorganization76 and recapitalization. It was proposed to reduce the capital structure of the corporation from $ 2,875,288.80 to $ 1,000,000, decreasing the total number of authorized shares of stock from 250,000 to 114,008 shares, the stock to consist thereafter of 32,004 shares of 50-cent noncumulative preference capital stock, hereinafter referred to as new preference stock, without par value, and 82,004 shares of common stock, without par value. The proposed plan modified the rights, privileges, and benefits of the old preferred stock.On September 9, 1937, the majority of the stockholders formally approved the proposed plan. Under the plan the old preferred stock was to be exchanged for an equal amount of new preference stock. In addition each holder of old preferred stock was to receive one share of common stock without par value and dividend scrip of the corporation for an amount equal to $ 12.50, plus $ 1 cash.Dividend scrip was to be issued in multiples of $ 12.50, the principal amount of which was payable on or before 25 years from the date of 1201 issuance, at the option of the petitioner. The scrip called for interest at the rate of 4 percent, to be paid annually. The interest77 was cumulative and, if not paid when due, was payable on any subsequent interest due date, as the directors of petitioner might determine. Failure to pay the annual interest was not a default and the maturity date of the scrip was not thereby accelerated. The scrip was transferable only on the dividend book of the petitioner and was subordinate to the payment of principal and interest due or to become due on the outstanding bonds of the company and to the sinking fund provided for the payment of such bonds. On the face of the scrip certificate it was stated to have been issued in satisfaction of accrued and accumulated dividends on preferred stock. The scrip was issued only on condition that the recipient thereof turn in his old preferred stock for the new preference stock, pursuant to the plan of reorganization and recapitalization.On September 13, 1937, the certificate of amendment of Globe-News Publishing Co., which made appropriate changes in the corporation's charter and duly authorized the exchange of old preferred stock for the new preference stock, common stock, and dividend scrip, was filed with the Secretary of State of Delaware. On September 15, 1937, petitioner's78 president addressed letters to holders of 30,704 of the 32,004 outstanding shares of old preferred stock, in which he stressed the importance of surrendering such stock for the new preference stock pursuant to the plan of reorganization adopted by the majority of stockholders. In these letters there was transmitted to each holder of the old preferred stock $ 1 representing the cash dividend on each share of such stock, which was paid pursuant to the plan of reorganization. Thirteen hundred shares of the old preferred stock, the difference between 32,004 and 30,704 shares, were actually owned by the corporation, but were shown to be outstanding in the names of nominees. No dividend was paid by petitioner on these 1,300 shares and on or about October 30, 1937, they were retired by petitioner, leaving 30,704 shares of old preferred stock subject to the exchange under the plan. The holders of 25,101 shares of old preferred stock exchanged their shares in 1937 for the following: 25,101 shares of new preference stock, 25,101 shares of common stock, and dividend scrip in the face amount of $ 313,762.50.The estate of Wilbur Hawk owned between 4,000 and 4,500 shares of dividend scrip 79 and shortly prior to December 4, 1937, the executors of the estate sold 800 units of the scrip to the Strauss Securities Co., of Chicago, for $ 3,200, being $ 4 for each $ 12.50 unit. In 1938 petitioner bought approximately $ 20,000 face value of the scrip, and in 1939 it purchased about $ 10,000 face value of the scrip, paying in both instances about 50 percent of the face value.1202 The secretary of petitioner notified each of its stockholders that the fair market value of the dividend scrip in 1937 was $ 4 for each $ 12.50 unit and that this, added to the $ 1 in cash, or a total of $ 5, was taxable at 68.6 percent and nontaxable to the extent of the remainder. This was based on information given petitioner by its auditors.In its corporation income and excess profits tax return petitioner showed adjusted net income of $ 92,380.48 and claimed a dividends paid credit of $ 92,380.48, the result of which was to reflect no income subject to undistributed profits tax for the year 1937. Respondent allowed $ 29,903.87 of the dividends paid credit so claimed. The amount so allowed represented $ 30,704, or the $ 1 cash dividend paid on each outstanding share of old preferred stock, 80 less an adjustment of $ 800.13, not here in issue. To the extent that the dividends paid credit represented scrip, the credit claimed was disallowed. In his notice of deficiency the respondent explained the disallowance as follows:The amount of $ 62,476.61 has not been allowed as a dividends paid credit for the reason that if any part of a distribution (the scrip notes in your case) is not a taxable dividend in the hands of such of the shareholders as are subject to taxation for the period in which the distribution is made, such part shall not be included in computing the basic surtax credit. See section 27 (i) [sic] of the Revenue Act of 1936 and appeal of Skenandoa Rayon Corporation, 42 B. T. A. No. 192.OPINION.Petitioner contends that it is "entitled to dividends paid credit in the amount of the adjusted net income on the basis of dividends paid to the old preferred stockholders of $ 1 per share in cash and dividends paid and/or available in Dividend Scrip to the old preferred stockholders under section 27 (d) of the Revenue Act of 1936, 1 or other applicable provisions" of that act.81 Respondent claims that the gain or income on the exchange by the preferred stockholders of old preferred stock for new preference stock, plus new common stock, scrip, and cash, pursuant to the plan of reorganization by recapitalization, was not, except to the extent received in cash, taxable to the stockholders within the meaning of section 1203 112 (b) (3), 2 and that under section 27 (h) 3 petitioner is not, therefore, entitled to a dividends paid credit with respect to the scrip.82 There is no dispute as to the material facts. Admittedly, there was a reorganization by recapitalization of petitioner. At the time of reorganization there was a dividend arrearage in the amount of $ 13.50 on each share of old preferred stock. A dividend of $ 1 in cash was paid on each share to all the holders of the old preferred stock, and the cash dividend so paid has been allowed petitioner as a dividends paid credit. It is agreed that the exchange of old preferred stock for the new preference stock, share for share, plus an equal amount of shares of new common stock as a stock dividend and scrip in the amount of $ 12.50 per unit to cover the balance of unpaid accumulated dividends on the old preferred stock, was made pursuant to the plan of reorganization as adopted by the stockholders of petitioner. No stockholder received the scrip or new stock unless he turned in his old stock, and the holders of 5,603 shares of preferred stock, not having turned in their shares, received no scrip dividends or new stock, but did receive the $ 1 cash dividend.The difference between the parties is in the manner of treating the scrip. Respondent claims that issuance of the scrip did not83 effect the payment of a taxable dividend, but that the scrip constituted securities given in exchange for stock, in pursuance of the plan of reorganization. Petitioner claims the scrip is an unsecured note in payment of unpaid dividends and contends that it is within the term "other property" as used in section 112 (c) (1); 4 that, under that section, it is a taxable dividend in the hands of the recipients to the extent of the fair market 1204 value of the scrip, and, therefore, petitioner, having turned over such "other property" to the shareholders in payment of accumulated dividends, is entitled to the dividends paid credit to the extent at least of its adjusted net income for the taxable year, which is considerably less than the aggregate value of the scrip.84 Petitioner also claims that the scrip is taxable under section 115.One fallacy in petitioner's contention lies in its treatment of the scrip as though it were a payment of dividends separate and apart from the reorganization. The issuance of the scrip by petitioner and the receipt of it by the old preferred stockholders was an integral part of the plan of reorganization and should be considered as such, and not as a separate transaction. Cf. ; affd., ; , affirming ; and . In those cases it was pointed out that the right to the dividend arrears was a part of the preferred shares and not a right separate and apart therefrom. Furthermore, the court, in , held that, even though the right to arrears of undeclared dividends be treated as something separate and apart from the stock under85 which it had accumulated, the exchange would still fall within the scope of section 112 (b) (3), supra, of the statute. The court said: "The stockholders' rights to dividend arrears, if treated as separate from the stock itself, must certainly be considered as 'securities in a corporation a party to a reorganization' -- a curious 'security' to be sure, but nevertheless a 'security.'"In further support of its claim that the issuance of the scrip must be recognized as the payment of a taxable dividend, the petitioner argues that the scrip did not constitute securities, and for that reason section 112 (b) (3), supra, is not applicable. In making this argument, it classifies the scrip as "only an unsecured note and obligation to pay." The contention is, we think, without merit. Securities may take the form of shares of stock, bonds, or notes. (20-year debenture bonds); (10-year debenture); (25-year debenture bonds); 86 (stock); (stock); (notes); (stock); (25-year debentures); (debenture notes).The scrip in the instant case was payable on or before 25 years from the date of issuance, at the option of the petitioner. It called for interest at 4 percent annually, which was cumulative and payable on 1205 any subsequent interest payment date, as petitioner's directors might determine. Failure to pay the interest when due did not affect or accelerate the maturity date of the scrip. The scrip was transferable only on the dividend book of the petitioner and was subordinate to the payment of principal and interest due or to become due on the outstanding bonds of the company and to the sinking fund provided for the payment of such bonds. Such being the character of the scrip, the scrip certificates issued evidenced such a continuing interest in the affairs87 of the petitioner as to constitute them securities within the meaning of section 112 (b) (3), supra. See and compare .The argument of the petitioner that in any event the issuance of the scrip constituted the payment of a taxable dividend within the meaning of section 115, supra, was considered and decided adversely in Decision will be entered for the respondentFootnotes1. SEC. 27. CORPORATION CREDIT FOR DIVIDENDS PAID. * * (d) Dividends in Obligations of the Corporation. -- If a dividend is paid in obligations of the corporation, the amount of the dividends paid credit with respect thereto shall be the face value of the obligations, or their fair market value at the time of the payment, whichever is the lower. If the fair market value is lower than the face value, then when the obligation is redeemed by the corporation, the excess of the amount for which redeemed over the fair market value at the time of the dividend payment (to the extent not allowable as a deduction in computing net income for any taxable year) shall be treated as a dividend paid in the taxable year in which the redemption occurs.↩2. SEC. 112. RECOGNITION OF GAIN OR LOSS. * * (b) Exchanges Solely in Kind. -- * * (3) Stock for stock on reorganization. -- No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.↩3. SEC. 27. CORPORATION CREDIT FOR DIVIDENDS PAID. * * (h) Nontaxable Distributions. -- If any part of a distribution (including stock dividends and stock rights) is not a taxable dividend in the hands of such of the shareholders as are subject to taxation under this title for the period in which the distribution is made, no dividends paid credit shall be allowed with respect to such part.↩4. SEC. 112. RECOGNITION OF GAIN OR LOSS. * * *(c) Gain from Exchanges not Solely in Kind. --(1) If an exchange would be within the provisions of subsection (b) (1), (2), (3), or (5) of this section if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624068/	ESTATE OF EVA WASSERMAN, DECEASED, NATHAN A. WASSERMAN, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Wasserman v. CommissionerDocket No. 106184.United States Board of Tax Appeals46 B.T.A. 1129; 1942 BTA LEXIS 771; May 12, 1942, Promulgated 771 Decedent during the years 1921 to 1937, inclusive, opened savings accounts in various banks and deposited funds therein as "trustee" for her husband and her seven children. There were one or more separate accounts for each of them. The decedent alone had the unrestricted right to make withdrawals from the accounts and did make such withdrawals from time to time. Held, that the funds in such accounts at the date of decedent's death are includable in her gross estate for estate tax purposes, since they were not transferred ferred to the beneficiaries as inter vivos gifts during the decedent's lifetime, and since if they were trust conveyances the trusts were intended to take effect at or after death, or were revocable at the pleasure of the grantor. Frank J. Maguire, Esq., for the petitioner. Davis Haskin, Esq., for the respondent. SMITH 1130 This proceeding involves a deficiency of $13,708.79 in estate tax of the estate of Eva Wasserman, deceased. In determining the deficiency the respondent has included in the gross estate 25 separate bank accounts aggregating $78,463.77 which decedent established during her lifetime, in each instance772 naming herself as trustee for her husband or one of her seven children. Respondent determined that the decedent did not make a valid transfer of the funds in these accounts during her lifetime and that if she did such transfers were intended to take effect at or after death, or were made in contemplation of death. He further contends that the trusts, if such they were, were revocable and for that reason are includable in the gross estate. Other minor issues relate to the deduction of administration expenses and taxes paid or to be paid by the executor, and to the inclusion in the gross estate of certain interest and other income accrued after the date of death of the decedent. FINDINGS OF FACT. The decedent died a resident of Brookline, Massachusetts, on February 21, 1937, at the age of 52. An estate tax return was filed by her executor with the collector of internal revenue for the district of Massachusetts on May 21, 1938, and by election of the executor the gross estate was valued as of the date one year from the date of death. The decedent was survived by her husband, Jacob A. Wasserman, and their seven children, whose names and ages were as follows: Arthur A. Wasserman, son30 yearsEsther Block, daughter28 yearsEdith Rimmer, daughter25 yearsNathan A. Wasserman, son23 yearsMay M. Cotton, daughter21 yearsAnna Gollance, daughter19 yearsJeannette L. Wasserman, daughter11 years773 The decedent left an estate consisting principally of real estate, stocks and bonds, mortgage notes, and cash, valued in her estate tax return (on the optional date one year from her death) at $153,866.53, exclusive of the value of the 25 bank accounts referred to above. These properties represented the accumulations of decedent and her husband over a long period of years. Prior to the adoption of the Eighteenth Amendment to the Constitution of the United States decedent and her husband conducted a liquor business in Boston. With the advent of prohibition, the decedent went into the real estate business, buying, remodeling, and renting houses in South Boston. She had an office in one of her buildings at the intersection of Broadway and Shawmut Avenue. 1131 Her husband conducted a tobacco business for a while but later sold that and engaged in the real estate business also. With the repeal of prohibition decedent and her husband opened a liquor store, of which their son Nathan was put in charge, and also a restaurant and bar, which was put in charge of their son Arthur. Decedent became very active in the restaurant and worked there regularly during the rest of her774 life. The first of the 25 bank accounts referred to above was created in 1921, when decedent was 36 years of age. The last was created in 1937, the year of her death. Following is a list of the accounts, showing the date when each was opened, the amount of the original deposit, and the balance in the account at the date of decedent's death: HOME SAVINGS BANKDate openedBeneficiaryOriginal depositBalance in account Feb. 21, 1937Feb. 7, 1921Nathan Wasserman$500.00$4,000.00Feb. 7, 1921Anna Wasserman500.004,000.00Feb. 7, 1921May Mildred Wasserman500.004,000.00Nov. 24, 1925Jeannette L. Wasserman500.005,130.59Nov. 11, 1925Esther Wasserman3,000.004,000.00Nov. 11, 1925Edith Wasserman3,000.004,000.00Aug. 31, 1932Arthur Wasserman4,498.224,000.00SUFFOLK SAVINGS BANKApr. 8, 1932Jeannette Lillian Wasserman$2,000.00$3,957.48UNITED STATES TRUST CO.Sept. 4, 1934Jacob A. Wasserman$500.00$1,279.44FRANKLIN SAVINGS BANKDec. 22, 1936Jeannette L. Wasserman$3,300.00$3,300.00Dec. 22, 1936Anna Gollance3,300.003,300.00Dec. 22, 1936May Mildred Cotton3,300.003,300.00Dec. 22, 1936Nathan A. Wasserman3,300.003,300.00Dec. 22, 1936Edith Rimmer3,300.003,300.00Dec. 22, 1936Esther Block3,300.003,300.00Dec. 22, 1936Arthur A. Wasserman3,300.003,300.00Dec. 22, 1936Jacob A. Wasserman3,300.003,300.00THE BOSTON FIVE CENTS SAVINGS BANKJan. 7, 1937Jeannette L. Wasserman$2,000.00$2,000.00Jan. 7, 1937Anna Gollance2,000.002,000.00Jan. 7, 1937Nathan A. Wasserman2,000.002,000.00Jan. 7, 1937May Mildred Cotton2,000.002,000.00Jan. 7, 1937Edith Rimmer2,000.002,000.00Jan. 7, 1937Esther Block2,000.002,000.00Jan. 7, 1937Arthur A. Wasserman2,000.002,000.00Jan. 7, 1937Jacob A. Wasserman2,000.002,000.00775 In opening the above accounts the decedent in each instance signed a "signature card" as "trustee" for either her husband or one of her children who was named as "beneficiary." The funds so deposited 1132 were from decedent's own property. In some or all of the 1921, 1925, 1932, and 1934 accounts substantial additional deposits were made from year to year in amounts of from less than $100 to $2,000. Also, there were withdrawals in varying amounts from time to time. The funds used in opening the account for Arthur with the Home Savings Bank on August 31, 1932, were withdrawn from the accounts of Nathan, Anna, May Mildred, Esther, and Edith in amounts of approximately $900 from each account. For some time previous Arthur had been under family censure for having married against the wishes of the others and the account was established for him as a sort of family "peace offering" and with the purpose of putting him on an equal financial footing with the other children. The children themselves suggested the withdrawals for the purpose indicated. In the 1936 and 1937 accounts there were no additional deposits except interest and no withdrawals up to the time of decedent's776 death. All of these 1936 and 1937 accounts were opened with funds which decedent obtained from the sale of shares of stock of the General Electric Co. She sold through brokers 1,000 shares of such stock in December 1936 for approximately $52,000, with the intention of establishing the accounts. She was advised by an officer of the bank that she might make a saving in gift taxes by dividing the amounts up and postponing some of the gifts until 1937. Acting on this advice, she went to the Franklin Savings Bank on December 22, 1936, and opened the eight accounts of $3,300 each. She was accompanied by her son Nathan, who assisted in preparing the cards. Each of the eight bank books was given a number by which the decedent, who was unable to read or write, could identify it. The decedent retained these books and on Christman Day following, when the family was gathered at her house, handed them out to the respective "beneficiaries", saying that she was making each of them a gift of his or her account. The beneficiaries retained the books for a short time and then returned them to the decedent or to her son Nathan, who assisted her in most of her business affairs, to be placed in777 the family safe deposit box at the bank for safekeeping. No one except the decedent or some one in her company had access to the safe deposit box. On January 7, 1937, the eight accounts of $2,000 each were opened at the Boston Five Cents Savings Bank in substantially the same manner as those at the Franklin Savings Bank, and again the bank books were handed to the beneficiaries at a family gathering held at decedent's house a few days later, with the explanation that this was the balance of their Christmas gifts. Each of the bank books was then returned to Nathan to be placed in the safe deposit box with the others, where they all remained until after decedent's death. 1133 In establishing the above accounts the decedent never executed any formal declaration of trust or entered into any trust agreement of any kind. Withdrawals from the savings accounts, other than those referred to above to establish Arthur's account, were made as follows: On October 15, 1934, $100 was withdrawn from each of the children's accounts, except that of Jeannette, to apply as part payment for a family burial ground. The total purchase price was $1,200 and the balance, $600, was paid778 by the decedent with her own separate funds. The withdrawals were sanctioned by the children. On October 14, 1936, withdrawals were made of $479.33 from each of the accounts of Nathan, Anna, May Mildred, Esther, and Edith in the Home Savings Bank, and of $236.15 from Arthur's account, leaving a balance in each of those accounts of exactly $4,000. On the same date, $500 was withdrawn from Jeannette's account, leaving a balance of $5,130.59. This money was all used to defray the cost of a large wedding for May Mildred. The beneficiaries all gave their consent to the withdrawals except Jeannette, who was then only 11 years old. In October 1933 a withdrawal of $750.16 was made from Arthur's account to purchase new furniture for him and to pay for reconditioning work on the family residence at 21 Hopkins Street, Dorchester, to which Arthur was moving at that time. Decedent had just moved to a new residence in Brookline. On April 15, 1936, $4,000 was withdrawn from Jeannette's account in the Suffolk Savings Bank. This money was used as a loan, or advancement, or otherwise to decedent's brother who was engaged in the clothing business. His business failed in that same year779 and the money was lost. Over the period November 1934 to February 1936 withdrawals aggregating $5,640, mostly in amounts of $1,000 each, were made from the account of Jacob A. Wasserman in the United States Trust Co. There is no explanation of what use was made of these withdrawals. There were also withdrawals of $1,000 from Anna's account in 1926, $700 from Jeannette's account in 1925, and a small amount from Jeannette's in 1934 which are not explained. There was a redeposit of a little more than $1,000 in Anna's account a short time after the withdrawal of the $1,000 in 1926. All of the above withdrawals were made by the decedent. The decedent alone had access to the accounts and had absolute control over them. Withdrawals could be made only upon her demand and upon presentation of the account books. After the decedent's death some of the accounts were continued and some were closed out. Interest of $1,696.26 was credited on the accounts 1134 after the decedent's death, of which amount $451.96 was accrued at the date of decedent's death. The decedent left a will, executed in November 1933, which was duly probated in the County of Norfolk, Commonwealth of780 Massachusetts. The first clause of the will provides: FIRST: Any deposit of money in any Savings Bank, standing in my name as trustee for any of my children, I give to the child for whom said deposit is held in trust, free and discharged of all trusts. The executor of decedent's estate, in computing the value of the gross estate (as of one year from the date of decedent's death), did not include the principal amounts of the 25 accounts described above or the interest credited to the accounts after the date of decedent's death. He did include in the gross estate $2,530.77 as income from real estate, stocks, bonds, and notes received between February 21, 1937, the date of decedent's death, and February 21, 1938. Of that amount $22.50 had accrued at the date of decedent's death. The respondent included the entire amount in his determination of the value of the gross estate. On decedent's death certificate it is stated that: The principal cause of death and related causes of importance in order of onset were as follows: Date of OnsetArteriosclerosis1931Chronic Cardiac Insufficiency1932Cerebral Hemorrhage1934Cerebral Hemorrhage 1/14-2/3 - 2/201937781 The decedent enjoyed good health most of her life. She was strong and stocky of build and possessed of great energy. She always practiced the habits of thrift and simplicity. For several years prior to her death she had had a cardiac insufficiency, or high blood pressure, but it was not serious and caused no great inconvenience. In 1933 she suffered a "fainting spell" while cooking dinner, and later in that year had an attack of facial paralysis which affected one side of her face for a short while. It had no permanent aftereffects, however. Her family physician diagnosed it as "Bell's Palsy." The decedent was at work in the restaurant of her son Arthur on the day that she was fatally stricken. She had had a tooth extracted earlier in that day, but had returned to work. She died about five weeks later. The executor of decedent's estate has incurred expenses of $1,674.08 in connection with estate tax matters, a portion of which has been paid, in addition to those claimed in the estate tax return and allowed by the respondent. 1135 OPINION. SMITH: The principal question for our determination in this proceeding is whether the amounts standing in the above782 described bank accounts which decedent established for the benefit of her husband and children are includable in the value of her gross estate for estate tax purposes. The respondent has determined that they are, on the grounds, first, that there was no completed conveyance of the accounts by the decedent during her lifetime, and that if there was they were trust conveyances made in contemplation of death, or to take effect in use and enjoyment at or after death. Respondent further contends that the trusts, if such they were, were revocable and for that reason includable in the gross estate. On the evidence of record we find little difficulty in agreeing with the respondent that there were no completed inter vivos gifts by the decedent of any of the funds in the accounts in question during her lifetime. It is essential to the validity of such gifts that the donor not only have a manifest intention to make the gift but that the subject matter of the gift, or something symbolic thereof, be delivered to the donee, or some one acting for the donee, so that it is put definitely and irrevocably beyond the ownership and control of the donor. 783 It is clear that the decedent did not divest herself of either the ownership or control of any of the accounts. She merely deposited the funds in her own name as "trustee" for the children or her husband without releasing any of her control over them. There is no evidence of any agreement between the decedent and the banks where she made the deposits which would have authorized any one other than herself to withdraw any of the funds at any time. In Hogarth-Swann v. Steele (1936), 294 Mass. 396">294 Mass. 396; 2 N.E.(2d) 446, it was said that: It is settled in this commonwealth that the mere fact that a person puts money belonging to him in a savings bank account in his name as trustee for another does not create a valid trust. Brabrook v. Boston Five Cents Savings Bank,104 Mass. 228">104 Mass. 228, 6 Am. Rep. 222">6 Am. Rep. 222; Robertson v. Parker,287 Mass. 351">287 Mass. 351, 355, 191 N.E. 645">191 N.E. 645, and cases cited. "Unless there is something more than the words that one is trustee for another, to show that a present creation of an equitable interest is intended and that the settlor has ceased to have full dominion, the nominal cestui has no rights." 784 Murray v. O'Hara (Mass.) 195 N.E. 909">195 N.E. 909, 911. The facts in the present case do not show such an intention or relinquishment of full dominion over the deposit. However, in Scanzo v. Morano,284 Mass. 188">284 Mass. 188; 187 N.E. 552">187 N.E. 552, the court determined that where a wife deposited in a savings account the earnings of herself, her husband, and her son, as trustee for the son, and handed the bank book to the son, who returned it to her so that she could get the interest on the account, there was a valid trust 1136 created for the son. See McCaffrey v. North Adams Savings Bank,244 Mass. 396">244 Mass. 396; 138 N.E. 393">138 N.E. 393; Supple v. Norfolk Savings Bank for Seamen,198 Mass. 393">198 Mass. 393; 84 N.E. 432">84 N.E. 432; Mulloy v. Charlestown Five Cents Savings Bank,285 Mass. 101">285 Mass. 101; 188 N.E. 608">188 N.E. 608; Robertson v. Parker,287 Mass. 351">287 Mass. 351; 191 N.E. 645">191 N.E. 645; and Buteau v. Lavalle,284 Mass. 276">284 Mass. 276; 785 187 N.E. 628">187 N.E. 628. A full discussion of this question is found in Eschen v. Steers (C.C.A., 8th Cir.), 10 Fed.(2d) 739, where it was held that there was no gift or trust where the intended donor wrote a letter to the bank directing the transfer of funds to another's account. The most recent case from the Massachusetts courts to come to our attention is Greeley v. Flynn,310 Mass. 23">310 Mass. 23; 36 N.E.(2d) 394 (Sept. 10, 1941). The facts in that case bear a close resemblance in many important respects to those in the instant case. The donor deposited funds in a savings account in her own name as "trustee" for her nephew, telling the nephew that she had given him the account and giving him possession of the account book, and from time to time, at his request, withdrawing funds from the account for him. It was held that there was no completed inter vivos gift, but that a valid trust was created for the nephew. In its opinion the court said: In the case at bar the only findings of the master bearing on the question of delivery of the book with the intention of making a gift thereof are that in November, 1933, Miss Conway786 gave the book to the defendant's mother who in turn gave it to him; that Miss Conway intended to retain control of the account and that "she alone controlled the account and she alone could make withdrawals"; that subsequent withdrawals were made by her and the sums withdrawn given by her to the defendant; and that she intended that the account should become payable to the defendant upon her death. It seems obvious that these findings of the master would not warrant a finding by the judge that there was any delivery of the book by Miss Conway to the defendant or to anyone for him, with an intent on her part to pass title and thus transfer ownership to him. While in the circumstances here present there may be some question as to whether the accounts which petitioner set up in the various banks were valid trusts for the benefit of the husband and children, there is little doubt that under the authoritative cases they were not completed inter vivos gifts. Greeley v. Flynn, supra. The funds so deposited were decedent's own funds. In depositing them as "trustee" she dispossessed herself of no interest whatever in the funds. Although the bank books were left787 in possession of the alleged donees for a short time, these bank books themselves carried no rights of possession or enjoyment of the funds. They could be reached only by the decedent in person. There is no indication that the banks would have complied with the request of any of the beneficiaries for the payment to them of either the interest or principal of any of the accounts. In fact the evidence is that they would 1137 not have and that all withdrawals had to be made by the decedent in person. Substantial withdrawals were made by the decedent from all of the accounts from time to time. While the testimony of petitioner's witnesses was that the withdrawals, or most of them, were made with the consent of the beneficiaries themselves, their consent was not necessary. At least one withdrawal was made without the beneficiary's consent when $4,000 was withdrawn from Jeannette's account when she was only 11 years old and loaned or given to the decedent's brother for use in his business. The business went into bankruptcy in the same year and the funds were lost. But even if the accounts were validly created trusts, we think that they were transfers intended to take788 effect in possession and enjoyment at or after death within the meaning of section 302(c) of the 1926 Act, as amended. This conclusion seems inescapable in view of the established facts that the decedent intended to and did retain complete and unlimited control over the funds, not just as a fiduciary but to the detriment of at least one beneficiary. The evidence shows beyond much doubt that it was not the decedent's intention that any beneficial interest in the funds should vest irrevocably in the beneficiaries until after her death. It is significant that in the first paragraph of her will decedent bequeathed to each of the beneficiaries the balance then standing in their respective accounts. This clause was put in the will at the suggestion of decedent's attorney. The provision would have been unnecessary, however, if the accounts had been previously conveyed to the beneficiaries either as inter vivos gifts or trusts. We think, too, that the trusts, if such they were, were revocable trusts, as the respondent further contends. See 789 Greeley v. Flynn, supra. The decedent had the unrestricted right to withdraw the funds and thus destroy the trusts. There is some evidence to support the respondent's further determination that the transfers which the decedent made to the accounts in 1936 and 1937 were made in contemplation of death, but we do not need to pass upon this question. As to the remaining issues, the respondent concedes that petitioner is entitled to a deduction of $1,674.08 in addition to that already allowed on account of administration expenses, including the fee of the attorney representing petitioner in this proceeding. It is alleged in the amended petition that the respondent further erred "in failing to allow credit for estate taxes due the Commonwealth of Massachusetts." Counsel for the petitioner stated at the hearing: * * The estate will be liable for Massachusetts taxes which have not been paid and the Petitioner claims an allowance should be made for those, that, of course is a saving of his right to the credit. 1138 Credit for the Massachusetts estate tax actually paid will be allowed as provided in section 813, Internal Revenue Code. It is further790 alleged in the amended petition that the respondent erred in including in the gross estate the amount of $4,206.91 representing income of the estate for the period from the date of decedent's death to the optional valuation date one year later. It is stipulated that of the amount of $4,206.91, $1,696.26 represented interest credited to the above 25 accounts after the date of decedent's death. A portion of that amount, $451.96, had accrued on February 21, 1937, the date of decedent's death. A further portion of the $4,206.91, $2,530.77, represented income from real estate, stocks, bonds, and notes received between February 21, 1937, and February 21, 1938. The executor included this latter amount in the value of the gross estate in the estate tax return. Respondent concedes in his brief that his determination of the deficiency herein with respect to "interim income" is not in accordance with Maass v. Higgins,312 U.S. 443">312 U.S. 443, or article 11 of Regulations 80 as amended by Treasury Decision 5047. Respondent further states in his brief that the stipulation of facts will provide the basis for a final adjustment of this issue under Rule 50. *791 Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624069/	JOEL KERNS AND RUTH KERNS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.Kerns v. CommissionerDocket No. 8279-81.United States Tax CourtT.C. Memo 1984-22; 1984 Tax Ct. Memo LEXIS 649; 47 T.C.M. (CCH) 904; T.C.M. (RIA) 84022; January 11, 1984. Joel Kerns, pro se. Darren Larsen, for the respondent. RAUMMEMORANDUM650 OPINION RAUM, Judge: The Commissioner determined an $8,002 deficiency in petitioners' 1978 Federal income tax. After concessions, the principal issue for decision is whether, pursuant to section 1034, I.R.C. 1954, petitioners are entitled to defer recognition of gain realized by them on sale of their principal residence on September 22, 1978. The facts have been stipulated. Petitioners Joel and Ruth Kerns are husband and wife. Their legal residence at the date of the filing of the petition herein was 1358 Paseo Gracia, San Dimas, California 91773. At the time of trial, Joel Kerns resided at 625 West Wisteria, Arcadia, California 91006, and Ruth Kerns resided at 33 Eastern, Pasadena, California 91107. On December 19, 1975, petitioners purchased and thereafter occupied a personal residence located at 601 South Old Ranch Road, Arcadia, California (the first, or the Old Ranch Road residence). On May 13, 1977, they sold this residence, realizing $32,070 of long-term capital gain. 1 Petitioners deferred recognition of this gain, pursuant to section 1034, I.R.C. 1954, as in effect for the tax year 1977. 651 On May 27, 1977, petitioners purchased and thereafter occupied a new residence located at 634 West Naomi Avenue, Arcadia, California (the second, or West Naomi residence). They sold this residence on September 22, 1978. The parties have stipulated that the "realized * * * net gain" on this sale was $52,638, an amount calculated by first determining that petitioners' adjusted basis in the second residence was $48,098 (The $80,168 purchase price of the second residence reduced by the $32,070 deferred gain on sale of the first residence) and by then subtracting this basis from the $100,736 net amount realized on the sale of the second residence. 2On December 1, 1978, petitioners purchased for $101,161 a third residence located at 1358 Paseo Gracia, San Dimas, California. The record indicates that they occupied this residence beginning in September 1978 and continued to occupy it after the purchase on December 1. On their 1978 Federal income tax return, petitioners recognized no part of the gain realized on the652 1978 sale of the second residence. In his deficiency notice, the Commissioner determined that petitioners should have recognized the entire $52,638 of realized gain "because it ha[d] not been established that [petitioners] * * met the requirements of section 1034". 3 We hold that the Commissioner was correct. Generally, all gain realized on the sale or exchange of property is recognized. Section 1001(c), I.R.C. 1954. Section 1034 provides a mandatory exception to this general rule if the gain realized relates to the sale or exchange of a principal residence. Section 1.1034-1(a), Income Tax Regs.Section 1034(a), as in effect with respect to the 1978 sale of the West Naomi residence, reads in relevant part: (a) Nonrecognition of Gain.--If property (in this section called "old residence") used by the taxpayer as his653 principal residence is sold by him, and, within a period beginning 18 months 4 before the date of such sale and ending 18 months after such date, property (in this section called "new residence") is purchased and used by the taxpayer as his principal residence, gain (if any) from such sale shall be recognized only to the extent that the taxpayer's adjusted sales price * * of the old residence exceeds the taxpayer's cost of purchasing the new residence. However, the nonrecognition provisions of subsection (a) are rendered inapplicable by subsection (d) if during the 18-month period rior to such sale the taxpayer had realized gain on sale of another principal residence which was not recognized by reason of subsection (a). Subsection (d) provides as follows: (1) In General.--Subsection (a) shall not apply with respect to the sale of the taxpayer's residence if within 18 months before the date of654 such sale the taxpayer sold at a gain other property used by him as his principal residence, and any part of such gain 5 was not recognized by reason of subsection (a). Accordingly, unless some other nonrecognition provision applies, a taxpayer who had enjoyed the benefits of section 1034(a) upon sale of a principal residence is not entitled to nonrecognition of gain on sale of a second principal residence where the first sale occurred during the 18-month period immediately preceding the second sale. It is obvious from the clear language of the statute that petitioners must recognize the gain realized on the 1978 sale of their West Naomi residence. Such sale occurred on September 22, 1978, only 16-1/4 months after the May 13, 1977, sale of the Old Ranch Road Residence. Gain on the sale of the Old Ranch Road residence was accorded nonrecognition pursuant to section 1034(a), and there655 is no serious evidence that such treatment was incorrect. Accordingly, the realized gain on the sale of the West Naomi residence is subject to the "exception to the exception" found in section 1034(d)(1) and therefore must be recognized pursuant to section 1001(c). Our conclusion is required by the express language of section 1034, I.R.C. 1954. Petitioners contend that the statute does not fix which of several sequential sales within the statutory period is entitled to the benefits of section 1034, and they seek nonrecognition here in respect of the 1978 sale rather than the 1977 sale. That contention is unfounded. No such unnatural reading of the statute is justified. At the time of the sale of the first residence and purchase of the second residence, section 1034 became applicable, 6 petitioners took advantage of its provisions, and may not now be heard to relinquish the benefits thus enjoyed in favor of still greater benefits based upon sale of the second residence and purchase of the third. The statute simply does not lend itself to any such application. It is clear upon its face, and that is the end of the matter. 656 Petitioners further argue that even if they must recognize gain on the sale of the West Naomi residence, the proper amount to be recognized is not the $52,638 gain actually realized, but rather $20,568, which is the difference between the property's $100,736 adjusted selling price and its $80,168 purchase price, unreduced by the earlier $32,070 deferred gain. We do not agree. Petitioners stipulated that the "realized * * net gain" on the sale was $52,638 and they have shown us no reason to ignore such stipulation.Moreover, the amount stipulated was correctly determined. When gain goes unrecognized pursuant to section 1034(a), section 1034(e)7 requires that the basis of the "new" principal residence be reduced by the amount of deferred gain, thus "preserving" such gain. In the situation where the taxpayer purchases more than one principal residence during the statutory period following the nonrecognition sale, the last residence so purchased is considered the "new" residence for purposes of "preserving" the nonrecognized gain. Section 1034(c)(4), I.R.C. 1954. 8 Thus, where a taxpayer purchases and sells a number of principal residences during the statutory period following657 a section 1034 nonrecognition sale, the statute ignores all of these transactions save for the last purchase occurring within the period and "preserves" the gain from the nonrecognition sale in the basis of that last purchase. See Aagaard v. Commissioner,56 T.C. 191">56 T.C. 191, 204 (1971); see also Rev. Rul. 81-53, 1 C.B. 439">1981-1 C.B. 439. 658 Here, the last purchase occurring within the 18-month statutory period was the purchase of the West Naomi (the second) residence; the purchase of the Paseo Gracia (the third) residence did not occur until December 1, 1978, 18-1/2 months after the May 13, 1977, nonrecognition sale. Thus, it was appropriate to reduce the basis of the West Naomi residence by the gain realized on the May 13, 1977, sale of the Old Ranch Road (the first) residence, and to recognize such gain when the West Naomi residence was sold. Petitioners must therefore recognize $52,638 of long-term capital gain on the sale of the West Naomi residence. To reflect concessions with respect to other issues, Decision will be entered under Rule 155.Footnotes1. The realized gain on the sale of the Old Ranch Road property was computed as follows: ↩Gross Sales Price$81,000Selling Expense & Commission4,640Amount realized76,360Adjusted Basis of Property44,290Realized Gain$32,0702. The parties determined the net amount realized on the sale by subtracting $7,264 of selling expense and commission from the gross sales price of $108,000.↩3. Respondent's deficiency notice also raised questions with respect to petitioners' 1978 charitable contribution and depreciation deductions, and included adjustments with respect to petitioners' medical expense and state sales tax deductions. However, the parties have stipulated with respect to all of these issues and they are not now in dispute.↩4. In 1981 the 18-month statutory period was increased to two years by section 122(a) of the Economic Recovery Tax Act of 1981, Pub. L. 97-34, 95 Stat. 197, as amended by sec. 101(d) Pub. L. 97-448, 96 Stat. 2366, generally for old residences sold or exchanged after July 20, 1981.↩5. This restriction is inapplicable if the sale is "in connection with the commencement of work by the taxpayer as an employee or as a self-employed individual at a new principal place of work". Sec. 1034(d)(2), I.R.C. 1954. There is no suggestion that section 1034(a)(2)↩ is applicable here.6. The provisions of section 1034 are mandatory. Sec. 1.1034-1(a), Income Tax Regs.↩7. Sec. 1034(e) provides in relevant part: (e) Basis of New Residence.--Where the purchase of a new residence results, under subsection (a) * * * in the nonrecognition of gain on the sale of an old residence, in determining the adjusted basis of the new residence as of any time following the sale of the old residence, the adjustments to basis shall include a reduction by an amount equal to the amount of the gain not so recognized on the sale of the old residence. For this purpose, the amount of the gain not so recognized on the sale of the old residence includes only so much of such gain as is not recognized by reason of the cost, up to such time, of purchasing the new residence. ↩8. Sec. 1034(c)(4) provides: (c) Rules for Application of Section.--For purposes of this section: * * * (4) If the taxpayer, during the period described in subsection (a), purchases more than one residence which is used by him as his principal residence at some time within 18 months after the date of the sale of the old residence, only the last of such residences so used by him after the date of such sale shall constitute the new residence.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624070/	DIXON F. MILLER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentMiller v. CommissionerDocket No. 6121-79.United States Tax CourtT.C. Memo 1981-431; 1981 Tax Ct. Memo LEXIS 312; 42 T.C.M. (CCH) 665; T.C.M. (RIA) 81431; August 13, 1981. Dixon F. Miller, pro se. Rose A. Mendes, for the respondent. DAWSONMEMORANDUM OPINION 1DAWSON, Judge: Respondent determined a deficiency of $ 252.71 in petitioner's313 Federal income tax for the year 1976. The only issue presented for decision is whether the petitioner is entitled to a deduction for a casualty loss under section 165(c)(3)2 where he failed to file a claim under an insurance policy covering the loss. All of the facts are stipulated and are found accordingly. The pertinent facts are summarized below. Dixon F. Miller (petitioner) was a resident of Columbus, Ohio, when he filed his petition in this case. In June 1976, a friend of petitioner, while operating petitioner's 1970 Pearson Sloop (hereinafter referred to as the boat) with his permission, ran it aground. This accident resulted in damage to the boat in the amount of $ 842.55. Although petitioner had an insurance policy that covered this casualty loss, he did not file a claim with his insurance company (hereinafter referred to as the company), because he believed that, if he did submit a claim, the company would cancel not only the policy covering his boat but also policies covering his apartment and personal automobile. 314 Prior to December 1974, petitioner purchased his insurance policies and made claims thereon at the following times: Type ofPolicyPurchasedClaims FiledPersonal automobile1969November 1969January 1970December 1973BoatSeptember 1972NoneApartmentSometime priorFebruary 1974to February 1974In December 1974, petitioner's insurance brokers notified him that they had received instructions from the company to terminate all of his insurance policies on their next renewal dates. They told petitioner that they would do their best to obtain policies with another company for him, but that he could expect to pay higher premiums. Petitioner requested that the brokers try to persuade the company to allow him to retain his then existing policies. The brokers convinced the company to permit petitioner to keep the policies, but the company imposed higher deductible provisions. The deductible provision on his boat policy was increased to $ 250. The brokers advised petitioner that, unless there was a catastrophic loss or a loss involving an undetermined potential liability, it would not be advisable for him to file any claims and that, "if he315 soon presented any further claims on the policies," they would be canceled. Rather than risk the loss of all his insurance coverage,the petitioner decided to recover as much as possible from the friend who had been operating the boat, and he did not file a claim with the insurance company. He was unable to obtain more than $ 200 from his friend. This reduced his actual loss to $ 642.55. After giving effect to the $ 100 limitation contained in section 165(c)(3), petitioner claimed a deduction in the amount of $ 542.55 for this casualty loss on his Federal income tax return for 1976. Respondent disallowed the claimed deduction because the petitioner did not seek reimbursement from his insurance company. Section 165(a) provides that a deduction shall be allowed for "any loss sustained during the taxable year and not compensated for by insurance or otherwise." In dispute here is the meaning of the term "compensated for." Respondent contends that it means "covered by." Petitioner, on the other hand, asserts that, although there was insurance money available for him, he was not compensated316 thereby because he did not receive it. Alternatively, petitioner argues that, even if it is decided that "compensated for" does mean "covered by," his loss was not compensated for because his failure to seek reimbursement was not attributable to a voluntary but a forced choice, since he had no practical alternative. To support his assertion that "compensated for" does not mean "covered by," petitioner contends: (1) That the everyday meaning of "compensated for" is not "covered by;" (2) that respondent's regulations refer to "any loss * * * not made good by insurance or some other form of compensation" 3 and "proper adjustment * * * for any insurance or other compensation received;" 4 and (3) that the Congress intended to tax only the aggregate accretion to a taxpayer's net worth, and there has been none to his net worth since he did not claim the insurance proceeds. We agree with the petitioner. The result in this case is controlled by the rationale expressed in our317 recent court-reviewed opinion in Hills v. Commissioner, 76 T.C. 484">76 T.C. 484 (1981), where under similar facts we held that the taxpayers sustained a loss during the taxable year which was not compensated for by insurance or otherwise, and therefore a deduction for such loss was allowed. In the Hills opinion the Court considered and discussed the case of Kentucky Utilities Company v. Glenn, 394 F.2d 631 (6th Cir. 1968), affg. on this issue 250 F. Supp. 265">250 F.Supp. 265 (W.D Ky. 1965), which is relied upon by respondent here as controlling and dispositive of the issue. In Hills we said (76 T.C. at 490): We view Kentucky Utilities as distinguishable from the instant case and, in any event, in light of the brief treatment of the issue, therein, that case should not preclude a fresh consideration of this issue. * * There are no operative facts which distinguish this case from Hills, or permit Kentucky Utilities to be accorded disparate treatment. In both this case and Hills the property on which the taxpayer claimed a casualty loss was covered by a valid insurance policy. In both cases the taxpayer had a history318 of prior claims with the insurer. In both cases the taxpayer refused to make a claim under the insurance policy because of a fear that the policy would not be renewed. In fact, the petitioner's fear in this case had been substantiated by the insurance company's prior decision to terminate his policies and, consequently, he had a stronger basis than the taxpayer's "fear" in Hills. The legal issues in both cases are likewise similar. The reasons given in Hills to support the Court's conclusion are equally applicable here. The statutory language is the same, so that our discussion of the construction of the terms "compensated" and "covered" is equally applicable here. The applicable regulations are the same, so that our discussion of the impact of the regulations applies with equal force here. The "voluntariness" of the failure to file for an insurance claim is the same (possibly even more pronounced in Hills than in the instant case), and our discussion of that argument is equally applicable here. Finally, our discussion in Hills of the important pragmatic considerations which may dicaate the abandonment of a civil (noninsurance) claim, and the parallel to the319 pragmatic considerations which dictate a decision not to file an insurance claim, are equally applicable to the present circumstances. We discern virtually no distinction between the operative facts or legal issues in this case and Hills. Accordingly, we conclude that Kentucky Utilities is distinguishable for the same reasons it was distinguishable in Hills. We reject respondent's contention that our Hills opinion is erroneous and does not control this case. It is our view that Kentucky Utilities is not "squarely in point," and therefore "efficient and harmonious judicial administration" does not require this Court to follow the Court of Appeals decision in these particular circumstances. 5 See Golsen v. Commissioner, 54 T.C. 742">54 T.C. 742, 757 (1970), affd. 445 F.2d 985">445 F.2d 985 (10th Cir. 1971), cert. denied 404 U.S. 940">404 U.S. 940 (1971). *320 To reflect these conclusions, Decision will be entered for the petitioner. Footnotes1. Pursuant to petitioner's motion, the Court, by Order dated August 12, 1981, vacated and set aside (1) the Decision entered herein on May 18, 1981, and (2) the Memorandum Findings of Fact and Opinion (T.C. Memo. 1980-550↩) filed herein on December 11, 1980.2. All section references are to the Internal Revenue Code of 1954, as amended and in effect for the year 1976, unless otherwise indicated.↩3. Sec. 1.165-1(a), Income Tax Regs.↩ (emphasis added by petitioner). 4. Sec. 1.165-1(c)(4), Income Tax Regs.↩ (emphasis added by respondent).5. See and compare Waxier Towing Co., Inc. v. United States↩ an unreported case ( W.D. Tenn. 1980, 81-2 USTC par. 9541), holding that repair costs suffered by a transporter of petroleum products in order to protect and maintain its insurance coverage were deductible business expenses because of the substantial risks of having its insurance coverage canceled if it made a claim.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4512573/	MEMORANDUM DECISION Pursuant to Ind. Appellate Rule 65(D), FILED this Memorandum Decision shall not be regarded as precedent or cited before any Mar 04 2020, 7:55 am court except for the purpose of establishing CLERK Indiana Supreme Court the defense of res judicata, collateral Court of Appeals and Tax Court estoppel, or the law of the case. ATTORNEY FOR APPELLANT ATTORNEYS FOR APPELLEE Alexander W. Robbins Curtis T. Hill, Jr. Bloomington, Indiana Attorney General of Indiana Robert J. Henke Deputy Attorney General Indianapolis, Indiana IN THE COURT OF APPEALS OF INDIANA In the Matter of the Termination March 4, 2020 of Parental Rights of: J.K. Court of Appeals Case No. (Minor Child), and 19A-JT-2341 F.K. (Mother), Appeal from the Morgan Circuit Court Appellant-Respondent, The Honorable Matthew G. v. Hanson, Judge Trial Court Cause No. Indiana Department of 55C01-1903-JT-83 Child Services, Appellee-Petitioner Baker, Judge. Court of Appeals of Indiana \| Memorandum Decision 19A-JT-2341 \| March 4, 2020 Page 1 of 18 [1] F.K. (Mother) appeals the trial court’s order terminating her relationship with her child, J.K. (Child). Mother argues that (1) her attorney was ineffective for failing to move to dismiss the termination proceedings when it exceeded the statutory time limit; and (2) the evidence is insufficient to support the termination order. Finding that Mother’s attorney was not ineffective and that the evidence is sufficient, we affirm. Facts [2] Mother has a prior history with the Department of Child Services (DCS). At some point in the past, she had a Child in Need of Services (CHINS) case that ended in the termination of her parent-child relationship with another child; the primary issue in that case was substance abuse. [3] Child was born on November 8, 2017,1 and was removed from Mother’s care less than a month later after Mother was arrested on drug and drug paraphernalia charges.2 On December 18, 2017, DCS filed a petition alleging that Child was a CHINS based on Mother’s arrest and other allegations. On January 18, 2018, Mother admitted that Child was a CHINS because “she is facing criminal charges, that she has ongoing substance abuse issues, that she is enrolled in [Intensive Outpatient Treatment] now, [and] that she has issues with 1 It appears that Child’s father has never been a part of her life. He did not appeal the termination of his parental rights. 2 Child was originally placed in relative care but later moved to foster care after allegations of inappropriate behavior on the part of the relative caregivers. Court of Appeals of Indiana \| Memorandum Decision 19A-JT-2341 \| March 4, 2020 Page 2 of 18 stability.” Tr. Ex. 7. At the dispositional hearing, the trial court ordered Mother to participate in services, including completing a substance abuse assessment and complying with all recommendations, submitting to random drug screens, and participating in group and individual counseling. Mother was also ordered to maintain stable and appropriate housing and income, and she was informed that any missed drug screen would be assumed to be positive. [4] From February 16 through March 22, 2018, DCS collected three drug screens that were positive for illegal substances including methamphetamine. Over the course of the rest of 2018, Mother did not have any positive drug screens, but she failed to report for screens on many occasions. [5] In April 2018, Mother failed to participate with most of her services, though she did participate sporadically with intensive outpatient treatment (IOP). After she had issues with someone in her IOP group and began to fail to attend, she was moved to a new IOP group. By mid-May, Mother was no longer permitted to attend the new IOP group because of her attitude and unwillingness to participate. At some point she resumed participation with IOP and successfully completed the program in November 2018. She did not, however, complete the required aftercare program or the recommended follow-up services of individual therapy, life skills, and recovery coaching. [6] Things began to improve for Mother in July 2018, when she participated in IOP, therapy, and home-based case management. DCS began to move Mother and Child to semi-unsupervised visits because of the progress Mother was Court of Appeals of Indiana \| Memorandum Decision 19A-JT-2341 \| March 4, 2020 Page 3 of 18 making. By late August 2018, Mother had moved in with her boyfriend, C.B., 3 on whom she relied financially. DCS tried to get C.B. involved in services but Mother refused to provide his contact information to get the process started. [7] In October 2018, Mother’s therapist became aware of fighting between Mother and C.B. and recommended that they obtain couples counseling. On November 8, 2018, Mother told her therapist that C.B. was high and throwing things at her; the police were called and C.B. left the home. Following this incident, service providers determined that Mother was not taking her medication and had permitted C.B. to return home despite agreeing not to. She kicked her therapist out of the house during a session and began minimizing the domestic violence issues. On November 25, 2018, C.B. was arrested following a domestic violence incident.4 [8] In December 2018, Mother was living in a shelter, had no transportation, and was unemployed. She reported a relapse on methamphetamine and heroin and also reported that she was pregnant. As a result of the relapse and other issues, DCS referred Mother for a new substance abuse evaluation and a psychological evaluation. Mother failed to attend the substance abuse evaluation and, in January 2019, was discharged from visitation, individual therapy, and home- based case management for noncompliance. She also left the shelter because 3 At some point during the CHINS case, Mother and C.B. got married. 4 Mother later reported to a therapist that C.B. had dragged her by her hair and raped her. Court of Appeals of Indiana \| Memorandum Decision 19A-JT-2341 \| March 4, 2020 Page 4 of 18 she did not want to follow the rules. In February 2019, Mother disappeared, failing to show up for her rescheduled psychological evaluation and failing to attend multiple drug screens. Mother later admitted that her December 2018 relapse continued through March 2019 and included almost daily drug use. [9] On March 1, 2019, DCS filed a petition to terminate the parent-child relationship between Mother and Child. A few days before the initial hearing on March 21, 2019, Mother and C.B. were arrested on drug-related charges after she was found in a residence with C.B. where drugs were being used. She was in the Morgan County Jail at the time of the initial hearing. In late March, Mother was released from jail but failed to participate in any services or keep in contact with DCS. In April, Mother failed to provide DCS with her current address or a working phone number, attend a psychological evaluation, or attend multiple drug screens. [10] In May 2019, Mother completed a substance abuse and parenting assessment and was recommended for services, including domestic abuse counseling. She moved to the Julian Center but did not attend the recommended services and failed, on multiple occasions, to attend random drug screens. Later that month, she moved to Crawfordsville and began participating with some services there. In June 2019, Mother gave birth and her newborn died shortly thereafter. [11] In July, Mother finally completed a psychological evaluation and began participating with IOP again. The psychological evaluation resulted in diagnoses of major depression, anxiety, post-traumatic stress disorder, drug Court of Appeals of Indiana \| Memorandum Decision 19A-JT-2341 \| March 4, 2020 Page 5 of 18 disorders, and schizoaffective disorder, and she was deemed paranoid and delusional. She had just begun counseling and medication to address these issues in the weeks leading up to the termination hearing. Mother reported to her counselor that she and C.B. had had numerous incidents of domestic violence, often tied to occasions when they were drinking alcohol. [12] Over the course of the CHINS case, Mother lived in Martinsville, Indianapolis, and Crawfordsville, with friends and in shelters and motels. She was removed from at least two facilities for noncompliance. A few weeks before the termination hearing, Mother moved into transitional housing with C.B. through a service provider in Crawfordsville. Mother was unemployed, as she had been throughout most of the CHINS case, and at some point before the termination hearing, C.B. lost his job. They had both received multiple infractions through the service provider and were at risk of being discharged from the program and losing their housing. Shortly before the third and final day of the termination hearing, Mother and C.B. were each employed and had secured an apartment. [13] The termination hearing took place over the course of August 22, August 27, and September 5, 2019. The second day of the hearing was day 179 of the 180- day statutory period.5 Counsel for Mother requested additional time to 5 Indiana Code section 31-35-2-6(a)(2) requires that the factfinding hearing on a petition to terminate parental rights “shall” be completed not more than 180 days after the petition was filed. Court of Appeals of Indiana \| Memorandum Decision 19A-JT-2341 \| March 4, 2020 Page 6 of 18 complete her presentation of evidence and did not object when the third day of the hearing was set outside of the 180-day period. [14] On September 9, 2019, the trial court issued a lengthy and detailed order terminating Mother and Child’s parent-child relationship. In pertinent part, it concluded as follows: 208. The mother’s drug issues have not been remedied, have controlled most of her adult life and have continued up to a time after this termination case was filed. 209. That while mother has taken very recent steps to remedy her drug issues it is clearly reasonable to believe from her testimony, her actions and her history with DCS that these are only temporary and very late to address her very serious drug issues. * 226. Since the start of this case [Mother] has stayed nowhere for any significant period of time and has not taken the steps necessary, until just last week, to find a place of her own. 227. That this stability issue is unacceptable over such a long period of time and the short period of stability over the last few months does not overcome this finding. * 230. That once more, only after the termination case was filed and only in the past two months has mother found work. Court of Appeals of Indiana \| Memorandum Decision 19A-JT-2341 \| March 4, 2020 Page 7 of 18 * 236. That over the life of this case mother has denied any issues with domestic violence and only recently (on the stand at the last hearing and in counseling) has admitted there may be some domestic violence issues. * 239. That the husband is clearly a poor choice in relationships, was a clear catalyst for leading mother to end her services in 2018, return to a drug life from December of 2018 to March of 2019 and only after the termination case was filed is he involved in some services in this case. * 249. That had the mother gone to any one of the [psychological] assessments back in 2018 she might have been able to start to tackle these very serious [mental health] issues. 250. However, as noted throughout this case, she did not take the necessary steps and once more, only in the last two months, has decided perhaps her mental health issues are a priority. * 254. That the drug issues continued until only after this termination was filed, the instability is still in question as mother just obtained her own housing and is now married to a batterer and partner in drug use, and mother’s mental Court of Appeals of Indiana \| Memorandum Decision 19A-JT-2341 \| March 4, 2020 Page 8 of 18 health issues are beyond a simple challenge that can be easily be overcome. * 262. That clearly if boyfriend/husband presents a danger to the mother and those issues have not been addressed, then he would present a danger to the child if the child was returned to mother. 263. That mother testified that she lost another child to the DCS system at a time when she did not want to “fight” for that child. * 266. The mother admitted to using heroin and methamphetamine “daily” from December of 2018 to March of 2019. 267. That mother was aware of the pregnancy during those times. * 272. That if mother is willing to place an unborn child in such a position and is willing to simply “not fight” for another live child that was lost to DCS, it is fair to assume that somewhere down the road this child would be in serious danger if mother simply decided to give up or return to drug use as she has done for most of her adult life. * Court of Appeals of Indiana \| Memorandum Decision 19A-JT-2341 \| March 4, 2020 Page 9 of 18 280. . . . [I]n a controlled [supervised visitation] environment free of drugs, domestic violence, with proper shelter and supervision of the mother, things [between Mother and Child] are great and the relationship is strong. 281. That without these services and things in place, this court is not convinced[] that this relationship overcomes the very real threats facing this child with this parent. * 287. This child has waited most of her life for her mother to get her act together. * 291. . . . [O]nly after the death of her third child has the mother decided it was time to look after the best interests of this child. *** 293. . . . [E]ven after the termination was filed she took few steps to get reengaged in services until after the death of her infant which suggests she is responding finally here out of a deep sadness rather than what is in the best interests of this little girl that has been without a mother for most of her life. Appealed Order p. 15-23. Mother now appeals. Court of Appeals of Indiana \| Memorandum Decision 19A-JT-2341 \| March 4, 2020 Page 10 of 18 Discussion and Decision I. Assistance of Counsel [15] First, Mother argues that her trial counsel was ineffective for failing to object when the third day of the factfinding hearing was set outside the 180-day window mandated by Indiana Code section 31-35-2-6(a)(2). [16] Indiana has chosen to provide counsel in termination proceedings to all parents who are indigent. Baker v. Marion Cty. Office of Family & Children, 810 N.E.2d 1035, 1038 (Ind. 2004). Those parents have a right to effective assistance, but the measure of counsel’s performance is not identical to that applied in the criminal justice context. Instead, our Supreme Court has held that the following standard is applied to the performance of counsel in termination of parental rights cases: Where parents whose rights were terminated upon trial claim on appeal that their lawyer underperformed, we deem the focus of the inquiry to be whether it appears that the parents received a fundamentally fair trial whose facts demonstrate an accurate determination. The question is not whether the lawyer might have objected to this or that, but whether the lawyer’s overall performance was so defective that the appellate court cannot say with confidence that the conditions leading to the removal of the children from parental care are unlikely to be remedied and that termination is in the child’s best interest. Id. at 1041 (emphasis added). Court of Appeals of Indiana \| Memorandum Decision 19A-JT-2341 \| March 4, 2020 Page 11 of 18 [17] When a parent does not object to a hearing being set outside of the 180-day limit, any objection is waived and the result of the termination proceeding may stand. In re N.C., 83 N.E.3d 1265, 1267 (Ind. Ct. App. 2017). Here, Mother’s attorney did not object, and she argues that he was ineffective for failing to do so. Had he objected, she maintains that she would have had more time to prove her stability and show that she was serious about participating with services and bettering herself as a parent. [18] Mother’s argument is precisely what was foreclosed by our Supreme Court— that her attorney was ineffective for failing to object at one singular point in the hearing. She even acknowledges that “the actual proceedings conducted in this case were not unfair. [Trial counsel] did a wonderful job of crossing and pushing back on DCS witnesses, and in arguing on his client’s behalf.” Appellant’s Br. p. 24 n.3. And indeed, having reviewed the record, it is apparent that her attorney did as good a job as could be done with a challenging set of facts. In no event does the record support a conclusion that counsel’s overall performance was so defective that the factfinding hearing was fundamentally unfair. Therefore, we decline to reverse on this basis. II. Termination [19] Next, Mother argues that the evidence is insufficient to support the termination of her relationship with Child. Our standard of review with respect to termination of parental rights proceedings is well established. In considering whether termination was appropriate, we neither reweigh the evidence nor Court of Appeals of Indiana \| Memorandum Decision 19A-JT-2341 \| March 4, 2020 Page 12 of 18 assess witness credibility. K.T.K. v. Ind. Dep’t of Child Servs., 989 N.E.2d 1225, 1229 (Ind. 2013). We will consider only the evidence and reasonable inferences that may be drawn therefrom in support of the judgment, giving due regard to the trial court’s opportunity to judge witness credibility firsthand. Id. Where, as here, the trial court entered findings of fact and conclusions of law, we will not set aside the findings or judgment unless clearly erroneous. Id. In making that determination, we must consider whether the evidence clearly and convincingly supports the findings, and the findings clearly and convincingly support the judgment. Id. at 1229-30. It is “sufficient to show by clear and convincing evidence that the child’s emotional and physical development are threatened by the respondent parent’s custody.” Bester v. Lake Cty. Office of Family & Children, 839 N.E.2d 143, 148 (Ind. 2005) (internal quotations omitted). [20] Indiana Code section 31-35-2-4(b)(2) requires that a petition to terminate parental rights for a CHINS must make the following allegations: (A) that one (1) of the following is true: (i) The child has been removed from the parent for at least six (6) months under a dispositional decree. (ii) A court has entered a finding under IC 31-34-21-5.6 that reasonable efforts for family preservation or reunification are not required, including a description of the court’s finding, the date of the finding, and the manner in which the finding was made. Court of Appeals of Indiana \| Memorandum Decision 19A-JT-2341 \| March 4, 2020 Page 13 of 18 (iii) The child has been removed from the parent and has been under the supervision of a local office or probation department for at least fifteen (15) months of the most recent twenty-two (22) months, beginning with the date the child is removed from the home as a result of the child being alleged to be a child in need of services or a delinquent child; (B) that one (1) of the following is true: (i) There is a reasonable probability that the conditions that resulted in the child’s removal or the reasons for placement outside the home of the parents will not be remedied. (ii) There is a reasonable probability that the continuation of the parent-child relationship poses a threat to the well-being of the child. (iii) The child has, on two (2) separate occasions, been adjudicated a child in need of services; (C) that termination is in the best interests of the child; and (D) that there is a satisfactory plan for the care and treatment of the child. DCS must prove the alleged circumstances by clear and convincing evidence. K.T.K., 989 N.E.2d at 1230. [21] Mother argues that the evidence does not support the trial court’s conclusion that there is a reasonable probability that the conditions resulting in Child’s Court of Appeals of Indiana \| Memorandum Decision 19A-JT-2341 \| March 4, 2020 Page 14 of 18 removal and continued placement outside of her care and custody will not be remedied. The trial court identified three broad categories of reasons for the original and continued removal of Child from Mother: (1) substance abuse; (2) instability in housing and life, including employment and her relationship with her husband; and (3) Mother’s mental health struggles. [22] With respect to Mother’s substance abuse, the record reveals that in February and March 2018, she provided three drug screens that were positive for methamphetamine. Then she relapsed in December 2018. Her relapse continued through March 2019, and she later admitted to nearly daily use of substances, including heroin and methamphetamine, even though she knew that she was pregnant at that time. During her periods of sobriety, she has provided some clean screens, but she has also failed to report for countless other screens, which are considered to be positive. While she completed an IOP program, she failed to participate with or complete the required aftercare services. It appears that Mother was clean and in substance abuse services at the time of the factfinding hearing, but when her habitual patterns of conduct and the overall history of the case—as well as the fact that her parental rights as to another child were terminated in the past because of her substance abuse— are considered, the outlook is not promising. [23] With respect to Mother’s stability, she argues that as of the final day of the termination hearing, she had an apartment and a job, was making ends meet financially, and had had no recent episodes of domestic violence with her husband. Our Supreme Court has observed that it is within the discretion of the Court of Appeals of Indiana \| Memorandum Decision 19A-JT-2341 \| March 4, 2020 Page 15 of 18 trial court to “disregard the efforts [a parent] made only shortly before termination and to weigh more heavily [the parent’s] history of conduct prior to those efforts.” K.T.K., 989 N.E.2d at 1234. Here, even if we only turn the clock back to the time at which DCS filed the termination petition, Mother was arrested shortly thereafter. Upon her release, DCS referred more services for Mother but she failed to participate for months. It was not until four months after the termination petition was filed that Mother finally completed required assessments, and she never participated in a second round of IOP treatment. [24] Mother’s housing was unstable throughout all the CHINS and termination cases. She moved from town to town and from motels to shelters to friends’ couches. She was kicked out of two shelters for noncompliance. Therefore, the fact that shortly before the third and final day of the termination hearing she and C.B. had managed to secure an apartment does not outweigh her lengthy history of housing instability. [25] As to her life stability, she continues to live with her husband, C.B., who has allegedly battered and raped her in the past. Throughout the CHINS case, Mother refused to acknowledge the domestic violence in her relationship and did not even report it to DCS until DCS learned about it through a police report. It was not until the termination hearing that she finally admitted to the issue. Neither Mother nor C.B. has ever participated fully with a program of treatment designed to address domestic violence. Multiple service providers testified that they would have serious concerns about Child’s safety if she were Court of Appeals of Indiana \| Memorandum Decision 19A-JT-2341 \| March 4, 2020 Page 16 of 18 placed with Mother and C.B. because of the ongoing, untreated domestic violence in the home. [26] Finally, with respect to Mother’s mental health issues, she failed to complete a required psychological assessment despite the many times it was scheduled in 2018 and 2019 until July 2019, four months after the termination petition was filed. At that time, Mother was diagnosed with a number of serious mental health problems and began to be treated for those diagnoses, including therapy and medication. As the trial court noted, had she completed the assessment a year earlier, she would have been able to show a track record of treating and coping with the diagnoses. But because she waited until the end of the termination proceedings to complete the assessments, the trial court was unable to evaluate her progress or the likelihood that she would become healthy enough to be a safe and appropriate parent. [27] Mother seemed to have made some progress on many of her obstacles in the days leading up to the third and final day of the termination hearing. But given the evidence in the record, we cannot second-guess the trial court’s conclusion that it was simply too little, too late. Her patterns of an inability, unwillingness, or lack of commitment to address her issues, to cooperate with services, and to abide by the trial court’s orders demonstrate that there is a reasonable probability that the conditions resulting in Child’s original and continued removal from her care and custody will not change. Mother’s arguments to the Court of Appeals of Indiana \| Memorandum Decision 19A-JT-2341 \| March 4, 2020 Page 17 of 18 contrary amount to a request that we reweigh the evidence, which we may not do.6 [28] The judgment of the trial court is affirmed. Riley, J., and Brown, J., concur. 6 Mother also argues that the evidence does not support a conclusion that there is a reasonable probability that the continuation of her relationship with Child poses a threat to Child’s well-being. As the statutory elements are phrased in the disjunctive, we need not consider this argument, but we note that the evidence already discussed herein likewise supports the trial court’s conclusion on this element of the termination statute. Court of Appeals of Indiana \| Memorandum Decision 19A-JT-2341 \| March 4, 2020 Page 18 of 18	01-04-2023	03-04-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624071/	Donald P. Frazee and Juanita R. Frazee v. Commissioner.Frazee v. CommissionerDocket No. 2627-62.United States Tax CourtT.C. Memo 1963-217; 1963 Tax Ct. Memo LEXIS 127; 22 T.C.M. (CCH) 1086; T.C.M. (RIA) 63217; August 19, 1963Donald P. Frazee, pro se, 1138 St. Andrews Dr., FairfaxVa. Douglas O. Tice, Jr., for the respondent. KERN Memorandum Findings of Fact and Opinion Respondent determined deficiencies in petitioners' income tax for the years 1958 and 1959 in the respective amounts of $57.64 and $102.30. The only issue for decision is whether expenses for books and tuition incurred by Donald P. Frazee in attending law school are deductible by him as business expenses. Findings of Fact Some of the facts have been stipulated and the stipulation of facts, together with the exhibits attached thereto, is incorporated herein and made a part of our Findings by this reference. Donald P. Frazee, sometimes hereinafter referred to as petitioner, and his wife are residents of Fairfax, Virginia, and filed joint Federal income tax returns128 for the years 1958 and 1959 with the district director of internal revenue at Richmond, Virginia. Petitioner is a civilian employee of the United States Department of the Air Force at the Pentagon, sometimes hereinafter referred to as the Air Force. Except for a period during the years 1943 to 1946 when he served in the United States Navy, petitioner has been continuously employed by the Air Force since 1942, and he has performed the following jobs at the pay grades and during the years as follows: Dates ofPayPerformanceGradeTitle of Job1942 to 1943CAF-2Mail Clerk(1943 to 1946In service with UnitedStates Navy)1946 to 1950GS-4Supply OfficerthroughGS-71950 to 1954GS-7Maintenance OfficerthroughGS-111954 toGS-12Maintenance ProgramDec. 2, 1956Control OfficerDec. 2, 1956,GS-13Maintenance Programto Sept. 20, 1959Control OfficerSept. 20, 1959,GS-14Maintenance Programto July 9, 1961Control OfficerJuly 9, 1961,GS-14Supervisory Industrialto April 15, 1963Specialist, MaintenanceEngineering Although a change in petitioner's job title went into effect on July 9, 1961, the129 duties he performed and his job description were not changed. When petitioner first began his employment with the Air Force in 1942 he was a senior in high school and 16 years old. Petitioner attended high school during the daytime and worked during the hours of 4 p.m. to 12:30 a.m. Petitioner entered Sinclair College in Dayton, Ohio, in September 1947 where he attended night classes and received an associate degree. He transferred to American University in Washington, D.C., where he also attended night classes and received a bachelor of science degree in business administration in January 1957. Petitioner spent a total of 9 years attending night school as an undergraduate. In the summer of 1957 petitioner decided to go to law school, and in September of that year he began a night law school course at the Washington College of Law, American University. Petitioner attended law school at night during the years 1958 through 1961, during which latter year he received a bachelor of laws degree. While pursuing his legal studies, petitioner continued as a full-time employee of the Air Force. During the years 1958 and 1959 petitioner incurred expenses in the respective amounts of $262130 and $465 for law books and tuition at law school. At the time of trial petitioner had been employed by the Air Force for approximately 20 years and 9 months, and was 37 years old. Under the retirement system in effect with respect to his employment he would be eligible for retirement benefits at the age of 60 after 44 years of service, or he could elect reduced retirement benefits at the age of 55 after 39 years of service. Petitioner has had no intention of leaving the Government service to work in private industry, or of changing his occupation or profession from a career civil service employee to an attorney and thereby forfeiting his retirement rights or facing the possibility of losing the seniority and grade he had attained in his employment. Petitioner has taken examinations without success for admission to the Virginia bar and he plans to take the examination again at a future date in 1963. Petitioner has no intention of practicing law prior to his retirement from Government service on an annuity. Petitioner was not required by his supervisors to undertake the education in question, nor was such education necessary for the retention of his position or promotion to a higher131 one. His attendance at law school, however, was regarded with favor by his supervisors. At the time petitioner entered law school his employment was located in the Financial Management Branch, Programs Development Group, Directorate of Maintenance Engineering, Deputy Chief of Staff-Materiel. The functions of the office in which petitioner worked pertained to world-wide maintenance engineering material programs of the Air Force. Petitioner's duties included the development and writing of numerous regulations, and policy and procedure documents governing world-wide maintenance and modification plans and policies for aircraft, missiles, and weapon systems. The regulations prepared by petitioner apply to the military as well as to the contractors and civilian agencies dealing with the Air Force. Petitioner also represented his office in conferences with other parties interested in the regulations, including the Air Force's legal staff which reviewed them for adequacy. Other duties performed by petitioner included the preparation of replies to congressional and industrial inquiries and preparation of speeches in justification of the maintenance engineering materiel program before various132 Federal agencies and bodies, such as the Secretary of Defense, Bureau of Budget, and congressional committees. Certain proposed legislation which petitioner discerned would be detrimental to essential military operations and wartime readiness was defeated in part due to petitioner's efforts in developing the points of opposition for the Department of Defense. Petitioner's supervisor correctly believed that the legal education undertaken by petitioner improved his skills in carrying on these assigned duties. There were approximately six men in petitioner's grade, GS-13, one in GS-14, and one in GS-12, and several military officers of senior grade in petitioner's office at the time he entered law school. None of the other employees in petitioner's office were attorneys, and attendance at law school was not required of petitioner or any of his associates. Petitioner was appointed to GS-14 in September 1959 to fill a vacancy in the Plans and Policy Branch which was in the same chain of command and was supervised by a colonel in the Air Force. There were no attorneys in this office and a legal education was not required of any employee assigned to this office. Petitioner's positions133 required a specialized skill in and knowledge of Air Force maintenance and his experience and background qualified him for his assigned duties. Petitioner attended law school for the purpose of improving his skills in writing regulations, in answering congressional inquiries, and in writing other policy and procedure documents. A legal education was appropriate and helpful in enabling petitioner to perform more skillfully the duties of the positions which petitioner held at the time he attended law school. At the time of trial, which was approximately 2 years subsequent to his graduation from law school, petitioner was still performing the duties that he performed at the time he attended law school. Although petitioner undertook a course of legal study in part to fulfill his general educational aspirations and it was his expectation that over the long term the law degree would be helpful in obtaining additional remuneration by way of promotions, his primary purpose for such undertaking was to maintain or improve his skills in his employment. Opinion KERN, Judge: Petitioner contends that the costs he incurred for books and tuition in attending law school are deductible under section 162 1 of the Internal Revenue Code134 of 1954 and the regulations thereunder, section 1.162-5, as expenses for education undertaken primarily for the purpose of maintaining and improving skills required by him in his employment. Respondent contends that the expenditures made by petitioner in attending law school are not deductible because the education was undertaken primarily for the purpose of obtaining a new position or substantial advancement in position, or primarily for the purpose of fulfilling petitioner's general educational aspirations. It is respondent's position that the costs incurred by petitioner are nondeductible personal or living expenses within the meaning of section 262 2 of the Internal Revenue Code of 1954. Section 1.162-5, Income Tax Regs.135 , upon which both petitioner and respondent rely, provides that expenditures made by a taxpayer for his education are deductible if they are for education undertaken primarily for the purpose of maintaining or improving skills required by the taxpayer in his employment, and that expenditures for education are not deductible if they are for education undertaken primarily for the purpose of obtaining a new position or substantial advancement in position, or primarily for the purpose of fulfilling the general educational aspirations or other personal purposes of the taxpayer. It is also provided in the regulations that whether or not education is undertaken primarily for the purpose of maintaining or improving skills required by the taxpayer in his employment shall be determined upon the basis of all the facts of each case. Petitioner recognizes that the burden of proof is upon him to show that his claimed deductions are allowable pursuant to respondent's regulations. The regulations also provide that expenditures made by a taxpayer for his education are deductible if such education was undertaken primarily for the purpose of meeting the express requirements of a taxpayer's employer136 imposed as a condition to the retention by the taxpayer of his salary, status, or employment. Section 1.162-5(a)(2), Income Tax Regs. Petitioner does not claim he is entitled to deduct the expenses he incurred under this section of the regulations, and the record herein shows it to be inapplicable. On the basis of the testimony presented, we have found that such education was not required of petitioner by his supervisors and no employee working in petitioner's office was an attorney or law school graduate. The record in the instant case shows that petitioner was employed in a position requiring specialized skill and experience in Air Force maintenance, and that his background in maintenance qualified him to fill the position he held. His duties included the writing of Air Force regulations and policy and procedure documents, responding to congressional and industrial inquiries, and preparing speeches to be used before high level administrative bodies and congressional committees. In addition, petitioner successfully developed the points of opposition used by the Department of Defense to defeat certain proposed legislation which, if enacted, allegedly would137 hinder military operations and impair wartime readiness. Petitioner undertook the legal education in question because he thought such study would aid him in performing these duties, and we believe that a legal education is reasonably related to that purpose and would be "appropriate and helpful" in enabling him better to perform such duties. See Cosimo A. Carlucci, 37 T.C. 695">37 T.C. 695, 697. Although petitioner admitted with candor at the trial herein that he had educational aspirations, we cannot agree with respondent that fulfillment of such aspirations was petitioner's primary purpose in going to law school. We would take an unduly narrow view, and one not required by respondent's regulations if we held that the mere presence of general educational aspirations was sufficient to defeat the claimed deductions. Of necessity, an individual must have some general educational aspirations in order to complete a legal education at night school while working full time at his regular employment. Further, the possibility that some benefit, if any, may accrue to petitioner by enhancing his chances for promotion over the long term as a result of his education does not establish that the138 education in question was undertaken primarily to obtain a new position or substantial advancement in position within the meaning of the regulations. See Cosimo A. Carlucci, supra at 701, 702. The record herein in its entirety supports petitioner's contention that his primary purpose in undertaking the education in question was to maintain or improve his skills in his employment. Respondent relies on Namrow v. Commissioner, 288 F.2d 648">288 F. 2d 648, affirming 33 T.C. 419">33 T.C. 419, certiorari denied 368 U.S. 914">368 U.S. 914; Sandt v. Commissioner and Hines v. Commissioner, 303 F. 2d 111, affirming Memorandum Opinions of this Court; Grant Gilmore, 38 T.C. 765">38 T.C. 765; and Joseph T. Booth III, 35 T.C. 1144">35 T.C. 1144. Those cases are distinguishable on their facts from the instant case. Those cases hold that where a course of education is undertaken primarily to obtain a higher position or to qualify for a new position or occupation the expenses incurred are not deductible. In the instant case petitioner did not seek or obtain a new or higher position because of the completion of his law school studies, nor did his duties change as a result of139 his completion of his legal education. There were no positions in petitioner's office for attorneys. We believe petitioner's testimony to the effect that he is not, and never has been willing to change his occupation or profession after approximately 20 years' service as a career civil servant and thereby sacrifice his seniority or, if he left the Government service, the retirement benefits accruing to him. The facts that petitioner obtained a bachelor of laws degree and thereby became qualified to seek admission to the Virginia bar constitute, in our opinion on the testimony herein, results which were secondary and incidental to petitioner's primary purpose of maintaining or improving his skills in his position. As such, they do not defeat the claimed deductions. Cf. Commissioner v. Johnson, 313 F. 2d 668, affirming a Memorandum Opinion of this Court; Cosimo A. Carlucci, supra; and Robert S. Green, 28 T.C. 1154">28 T.C. 1154. Petitioner's failure to establish that it was customary for those engaged in his trade or business to study law does not persuade us to a conclusion in favor of respondent. The regulations provide that if it is customary for other140 established members of the taxpayer's trade or business to undertake such education, then the taxpayer will be considered to have undertaken his education for the purpose of maintaining or improving the skills required in his employment. In the instant case none of petitioner's associates were attorneys or had obtained a law degree, and the inference is that it was not customary among the established members of petitioner's trade or business to obtain a legal education. We do not read the regulations as requiring the disallowance of deductions for educational expenses where the deduction is undertaken primarily for the purpose of maintaining or improving skills in a trade or business, even though such education is not customarily undertaken by other established members of petitioner's trade or business. See John S. Watson, 31 T.C. 1014">31 T.C. 1014, 1016. Having found that petitioner's primary purpose in undertaking his legal education was to maintain or improve his skills in his employment and that such education in fact served that purpose, we hold that the costs incurred for tuition and books with respect to his attendance at law school during the years 1958 and 1959 are deductible141 expenditures. Decision will be entered for the petitioners. Footnotes1. SEC. 162. TRADE OR BUSINESS EXPENSES. (a) In General. - There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * *↩2. SEC. 262. PERSONAL, LIVING, AND FAMILY EXPENSES. Except as otherwise expressly provided in this chapter, no deduction shall be allowed for personal, living, or family expenses.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624072/	RAYMOND A. CLOUTIER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentCloutier v. CommissionerDocket No. 23633-92United States Tax CourtT.C. Memo 1994-558; 1994 Tax Ct. Memo LEXIS 563; 68 T.C.M. (CCH) 1165; 68 Trade Cas. (CCH) P1165; November 3, 1994, Filed 563 Decision will be entered for respondent. For the petitioner: Tristan P. Junius. For the respondent: Wesley F. McNamara. RAUMRAUMMEMORANDUM OPINION RAUM, Judge: The Commissioner determined deficiencies and additions to tax as follows: Additions to TaxYearDeficiencySec. 6653(b) 1Sec. 66541975$ 3,455.74$ 1,727.87$ 149.521976$ 5,381.00$ 2,690.50$ 200.411977$ 5,943.75$ 2,971.88$ 204.481978$ 6,512.00$ 3,256.00$ 207.881979$ 5,549.88$ 2,774.94$ 204.551980$ 7,697.65$ 3,848.83$ 461.861981$ 8,422.00$ 4,211.00$ 593.001982$ 10,408.001 $ 870.001983$ 8,304.002 $ 507.00564 Petitioner has conceded the above deficiencies and the section 6654 additions to tax. The sole issue remaining for decision is whether petitioner is liable for the additions to tax for fraud under section 6653(b). At the time the petition in this case was filed, petitioner resided in Queens' Village, New York. During the tax years and for some period prior thereto, at least back to 1972, petitioner was an employee of United Airlines. For the tax years petitioner received taxable income from wages, interest, and dividends as follows: YearWagesInterestDividendsTotal1975$ 16,333.00$ 27.72$ 344.11$ 16,704.83197621,351.0029.16142.3521,522.51197722,750.0061.00164.0022,975.00197823,839.5076.00251.1624,166.66197922,548.00109.00359.0023,016.00198027,547.9082.00- 27,629.90198129,150.00158.00- 29,308.00198235,162.2630.00- 35,192.26198332,698.00- - 32,698.00Prior to 1975 petitioner filed his Federal income tax returns and had Federal income taxes withheld from his wages. He had knowledge of the Federal income tax return filing requirements. The returns filed for the years prior 565 to 1975 were accompanied by payment in full of the tax liabilities shown thereon. In 1972 petitioner had submitted to his employer a Form W-4, Employee's Withholding Exemption Certificate, claiming three exemptions, two for himself and his wife and the third for a dependent. Beginning with the tax year 1975, however, petitioner took steps to eliminate the withholding of income taxes from his wages. To that end he submitted to his employer a Form W-4 claiming 25 withholding exemptions. Petitioner did not file Federal income tax returns for any of the years 1975 through 1983. He made no payments toward Federal income tax liabilities, although his employer did make payments of comparatively small amounts on his behalf for some of those years equal to the withholdings from his wages. On January 15, 1982, the Commissioner sent petitioner a letter informing him that the IRS had not received a Federal income tax return from petitioner for the year 1979. Shortly thereafter, in February 1982, the IRS received from petitioner Form 1040 documents purporting to cover the years 1975 through 1982. The tax return forms thus submitted by petitioner for the years 1975 through 1982 contained566 none of the information necessary to determine his income or his tax liability. Petitioner answered "object 5th" or entered similar Fifth Amendment objections on almost every line of the return forms. He also stated on the front of each form "Objections are also made under the 1st, 4th, 7th, 8th, 9th, 10th, 13th & 14th [amendments]". On one of the forms there was added even a further objection based on the Second Amendment. Attached to each of these forms (except 1982) were various tax protester materials. The director of the Internal Revenue Service Center for petitioner's area informed petitioner by letter dated March 3, 1982, that the forms petitioner submitted for 1980 and 1981 were unacceptable. Petitioner responded the same month by letter which contained numerous tax protester arguments. Again, on May 16, 1983, the same director informed petitioner, this time by registered mail, that the form which petitioner had submitted for 1982 was not acceptable as an income tax return, and again petitioner responded with a tax protester type of letter. Thereafter, by letter to the IRS dated May 17, 1986, petitioner attempted to withdraw from the Social Security System, attempted567 to "rescind" all his past W-4s, 1040s, "and any other type of forms connected with [his] Social Security Number, Account and [his] application for enrollment into the Social Security and Income Tax Programs." Finally, by letter to the Secretary of the Treasury dated July 10, 1986, he gave "notice of my Official Recision of all government forms and signatures thereon", asserting that "constructive fraud" had been perpetrated against him by, inter alia, the IRS. Other than petitioner's foregoing frivolous communications, he made no further effort to address his income tax liability for the years in issue. In an attempt to obtain third party records regarding petitioner's income tax liabilities, the IRS served summonses on both Jamaica Savings Bank and Manufacturers Hanover Trust on May 10, 1984. The summonses requested information regarding petitioner for the years 1980, 1981, and 1982. Petitioner vigorously sought in a Federal District Court to have the summonses quashed, and he also filed in the District Court a Motion for Discovery on May 30, 1984. The District Court on April 17, 1985, entered an order denying petitioner all relief and dismissing his action. On April 17, 1986, 568 petitioner was charged with three counts of willfully failing to file income tax returns for the taxable years 1980, 1981, and 1982, in violation of section 7203. Following a jury trial, petitioner was found guilty on July 25, 1986, on all three counts. Petitioner was sentenced to 1 year imprisonment (6 months suspended), to be followed by 3 years of probation. A special condition of his probation was that petitioner file timely and accurate tax returns. The conditions of probation were extended for 2 additional years due to petitioner's failure to make restitution payments in respect of his past due taxes. The Court of Appeals for the Second Circuit affirmed the District Court. Upon petitioner's failure to discharge his liabilities for his past due taxes, the Commissioner sent him a statutory notice of deficiency determining income tax deficiencies and additions to tax for the years 1975 through 1983. Currently in controversy is whether petitioner is liable for additions to tax for fraud under section 6653(b). The Commissioner has the burden of proving fraud by clear and convincing evidence. Sec. 7454(a); Rule 142(b); Douge v. Commissioner, 899 F.2d 164">899 F.2d 164, 168 (2d Cir. 1990);569 Parks v. Commissioner, 94 T.C. 654">94 T.C. 654, 660 (1990); Castillo v. Commissioner, 84 T.C. 405">84 T.C. 405, 408 (1985). Fraud is defined as an intentional wrongdoing designed to evade tax believed to be owing. Bradford v. Commissioner, 796 F.2d 303">796 F.2d 303, 307 (9th Cir. 1986), affg. T.C. Memo 1984-601">T.C. Memo. 1984-601; Niedringhaus v. Commissioner, 99 T.C. 202">99 T.C. 202, 210 (1992). The Commissioner must establish (1) that the taxpayer has underpaid his taxes for each year and (2) that some part of the underpayment was due to the taxpayer's intent to conceal, mislead, or otherwise prevent the collection of such taxes. Sec. 6653(c); Parks v. Commissioner, supra at 660-661. Petitioner has conceded the underpayment of tax for the years in question. The first half of the Commissioner's burden is therefore met. We must now determine whether some part of the underpayment was due to petitioner's intent "to conceal, mislead, or otherwise prevent the collection of such taxes." Id. at 661. Fraud is never presumed, it must 570 be established by affirmative evidence. Niedringhaus v. Commissioner, supra at 210. Fraud, however, may be inferred from any conduct, the effect of which would be to mislead or conceal, Spies v. United States, 317 U.S. 492">317 U.S. 492, 499 (1943), or can be found where an entire course of conduct establishes the necessary intent, Patton v. Commissioner, 799 F.2d 166">799 F.2d 166, 171 (5th Cir. 1986), affg. T.C. Memo. 1985-148; Niedringhaus v. Commissioner, supra at 210; Rowlee v. Commissioner, 80 T.C. 1111">80 T.C. 1111, 1123 (1983). The record before us provides ample evidence of fraud on the part of petitioner. Although petitioner had filed returns for pre-1975 years and knew of the filing requirements, he deliberately ceased filing the required tax returns for at least 9 years. Petitioner increased the number of withholding exemptions on his Form W-4 in an attempt to eliminate the withholding of Federal income taxes. He failed to cooperate with the Commissioner's agents during their investigation, and filed frivolous motions571 with the District Court in an attempt to impede their investigation. Petitioner filed tax protester types of alleged returns for the years 1975-1982, which served no purpose other than to impede and delay the collection of the tax due from him. Finally, not only was he convicted of three counts of willfully failing to file income tax returns for the years 1980, 1981, and 1982 in violation of section 7203, but the parties hereto have stipulated "Petitioner willfully chose not to file U.S. Individual Income Tax Returns for each of the years 1975 through 1983." We are convinced that petitioner's conduct revealed by the record clearly rises to the level of fraud. Petitioner concedes all of the facts that support our determination of fraud. However, he argues that his conduct was sufficiently open to preclude a finding of fraud, relying upon Raley v. Commissioner, 676 F.2d 980">676 F.2d 980 (3d Cir. 1982), revg. T.C. Memo. 1980-571. To be sure, Raley bears a superficial resemblance to the present case. There, a tax protester also decided to stop filing tax returns, and filed false Form W-4Es for the years there at issue, claiming he572 was exempt from Federal withholding. He engaged in a campaign of letter writing to the IRS, the Secretary of the Treasury, and others, designed to "inform every person involved in the collection process that he was not going to pay any federal income taxes." Id. at 983. But there is a critical difference between the present case and Raley. The letter writing in Raley began at approximately the same time the taxpayer decided to stop paying Federal taxes. Id. at 982. It was the contemporaneous nature of these letters that played a part in the Third Circuit's conclusion that there was an absence of intent to defraud. The Court of Appeals stated "The letters do not support a claim of fraud; to the contrary, they make it clear that Raley intended to call attention to his failure to pay taxes. It would be anomalous to suggest that Raley's numerous attempts to notify the Government are supportive, let alone suggestive, of an intent to defraud." Id. at 983-984. In the present case petitioner did not inform any official of his refusal to pay Federal income taxes until after he was first notified by the Commissioner in a letter dated January 15, 1982, that no573 1979 return had been received from petitioner. The fact that petitioner took steps to contact the IRS only after receiving notice of his delinquency is itself evidence to be taken into account in determining whether there was fraud. Rowlee v. Commissioner, 80 T.C. 1111">80 T.C. 1111, 1124 (1983). "It is well settled that later repentant behavior does not absolve a taxpayer of his antecedent fraud." Niedringhaus v. Commissioner, supra at 213 (citing Badaracco v. Commissioner, 464 U.S. 386">464 U.S. 386, 394 (1984); Plunkett v. Commissioner, 465 F.2d 299">465 F.2d 299, 303 (7th Cir. 1972), affg. T.C. Memo. 1970-274; Miller v. Commissioner, 94 T.C. 316">94 T.C. 316, 335 (1990)). In Estate of Ming v. Commissioner, T.C. Memo. 1976-115, 35 T.C.M. (CCH) 522">35 T.C.M. 522, 528, we said: His [the taxpayer's] cooperation began after the Internal Revenue Service had discovered on its own that he had failed to file returns for a number of years. Cooperation, when there is no sensible alternative may indicate a taxpayer's reasonableness574 and intelligence, but it does not necessarily suggest the absence of fraudulent intent. Cf. Lord v. Commissioner, supra, 525 F.2d at 748.Regardless of whether we accept the Third Circuit's reversal of our decision in Raley as a correct analysis of the law, cf. Rowlee v. Commissioner, 80 T.C. 1111">80 T.C. 1111, 1124 n.10 (1983), not only is it factually distinguishable here, but also other Courts of Appeals that have considered Raley have either limited the reach of that opinion or have refused to follow it. See Edelson v. Commissioner, 829 F.2d 828">829 F.2d 828 (9th Cir. 1987), affg. T.C. Memo. 1986-223 (disclosure of willful refusal to file is irrelevant to Tax Court's finding of fraud and such a finding is not clearly erroneous); Granado v. Commissioner, 792 F.2d 91">792 F.2d 91 (7th Cir. 1986), affg. T.C. Memo 1985-237">T.C. Memo. 1985-237, cert. denied 480 U.S. 920">480 U.S. 920 (1987) (explicitly rejected the analysis of the Third Circuit in Raley); and Zell v. Commissioner, 763 F.2d 1139">763 F.2d 1139, 1144, 1146, 1147 (10th Cir. 1985)*575 (agreeing "with the Third Circuit's interpretation of section 6653(b) in Raley" but holding that the filing of false W-4 statements is an "'affirmative act' of misrepresentation sufficient to justify the fraud penalty"; concurring opinion explicitly treats Raley as "an unwarranted departure from established law identifying 'fraud' in the context of section 6653(b)"), affg. T.C. Memo 1984-152">T.C. Memo. 1984-152. We are satisfied that the Commissioner has met the required burden of proof as to fraud for each of the years in question in respect of the full amount of the deficiency for each year. We find petitioner's argument that his failure to make payment was sufficiently open to negate a finding of fraud to be without merit. Decision will be entered for respondent. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩1. Petitioner is liable for additions to tax in the amounts of $ 5,204 pursuant to sec. 6653(b)(1) and 50 percent of the interest due on $ 9,234 pursuant to sec. 6653(b)(2).↩2. Petitioner is liable for additions to tax in the amounts of $ 4,152 pursuant to sec. 6653(b)(1) and 50 percent of the interest due on $ 8,304 pursuant to sec. 6653(b)(2).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624074/	SOL M. STOCK, PETITIONER, v.. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Stock v. CommissionerDocket No. 11409.United States Board of Tax Appeals10 B.T.A. 1169; 1928 BTA LEXIS 3948; March 5, 1928, Promulgated 3948 Upon withdrawal of petitioner from the copartnership of which he was a member he received, in addition to a return of his capital investment, a sum equal to 2 per cent of gross sales from the date of the last regular inventory to the date of retirement, which latter figure petitioner claims was paid to him for his interest in good will of the business. Held, that the amount represents a payment in lieu of actual profits of the firm and is taxable as income derived from partnership profits. W. W. Spaulding, Esq., for the petitioner. J. L. Deveney, Esq., for the respondent. ARUNDELL1169 By this proceeding the petitioner seeks a redetermination of his income tax for the year 1921 for which the respondent has declared a deficiency of $482.03. The only question before us is whether the sum of $4,246.10 received by the petitioner in 1921 upon his retirement from the copartnership of which he was a member should be treated as income for that year. The other issue raised by the pleadings was abandoned by the petitioner at the hearing in view of the decision in the case of 3949 . The facts were stipulated. FINDINGS OF FACT. The petitioner is an individual residing in San Francisco, Calif.Some time prior to the year 1910 the petitioner, together with Andrew A. Jacob and Henry R. Jacob, formed a copartnership under the firm name of Andrew A. Jacob & Co., to engage in the wholesale millinery business at San Francisco. The capital invested and net income of the firm for the years 1910, 1911 and 1912 were as follows: YearPartnership invested capitalPartnership net income1910$144,414.90$21,457.761911135,872.6719,975.521912128,848.1917,628.46Total409,135.7659,061.74Average per year136,378.5819,687.24By the terms of a written agreement entered into some time in the year 1919 among the members of the firm, the copartnership was continued for six years commencing July 1, 1919. The pertinent clauses of the contract read as follows: Said parties heretofore joined and have joined, and by these presents do again join themselves to be copartners together in the business of wholeasale 1170 millinery, and all things thereunto belonging; 3950 and also buying and selling all sorts of goods, wares and merchandise and commodities usually kept and sold in the wholesale millinery store and in such commission business as may be appurtenant to the same. The said copartnership is to be conducted at 753 Market Street, City and County of San Francisco, State of California, and elsewhere, as may be hereafter determined upon under the firm name and style of ANDREW A. JACOB & CO., and shall continue from the first day of July 1919 up to and during and until the 1st day of July 1925, thence fully to be completed and ended, unless otherwise determined upon. And to that end and purpose, the said parties to these presents have the day and date hereof delivered in as capital, the stock of goods, wares and merchandise book accounts, bills receivable, and all assets of the business, at the date hereof conducted between the parties hereto, at the City and County of San Francisco, State of California, as aforesaid, under the name and style of Andrew A. Jacob & Co., share and share alike, to be used, laid out and employed in common between them, for the management of the said business, as aforesaid, to their mutual benefit and advantage. 3951 It is agreed between the parties, that the said capital stock, together with all goods, ware or commodities bought or obtained by the said firm by barter, or otherwise, shall be kept, used and employed in and about the business aforesaid. That should either of the partners wish to dissolve the said partnership, he shall offer to the remaining partners, the privilege of buying his interest, or selling to him their interest in the business on the basis of the amount of their capital, and accumulated profits, to his or their credit, as the case may be, remaining in the business as shown by the books of account, plus 2% of the gross sales from the date of the last regular inventory to the date of the acceptance of the offer, after deduction of any amounts due to the partnership by the retiring partner or partners. In the event of the death of any of the parties hereto during the partnership, it is agreed that the surviving partners shall have the privilege of buying the interest of the deceased partner on the following basis: - There shall be paid to the heirs, executors, administractors or assigns of said deceased partner, the amount of his capital in said business, plus accumulated3952 profits, if any thereon to his credit remaining in the business, as shown by the books of account, plus 2% of the gross sales from the date of the last regular inventory to the date of the payment of the amount, after deduction of any amounts due to the partnership from said deceased partner. That all gains, profits and increase, that shall come, grow or arise from or by means of the said business, shall be divided between them, share and share alike; and all loss that shall happen to their said joint business, by ill commodities, bad debts, or otherwise, shall be borne and paid equally between them. The copartnership operated under the aforementioned agreement until May 31, 1921, when the petitioner retired from the firm and there was paid to him for his interest therein, pursuant to the provisions of the articles of copartnership above quoted, an amount equal to his capital investment, plus the sum of $4,246.10, representing 2 per cent of the gross sales of the firm from November 30, 1920, the date of the last regular inventory, to May 31, 1921, the date of petitioner's retirement. The copartnership did not take an inventory at May 31, 1921, or at any time between December 1, 1920, and3953 November 30, 1921. 1171 Neither the partnership assets nor the accounts of the partners on the firm's books contained any item of good will. In his return for the year 1921 petitioner claimed that his one-third interest in the good will of the partnership at March 1, 1913, was of a value of $13,443. This value was arrived at by first deducting from the average earnings of the partnership for the years 1910, 1911 and 1912, an amount equal to 10 per cent of the average capital invested during those years and then capitalizing the remainder at 15 per cent. From the sum of $13,443, as determined by him, he deducted $4,246.10, leaving under his calculation a loss of $9,196.90 on the sale of his one-third interest in the partnership. On an audit of the petitioner's return for 1921 respondent treated the amount of $4,246.10 as income derived from partnership profits. OPINION. ARUNDELL: The petitioner argues that the sum of $4,246.10 does not represent his share of the profits of the partnership from December 1, 1920, to May 31, 1921, the date of his retirement from the firm, as contended by the respondent, but that the amount was paid him by the remaining members of3954 the partnership as part of the purchase price of his individual interest, including alleged good will. If this be true and the good will be valued at the amount claimed, then there would be no income from this transaction, as the March 1, 1913, value of the petitioner's interest in the partnership would be greater than the sales price. In support of his position petitioner calls attention to the following clause of the articles of copartnership, pursuant to the terms of which the petitioner's interest in the concern was sold and the money was paid: That should either of the partners wish to dissolve the said partnership, he shall offer to the remaining partners, the privilege of buying his interest, or selling to him their interest in the business on the basis of the amount of their capital, and accumulated profits, to his or their credit, as he case may be, remaining in the business as shown by the books of account, plus 2% of the gross sales from the date of the last regular inventory to the date of the acceptance of the offer, after deductions of any amounts due to the partnership by the retiring partner or partners. The copartnership kept its books and filed its return for3955 1921 on the basis of the fiscal year ended November 30. It did not take an inventory at May 31, 1921, the date of petitioner's withdrawal from the business, or at any time between December 1, 1920, and November 30, 1921. It is quite evident, therefore, that the profits of the firm had not been determined at May 31, 1921, and were not computed, if at all, until the end of the fiscal year. Having withdrawn from the business on a date falling within the fiscal year, according to the terms of the clause of the articles of copartnership above quoted, under which settlement was to be made in 1172 such a case, the petitioner became entitled to a return of his capital investment, profits credited to his account, and, in addition thereto, a sum equal to 2 per cent of gross sales from the date of the last regular inventory. He was paid for his capital investment and in addition thereto a sum of $4,246.10, equivalent to 2 per cent of gross sales from December 1920, to and including May 31, 1921. We are concerned only with the latter amount. The petitioner, in contending that the sum does not represent profits of the copartnership or a payment in lieu thereof, says that the figure3956 was paid to him by the remaining partners for his one-third interest of the good will of the business. It is entirely probable that the firm may have possessed good will, although the item was not reflected in its books of account and there is no evidence in the record to indicate that the remaining members of the copartnership recognized its existence, or that they paid their money for such an asset. The provisions of the agreement under the terms of which the money in question was paid is limited in its operation to retirements on a date other than a regular inventory period. What was its purpose? If it were inserted as a measure of the value of each partner's interest in the good will, the value thereof would depend upon when a partner withdrew. It he withdrew on a regular inventory date, the good will would have no value, or at least the retiring partner would receive nothing for his interest therein. However, if the retirement took place between the dates the inventory was taken, then, to the extent of the gross sales between those dates, the good will would be of value. The argument proves too much. We think the provisions of the agreement under which the payment was3957 made was a method adopted by the copartnership to settle with a retiring member without closing its books. Petitioner's interest in the copartnership appears to have been confined to his capital investment and right to a pro rata share of the profits. We are of the opinion that the sum represents a payment in lieu of actual profits and that the respondent did not err in treating the figures as income of the petitioner for the year 1921. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624075/	Euleon Jock Gracey, Petitioner, v. Commissioner of Internal Revenue, Respondent. Dorothy Mahn (Formerly Mrs. E. J. Gracey), Petitioner, v. Commissioner of Internal Revenue, RespondentGracey v. CommissionerDocket Nos. 3394, 3395United States Tax Court5 T.C. 296; 1945 U.S. Tax Ct. LEXIS 138; June 21, 1945, Promulgated 138 Decision will be entered under Rule 50. 1. Petitioner sold stock, a capital asset, in the taxable year, after holding it one month. He received the stock in an exchange for which no gain or loss was recognized. The property given in the exchange was not a capital asset within section 117 (a) (1) of the Internal Revenue Code. Held, that the determination of the period for which the stock was held is controlled by subsection (h) (1) of section 117, and, consequently, the period for which the stock was held includes the period for which the taxpayer held the property given in the exchange.2. Under the facts presented, held, that the sum of $ 3,867.86 is a capital expenditure and not a legal deduction from gross income. Quintana Petroleum Co., 44 B. T. A. 624; affd., 143 Fed. (2d) 588, followed. James H. Yeatman, Esq., and Felix T. Terry, C. P. A., for the petitioners.Stanley B. Anderson, Esq., for the respondent. Harron, Judge. Mellott, J., dissents on the first issue. HARRON 296 The respondent has determined deficiencies in income tax for the year 1940 in the amount of $ 2,730.13 for each petitioner. Not all of the adjustments are in dispute. The issues are (1) whether the petitioners are entitled to deduct, in computing their community net 297 income, the sum of $ 1,933.93 representing one-fourth of the net profits from the operation of an oil and gas lease which they paid to the assignor of the lease during the taxable year, or, alternatively, whether they are entitled to exclude that amount from their gross income, and (2) whether petitioners are entitled to report as a long term capital gain the gain realized by them from the sale of stock of C. I. Drilling Co. during the taxable year. The proceedings were consolidated140 for hearing.The petitioners filed their returns for the taxable year with the collector for the first district of Texas.FINDINGS OF FACT.The facts have been stipulated and we adopt the stipulation of facts as our findings of fact. Only those stipulated facts which are essential to the determination of the issues are set forth herein.Petitioner Dorothy Mahn was formerly the wife of petitioner Euleon Jock Gracey. Throughout the taxable year they resided together as man and wife in Houston, Texas. Their income tax returns for the taxable year were filed on a community basis, and all of their income and deductions in that year represented community income and community deductions. Hereinafter, Euleon Jock Gracey will be referred to as the petitioner.Issue 1. -- Prior to October 31, 1939, petitioner was a member of a partnership, Cron and Gracey, which concern engaged in the business of drilling oil wells and producing and selling oil and gas. On October 31, 1939, the partnership was dissolved.When the partnership of Cron and Gracey was dissolved on October 31, 1939, its assets were distributed in kind to the partners. Among the assets distributed to petitioner upon the141 dissolution was an oil well drilling rig which was acquired by the partnership in 1935. The drilling rig had been used by the partnership in its business and had been subject to a depreciation allowance.On or about February 10, 1940, petitioner and a man named DeArmand, who also owned a drilling rig, formed a corporation known as the "C. I. Drilling Co., Inc.," for the purpose of conducting a drilling business in Louisiana. On February 10, 1940, petitioner and DeArmand exchanged their drilling rigs for stock of the C. I. Drilling Co., petitioner receiving 500 shares and DeArmand receiving 250 shares. The stock of the C. I. Drilling Co. received by petitioner and DeArmand was substantially in proportion to their respective interests in the assets exchanged for the stock. The drilling rig which petitioner transferred to the C. I. Drilling Co. had an undepreciated cost or basis to petitioner of $ 29,658.18 at the time he transferred it to the drilling company. The parties have stipulated that 298 the exchange of the drilling rigs for the stock of the C. I. Drilling Co. was a tax-free exchange under the provisions of section 112 (b) (3) of the Internal Revenue Code, in connection142 with which no gain or loss is recognizable, and that the basis for gain or loss to petitioner of the 500 shares of stock of C. I. Drilling Co. which he received in exchange for the drilling rig is $ 29,658.18, the undepreciated cost of the rig.On March 6, 1940, petitioner sold 250 of the 500 shares of C. I. Drilling Co. stock received by him in exchange for the rig for $ 25,000. The gain realized on such sale was $ 10,170.91, since the stock had a substituted basis of $ 14,829.09. In filing their community returns for the year 1940 petitioners included $ 5,085.46, or 50 percent of the gain of $ 10,170.91, on the theory that the gain was realized from the sale of a capital asset which had been held for more than 24 months. The respondent held that the sale of the stock was a sale of assets held for not more than 18 months, and that, therefore, the entire profit of $ 10,170.91 is includible in the net taxable community income of the petitioners.Issue 2. -- After the partnership of Cron and Gracey was dissolved on October 31, 1939, petitioner and Cron continued to own jointly and operate certain oil properties, including an oil and gas lease known as the Jarvis lease.This 143 lease was originally executed by the lessor, Jarvis, on March 4, 1931. On September 10, 1931, the lessee, Gulf Production Co., hereinafter referred to as Gulf, did "grant, bargain, sell and convey" the lease to C. B. Bunte, Inc., hereinafter referred to as Bunte, and on the same date Gulf entered into a contract with Bunte, under the terms of which Bunte agreed to account to Gulf for one-fourth of the net profits arising from operations on the leased property.On November 20, 1931, Bunte and J. S. Wheless, Jr., who owned an interest in the Jarvis lease, agreed to assign a one-half undivided interest in the lease to Cron and Gracey in consideration of Cron and Gracey drilling two wells on the leased property at their own expense. On April 30, 1932, Bunte and Wheless, pursuant to the agreement of November 20, 1931, assigned an undivided one-half interest in the lease to Cron and Gracey, it being stated in the assignment that Cron and Gracey had drilled and completed the two wells in accordance with the terms of the agreement. Neither in the contract of November 20, 1931, nor in the assignment of April 30, 1932, did Cron and Gracey expressly assume the obligation to account to Gulf144 for one-fourth of the net profits to be derived from the operation of the Jarvis lease as provided in the contract of September 10, 1931, between Gulf and Bunte.The remaining one-half interest in the Jarvis lease was acquired by Cron and Gracey from J. S. Wheless, Jr., and R. G. Rapp under 299 dates of July 22, 1932, and December 10, 1937. By the terms of the assignment from Wheless to Cron and Gracey, the latter did not expressly assume the obligation to account to Gulf for one-fourth of the net profits to be derived from the operation of the Jarvis lease, as provided in the contract of September 10, 1931, between Gulf and Bunte. In the assignment from Rapp it was provided that the interest in the lease which he was assigning was subject to all existing oil payments and indebtedness against said interest and the assignee agreed to relieve Rapp from all liabilities by reason of said indebtedness.On December 17, 1937, Cron and Gracey entered into an agreement with Gulf Oil Corporation, which was the successor to the Gulf Production Co., the provisions of which are as follows:* * * Whereas, by mesne assignments and conveyances, E. J. Gracey and L. H. Cron became, and are145 now, the owners of said lease in so far as said lease covers the above described 41.11 acres of land, subject to the terms of the assignments and conveyances under which they claim title to the leasehold estate created by the aforesaid oil, gas, and mineral lease, all of which assignments and conveyances, and their respective records in the Deed Records of Smith County, Texas, are made parts hereof by reference; and,Whereas, by instrument dated September 10, 1931, Gulf Production Company assigned and conveyed to C. B. Bunte, Inc., the leasehold estate upon, among other lands, the 41.11 acres above described, and, contemporaneously with the execution and delivery of said assignment to said C. B. Bunte, Inc., Gulf Production Company entered into a concurrent agreement with the said C. B. Bunte, Inc., with reference to the leasehold estate so assigned by Gulf Production Company to C. B. Bunte, Inc., which assignment and its record and the concurrent agreement made in connection therewith are made parts hereof by reference; and,Whereas, under the terms of the third paragraph of said concurrent agreement, it was therein provided that, after complying with certain other provisions contained146 in said agreement, the said C. B. Bunte, Inc., its successors and assigns, should account to Gulf Production Company for one-fourth (1/4) of the net profits arising from operations conducted on said lease; and,Whereas, E. J. Gracey and L. H. Cron have complied with the provisions of the said assignment and the concurrent agreement referred to and have paid all sums therein provided, with the exception of accounting to Gulf Production Company for the one-fourth (1/4) of the net profits as therein provided; andWhereas, E. J. Gracey and L. H. Cron have heretofore operated said lease on the premises above described, and, as a result of such operations, there have accrued net profits out of which they have not paid to Gulf Production Company its one-fourth (1/4) interest therein as in said agreement provided, said net profits now being due under the terms of the assignments and concurrent agreement above referred to; and,Whereas, it is the desire of E. J. Gracey and L. H. Cron to account to Gulf Oil Corporation (successor in interest to Gulf Production Company) for its pro rata part of the net profits which have heretofore accrued up to the date hereof, and the desire at the same time147 to establish for the convenience of all parties hereto a system of accounting and a basis of charges to be made for the cost 300 of operations hereafter to be conducted upon the premises affected hereby; and,Whereas, E. J. Gracey and L. H. Cron and Gulf Oil Corporation (as the successor in interest of Gulf Production Company) have reached an agreement as to the correct system of accounting and basis of charges to be made for the cost of operations hereafter to be conducted by E. J. Gracey and L. H. Cron upon the premises affected hereby:Now, Therefore, it is agreed by and between E. J. Gracey and L. H. Cron, on the one hand, and Gulf Oil Corporation, on the other hand, as follows:I.The said E. J. Gracey and L. H. Cron shall continue to operate under the terms of the aforesaid lease at the cost and expense of E. J. Gracey and L. H. Cron, and shall hereafter account monthly to Gulf Oil Corporation for one fourth (1/4) of the net profits accruing as a result of the said operations. * * Thereafter the agreement set forth a lengthy accounting procedure to be followed in determining the amount of profits derived from the operation of the lease. It was also provided in the148 agreement that all the terms and conditions contained therein should run with the leasehold estate as covenants.During the taxable year Cron and Gracey operated the Jarvis lease and produced and sold oil therefrom. They kept separate accounts and records of the proceeds derived from the sale of oil produced from the leased property and the expenses incurred in the operation of the property. During the taxable year one-fourth of the net revenue derived by Cron and Gracey from the operations of the Jarvis lease amounted to $ 3,867.86, and Cron and Gracey paid this amount to the Gulf Oil Corporation. Petitioner owned a one-half interest in the Jarvis lease, and one-half of the gross proceeds from the sale of oil from the Jarvis lease for the year 1940 was included in the community income of petitioners for that year and percentage depletion was claimed and allowed thereon. One-half of the sum of $ 3,867.86 paid by Cron and Gracey to Gulf Oil Corporation during the taxable year, or $ 1,933.93, was taken as an expense deduction in the community returns of petitioners for the year 1940. The respondent disallowed the deduction on the ground that the amount of $ 1,933.93 represented149 a part of the cost of the Jarvis leasehold estate and is recoverable through depletion rather than as an expense deductible from gross income.OPINION.Issue 1. -- In 1940 petitioner sold some of the stock of the C. I. Drilling Co. The stock was a capital asset. The question to be determined is what percentage of the capital gain is to be taken into account in computing net income under section 117 (b) of the Internal Revenue Code. The stock was acquired in February 1940 and was sold in March 1940. Respondent determined that 100 per centum of the gain should be taken into account because the stock, a capital 301 asset, was held for less than 18 months. He denied petitioner's claim that the holding period of the stock was 24 months, or more, which was founded upon adding the holding period for the rig to the holding period for the stock.Respondent's view is that the capital asset which was sold, the stock, was not held longer than the actual period of one month, because the property given in exchange for the stock was not a capital asset. It, the rig, was property which had been used in a business and was subject to the allowance for depreciation. Consequently it150 was not a capital asset within the definition of section 117 (a) (1). Respondent contends that petitioner can not avail himself of the period for which he held the rig, as a member of the partnership of Cron and Gracey ( City Bank Farmer's Trust Co. v. United States, 48 Fed. Supp. 98), before the exchange of the rig for stock in the corporation, since during that period he did not hold a capital asset as defined in the statute.Respondent's contention seems logical, but it is in conflict with subsection (h) (1) of section 117 of the Internal Revenue Code, 1 upon the terms of which petitioner relies. The stock in question was "property received on an exchange." The exchange was one in which no gain or loss was recognized, and, therefore, the basis of the stock was the same as the basis of the rig, the property given in the exchange. Under these facts, to which the parties agree, the determination of the period for which the stock was held is prescribed by subsection (h) (1). The holding period for the stock shall include the holding period for the rig, under that section. The matter is controlled by the statutory provision. It is not stated151 in that provision that its application is limited to instances where the property given in an exchange is a capital asset. The provision applies where the property received in an exchange is a capital asset. The terms of subsection (h) (1) are clear.The precise question presented has not been brought to issue before any court, as far as can be ascertained. The Commissioner has not incorporated into his regulations, at any time, the interpretation of subsection (h) (1) which is advanced here. Respondent cites two rulings where he has taken the 152 position which he took here, G. C. M. 621 (1926), C. B. V-2, p. 5 (at p. 7); and G. C. M. 11557 (1933), C. B. XII-1, p. 128. Consideration has been given to those rulings, but, under the facts of this proceeding, we must reach the conclusion stated above.Under this issue, respondent's determination is reversed.Issue 2. -- The principle is now well established that the income derived from the production of oil and gas is taxable to the owner of 302 the capital investment in the oil and gas in place. The same principle determines to whom a deduction for depletion is allowable. Anderson v. Helvering, 310 U.S. 404">310 U.S. 404; Helvering v. Bankline Oil Co., 303 U.S. 362">303 U.S. 362; Helvering v. O'Donnell, 303 U.S. 370">303 U.S. 370; Helvering v. Elbe Oil Land Development Co., 303 U.S. 372">303 U.S. 372. In order for petitioner to be sustained in his contentions, the Gulf Oil Corporation, after its assignment, must be considered as having retained an economic interest or a capital investment in the oil and gas in place. Petitioner153 apparently makes this contention, relying upon a twofold argument. He attaches some importance to the fact that three of the assignments to Cron and Gracey of interests in the Jarvis lease contained no express assumption on the part of the partnership to account to Gulf Oil Corporation for one-fourth of the net profits to be derived from the operation of the lease. From this he argues that the amounts paid to Gulf in the taxable year can not be considered as additional leasehold cost. He then contends that, since the agreement of December 17, 1937, between the partnership and Gulf contained a provision that the covenants therein should run with the leasehold estate, Gulf received an economic interest in the gas and oil in place.Substantially the same issue presented here, on very similar facts, was decided by us in Quintana Petroleum Co., 44 B. T. A. 624. In that case we held that the taxpayer was not entitled to deduct as a business expense a payment to Gulf which represented one-fourth of the net proceeds derived from the operation of leased properties. It was held that the payment constituted a capital expenditure. In affirming our decision, 154 143 Fed. (2d) 588, the Circuit Court of Appeals for the Fifth Circuit said:The obligation of the taxpayer to pay one-fourth of the net proceeds arising from its operation of the lease arose out of a personal covenant. Such obligation vested no interest in the payee in the oil and gas in place, and entitled the payee to no percentage depletion on the amount received. The taxpayer's title to the oil and gas in place was unaffected thereby. This it recognized, for it claimed (and was allowed) percentage depletion on the gross income from production without deduction for net-profit payments. An outright assignment is a sale, not a sublease. Net-profit payments are payments on the purchase price. As capital investments they may not be treated as business expenses or as rentals or as royalties. Cf. Commissioner v. Rowan Drilling Co., 130 F. (2d) 62.It seems clear that the obligation of the partnership to account to Gulf for one-fourth of the profits derived from its operation of the leased property was a personal covenant. After the assignment of the lease by Gulf to Bunte, Gulf no longer retained any interest or capital155 investment in the oil and gas in place. The assignment of the lease was a sale of all of Gulf's interest in the property, and the reservation of the right to receive one-fourth of the net profits was merely part of the purchase price on such sale. From the record, it appears that petitioner claimed and was allowed percentage depletion on the gross 303 income from production without deduction for net profit payments. At the time the return was filed, petitioner apparently believed that the partnership owned the full economic interest in the gas and oil in place.The fact that some of the assignments to the partnership did not contain an express agreement on its part to account to Gulf for one-fourth of the net profits is immaterial. The law implies a legal obligation on the part of the assignee to assume the burdens imposed by the original contract where it accepts the benefits and advantages of that contract. Kirby Lumber Co. v. R. L. Lumber Co. (Tex. Civ. App.), 279 S.W. 546">279 S. W. 546; Marathon Oil Co. v. Rowe (Tex. Civ. App.), 83 S. W. (2d) 1028; Jackson v. Knight (Tex. Civ. App.), 194 S. W. 844.156 Nor do we think that the subsequent agreement of December 17, 1937, between the partnership and Gulf gave Gulf an economic interest in the oil and gas in place merely because of the provision that the covenants were to run with the leasehold estate. An analysis of that agreement is convincing that its real purpose was to set forth the proper accounting procedure to be used by the operators of the leased property in ascertaining the amount of net profits derived from the operations. It is in this light that the covenants are to be considered as running with the leasehold estate. In so far as the obligation of the partnership to account to Gulf for one-fourth of the net profits is concerned, Gulf had nothing after the agreement that it did not have before.Petitioner's alternative contention that the payment made to Gulf in the taxable year should be excluded from gross income is also untenable. A similar contention was made and rejected in Burton-Sutton Oil Co., 3 T.C. 1187">3 T. C. 1187. See also Schermerhorn Oil Corporation, 46 B. T. A. 151. Accordingly, respondent's determination on this issue is sustained.Decision will be 157 entered under Rule 50. Footnotes1. (h) Determination of Period for Which Held. -- For the purpose of this section --(1) In determining the period for which the taxpayer has held property received on an exchange there shall be included the period for which he held the property exchanged, if under the provisions of section 113, the property received has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as the property exchanged.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624076/	J. HOWLAND AUCHINCLOSS, EXECUTOR, ESTATE OF CHARLES H. RUSSELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Auchincloss v. CommissionerDocket No. 24312.United States Board of Tax Appeals11 B.T.A. 947; 1928 BTA LEXIS 3679; May 2, 1928, Promulgated 3679 Claims for compensation for services rendered by decedent prior to his death are not taxable income when collected by his estate. Blount Ralls, Esq., for the petitioner. M. N. Fisher, Esq., for the respondent. LITTLETON947 The Commissioner determined a deficiency in income tax of $3,145.34 for 1922. The question is whether an amount collected by 948 the petitioner as executor during 1922 on claims of the decedent arising prior to his death represents taxable income to the estate for 1922. The facts are not in dispute, either being admitted in the answer of the respondent or covered by stipulation. FINDINGS OF FACT. Petitioner is the executor of the estate of Charles Howland Russell, who died on February 19, 1921. For many years prior to his death Russell was a partner in the law firm of Stetson, Jennings & Russell, at New York City. This partnership at all times kept its accounts and rendered its income-tax returns on the cash receipts and disbursements basis. The same method of accounting was always employed by the decedent and by the executor of his estate. At the date of his death Russell had rendered various legal3680 services as a partner in the firm, but his fees therefor had not been collected at the time of his death. Upon his death a valuation was placed on the legal claims due the decedent for such fees. This valuation was shown in the estate-tax return as $65,048.70. The Commissioner increased this valuation to $116,453.53, resulting in an increased estate tax liability of $17,235.19. The increased market value of these claims by the Commissioner was concurred in by the estate and on October 26, 1923, the estate paid an additional estate tax of $9,803.13. The remainder of the additional estate tax is accounted for by the fact that a claim for the abatement of $7,432.06 thereof was allowed by the Commissioner on other grounds. The fair market value at the time of the decedent's death of the said claims was $116,453.53, as determined by the Commissioner. February 19 to December 31, 1921, the estate collected $71,688.98 on account of the aforementioned claims. The total of all amounts collected during the years 1921 and 1922 on account of the claims was less than the fair market value of such claims at the time of decedent's death. In 1922 the estate collected on account of3681 these claims $11,364.03, which amount was added by the Commissioner to the gross income shown on the income-tax return of the estate for 1922, resulting in a deficiency of $3,145.34, the amount here in controversy. The parties have stipulated that if the Board finds that $11,364.03 collected by the estate in 1922 does not represent taxable income to the estate, there will be no deficiency. OPINION. LITTLETON: It is contended by the petitioner that amounts collected by him as the executor on account of services rendered prior 949 to the decedent's death, represented capital in the hands of the estate at decedent's death, and, therefore, were not taxable income when received by the estate. On the other hand, Commissioner contends that amounts collected constituted taxable income when received by the estate. The claim of the executor is correct. Nichols v.United States, (Ct. Cls.), 6 Am.Fed. Tax Rep. 6592; ; . Judgment of no deficiency will be entered.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624077/	P. P. GRIFFIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Griffin v. CommissionerDocket No. 11546.United States Board of Tax Appeals7 B.T.A. 1094; 1927 BTA LEXIS 3007; August 22, 1927, Promulgated 3007 1. Loss resulting from actual and bona fide sale of stock allowed. 2. Claimed loss on sale of stock disallowed for lack of evidence. 3. Interest paid for a corporation by an individual not allowed as a deduction to the individual. George W. Zeigler, Esq., for the petitioner. W. H. Lawder, Esq., for the respondent. MILLIKEN 1094 This proceeding results from the determination by the respondent of deficiencies in income tax for the calendar years 1920 and 1921, in the amount of $7,989.10. Two errors are assigned: (1) The respondent erred in his failure to allow losses sustained in the year 1920, resulting from the sale of stock; (2) respondent erred in his failure to allow a deduction for interest paid in the year 1921. FINDINGS OF FACT. Petitioner resides at Lock Haven, Pa., where he is engaged in the lumber business. Subsequent to March 1, 1913, he acquired 610 shares of the capital stock of the Bee Tree Lumber Co., a West Virginia corporation, paying cash therefor in the amount of $61,000. Between the date of acquiring the stock and the year 1920, the Bee Tree Lumber Co. was not prosperous and became involved financially. 3008 Petitioner's attorney advised him to sell a part of his stock in the year 1920, in order that his books of account would not show as appearing thereon an asset of questionable value, and also that he might derive the benefit of the sale in being able to claim a deduction for the loss in his income-tax return for the year 1920. Petitioner sold the 610 shares of stock of the Bee Tree Lumber Co. to his brother and secretary in the month of November, 1920, for the sum of $6,100. No agreement or understanding existed between petitioner and the purchasers of the stock, concerning the repurchase of 1095 the same. Checks in payment of the stock in amounts of $6,100 were received by petitioner in the year 1920. During the year 1921 petitioner repurchased the stock. Petitioner acquired, prior to 1920, shares of stock in the Basic Refractories Co. located at Natural Bridge, N.Y. He owned, in the year 1920, between 68 and 78 shares of the par value of $100 per share, and in the year 1920 or 1921, sold the same, either to his brother or secretary, for $10 per share. During the year 1920 and 1921, the Bee Tree Lumber Co. was in need of additional funds with which to carry on3009 its business, and petitioner agreed to endorse the promissory notes of the corporation to enable it to secure the desired funds. In either the year 1920 or 1921, petitioner paid interest due on the promissory notes of the corporation, in the amount of $6,278.44. OPINION. MILLIKEN: The respondent disallowed the losses claimed to have resulted from the sale of the stock of the Bee Tree Lumber Co. and the Basic Refractories Co., for the reason that he did not consider the sales to be actual and bona fide. Petitioner testified that he made an actual sale of his shares of stock in the Bee Tree Lumber Co. to his brother and secretary, in the year 1920, that title to the stock passed to the purchasers, and payment was received from them in the year 1920 for the stock so sold. He also testified that no understanding or agreement existed between the seller and the buyer concerning the repurchase of the stock. On the evidence presented, the sale of the stock of the Bee Tree Lumber Co. was an actual and a bona fide sale, and petitioner is entitled to the loss claimed for the year 1920. We are unable, from the evidence, to determine the cost, date of sale, or amount of stock sold, relative3010 to the loss claimed to have resulted from the sale of the capital stock of the Basic Refractories Co., and accordingly, the determination of the respondent is approved. The petitioner seeks to take a deduction of the interest which he paid for the Bee Tree Lumber Co. We are unable to determine, from the evidence, the year of payment, but in any event the deduction claimed merely represents the obligation of the corporation, which petitioner paid for it and against whom he had the right to look for repayment. The respondent did not err in his failure to allow the interest deduction claimed. Judgment will be entered on 15 days' notice, under Rule 50.Considered by MARQUETTE, PHILLIPS, and VAN FOSSAN.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624078/	James Lewis Caldwell McFaddin, Petitioner, et al., 1 v. Commissioner of Internal Revenue, RespondentMcFaddin v. CommissionerDocket Nos. 107896, 108082, 108083, 108084, 109031, 109032, 109033, 109034United States Tax Court2 T.C. 395; 1943 U.S. Tax Ct. LEXIS 104; July 9, 1943, Promulgated 104 Decisions will be entered under Rule 50. 1. Under an oil and gas lease, lessees were to pay a stated sum annually, called "rental," and to retain the royalties produced and be reimbursed therefrom each year, the excess to be paid to lessor. Held, such payments were in the nature of advance royalty, and subject to depletion by lessor.2. A trust received, by way of gift, certain real estate, a portion of which it subdivided into lots for sale at the suggestion of a licensed real estate broker, who was given the exclusive agency with a stated commission on all sales. The broker assumed advertising expense and made collections to the amount of his commissions, the balance being collected by the trust. Held, the lots were held by the trust primarily for sale to customers in the ordinary course of business, and the profits therefrom are taxable as ordinary gains.3. Recoveries of bad debts claimed and allowed as deductions in a prior year, which resulted in no tax benefit in such year, held not includible in gross income in the year of recovery, under section 22(b), Revenue Acts of 1936 and 1938, as amended by section 116, Revenue Act of 1942.4. Property was conveyed105 to trustees for the uses and purposes set forth in a trust instrument of even date, subject to existing indebtedness of grantors and a sum payable to grantor's wife solely out of trust income or corpus each year during the life of the wife or existence of the trust, whichever was shortest in period of time, neither the trustees nor any beneficiary assuming personal liability therefor. Held, under the facts, and Texas law, the transfers were gifts and the beneficiaries' interests in trust corpus their separate property. Held, further, there was not such commingling of separate and community interests as to require either the original acquisition or property subsequently purchased to be treated as community property. Held, further, the beneficiaries' distributive shares of gains from the sale of portions of the corpus, including proceeds of oil royalties, are taxable as their separate income. Held, further, in the absence of evidence as to what constituted general expenses of the trust, or the amount attributable to separate income, respondent's action in not allocating any part thereof to petitioners' separate income is approved.5. Three of the petitioners paid106 attorney fees for the recovery of overpayments of income tax in a prior year and interest thereon. Held, such fees should be apportioned pro rata between amounts received as refunds of tax and amounts received as interest and deduction allowed as to portion allocable to recovery of interest only. Percy W. Phillips, Esq., for the petitioners.Stanley B. Anderson, Esq., for the respondent. Arnold, Judge. ARNOLD 396 These consolidated cases involve deficiencies in income tax asserted against the petitioners, as follows:Docket No.PetitionerYearDeficiency107896James Lewis Caldwell McFaddin1938$ 648.98109032James Lewis Caldwell McFaddin1939167.41108082W. P. H. McFaddin, Jr1938672.00109034W. P. H. McFaddin, Jr1939242.96108083Mamie McFaddin Ward1938687.15109033Mamie McFaddin Ward1939314.73108084W. V. McFaddin1938150.51109031W. V. McFaddin193957.81The petitioners are individuals, residing in Beaumont, Texas. During the years 1938 and 1939 each of the petitioners was married and living with his or her husband or wife and was a resident of Texas. Each petitioner and his or her spouse filed separate107 returns for the taxable years 1938 and 1939, on a community property basis, with the collector of internal revenue for the first district of Texas, located at Austin, Texas.Certain adjustments resulting in the deficiencies here involved are not contested. These will be taken care of under Rule 50. One allegation of error to the effect that section 820 of the Revenue Act of 1938 should have been applied apparently has been abandoned.FINDINGS OF FACT.Petitioners James Lewis Caldwell McFaddin, W. P. H. McFaddin, Jr., and Mamie McFaddin Ward are beneficiaries of a trust known as the McFaddin trust, and each is entitled to receive 21 2/3 percent of the net income thereof. W. V. McFaddin is likewise a beneficiary and is entitled to 11 2/3 percent of the net income.The trust keeps its accounts and makes its income tax returns upon the basis of a fiscal year ending February 28. The petitioners keep their accounts and make their income tax returns on a calendar year basis. With respect to petitioners' income tax liability for the calendar years 1938 and 1939, with which we are here concerned, the taxable years of the trust which are involved are its fiscal years ending February 28, 108 1938, and February 28, 1939.The trust was created by a declaration of trust executed March 1, 1927, by W. P. H. McFaddin, W. P. H. McFaddin, Jr., and J. L. C. McFaddin, as trustees. It was to continue for a period of ten years at which time it was to terminate, unless continued for an additional period of not exceeding ten years at the election of two-thirds in interest and number of the beneficiaries. The beneficiaries have elected that the trust continue.397 On the same day that the trust was created W. P. H. McFaddin, petitioners' father, and his wife, Ida Caldwell McFaddin, conveyed considerable land holdings in Jefferson, Knox, King, and Fort Bend Counties, Texas, to W. P. H. McFaddin, W. P. H. McFaddin, Jr., and J. L. C. McFaddin, as trustees of the McFaddin trust, in consideration of $ 10 and the uses, purposes, and trusts set forth in the trust instrument. These properties comprised the original corpus of the trust.The deeds and declaration of trust were submitted in evidence. We incorporate them herein by reference as part of our findings of fact. Stated briefly, the pertinent provisions of the trust instrument are as follows:In the preamble, the trust estate109 is described as all of the property then conveyed, "together with any property that may from time to time be added to or become a part of this Trust." Section 1 gives the trustees full power and authority over the trust estate, to invest and reinvest it, to conduct any business, to borrow money, to subdivide any real property constituting a part of the estate, to lease any part thereof for oil, gas, or other minerals, to appoint agents, and, generally, to deal with the estate to the same extent that an owner could. Section 4 refers to certain liens and charges to which certain portions of the trust estate are subject, a schedule of which is attached to the trust instrument, and authorizes the trustees "to renew, extend or refund said charges and liens or any portion thereof, or to pay or discharge the same or any portion thereof and to use for said purposes either the principal or income of said trust estate." Section 5 directs the trustees to pay Ida Caldwell McFaddin $ 30,000 per year out of the income of the trust estate or, if insufficient, out of corpus, such payments to continue until the termination of the trust or until her death, whichever occurred first. Section 6 authorizes110 the trustees from time to time to set apart from the trust income "such amounts as they deem necessary for the purpose of accumulating a reserve with which to discharge in whole or in part the charges or liens mentioned in section four"; and for accumulating a reserve on account of depreciation, obsolescence, and depletion in such amount "as the Trustees deem necessary to maintain and preserve the principal of the trust estate. Any funds so reserved may be invested and reinvested in like manner as other funds in the trust estate and the income arising therefrom shall be subject to all provisions of this agreement with reference to income from the trust estate. The principal of any such reserve funds may be used from time to time by the Trustees in the same manner as any other funds of said trust estate without reference to the source of such funds." Section 8 directs the trustees to distribute the net income of the trust estate periodically among the beneficiaries. 398 Net income is defined as the income derived from the trust estate after deducting therefrom all expenses of operation and maintenance, any amount set up as a reserve under section 6, the amount paid to Ida 111 Caldwell McFaddin, amounts applied to pay or discharge charges or liens mentioned in section 4, and any renewals thereof, and charitable donations. The trustees "may determine the mode in which any expenses are to be borne as between capital and income and may determine what moneys or property are to be treated as capital or income, which said determination * * shall be conclusive and binding upon all persons." Upon direction in writing of a majority in number of the beneficiaries, the trustees shall retain all or any portion of the net income and hold, invest, and reinvest it for the benefit and in the interest of the beneficiaries, with all the powers granted as to the trust estate, "provided, however, that the portion of said net income so retained shall not be intermingled with the general trust estate but shall be held separate and distinct." Section 11 provides that no assignment by any beneficiary of income or principal shall be valid, and that no part of the principal or income of the estate or the interests of the beneficiaries therein shall be subject to the payment of any debts of any beneficiary. Section 14 absolves the trustees and beneficiaries of any and all personal112 obligation or liability for obligations or debts of the trustees and provides that any person dealing with the trustees shall look solely to the trust estate.On December 1, 1933, W. P. H. McFaddin, individually, and the McFaddin trust, referred to in the lease as lessor, in consideration of $ 100 and other valuable considerations in hand paid and the royalties therein provided and the agreements to be performed by the lessee, entered into an oil, gas, and mineral lease (hereinafter referred to as the Humble lease) with Humble Oil & Refining Co. and Shell Petroleum Corporation, referred to in the lease as lessee, covering 86,905.98 acres of land, more or less, in Jefferson County, Texas, "for the purpose of investigating, exploring, prospecting, drilling and mining for and producing oil, gas and all other minerals." Royalties of one-eighth of the oil and gas produced and saved from the premises, one-tenth of minerals, other than sulphur, and $ 1 per long ton on sulphur were provided for.Other provisions of the lease material here are as follows:4. Lessee agrees on or before January 31, 1934, to pay or tender to Lessor * * the sum of Twenty-five Thousand Dollars ($ 25,000.00) (herein113 called rental). In like manner, Lessee shall pay or tender annually thereafter the sum of Twenty-five Thousand Dollars ($ 25,000.00) during the primary term; provided, however, that Lessee at Lessee's option shall have the right at the end of five years and two months from date hereof to terminate this lease by failing to pay the rental for the next ensuing year upon giving Lessor sixty (60) 399 days notice of its intention not to pay such rental. * * * Should Lessee not elect to terminate this lease at the end of five years and two months from the date hereof as above provided, then and in that event, Lessee shall maintain this lease in force and effect and make such rental payments herein provided for annually during the remainder of the ten years and two months primary term of the lease subject, however, to the further provisions thereof.It is expressly provided, however, that should Lessee during the primary term discover oil, gas or other mineral upon the leased premises, Lessee shall have the right to retain and own all of the royalties on production from said premises accruing or to accrue during each year until such royalties during such year amount in value to the114 equivalent of the rental paid hereunder for that year. * * 6. Without reference to the commencement, prosecution, or cessation at any time of drilling or other development operations and/or to the discovery, development or cessation at any time of production of oil, gas or other minerals, subject only to the obligation of reasonable development as hereinafter provided, and without further payments than the rentals and royalties over and above the equivalent of such rentals as herein provided, this lease shall be for the primary term of ten years and two months from date hereof, subject to the right of Lessee to terminate the same at the end of five years and two months from date hereof as above provided, and as long thereafter as oil, gas, sulphur or other mineral is produced from said land hereunder, or operations are conducted on the leased premises as provided below.Soon after the trust was created, a part of the property was laid out in a subdivision known as Central Gardens. An arrangement for the sale of lots in Central Gardens was made with a licensed real estate broker, A. A. Dunn, who had approached the trustees in regard to the development. Dunn had the exclusive 115 agency and he received a 25 percent commission on all sales. He assumed all of the advertising expense. The trust, in addition to furnishing the land, paid the expense of grading and paving streets, surveying, and marking off the lots. Most sales were made by Dunn. In a few cases, sales were made through the office of the trust, but Dunn received his commission on these sales as well as on those made by him. After Dunn had made collections equal to his 25 percent commission, he would turn over the contract to the office of the trust and further payments were made to that office. The development was started in 1936. Eighty-five lots were sold in 1937, the first year in which sales were made, seventy-nine in 1938, and seventy-seven in 1939. Dunn died in 1940. Seventy-eight lots were sold in 1940, fifteen in 1941, and twenty in 1942.It was stipulated at the hearing that the trust reported in its income tax returns for the fiscal years ended February 28, 1938, and February 28, 1939, the respective amounts of $ 3,333.33 and $ 716.67 representing recoveries of portions of a bad debt which had been claimed and allowed as a deduction in its return for 1933, and the trust derived 116 no tax benefit from the deduction allowed in 1933.At the time of the conveyances in trust the following indebtedness 400 of settlors was outstanding, all of which is included in the "Schedule of Liens and Charges" attached to the trust instrument:Guardian Trust Co., deed of trust on portion of lands$ 150,000.00San Jacinto Trust Co., deed of trust on portion of lands200,000.00Commerce Farm Credit Co. of Dallas, Texas, deed of trust onportion of lands78,000.00State of Texas, balance purchase price on 19,756.8 acres20,779.50New York Life Insurance Co., promissory note5,670.00Prudential Insurance Co. of America, promissory note28,499.62Great Southern Life Insurance Co., promissory note5,284.90Total488,234.02The conveyances were made to the trustees subject to the above indebtedness, but in neither the deeds of conveyance nor the trust instrument did the trust or beneficiaries expressly assume or agree to pay the same. All of the indebtedness, however, was repaid prior to the taxable years except approximately $ 16,000 to the State of Texas.The trustees borrowed money in 1930, 1931, and 1932 from various banks and from the Yount-Lee Oil117 Co. to help defray operating expenses. In the years 1932 through 1934, and possibly 1935, the trust operated at a loss.Since the inception of the trust and prior to the taxable years the trustees purchased various properties, some for cash and some partially on credit. Most of the obligations assumed on such properties were paid off. A part of the income for the taxable years was derived from these properties.Included in the property originally conveyed in trust were two cattle ranches. The Jefferson County ranch was approximately 10 miles by 25 miles in size and covered approximately 84,000 acres. The Knox County ranch covered about 16,000 acres. The normal number of cattle on these ranches combined was approximately 7,500. These ranches were operated by the trust. The larger ranch in Jefferson County was also leased for rat-trapping operations. In the trust's earlier years trapping operations were conducted by the trust itself. The Jefferson County ranch was included in the Humble lease, which interferes very slightly in the ranching and trapping operations. Some of the property conveyed to the trustees was used for farming operations. The trustees also received many118 properties which were rented. The land which was subdivided as Central Gardens was also a part of the original conveyance. There were no outstanding debts on the Central Gardens property.The trust has one principal bank account in a Beaumont, Texas, bank. At times other small bank accounts were maintained for convenience. Transfers of funds were sometimes made between bank accounts. Income from all sources was deposited in the principal account, as well as borrowed funds. All expenses and payments to 401 beneficiaries were paid out of that account. In the taxable years 1938 and 1939 the only bank account maintained by the trust was in the Beaumont bank. In those years all receipts and disbursements, for whatever purpose, went through this bank account. The trust has books of account for these years, including a ledger summarizing receipts from each source.In Docket Nos. 107896, 108082, and 108084 petitioners James Lewis Caldwell McFaddin, W. P. H. McFaddin, Jr., and W. V. McFaddin in 1938 paid attorney fees for services rendered in litigation involving claims filed by them for refunds of income taxes relative to their distributive shares of income from the trust for119 a previous year. The matter was settled in 1938 and the claimants received refunds together with interest. The details are given in the following table:PetitionerRefundInterestFee paidJames Lewis Caldwell McFaddin$ 5,691.42$ 1,567.99$ 1,031.47W. P. H. McFaddin, Jr5,692.891,569.461,023.80W. V. McFaddin2,031.38557.69365.35In its return for the fiscal year ended February 28, 1938, the trust reported bonuses and royalties and claimed deductions as follows:Oil and mineral lease bonuses:Fidelity Oil Royalty Co$ 802.20Sinclair Prairie Co205.92B. E. Quinn240.00Magnolia Petroleum Co539.00Humble Oil & Refining Co25,000.00Magnolia Land Co15.0026,802.12Oil royalties:Stanolind Oil & Gas Co$ 20,048.08Gulf Oil Corporation (Unity)2,188.74Gulf Oil Corporation (Stella)140.88Gulf Oil Corporation (Baker)216.5922,594.29Natural gas royalties56.0649,452.47Deductions:Depletion on bonuses:27 1/2% on $ 26,802.12$ 7,370.58Depletion on oil royalties:27 1/2% on $ 22,594.296,213.43Depletion on gas royalties:27 1/2% on $ 56.0615.4213,599.43Net royalties35,853.04120 402 It also reported profits on sales of assets as follows:Asset:Rice mill property ($ 47,526.20 at 30%)$ 14,257.86Oil royalty sold (1/64th royalty under 4,000 acres,$ 50,000 at 30%)15,000.00Central Gardens lots ($ 10,013.26 at 30%)3,003.98Miscellaneous acreage ($ 1,752.22 at 30%)525.67Total32,787.51The assets sold were a portion of the property conveyed to the trust on March 1, 1927.In its return for the fiscal year ended February 28, 1939, the trust reported royalties and claimed deductions as follows:Gross income:Natural gas royalties$ 24.77Lease, Fidelity Oil & Royalty Co802.20Lease, B. E. Quinn160.00Lease, Magnolia Petroleum Co539.00Lease, Shell Petroleum Co$ 25,000.00Less share to St. Germain, et al593.6124,406.39Oil royalties, Gulf Co. Unity lease2,116.38Oil royalties, Gulf Co. Stella lease118.69Oil royalties, Gulf Co. Baker lease127.79Oil royalties, Stanolind Oil & Gas Co18,809.3147,104.53Deductions:Depletion on above, 27 1/2% of $ 47,104.53 --$ 12,953.7512,953.75Net royalties34,150.78It also reported profits on sale121 of assets as follows: Central Gardens lots ($ 7,574.99 at 50%), $ 3,787.50.OPINION.Respondent determined (1) that petitioners' respective shares of the income of the trust should be increased, due to (a) his disallowance of depletion claimed on payments under the Humble lease in excess of royalties retained by the lessee, (b) his treatment of profits on the sale of Central Gardens lots as ordinary rather than as capital gain; (2) that such portions of petitioners' distributive shares of the income of the trust as were attributable to royalties and to sales of trust property were separate and not community income; and (3) that with respect to petitioners James Lewis Caldwell McFaddin, W. P. H. McFaddin, Jr., and W. V. McFaddin no deduction was allowable for attorney fees incurred in 1938 for the recovery of an overpayment of Federal income tax.403 The petitioners allege error in regard to each of these determinations. They also allege error in that the respondent failed to exclude from gross income of the trust the amounts received by it and reported in its returns for the fiscal years ended February 28, 1938, and February 28, 1939, as payments upon the indebtedness charged122 off in a previous year as a bad debt. It is also alleged that, in determining the income of the trust for its fiscal years involved, respondent erred in allocating no part of the general expense of the trust to the amounts which he had determined to be distributable as separate income.The issues to be considered first are those relating to the amount of the trust's income for the fiscal years in question. These pertain to the allowance of depletion upon payments under the Humble lease, the treatment of profits upon the sale of Central Gardens lots, and the treatment of bad debt recoveries. They will be taken up in the order listed.The respondent disallowed the depletion claimed by the trust upon the annual payments under the Humble lease to the extent that such payments exceeded royalties retained by the lessee pursuant to section 4 of the lease. The royalties so retained amounted to $ 4,301.64 in 1938 and $ 4,059.49 in 1939. Respondent contends that the portion of the annual payment in excess of the retained royalties for each year was rental on which no depletion was allowable, and cites as authority Commissioner v. Wilson (C. C. A., 5th Cir., 1935) 76 Fed. (2d) 766;123 and Continental Oil Co., 36 B. T. A. 693. He also attempts to distinguish our decision in Alice G. K. Kleberg, 43 B. T. A. 277.In the Wilson and Continental Oil Co. cases, supra, under substantially different facts, it was held that the amounts paid under oil leases for the purpose of obtaining delays in production were delay rentals and not royalties. Continental Oil Co. held that an amount which was clearly a delay rental was not subject to depletion. The Wilson case did not concern itself with depletion.In Alice G. K. Kleberg, supra, we had the question of whether an amount described in an oil lease as "rental" was to be treated as a delay rental, not subject to depletion, or as an advance royalty, upon which depletion was allowable. We there held, under facts quite similar to those here involved, that the payment, although called a "rental," was really an advance royalty and as such subject to depletion.The characteristics of delay rentals have been fully considered in previous cases and need not be repeated here. (See Houston Farms Development Co. v. United States (C. C. A., 5th Cir., 1942), 131 Fed. (2d) 577;124 Commissioner v. Wilson, supra;Alice G. K. Kleberg, supra;Continental Oil Co., supra;J. T. Sneed, Jr., 33 B. T. A. 478.)We think here as in the Kleberg case the payments in 1938 and 1939 were in the nature of advance royalties. The primary purpose of the 404 lease was the exploration and development of the premises for the production of oil and gas and other minerals therefrom, in which lessor would profit from the royalties obtained from the oil and gas produced. The payments were not for delay in development of the premises for oil, gas, and other minerals, as the lessee was bound to make them regardless of exploration and development of the premises. The lessee had "the right to retain and own all of the royalties on production from said premises accruing or to accrue during each year until such royalties during each year amount in value to the equivalent of the rental paid hereunder for that year." The royalties belonged to the lessor and instead of being paid direct they were to be withheld to reimburse lessee to the extent of the payments. The 125 payments were, therefore, in the nature of guaranteed minimum royalties and not delay rentals. If the payments had been made and accepted for delay in exploring and developing the premises, the lessee would have no right to reimbursement out of the royalties produced. The fact that the premises did not produce sufficient royalties during the years in question to completely reimburse lessee for the amounts paid, in our opinion, does not justify us in treating a portion of the moneys paid as delay rentals and a portion as royalties, as respondent contends. We think such construction would do violence to the terms of the lease and the intention of the parties in entering therein.The fact that the lease refers to the payments here in question as rentals is not controlling in determining the right to depletion thereon. Alice G. K. Kleberg, supra.Royalties and bonuses under oil, gas, and mineral leases have some resemblance to rentals. See Burnet v. Harmel, 287 U.S. 103">287 U.S. 103; Von Baumbach v. Sargent Land Co., 242 U.S. 503">242 U.S. 503; Commissioner v. Laird (C. C. A., 5th Cir., 1937), 91 Fed. (2d) 498.126 Nevertheless they are entitled to depletion deduction, Murphy Oil Co. v. Burnet, 287 U.S. 299">287 U.S. 299, and without regard to whether there was actual production during the year in which paid, Herring v. Commissioner, 293 U.S. 322">293 U.S. 322.It is our opinion that the annual payments were not delay rentals, but in the nature of advance royalties and as such subject to depletion, and we so hold.The next question, relating to the income of the trust for its fiscal years ended February 28, 1938, and February 28, 1939, is whether the profits realized upon the sale of Central Gardens lots are taxable as capital gains as contended by petitioners, or as ordinary gains as determined by respondent.Section 117 (b) of the Revenue Act of 1936 and section 117 (a) of the Revenue Act of 1938 both provide that the term "capital asset" does not include property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.405 The petitioners contend that Central Gardens was not held by the trust primarily for sale to its customers in the ordinary course of its trade or business. The proposition, 127 as stated in petitioners' reply brief, is "that the sale of real estate in lots through a broker is no more than an investment operation by the trustees, and that they did not hold the property 'primarily for sale to customers in the ordinary course of [their] trade or business'. The business was that of the brokers." Higgins v. Commissioner, 312 U.S. 212">312 U.S. 212 (1941), is cited by petitioners as having given a restricted definition of "trade or business" and they claim that under the authority of that decision and under the statute, the trust was not engaged in a trade or business in connection with the sale of Central Gardens lots.Whether or not a particular activity in which a taxpayer engages constitutes a trade or business must depend upon the facts in the case. Higgins v. Commissioner, supra. The Central Gardens development was for the purpose of profit from the sale of lots to customers. Such sales were frequent and continuous, and not isolated or casual. The sale of these lots was a trade or business. R. J. Richards, 30 B. T. A. 1131; affd. (C. C. A., 9th Cir., 1936), 81 Fed. (2d) 369;128 Willard Pope, 28 B. T. A. 1255; Ehrman v. Commissioner (C. C. A., 9th Cir., 1941), 120 Fed. (2d) 607; certiorari denied, 314 U.S. 668">314 U.S. 668.It is an elementary rule of agency that the act of an agent, within the scope of his authority, is the act of his principal. The relationship here between the trust and Dunn was no more than that of principal and agent. Dunn, a licensed real estate broker, had undertaken to sell lots in Central Gardens as agent for the trust. The trust retained title to the property and made deeds when the lots were sold. Section 1 of the trust instrument authorizes the trustees to engage in the business of subdividing real estate and to engage agents. The fact that, to a large extent, the trustees confided the management of the sales to their agent does not make the business any the less that of the trust. The business is that of the seller and not the agent. Commissioner v. Boeing (C. C. A., 9th Cir., 1939), 106 Fed. (2d) 305; certiorari denied, 308 U.S. 619">308 U.S. 619 (1939); Welch v. Solomon (C. C. A., 9th Cir., 1938), 99 Fed. (2d) 41;129 R. J. Richards, supra;Willard Pope, supra.The purchasers of the lots dealt with the trust as well as with Dunn. They were customers of the trust.On this issue we sustain respondent's determination.The final issue relating to the amount of the income of the trust for the fiscal years involved is whether certain amounts which had been charged off and taken as a bad debt deduction in a previous year, resulting in no tax benefit, are includible as taxable income in the years of recovery.406 The petitioners rely upon section 116 of the Revenue Act of 1942 and contend that the amounts referred to should be excluded from the income of the trust for the years involved.Section 116 of the Revenue Act of 1942 added to section 22 (b) of the Internal Revenue Code and to the corresponding provisions of the Revenue Act of 1938 and prior revenue acts a new subsection providing for the exclusion from gross income of certain recoveries of bad debts, prior taxes, and delinquency amounts. This new subsection was made effective retroactively under the Code with respect to taxable years beginning after December 31, 1938, and under 130 prior revenue acts as if it were a part thereof on their respective enactment dates.As amended, sections 22 (b) of the Revenue Acts of 1936 and 1938, applicable to the fiscal years of the trust here involved, exclude from gross income:(12) Recovery of bad debts, prior taxes, and delinquency amounts. -- Income attributable to the recovery during the taxable year of a bad debt, * * * to the extent of the amount of the recovery exclusion with respect to such debt * * . For the purposes of this paragraph:(A) Definition of bad debt. -- The term "bad debt" means a debt on account of worthlessness or partial worthlessness of which a deduction was allowed for a prior taxable year. * * (D) Definition of recovery exclusion. -- The term "recovery exclusion", with respect to a bad debt, * * means the amount, determined in accordance with regulations prescribed by the Commissioner with the approval of the Secretary, of the deductions or credits allowed, on account of such bad debt, * * * which did not result in a reduction of the taxpayer's tax under this chapter * * * or corresponding provisions of prior revenue laws, reduced by the amount excludible in previous taxable years with131 respect to such debt, tax, or amount under this paragraph.As the parties have stipulated that the trust derived no tax benefit from the deduction allowed in 1933, we hold that the amounts of $ 3,333.33 and $ 716.67 were erroneously included in the returns of the trust for its fiscal years ended February 28, 1938, and February 28, 1939, respectively.As to the community property issue, the petitioners contend that from the inception of the trust their respective interests in the trust estate were community property and the income therefrom was community income as to each. The basis for this contention is that, as there was an outstanding indebtedness of the settlors of approximately $ 488,000 when the trust was created and the trust instrument provided for the payment of $ 30,000 annually to Mrs. Ida Caldwell McFaddin, the trust estate was acquired not by gift but upon credit and for an onerous consideration during coverture equivalent to a purchase, which, they contend, under Texas law makes the trust estate community property of the trust beneficiaries and the income therefrom community income. The petitioners also contend that even if some, or all, 407 of the trust estate132 was separate property at the inception of the trust, there was such later commingling of separate and community property and income by the trustees that all of the original trust estate had become community property before the taxable years here involved. Property subsequently purchased by the trustees, petitioners say, was also community property because some of it was acquired upon credit and because the money paid therefor was derived from commingled separate and community funds, and if any part of the income therefrom is separate income respondent erred in not allocating a part of the general expenses of the trust to such separate income.The record discloses that petitioners were married during the taxable years, but their marital status on March 1, 1927, when the deeds were made and the trust created, is not shown, with the possible exception of Mamie McFaddin Ward, and as to her only by inference in that she was named a beneficiary under her present name.Under Texas law property, and the increase of all lands, acquired before marriage, and by gift, devise or descent after marriage, is separate property, Arts. 4613, 4614. Vernon's Annotated Revised Civil Statutes of Texas133 (1925). 2 In the absence of evidence that the property comprising the trust was acquired subsequent to the marriage of petitioners, we can not hold that their respective interests in the trust were the community and not the separate property of each of them. However, we need not base our conclusion solely on petitioners' failure to show the marital status of petitioners at the time the deeds and trust instrument were executed.The first argument is that the property comprising the trust estate is community property134 because acquired during coverture for credit and upon an onerous consideration. The onerous consideration, it is said, was the credit extended in connection with the outstanding indebtedness of the grantors when the property was conveyed, and the amount payable to Ida Caldwell McFaddin.Although property acquired by either the husband or wife during marriage, except that which is the separate property of either, shall be deemed the community property of the husband and wife, art. 4619, Vernon's Annotated Revised Civil Statutes of Texas (1925), such presumption is not alone sufficient to support the burden cast upon the petitioner to overcome the presumption of correctness of the Commissioner's determination of deficiency. W. D. Johnson, 1041">1 T. C. 1041. Also, such presumption may be rebutted by the evidence. W. W. Clyde 408 v. Dyess (C. C. A., 10th Cir., 1942), 126 Fed. (2d) 719; Stephens v. Stephens (Tex. Civ. App., 1927), 292 S.W. 290">292 S. W. 290.Under Texas law the character of property as to its separate or community status is fixed by the facts of acquisition. Woodrome v. Burton (Tex. Civ. App., 1941), 154 S. W. (2d) 665;135 Skinner v. Vaughan (Tex. Civ. App., 1941), 150 S. W. (2d) 260; MacRae v. MacRae (Tex. Civ. App., 1940), 144 S. W. (2d) 320; Myers v. Crenshaw (Tex. Civ. App., 1938), 116 S. W. (2d) 1125; Janes v. Gulf Production Co. (Tex. Civ. App., 1929), 15 S. W. (2d) 1102; McClintic v. Midland Grocery & Dry Goods Co. (Tex., 1913), 154 S.W. 1157">154 S. W. 1157.We do not think the conveyances in trust were purchases of the trust corpus on credit or upon onerous consideration. The debts of approximately $ 488,000 were debts of the grantors and it does not appear that the grantors were relieved of their obligations with respect thereto or that the trust, the trustees, or the beneficiaries, were substituted as principal obligors, or that they assumed or agreed to pay the debts. Their action with respect to these obligations was discretionary and not obligatory and confined solely to trust income or corpus. In fact, the trust agreement specifically negatives any intent to impose any obligation whatever on the beneficiaries in the nature of136 a purchase consideration.In John Hancock Mutual Life Insurance Co. v. Bennett (Tex. Com. App., 1939), 128 S. W. (2d) 791, a father conveyed property by separate deeds to each of his seven children, with a proviso in each deed for the payment to him by each grantee of $ 200 annually. It was held, in the light of the facts there present, that the conveyances constituted gifts rather than sales for an onerous consideration, as the intention of the grantor was to divide his property equitably among his children during his lifetime. The facts in the case before us are even stronger for holding that the annual payment to Ida Caldwell McFaddin was not an onerous consideration equivalent to a purchase consideration than were the facts in the John Hancock case, in that there the obligation to make the payment was personal. Here the payments were to be made only for the duration of the trust, or until her death, whichever first occurred, and only out of trust income or corpus. "Gift" and "onerous consideration" are exact antitheses. The idea of their coexistence involves a paradox. Kearse v. Kearse (Tex. Com. App., 1925), 276 S. W. 690, 693.137 The trust beneficiaries were the children of settlor W. P. H. McFaddin and the natural objects of his bounty. He was naturally interested in their welfare and transferred to the trust whatever interest grantors had therein for the children's benefit, taking care in so doing to impose no obligation on them beyond the property transferred. Under these circumstances it can not be said that the indebtedness of the settlors or the amount payable to Ida Caldwell McFaddin constituted 409 consideration for the transfers to the trust to the extent of making what would otherwise be a gift a purchase by the trust for a valuable consideration.Gifts in trust are gifts to the beneficiaries of beneficial interests in the trust corpus, the distributable income from which is taxable to the beneficiaries, Irwin v. Gavit, 268 U.S. 161">268 U.S. 161, and such interests are separate property under Texas law, Commissioner v. Wilson, supra;Commissioner v. Terry, 69 Fed (2d) 969.We do not agree that this interest, although separate originally, became community property because of the alleged commingling by the138 trustees of separate and community property and income. We are not convinced by the evidence that there was such a hopeless commingling of separate and community interests as to require that the entire interest be treated as community under Texas law, cf. W. D. Johnson, supra;John Hancock Mutual Life Insurance Co. v. Bennett (Tex. Civ. App., 1942), 159 S. W. (2d) 892; Taylor v. Suloch Oil Co. (Tex. Civ. App., 1940), 141 S. W. (2d) 657.Furthermore, in Texas separate property retains its status as such so long as it can be traced, Scofield v. Weiss (C. C. A., 5th Cir., 1942), 131 Fed. (2d) 631; W. D. Johnson, supra;Stephens v. Stephens, supra; irrespective of enhancement in value; otherwise a specific piece of property would be constantly in the process of shifting from separate to community, and its status would be in constant confusion. Cf. Scofield v. Weiss, supra;Beals v. Fontenot (C. C. A., 5th Cir., 1940), 111 Fed. (2d) 956.139 Also, we are unable to say that any of the funds utilized by the trustees to pay off indebtedness outstanding against the original trust estate, which payment, it is contended, gave rise to a commingling of separate and community funds, were to any extent community property. Under the terms of the trust instrument gross income was treated as corpus and the rights of the beneficiaries therein did not attach to gross income but only to the distributable "net income" as defined therein, which is gross income less all operating expenses and additions to the corpus. Therefore, gross income so used was not community income and petitioners' contention that community income was used to pay off trust indebtedness and to acquire additional corpus is without merit. 3140 410 The petitioners also argue that property subsequently purchased by the trustees became community property because some of it was acquired upon credit and because the money paid therefor was derived from commingled separate and community funds. The latter portion of this argument we have disposed of previously in holding that none of the funds utilized by the trustees were community property of any of the beneficiaries. The first part of the argument is invalid also, because under the Texas law if the down payment is from separate funds and the intention is clear to bind only the separate estate for future payments, the property so acquired is separate property, Welsh v. Pottorff (Tex. Civ. App., 1935), 87 S. W. (2d) 287; Baxter v. Baxter (Tex. Civ. App., 1920), 225 S. W. 204. This rule clearly applies to the situation presented here. The down payment for property subsequently acquired by the trustees upon credit was from funds which we have held to be separate property; the credit pledged was that of the trust estate, 4 in which petitioners' interests were also their separate property. The properties141 so purchased are therefore separate property.Our conclusion is that the interests of petitioners in the entire trust estate which gave rise to the income here in controversy were their separate property.The question remains whether the portions of petitioners' respective distributive shares of the "net income" of the trust which were attributable to royalties and to the sale of trust assets were properly treated by the Commissioner as separate income.It is well settled in Texas that the proceeds of the sale of separate property are separate income. Commissioner v. Skaggs (C. C. A., 5th Cir., 1941), 122 Fed. (2d) 721; certiorari denied, 315 U.S. 811">315 U.S. 811; Stephens v. Stephens, supra. In Texas oil and mineral royalties are considered to be proceeds of the sale of realty, and if derived from separate property they are separate income, Commissioner v. Wilson, supra;142 Chesson v. Commissioner (C. C. A., 5th Cir., 1932), 57 Fed. (2d) 141; W. D. Johnson, supra;Dolores Crabb, 47 B. T. A. 916; Mellie Esperson Stewart, 35 B. T. A. 406; Stephens v. Stephens, supra.No evidence was submitted by the petitioners to show what were the general expenses or what portions thereof were attributable to the production of either community income or separate income or to the production of gross income not distributable under the trust instrument. We, therefore, approve the Commissioner's determination in the community property issue involved.Petitioners in Docket Nos. 107896, 108082, and 108084 contend that the attorney fees paid for the recovery of overpayments of their income tax were ordinary and necessary business expenses, deductible under section 23 (a) (1) of the Revenue Act of 1938, or ordinary and 411 necessary expenses paid for the production or collection of income deductible under section 23 (a) (2) of the Revenue Act of 1938, as amended by section 121 of the Revenue Act of 1942. 5143 In Commissioner v. Burnett (C. C. A., 5th Cir., 1941), 118 Fed. (2d) 659, it was held that attorney fees paid by a taxpayer for services in connection with obtaining a refund of personal income taxes arising out of an adjustment of distributable income of an estate of which she was a beneficiary, and to the trustees of which she acted as consultant, were personal expenses and not deductible as ordinary and necessary business expenses. The same is true in regard to the attorney fees here involved.The overpayments were not income to petitioners when received. The fees paid for the recovery of the overpayments in tax were therefore not ordinary and necessary expenses paid or incurred during the taxable years for the production or collection of income, nor were they expenditures made by the petitioners for the management, conservation, or maintenance of property held for the production of income, as the trustees were the custodians of the property and such obligation did not rest on petitioners. The interest, however, was income to petitioners when received. To the extent therefore that these attorney fees were paid or incurred for the collection144 of the interest, they were paid or incurred for the production or collection of income and are deductible under section 23 (a) (2) as nontrade or nonbusiness expenses. Regulations 103, sec. 19.23 (a)-15, as amended. (See C. B. 1942-2, p. 96.) In our findings of fact, we have set forth the amount of refunds including interest received by each of the three petitioners involved in this issue and the amount of interest received and the fee paid by each. The attorney fees paid by each of these petitioners should be apportioned pro rata between the amount received by each as overpayments of the tax and the amounts received as interest thereon.Decisions will be entered under Rule 50. Footnotes1. Proceedings of the following petitioners are consolidated herewith: W. P. H. McFaddin, Jr.; Mamie McFaddin Ward; and W. V. McFaddin.↩2. Art. 4613. All property of the husband, both real and personal, owned or claimed by him before marriage, and that acquired afterwards by gift, devise, or descent, as also the increase of all lands thus acquired, shall be his separate property. * Art. 4614. All property of the wife, both real and personal, owned or claimed by her before marriage, and that acquired afterward by gift, devise, or descent, as also the increase of all lands thus acquired, shall be the separate property of the wife. * ↩3. Paragraph 6 of the trust instrument authorizes the trustees to set aside out of the income of the trust such amounts as they deem necessary for the purpose of accumulating reserves to pay off trust indebtedness, depreciation, obsolescence, and depletion. These funds may be used from time to time by the trustees in the same manner as any other funds of the trust estate without reference to the source of such funds. The income arising therefrom is to be treated as any other trust income. The intention is apparent from the provision that any portion of the trust income so set aside and utilized shall be considered to be part of the corpus. The corpus is effectively protected from being diluted with community income by the last part of paragraph 8 of the instrument, which, although permitting a retention by the trustees of some of the distributive net income, upon election of the beneficiaries, requires that the fund so established and the property purchased therewith be kept separate from the trust estate, and the income from such special fund distributed separately.↩4. See section 14 of the declaration of trust.↩5. As amended, section 23 (a) (2) of the Revenue Act of 1938 permits the deduction of nontrade or nonbusiness expenses, as follows:"In the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income."Treasury Decision 5196, approved December 8, 1942, C. B. 1942-2, p. 96, provides:" * * Expenditures incurred * * * for the purpose of recovering taxes (other than recoveries required to be included in income), or for the purpose of resisting a proposed additional assessment of taxes (other than taxes on property held for the production of income) are not deductible expenses under this section, except that part thereof which the taxpayer clearly shows to be properly allocable to the recovery of interest required to be included in income."↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624079/	WALT WILGER TIRE CO., INC. and J. W. BREWER TIRE CO., INC., SUCCESSOR IN INTEREST TO WALT WILGER TIRE CO., INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentWalt Wilger Tire Co. v. CommissionerDocket No. 4456-76.United States Tax CourtT.C. Memo 1979-66; 1979 Tax Ct. Memo LEXIS 457; 38 T.C.M. (CCH) 287; T.C.M. (RIA) 79066; February 28, 1979, Filed John P. Dwyer, for the petitioner. Thomas M. Ingoldsby, for the respondent. FAYMEMORANDUM FINDINGS OF FACT AND OPINION FAY, Judge: Respondent determined deficiencies in petitioner's income taxes for the years 1972 and 1973 in the amounts of $ 13,988.12 and $ 4,888.28, respectively. The sole issue for decision is whether petitioner's contributions to its profit-sharing plan were timely made under section 404(a)(6) 1 and, therefore, deductible during the years in issue. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. At the time of filing its petition herein, petitioner, Walt Wilger Tire Company, maintained its principal office in Albuquerque, New Mex. 2 Walt Wilger Tire Company was a New Mexico corporation engaged in selling, distributing, retreading and servicing tires. The corporation filed its income tax returns on a calendar year basis using the accrual method of accounting. Its return for 1972 was filed on or before March 15, 1973, and459 its return for 1973 was filed on or before March 15, 1974. Effective January 1, 1970, the petitioner established a profit-sharing plan for its employees known as the "Walt Wilger Tire Company Employees Profit Sharing Trust" (hereinafter the plan). A request for a determination as to whether this plan qualified under section 401 was not made by petitioner until after the years in issue. However, for purposes of this case, the parties agree that the plan was qualified under section 401 during 1972 and 1973. On March 14, 1973, one of petitioner's clerical employees prepared a check in the amount of $ 29,141.90 payable to the plan. The following year on March 15, 1974, a check in the amount of $ 39,325.83 payable to the plan was also prepared by one of petitioner's clerical employees. Both checks were drawn on the petitioner's checking account at the Albuquerque National Bank and signed by Jack P. Wilger (Wilger). Wilger was the petitioner's vice president and general manager. In connection with his460 duties as vice president and general manager, Wilger kept himself informed as to the financial status of the company. In addition, Wilger was a trustee of the petitioner's profit-sharing plan. After these checks were prepared, Wilger kept them in his possession by placing them in a drawer of the credenza in his office. The check dated March 14, 1973, was subsequently deposited in the plan's checking account on May 16, 1973, and paid by petitioner's bank on the same day. The check dated March 15, 1974, was deposited in the plan's account and paid by petitioner's bank on March 29, 1974. During the years in issue, the petitioner had a line of credit at the Albuquerque National Bank. One of the benefits of this line of credit was overdraft protection. If petitioner issued a check that created an overdraft, the bank would credit the petitioner's account for the amount of the overdraft, thus, permitting the check to be paid. A promissory note which petitioner had been required to sign was then debited in the same amount. In addition, petitioner was required to pay interest on any amounts advanced against its line of credit. From January 1973 to May 1973, the petitioner's line461 of credit was $ 100,000. From May 1973 through March 1975, the petitioner's line of credit was $ 250,000. During both March 1973 and March 1974, petitioner found it necessary to use its line of credit to pay its outstanding checks. In March of 1973 petitioner received a $ 40,000 advance against its line of credit and in March of 1974 petitioner received a $ 50,000 advance against its line of credit. Petitioner made no repayment of any portion of these advances during the months they were made. On its 1972 Federal income tax return, the petitioner claimed a deduction of $ 29,141.40 for the contribution made to its profit-sharing plan in 1973. On its 1973 Federal income tax return, petitioner claimed a deduction of $ 39,325.83 for the contribution made to its profit-sharing plan in 1974. The respondent, in his statutory notice, disallowed both deductions for the years claimed on the ground that the contributions were not timely made. OPINION The only issue for decision is whether petitioner's contributions to its profit-sharing plan were timely made under section 404(a)(6) and, therefore, deductible during the years in issue. Under section 404(a) employers are permitted462 to take a deduction for amounts contributed to a pension or profit-sharing plan for the benefit of their employees subject to certain restrictions. Section 404(a)(1) and (3). Generally the deductions are allowable only for the year in which the contributions are actually paid regardless of the taxpayer's method of accounting. Section 1.404(a)-1(c), Income Tax Regs. However, for taxpayers on the accrual basis, section 404(a)(6) modifies this rule to some extent.It provides that a taxpayer on the accrual basis shall be deemed to have made a payment on the last day of the year of accrual if the payment is on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof). 3 Thus, an accrual basis taxpayer must actually pay out cash or its equivalent by the end of the grace period in order to qualify for the section 404(a) deduction. Don E. Williams Co. v. Commissioner, 429 U.S. 569">429 U.S. 569, 579 (1977).463 In light of these requirements, the pivotal question in this case is whether the petitioner actually paid the contributions for 1972 and 1973 before March 15, 1973, and March 15, 1974, respectively. Petitioner's contribution for 1972 was made by check dated March 14, 1973. After the check was prepared Wilger placed it in a drawer of his credenza. This check was subsequently deposited in the plan's checking account and paid by petitioner's bank on May 16, 1973. Similarly, petitioner's contribution for 1973 was made by check dated March 15, 1974. Wilger also placed this check in a drawer of his credenza once it had been prepared.Thereafter, on March 29, 1974, this check was deposited in the plan's account and paid by petitioner's bank on this same day. As a general rule a check constitutes payment when it is delivered to the payee. Estate of Spiegel v. Commissioner, 12 T.C. 524">12 T.C. 524, 529 (1949). If, however, the check is not paid in the ordinary course of business or at least delivered to the payee without restriction on payment, the general rule is inapplicable and the check will not constitute payment until it is actually paid. Estate of Spiegel v. Commissioner, supra, at 530.464 Similarly, if there is an understanding that a check will not be presented for payment in due course, no payment is considered to have been made until the check is actually paid. Eagleton v. Commissioner, 97 F.2d 62">97 F.2d 62 (8th Cir. 1938). In the present case, petitioner maintains that the checks were delivered to a trustee of the plan within the statutory grace period and, thus, the contributions were timely made. Petitioner argues that since Wilger was both an officer of the company and a trustee of the plan, the only logical conclusion is that when he placed the checks in the drawer of his credenza after signing them, he effectively delivered the checks to himself as trustee of the plan. 4465 Respondent, on the other hand, contends that Wilger did not sign the checks on or before March 15, 1973, and March 15, 1974, and since a check must be signed to constitute payment, petitioner's payment of the contributions was, therefore, not timely made. Alternatively, respondent contends that if the checks were timely signed, the petitioner is still not entitled to the deductions in the years claimed because the checks were not timely delivered to the payee, the plan, free and clear of any restrictions as to time of payment.According to respondent, the petitioner had serious cash flow problems during March 1973 and March 1974 of which Wilger was aware. Consequently, Wilger held the checks until there were sufficient funds in the company's checking account to pay these checks and, thereby, avoid aggravating the cash flow problems. Respondent, therefore, concludes that at the time Wilger allegedly delivered the checks to himself as trustee, the checks were subject to a restriction as to time of payment and, hence, the contributions to the plan were not timely made. Assuming arguendo that Wilger timely signed the checks and delivered them to himself as trustee, we conclude that466 petitioner's plan contributions for 1972 and 1973 were not actually paid within the period permitted under section 404(a)(6) because neither check was delivered without restriction on payment during this period. Wilger, petitioner's vice president and general manager, testified that the delay in payment was simply due to the fact that he did not get around to making the deposits for some time after writing the checks. However, considering that as a trustee of the petitioner's profit-sharing plan, Wilger had a fiduciary duty to properly manage company contributions to the plan, 5 we find it difficult to believe that Wilger kept the checks in his office when they should have been in the plan's account earning interest merely because he did not "get around" to depositing them. Although the record could be more complete, the evidence presented indicates that during March 1973 and March 1974 the petitioner was having difficulties meeting its obligations with cash on hand. This is illustrated by the fact that the petitioner received substantial advances against its line of credit during these two months. 467 Such evidence supports respondent's argument that since Wilger was aware of the petitioner's cash flow situation during March 1973 and March 1974 he delayed depositing the checks until there were sufficient funds in the company's checking account to pay these checks in order to avoid aggravating the petitioner's financial condition. Respondent, therefore, concludes that while Wilger allegedly held the checks as trustee, the checks were subject to a restriction on payment and, hence, the contributions to the plan were not timely made. Petitioner, who has the burden of proof, failed to offer any evidence which would satisfactorily explain these delays in depositing the checks. Consequently, the petitioner has not satisfied this burden. Simply put, until Wilger deposited the checks in the plan's account or gave the checks to another individual for deposit in the plan's account, the time of payment was wholly within his control.We believe such retention of control over the checks clearly constitutes a restriction on the time of payment. Accordingly, we hold that the petitioner's contributions for 1972 and 1973 were not timely made and, hence, are non-deductible in the years claimed. 468 6To reflect the foregoing, Decision will be entered for the respondent. Footnotes1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended, and in force during the years in issue.↩2. On September 19, 1977, the petitioner, Walt Wilger Tire Company, completed a merger with the J. W. Brewer Tire Company in which the latter was the surviving corporation.↩3. Section 6072(b) provides that returns of corporations made on the basis of the calendar year shall be filed on or before the 15th day of March following the close of the calendar year.↩4. In support of its argument, petitioner cites Dick Bros., Inc. v. Commissioner, 205 F.2d 64">205 F.2d 64 (3d Cir. 1953), revg. 18 T.C. 832">18 T.C. 832↩ (1952). In this case the sole issue was whether the taxpayer's pension plan contribution check had been delivered to the trustee within the statutory grace period. It is, therefore, distinguishable from the present case because the issue here is not simply whether the checks were delivered but whether they were delivered without any restrictions as to time and manner of payment.5. See the Employee Retirement Income Security Act of 1974, sec. 404(a).↩6. We note that the respondent allowed the $ 29,141.90 contribution paid on May 16, 1973, as a deduction for 1973. Similarly, the $ 39,325.83 contribution paid on March 29, 1974, should be allowed as a deduction in 1974. See Rev. Rul. 63-117, 1 C.B. 92">1963-1 C.B. 92↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624080/	William Wagner and Evelyn Wagner, Petitioners v. Commissioner of Internal Revenue, RespondentWagner v. CommissionerDocket Nos. 6290-79, 13865-79United States Tax Court78 T.C. 910; 1982 U.S. Tax Ct. LEXIS 87; 78 T.C. No. 64; June 9, 1982, Filed 87 Decisions will be entered for the respondent. In 1972, petitioner sold certain stock for $ 2,400,000, payable $ 700,000 down with the balance to be paid in 12 quarterly installments. Petitioner reported his gain on the transaction as long-term capital gain on the installment basis. In 1974, the buyer brought suit against petitioner for damages alleging that petitioner violated sec. 10 of the Securities Act of 1934 and rule 10(b)-5 of the SEC in failing to disclose certain information affecting the value of the stock. Petitioner incurred litigation expenses in defending the suit in 1975, 1976, and 1977, which he deducted as expenses deductible under sec. 212, I.R.C. 1954. Held, the "origin-of-the-claim" test is applicable to determine whether the litigation expenses were capital expenditures or sec. 212 expenses. Held, further, the litigation originated with respect to a capital transaction, and the litigation expenses incurred were capital expenditures. Sidney A. Soltz, for the petitioners.David R. Smith, for the respondent. Drennen, Judge. DRENNEN911 OPINIONRespondent determined deficiencies in petitioners' Federal income taxes as follows:Docket No.TYE Dec. 31 --Deficiency6290-791975$ 15,39413865-7919767,51013865-79197710,136These cases have been consolidated for purposes of trial, briefing, and opinion.After concessions by petitioners, 89 the only issue is whether attorney's and accountant's fees and other legal expenses paid by petitioner in connection with certain litigation are deductible expenses pursuant to section 2121 or are nondeductible capital expenditures.The cases were submitted on facts that were fully stipulated. The stipulation of facts and exhibits attached thereto are incorporated herein by reference. The pertinent facts are as follows.Petitioners William Wagner (hereinafter petitioner) and Evelyn Wagner, husband and wife, resided in Miami Beach, Fla., at the time they filed their petitions herein. Petitioners filed a joint Federal income tax return for each of the taxable years in issue with the Internal Revenue Service Center, Chamblee, Ga. Evelyn Wagner is a party herein solely by reason of filing a joint return for each of the taxable years in issue with her husband.912 90 Prior to November 27, 1972, petitioner owned 349,000 shares of common stock of Watsco, Inc. (hereinafter Watsco), a Florida corporation. Watsco was engaged in the design, manufacture, and sale of refrigeration components and tools, professional hair spraying systems, and roller bearings and wheels. Watsco stock was traded on the American Stock Exchange.On November 27, 1972, petitioner agreed to sell 300,000 shares 291 of his Watsco stock to Albert H. Nahmad (hereinafter Nahmad) for $ 2,400,000. Of this amount, $ 700,000 was to be paid at the time of closing by certified check, while the remaining $ 1,700,000 was to be paid in 12 substantially equal quarterly installments of $ 141,674, plus interest at 6 percent per annum on the outstanding principal balance. The first of these payments was due 3 months from the date of closing. Nahmad thereafter assigned his interest in the November 27, 1972, purchase agreement to Alna Corp., a Panamanian corporation of which Nahmad was the principal officer. The closing date was specified in the purchase agreement to be no later than December 29, 1972, and in fact was closed on that date. 3Prior to December 29, 1972, petitioner was the chief executive officer of Watsco. On that date, he resigned as chief executive officer, and entered into a consulting agreement with Watsco for a period of 6 years at an annual rate of compensation of $ 50,000 per year plus certain fringe benefits. In addition, petitioner agreed not to compete with Watsco for a period of 5 years.On December 31, 1974, Alna Corp. and Alna Capital Associates, a limited partnership formed under the laws of the State of New York4 (hereinafter the plaintiffs), filed a lawsuit in the U.S. District Court for the Southern District of Florida naming petitioner and several others as defendants (hereinafter 913 sometimes referred to as the lawsuit). The complaint filed in connection with this lawsuit charged generally that the defendants had made material misleading statements to the plaintiffs and to Nahmad, and had failed to92 disclose certain other information in connection with the sale of the Watsco stock. The complaint alleged that the acts, misrepresentations, and failure to disclose, complained of therein, constituted a violation by petitioner of section 10 of the Securities Act of 1934, and rule 10(b)-5, of the Securities and Exchange Commission (hereinafter SEC). The remedies sought in the lawsuit included, inter alia, (1) a complete recision of the purchase of stock from petitioner, and (2) compensatory damages of at least $ 1,500,000 and punitive damages of $ 1 million.On January 31, 1975, petitioner filed an answer to the above complaint, including therein affirmative defenses and counterclaims. The counterclaims were (1) for the amount of $ 131,593.81, which petitioner alleged was the installment payment due on January 1, 1975, in respect of his93 Watsco stock sale, and (2) for the amount of $ 566,670, which he alleged to be the remaining unpaid balance of the purchase price due in respect of such sale 5 (not including the amount claimed in count 1).The plaintiffs filed an amended complaint and demand for jury trial on July 1, 1975. Petitioner filed his answer to the amended complaint on July 14, 1975, including therein affirmative defenses and counterclaims, which were essentially the same as in his original answer, filed on January 31, 1975.On November 30, 1975, the district judge required the plaintiffs to make an election between the remedies sought in the pleadings. The plaintiffs elected to pursue their claim for money damages and waived their prayer for recision.On 94 December 23, 1977, Watsco terminated the December 29, 1972, consulting agreement with petitioner. Thereafter, on or about December 28, 1977, Watsco filed a lawsuit against 914 petitioner in the Circuit Court for the Eleventh Judicial Circuit, Dade County, Fla., alleging fraud, misrepresentation, and deceit in connection with their consulting agreement. Watsco sought recision of that agreement as well as compensatory and punitive damages. 6During the taxable years 1975, 1976, and 1977, petitioner paid and deducted attorney's fees and other legal expenses incurred in connection with the lawsuit in the amounts of $ 61,431, $ 13,335, and $ 18,139, respectively. 795 Respondent has disallowed these deductions in their entirety because he determined that the legal expenses were incurred as a result of a capital transaction rather than in a trade or business. 8The issue for decision is whether expenses incurred in defending a lawsuit96 wherein it was alleged that petitioner had made fraudulent representations and concealed certain information with respect to the sale of stock, in violation of the Securities Act of 1934 and rule 10(b)-5 of the SEC, are deductible expenses pursuant to section 212 or are nondeductible capital expenditures. 9Petitioner claims that the legal expenses, and attorney's and accountant's fees (hereinafter collectively referred to as the litigation expenses) were paid for the "production or collection of income" within the meaning of section 212(1). 10 He asserts 915 that the stock sale to the plaintiffs was a completed transaction, and that in order to protect and collect his income, both from the sale of his stock and97 from his consulting fees from Watsco, he had no recourse other than to defend the lawsuit.Respondent claims that the litigation expenses were incurred in a dispute having its origin in the disposition of a capital asset, and are therefore nondeductible capital expenditures. He maintains that the real dispute in the lawsuit centered around what price the plaintiffs would ultimately have to pay for the 300,000 shares of Watsco stock purchased.Section 212 provides for the deduction of all ordinary and necessary expenses paid or incurred during a taxable year, inter alia, "for the production or collection of income." The purpose of this section is to extend deductions previously allowed only in a "trade or business" context to certain nonbusiness situations. See Baier v. Commissioner, 63 T.C. 513">63 T.C. 513, 517 (1975),98 affd. 533 F.2d 117">533 F.2d 117 (3d Cir. 1976); Boagni v. Commissioner, 59 T.C. 708">59 T.C. 708, 712 (1973). Likewise, the restrictions and limitations applicable to the deductibility of trade or business expenses are also applicable to the expenses covered by section 212. United States v. Gilmore, 372 U.S. 39">372 U.S. 39, 45 (1963).One of the limitations to deductibility of expenses under section 212 is that capital expenditures are nondeductible. Sec. 263; 11 see Woodward v. Commissioner, 397 U.S. 572">397 U.S. 572, 575 (1970); United States v. Hilton Hotels, 397 U.S. 580 (1970); sec. 1.212-1(n), Income Tax Regs. These expenditures are added to "the basis of the capital asset with respect to which they were incurred, and are taken into account for tax purposes either through depreciation or by reducing the capital gain * * * when the asset is sold." ( Woodward v. Commissioner, supra at 574-575; see sec. 1016(a)).99 Expenses which are incurred in either the acquisition or disposition of a capital asset are considered capital expenditures. Woodward v. Commissioner, supra at 575; United States v. Hilton Hotels, supra at 585; sec. 1.263(a)-2(a), Income Tax Regs. In determining whether litigation expenses are incurred 916 in the acquisition or disposition of property, or merely for the production or collection of income, the U.S. Supreme Court, in Woodward v. Commissioner, supra, adopted what has become known in tax parlance as the "origin-of-the-claim" test. See United States v. Hilton Hotels, supra.Therefore, our inquiry is whether the claim had its origin in the disposition of the Watsco stock, or in petitioner's attempt to collect income owed to him. In this regard, the proper focus is not upon petitioner's motive in undertaking a defense in the litigation, but, rather, upon the origin of the claim against petitioner. Woodward v. Commissioner, supra;United States v. Gilmore, supra;Madden v. Commissioner, 514 F.2d 1149">514 F.2d 1149, 1151 (9th Cir. 1975),100 revg. 57 T.C. 513">57 T.C. 513 (1972). 12 Resolution of this question requires an 917 examination of all the surrounding facts and circumstances. Boagni v. Commissioner, supra at 713.101 In the lawsuit out of which the litigation expenses herein arose, the plaintiffs claimed that petitioner had violated the Securities Act of 1934 and rule 10(b)-5 of the SEC by making fraudulent representations and failing to disclose facts within his knowledge, thereby inducing them to purchase the Watsco stock for more than its true value. They initially sought both a recision of the purchase and a monetary judgment, but later abandoned their claim for recision. The essence of their claims 918 was that the agreed-upon price for the Watsco stock was excessive, and that such price should be modified. 13102 When a purchaser brings suit to determine the purchase price of a capital asset, the litigation expenses incurred therein are considered a part of his cost of acquiring that asset (see Woodward v. Commissioner, supra;United States v. Hilton Hotels, supra), and when a seller brings suit to determine such price, the litigation expenses are a part of his cost of disposing of that asset. See also Soelling v. Commissioner, 70 T.C. 1052 (1978); Estate of Meade v. Commissioner, 489 F.2d 161 (5th Cir. 1974), revg. a Memorandum Opinion of this Court.Further, we have held that expenses incurred by a taxpayer in defending a lawsuit brought by the seller of certain stock, after that sale had been completed, were capital expenditures. In Locke v. Commissioner, 65 T.C. 1004">65 T.C. 1004 (1976), affd. 568 F.2d 663">568 F.2d 663 (9th Cir. 1978), the taxpayers were sued in Federal District Court for allegedly violating the Securities Act of 1934 and rule 10(b)-5 of the SEC in connection with the purchase of certain stock. In that case, we found103 that the origin of the claim which formed the basis for the plaintiffs' (sellers) action was the taxpayers' allegedly fraudulent representations and concealments when purchasing the stock from the plaintiffs, and held that the legal expenditures incurred in defending the lawsuit had their origin in the acquisition of a capital asset and were therefore nondeductible capital expenditures. See Bradford v. Commissioner, 70 T.C. 584">70 T.C. 584 (1978).We see no reason why the result should be different simply because the suit was brought by a purchaser rather than a seller. The origin of a claim is not determined by who brought the suit, but rather by the "'kind of transaction' out of which the litigation arose." (Citations omitted.) Boagni v. Commissioner, supra at 713. Indeed, as the Court of Appeals stated in Munson v. McGinnes, 283 F.2d 333">283 F.2d 333, 336 (3d Cir. 1960), it would be "anomalous to require capitalization of expenses of the party who is on one side of a negotiation or controversy over the disposition of a capital asset while permitting the opposing 919 party to claim an ordinary deduction 104 for his equivalent expenses." As a seller of stock, petitioner has incurred litigation expenses in defense of claims that he violated, inter alia, the Securities Act of 1934 and rule 10(b)-5 of the SEC when selling the Watsco stock. The plaintiffs claimed that too much had been paid for such stock, and a readjustment of the purchase price was sought. We think that the litigation expenses incurred by petitioner in defense of this claim had their origin in the disposition of the Watsco stock and are therefore nondeductible capital expenditures. See Munson v. McGinnes, supra; see also Locke v. Commissioner, supra.14105 Petitioner has relied primarily on Naylor v. Commissioner, 203 F.2d 346">203 F.2d 346 (5th Cir. 1953), revg. 17 T.C. 959">17 T.C. 959 (1951), and Doering v. Commissioner, 39 T.C. 647">39 T.C. 647 (1963), affd. 335 F.2d 738">335 F.2d 738 (2d Cir. 1964). In Naylor v. Commissioner, supra, the taxpayer granted an option to purchase certain stock which was a capital asset in his hands, at a price based on the stock's net asset value shown on the books of the company on a certain date. The purchaser thereafter exercised the option, but a dispute arose as to the amount due under the sales contract. In resolving the dispute, the taxpayer incurred certain legal expenses which he sought to deduct as nonbusiness expenses incurred in the collection of income. The Court of Appeals found that the taxpayer's attorney was not employed until after an enforceable contract of sale existed, and held that the legal expenses were deductible as expenses incurred for the collection of income.In Doering v. Commissioner, supra, the taxpayer was a shareholder in a corporation which106 produced motion pictures for distribution. It contracted with another corporation for the latter to distribute and exhibit motion pictures produced by it. A dispute arose between the corporations over the amount 920 that the taxpayer's corporation was to receive under the contract. Before the dispute was settled, the taxpayer's corporation was liquidated, and its claim against the other corporation, which had no ascertainable value at that time, was distributed to the shareholders. The claim was ultimately settled, and the taxpayer deducted the legal fees incurred in connection with that settlement under section 212(1) as expenses incurred for the collection of income. Relying heavily on Naylor, we sustained the taxpayer, finding that since the liquidation was completed when the expenses were incurred, they were incurred for the collection of income. We also said that the deductibility of legal expenses depends on the purpose for which incurred.Petitioner's reliance on these two cases, we believe, is misplaced. First, with respect to the Naylor case, we note that the propriety of that decision, in light of the Supreme Court decisions in Woodward v. Commissioner, supra,107 and United States v. Hilton Hotels, supra, has been "considerably eroded." 15Estate of Meade v. Commissioner, supra at 167; see Helgerson v. United States, 426 F.2d 1293">426 F.2d 1293, 1298 (8th Cir. 1970). Further, in Estate of Meade, which came from the same circuit as Naylor 21 years later, the Court of Appeals limited the holding in Naylor to factual situations wherein the disposition of a capital asset had been consummated, and the subsequent controversy concerns only the enforcement of the terms of the agreement. In the instant case, the origin of the claim out of which the expenses in question arose was a lawsuit brought by the plaintiffs essentially to modify the terms of the sale to reflect the true value of the stock. We do not view this controversy to be one of the enforcement of the terms of the sales agreement. See Munson v. McGinnes, supra.108 With regard to the Doering case, we note that that case was also decided before Gilmore, Woodward, and Hilton were decided and stated that "the deductibility of legal expenses depends on the purpose for which they were incurred." It also relied heavily on Naylor.In view of the foregoing, we find that litigation expenses 921 incurred by petitioner had their origin in the disposition of the Watsco stock, and, therefore, we hold such expenses to be nondeductible capital expenditures.Decisions will be entered for the respondent. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 as amended and in effect for the taxable years in issue.↩2. This represented about 37.8 percent of the stock of Watsco.↩3. Petitioner reported the gain from this sale on the installment basis as long-term capital gain on his tax returns for 1972 and subsequent years. Respondent does not dispute this treatment.↩4. Nahmad is the sole general partner of Alna Capital Associates. No evidence was presented as to how this partnership was otherwise connected with the purchase of the Watsco stock.↩5. Petitioner counterclaimed for the remaining portion of the purchase price although it was not yet due under the sales agreement. He alleged that the plaintiff had anticipatorily breached such agreement by refusing to make any further payments and by filing suit against petitioner.↩6. None of the expenses claimed by petitioner herein were related to this claim.↩7. No evidence was presented as to the final outcome, if any, of the lawsuit as of the time of this trial.↩8. Petitioner does not dispute respondent's disallowance of $ 2,025 of the expenses claimed for the taxable year 1975. Respondent has not disputed the amount of the remaining portion of the deductions claimed by petitioner.Petitioner reported long-term capital gain from this transaction on his 1975 return in the amount of $ 133,638. Respondent added the allowable legal expenses paid in 1975 ($ 59,406) to the basis of the stock and reduced the reported capital gain by that amount for 1975. Since petitioner received no payments on the installment sale in 1976 or 1977, he reported no capital gain from the transaction on his 1976 and 1977 returns, so respondent simply disallowed the legal expenses claimed as a deduction under sec. 212↩ for those years.9. Petitioner did not claim, either at trial or on brief, that an allocation of the legal expenses should be made between expenses incurred in defending the suit and those incurred in counterclaiming for the unpaid balance of the sales price; rather, he has claimed the entire amount to be deductible.↩10. SEC. 212. EXPENSES FOR PRODUCTION OF INCOME.In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year -- (1) for the production or collection of income;↩11. SEC. 263. CAPITAL EXPENDITURES.(a) General Rule. -- No deduction shall be allowed for -- (1) Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate. * * ↩12. Prior to the decision of the Supreme Court in United States v. Gilmore, 372 U.S. 39 (1963), the Fifth Circuit in Naylor v. Commissioner, 203 F.2d 346">203 F.2d 346 (1953), revg. 17 T.C. 959">17 T.C. 959 (1951), held that the exercise of an option to purchase stock closed the transaction and that legal expenses incurred in a dispute over the purchase price were incurred to collect the proceeds of sale of a capital asset and were thus deductible. Also in Doering v. Commissioner, 39 T.C. 647">39 T.C. 647 (1963), affd. 335 F.2d 738">335 F.2d 738 (2d Cir. 1964), this Court held that legal expenses incurred to collect amounts due on taxpayer's share of a fully executed contract distributed to him in liquidation of a corporation were expenses incurred in the collection of income, rather than the disposition of a capital asset, and were therefore deductible. The Court relied heavily on Naylor and said that the deductibility of legal expenses depends on the purpose for which incurred. However, in Munson v. McGinnis, 283 F.2d 333">283 F.2d 333 (3d Cir. 1960), the Third Circuit held that legal expenses incurred by the seller in an action based on fraud to obtain additional proceeds of sale were expenses of modifying the terms of sale rather than to collect income and were an essential incident in the disposition of a capital asset and were thus not deductible. Also see Spangler v. Commissioner, 323 F.2d 913 (9th Cir. 1963), affg. a Memorandum Opinion of this Court.In Gilmore, the Supreme Court held that legal expenses incurred in a divorce proceeding to protect the taxpayer's investments were personal expenses, and thus not deductible, rather than business or investment expenses deductible under either sec. 162 or sec. 212. The Court stated that the origin and character of the claim with respect to which the expense was incurred, rather than its potential consequences upon the fortunes of the taxpayer, is the controlling test of whether the expense was business or personal. The Court concluded that the claim arose out of the marital relationship and thus was personal. The origin-of-the-claim test was extended by the Supreme Court in Woodward v. Commissioner, 397 U.S. 572 (1970), and its companion case United States v. Hilton Hotels, 397 U.S. 580 (1970), to apply to expenses incurred in determining the price for acquiring a capital asset, rejecting the primary purpose test which had been used with respect to expenses incurred in defending or perfecting title. The Court stated, in Woodward, that the simpler test was whether the origin of the claim litigated was in the process of acquisition itself and should be used. In Hilton, the Court said that expenses arising out of the acquisition of a capital asset are capital expenses, quite apart from whether the taxpayer's purpose in incurring them is the defense or perfection of title -- and the fact that under local law, title to the stock passed prior to incurring the appraisal expenses made no difference. Price is an element of acquisition, as is passage of title, and it makes no difference which comes first.In Helgerson v. United States, 426 F.2d 1293">426 F.2d 1293 (1970), the Eighth Circuit applied the origin-of-the-claim (litigation) test even though the taxpayers were sellers rather than buyers, pointing out that the Woodward and Hilton cases favored an expansive application of the phrase "incurred in the disposition of a capital asset." The Court also cast doubt on the soundness of the Naylor case in light of the subsequent Woodward case. And in Estate of Baier v. Commissioner, 533 F.2d 117">533 F.2d 117 (3d Cir. 1976), affg. 63 T.C. 513">63 T.C. 513 (1975), it was held that the origin-of-the-claim test is applicable to disposition of a capital asset (a patent) as well as to acquisition of property. Also, in Madden v. Commissioner, 514 F.2d 1149 (9th Cir. 1975), revg. 57 T.C. 513">57 T.C. 513 (1972), involving expenses incurred in resisting the Government's right to condemn taxpayer's land, the Court said that Woodward implied that the origin-of-the-claim test should be used to characterize litigation expenses whenever its use would be feasible. Applying that test, the Court found that litigation resisting the taking of a capital asset was inherently related to the sale and acquisition of a capital asset and resulted in a capital expenditure even though a sales price was not involved.This Court in Boagni v. Commissioner, 59 T.C. 708 (1973), noted that Woodward and Hilton had enunciated the rule that in cases where the litigation involved the acquisition or disposition of capital assets, the origin of the claim, rather than the taxpayer's primary purpose in litigating the claim, is the controlling criterion in deciding whether the expenditure should be capitalized, and that this Court has extended the same rule to cases involving the defense or perfection of title to property. The Court went on to say that the rule does not contemplate a mechanical search for the first in a chain of events which led to the litigation but requires an examination of all the facts, directed toward determining the "kind of transaction" out of which the litigation arose.In Locke v. Commissioner, 65 T.C. 1004 (1976), affd. 568 F.2d 663">568 F.2d 663 (9th Cir. 1978), where taxpayer-buyer incurred litigation expenses in defending a suit brought by the seller for damages under SEC rule 10(b)5, based on taxpayer's failure to disclose insider information affecting the value of the stock prior to the sale, we found the origin-of-the-claim test to be applicable and concluded that the defense to the litigation was not to protect taxpayer's business reputation, but was to protect his $ 675,000 profit in purchasing and reselling the stock -- thus, the expenses were capital in nature. See also Bradford v. Commissioner, 70 T.C. 584 (1978), where in an SEC action, the buyer of stock was forced to disgorge profits realized on resale of stock, this Court applied the origin-of-the-claim test to conclude that the monetary portion of the SEC action arose in connection with taxpayer's purchase of the stock (nondisclosure of information) and must be added to taxpayer's basis in the stock.Finally, in Soelling v. Commissioner, 70 T.C. 1052">70 T.C. 1052, 1055 (1978), a Court-reviewed opinion, this Court accepted the reversal of Madden, stating:"In Madden the Ninth Circuit clarified the law in this area basing its opinion on those of the Supreme Court in * * [Woodward and Gilmore]. The cummulative result of these opinions places a difficult burden on the taxpayer to prove that a section 212↩ expense is ordinary and necessary rather than capital in nature when incurred in connection with an investment, be it an acquisition or a disposition thereof. * * *"13. It is not clear from the pleadings in the lawsuit just on what the claim for compensatory damages was based. The plaintiffs believed that because of fraudulent misrepresentations by petitioner, they had paid much more for the Watsco stock than it was worth, and sought an adjustment of the price paid. See Locke v. Commissioner, 65 T.C. 1004 (1976), affd. 568 F.2d 663">568 F.2d 663↩ (9th Cir. 1978).14. When we initially considered this issue, we had some doubts whether the origin-of-the-claim test should be applied in light of the fact that the sale of the stock here was a closed transaction and petitioners, as the sellers of the stock, were trying to collect or protect their right to receive the contract price of the sale. However, a careful perusal of the case law, summarized in note 12, convinces us that the origin-of-the-claim test should be applied. Applying that test, it becomes clear that, regardless of petitioners' motive or purpose in defending against the claim, the litigation originated out of the sale of petitioners' stock and the buyers' claim of fraud on the part of petitioners in that transaction. The "kind of transaction" from which the litigation stemmed (see Boagni v. Commissioner, supra↩) was a capital transaction.15. Prior to Woodward v. Commissioner, 397 U.S. 572">397 U.S. 572, 575↩ (1970), the test for determining whether litigation expenses were incurred in connection with the acquisition or disposition of a capital asset was the "primary purpose" of the taxpayer for incurring such expense.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624081/	Peoples Water and Gas Company v. Commissioner.Peoples Water & Gas Co. v. CommissionerDocket No. 11837.United States Tax Court1948 Tax Ct. Memo LEXIS 176; 7 T.C.M. (CCH) 337; T.C.M. (RIA) 48105; June 1, 1948176 Petitioner, a subsidiary of a holding company, acquired certain properties in 1927 from the holding company, which had acquired the same properties from X and Y corporations by a purchase of all of the capital stock of these corporations. The petitioner had been organized by the holding company to own and operate these properties. Held, that the several transactions, beginning with the purchase of the stock of X and Y for cash and including the conveyance of the properties to petitioner as the operating subsidiary, were one transaction for tax purposes and the transfer did not come within any of the provisions of section 203 (h) (1) of the Revenue Act of 1926, or within section 113 (a) (7) of the Revenue Act of 1932. Francis L. Casey, Esq., 14 Wall St., New York, N.Y., for the petitioner. Clay C. Holmes, Esq., for the177 respondent. HARRON Memorandum Findings of Fact and Opinion HARRON, Judge: The respondent determined a deficiency of $12,576.25 in income tax of the petitioner for the taxable year ending December 31, 1939. The deficiency primarily results from the disallowance of a deduction for depreciation in the amount of $2,985.04 on the water works properties of the Mount Vernon plant acquired by petitioner from the Home Water & Ice Company, in 1927, and the water works property of the Burlington and Sedro-Woolley plants acquired from the Skagit Improvement Company, in 1927; and also from the disallowance of a loss of $58,609.08 on the sale of the water works properties of the Mount Vernon, Burlington, and Sedro-Woolley plants as of November 1, 1939. The question for decision is whether the cost basis for the purpose of computing depreciation and the determination of gain or loss upon the sale of these water works properties owned by petitioner is the amount paid for the stock of the predecessor corporate owners by Federal Water Service Corporation, who thereupon conveyed their properties to petitioner, or whether the cost basis of such properties is the cost to the predecessor178 corporate owners. Findings of Fact The case was submitted upon a stipulation of facts. The stipulation is incorporated herein by reference and adopted as our findings of fact. Christopher T. Chenery, an engineer and G. L. Ohrstrom & Co. (hereinafter referred to as Ohrstrom), organized the Federal Water Service Corporation (hereinafter referred to as Federal), on June 21, 1926, under the laws of the State of Delaware. Federal was organized as a holding company for the purpose of acquiring small water service companies. After February 7, 1927, Federal's stock was owned as follows: Ohrstrom, 51,346 shares; Chenery, 13,650 shares; and directors 4 shares; the total outstanding being 65,000 shares. Chenery owned 21 per cent of the stock and the Ohrstrom Co. and directors owned 79 per cent. Federal was a holding company and a management company. It was not an operating company, but owned the controlling stock of subsidiary corporations which were operating companies. It purchased privately owned water properties in various states and brought such properties together into a single, newly organized corporation within each state. It was not intended that Federal would own and operate179 physical properties. Chenery and his associates arranged a purchase directly of the physical properties from individual or corporate vendors, but if such procedure was not possible, the controlling stock of an outside corporation was purchased first and later the physical properties were transferred to a Federal subsidiary corporation and the outside corporation was dissolved. During 1926 and 1927, Federal arranged for the purchase of the controlling stock or the property and assets of several independent water companies and water and electric light companies in Indiana, New Jersey, West Virginia, Michigan, New York, Pennsylvania, Ohio, and other states and put the various physical properties into new subsidiary corporations of its own in those states. In all instances Federal owned the common stock of its subsidiaries. The senior securities of the subsidiaries' preferred stock and bonds were sold. The senior securities of subsidiaries were sold to the Ohrstrom Co. by Federal or by the subsidiary company, itself, and Ohrstrom resold the securities to the public. On or about April 15, 1927, Federal entered into contracts to purchase for cash from Portland Electric Power Company the180 water properties and franchises at Hillsboro, Oregon, and Vancouver, Washington, from Salem Water, Light and Power Company, the water properties and franchises at Salem, Oregon, and all of the outstanding shares of stock of three Washington corporations, Hoquiam Water Company (hereinafter called Hoquiam), the Skagit Improvement Company (hereinafter called Skagit), which owned and operated the water plants at Sedro-Woolley and Burlington, Washington; and Home Water & Ice Company (hereinafter called Home), which owned and operated the water plant in Mount Vernon, Washington. The contract dated April 15, 1927, between Federal and Mount Vernon Investment Company, and others, the stockholders of Home, provided that Federal was to purchase all of the outstanding shares of Home for $150,000, in cash. A contract dated April 16, 1927, between Federal and W. R. Morgan, who owned or controlled all of the outstanding capital stock of Skagit, provided that Federal was to purchase all of the outstanding shares of Skagit for $184,000, in cash. The two above contracts were similar. Each provided for the sale of all of the outstanding stock of the companies. Each provided that the purchase price181 was based upon the statement of physical assets, and that all of the properties at the time of the closing were to be vested in the respective companies free and clear of any encumbrances whatsoever; that the sellers would pay off all liabilities and indebtedness of the company and indemnify the buyers against any liabilities; that the sale of the stock was subject to the approval of the buyer as to the validity of all franchises and the validity and merchantability of all land titles, water rights, etc. Each contract provided for the deposit upon the signing of the contract of all of the stock in escrow with the Dexter Horton National Bank of Seattle, Washington, to be delivered upon payment of the purchase price. Each contract provided for the consummation thereof and the delivery of the stock and payment of the consideration on or before June 30, 1927. Upon executing the contracts with Mount Vernon Investment Company and W. R. Morgan, Federal caused audits of the accounts and title examinations of the properties, including those of Home and Skagit, to be made, and prepared to have the properties of Home and Skagit conveyed, along with other properties it had under contract in182 Washington and Oregon, to its subsidiary which was to operate in those states. On June 6, 1927, Federal caused petitioner to be organized under the laws of the State of Delaware under the name of Oregon-Washington Water Service Company for the purpose of acquiring and operating the water properties to be acquired under the above contracts, which were located in the states of Oregon and Washington. The petitioner was authorized to issue 35,000 shares of stock of which 25,000 shares were preferred stock of no par value and 10,000 shares were common stock of no par value. Federal subscribed on June 6, 1927, for 10,000 shares of common stock of petitioner at $20 per share in cash and owned all of the voting stock of petitioner at all times in 1927, hereinafter mentioned. In October, 1935, petitioner's name was changed to Peoples Water and Gas Company. On June 17, 1927, a special meeting was held by the Board of Directors of Federal. At this meeting, the following transactions took place: The president of Federal was authorized to offer to sell and convey or cause to be sold and conveyed to petitioner the water properties and franchises at Salem and Hillsboro, Oregon, and Vancouver, 183 Washington, and the properties and franchises of the three Washington corporations, Home, Skagit, and Hoquiam, the outstanding stock of which it had under contract of purchase as aforesaid. It was proposed that in consideration of the sale and conveyance of these properties that petitioner pay Federal $1,438,350, in cash, and $245,500 in principal amount of its first mortgage 5 per cent gold bonds, Series A, and 1,015 shares of its preferred stock to be issued to or upon the order of Hoquiam, $153,000 first mortgage 5 per cent gold bonds, Series A, and 631 shares of petitioner's preferred stock to be issued to or upon the order of Skagit, and $124,500 first mortgage 5 per cent gold bonds, Series A, and 515 shares of its preferred stock to be issued to or upon the order of Home, or a total amount of $523,000 first mortgage 5 per cent gold bonds, Series A, and 2,161 shares of preferred stock to be issued upon the order of Home, Skagit, and Hoquiam. The directors of Federal authorized the conveyance of the properties in accordance with this offer, if accepted, and thereafter the dissolution of the three Washington corporations, Home, Skagit and Hoquiam. Also at this meeting the Board184 of Directors of Federal accepted an offer of Ohrstrom to purchase from Federal the $523,000 principal amount of first mortgage 5 per cent gold bonds, Series A, of petitioner at 88 and the 2,161 shares of preferred stock of petitioner at 84 1/2, to be issued by petitioner to or upon the order of three Washington corporations for the conveyance of their properties to petitioner and to be received by Federal as liquidating dividends from said three Washington corporations. By letter dated June 17, 1927, Federal offered to sell and convey or cause to be sold and conveyed to petitioner, the water properties and franchises at Salem and Hillsboro, Oregon, and Vancouver, Washington, and the properties and franchises of the three Washington corporations, Home, Skagit and Hoquiam, upon the terms stated above. On June 20, 1927, the contract to purchase all of the shares of Home was performed according to its terms, Federal paying $150,000 in cash plus a commission of $3,000 or a total consideration of $153,000. On the same day the contract to purchase all of the shares of Skagit was performed according to its terms, Federal paying $184,000 in cash plus a commission of $3,680 or a total consideration185 of $187,680. Also, the contract to purchase all of the stock of Hoquiam was performed according to its terms. On June 22, 1927, each of the three Washington corporations, Home, Skagit, and Hoquiam, directed petitioner to issue to or upon the order of Federal the bonds and preferred stock which by the terms of Federal's offer of June 17, 1927, to petitioner, were to be issued to or upon the order of the three Washington corporations. On June 27, 1927, Ohrstrom confirmed its agreement to buy the $523,000 principal amount of petitioner's 5 per cent gold bonds, Series A, and 2,161 shares of petitioner's preferred stock to be received by Federal as liquidating dividends from the three Washington corporations and directed issuance of the stock in the name of A. F. Carney. On June 27, 1927, Federal directed petitioner to issue in bearer form and deliver to or upon the order of Ohrstrom the $523,000 principal amount of its bonds and to issue in the name of A. F. Carney and deliver to or upon the order of Ohrstrom the 2,161 shares of its preferred stock, which it was required to issue pursuant to Federal's offer of June 17, 1927, and the directions of the three Washington corporations. 186 On June 28, 1927, petitioner duly accepted the offer contained in the letter dated June 17, 1927, of Federal. The petitioner's Board of Directors at the meeting held on June 28, 1927, also authorized the issuance of $2,300,000 principal amount of first mortgage 5 per cent gold bonds, Series A, of which $942,000 were authorized to be sold to Ohrstrom for $828,960 cash and an aggregate principal amount of $523,000 were authorized to be issued in accordance with Federal's offer of June 17, 1927. On June 28, 1927, the contracts between Federal and petitioner, the directions of the three Washington corporations and Federal, and the contract between Federal and Ohrstrom were all performed according to their terms. The properties and franchises of the three Washington corporations, Home, Skagit, and Hoquiam, were conveyed to petitioner which issued to Ohrstrom $153,000 principal amount of its first mortgage 5 per cent gold bonds, Series A, and 631 shares of its no par preferred stock, upon orders of Skagit and Federal, and $124,500 principal amount of its first mortgage 5 per cent gold bonds, Series A, and 515 shares of its no par preferred stock upon orders of Home and Federal, and $245,000187 principal amount of its first mortgage 5 per cent gold bonds, Series A, and 1,015 shares of its no par preferred stock upon the orders of Hoquiam and Federal. Said bonds and preferred stock were sold by Ohrstrom to the public. Federal received cash from Ohrstrom for said bonds and preferred stock in accordance with its contracts of June 17, 1927, which on June 30, 1927, were credited as follows: Investment in Home$153,077.50Investment in Skagit187,959.50Investment in Hoquiam301,807.50 The excess of $77.50 of the credit to Home over its cost of $153,000, and the excess of $179.50 of the credit to Skagit over its cost of $187,680, were carried to Federal's earned surplus account. Pursuant to authorizations granted at meetings of their stockholders held June 29, 1927, proceedings were brought in the Supreme Court of the State of Washington for the dissolution of Home and Skagit resulting in court orders of dissolution entered November 14, 1927. Prior to entering into the contracts of April 15, and 16, 1927, with Federal, and until their performance on June 20, 1927, all the stock of Home and Skagit was owned by Mount Vernon Investment Co., W. R. Morgan, 188 and others, none of whom had any ownership or interest in Home or Skagit or the properties of those companies after June 20, 1927. On November 1, 1939, petitioner sold the Mount Vernon, Burlington and Sedro-Woolley water properties and franchises acquired from Home and Skagit in 1927 for the sum of $300,380.53 and in connection therewith incurred expenses of sale amounting to $11,997.66. The cost basis claimed by respondent, based on the cost to Home and Skagit, or the so-called "old cost basis" for the properties and franchises at Mount Vernon, Burlington and Sedro-Woolley, adjusted for additions at cost and retirements on the old basis to November 1, 1939, was as follows: Depreciable property$368,975.14Non-depreciable property58,569.06Total cost$427,543.20Less accumulated reserve for de-preciation89,478.67Net tax cost$338,064.53 The loss on the sale at November 1, 1939, computed on the so-called "old basis" was as follows: Cost of non-depreciable property sold / Net cost of all property sold 58,568.06 / 338,064.53 = 17.3245%DepreciableNon-depreciableTotal82.6755%17.3245%100%Net cost property sold$279,496.47$58,568.06$338,064.53Expense of sale 9,919.132,078.5311,997.66Total cost$289,415.60$60,646.59$350,062.19Proceeds from sale 248,341.1152,039.42300,380.53Loss on sale($ 41,074.49)($ 8,607.12)($ 49,691.66)189 Should the June 28, 1927, cost basis claimed by petitioner of $340,680 based on the transaction in 1927 between Federal, Home, Skagit, their stockholders and petitioner hereinabove described, the so-called "new basis" for the properties and franchises at Mount Vernon, Burlington and Sedro-Woolley, be finally determined to be proper, that basis adjusted for additions at cost and retirements on the so-called new basis, to November 1, 1939, is as follows: Depreciable property$399,904.47Non-depreciable property66,440.18Total cost$466,344.65Less accumulated reserve for de-preciation59,424.04Net tax cost$406,920.61The loss on the sale at November 1, 1939, computed on the so-called "new basis" would be as follows: Cost of non-depreciable property sold / Net cost of all property sold 66,440.18 / 406,920.61 = 16.3275%DepreciableNon-depreciableTotal83.6725%16.3275%100%Net cost of property sold$340,480.43$66,440.18$406,920.61Expenses of sale 10,038.741,958.9211,997.66Total cost$350,519.17$68,399.10$418,918.27Proceeds from sale 251,335.9049,044.63300,380.53Loss on sale($ 99,183.27)($19,354.47)($118,537.74)190 Federal filed a consolidated Federal income tax return for itself and affiliates, including petitioner, for its fiscal year ended May 31, 1928, with the Collector of Internal Revenue for the 2d district of New York. No gain or loss on the transactions in 1927 between Federal, Home, Skagit, their stockholders and petitioner, hereinabove described, was reported in said return. Petitioner filed a separate Federal income tax return for its calendar year 1939 with the Collector of Internal Revenue for the 2d district of New York and reported therein the loss on the sale of its properties at Mount Vernon, Burlington and Sedro-Woolley, hereinabove described. Petitioner used the so-called "old basis" described above in computing its depreciation on the properties at Mount Vernon, Burlington and Sedro-Woolley, until the year 1938, when it claimed a deduction on its 1938 Federal income tax return for depreciation computed on the so-called "new basis" described above. The respondent disallowed the deduction for depreciation computed on the so-called "new basis" and after protest by petitioner and hearing before the Technical Staff the petitioner191 agreed to the deficiency in tax for 1938 resulting from the disallowance of the depreciation computed on the so-called "new basis." All of the transactions which Federal entered into commencing with the signing of the contracts for the purchase of the stocks of Home, Skagit and Hoquiam, in April, 1927, through the conveyance of their properties to petitioner on June 28, 1927, were interrelated and interdependent, and were steps in a plan to acquire the physical properties of these companies and to convey them to petitioner. Opinion Petitioner contends that the purchase by Federal of the stock of Home and Skagit and the subsequent transfer of their physical properties to petitioner was, in substance, a purchase by petitioner for cash of the physical properties of Home and Skagit. It argues that each and every step in the transaction commencing with the signing of the contract for the purchase of the stock of the three Washington companies, including Home and Skagit, by Federal, were all interrelated and interdependent and part of a preconceived plan to acquire the physical properties of these companies and to place the ownership of their property in Federal's subsidiary, the petitioner, 192 who was to operate them. So viewed, petitioner maintains that it did not acquire the property of Home and Skagit pursuant to a plan of reorganization. Petitioner contends, therefore, that the cost basis to it of the properties of Home and Skagit was the amount paid in cash by Federal for the stock of Home and Skagit, or the value of the securities issued by petitioner therefor. Respondent, on the other hand, contends that the petitioner acquired the property of Home and Skagit pursuant to a reorganization under section 203(h)(1) of the Revenue Act of 1926, and that the basis for depreciation and for determining gain or loss is the same basis that such properties had in the hands of the original predecessor owners, Home and Skagit, as required under sections 114, 113(b) and 113(a)(12) of the Internal Revenue Code, and section 113(a)(7) of the Revenue Act of 1932. It is well recognized that where a series of transactions were in fact merely steps in carrying out a definite pre-conceived purpose, the object sought and obtained must govern and the integrated steps used in effecting the desired result may not be treated separately for tax purposes either at the193 instance of the taxpayer or the taxing authority or by agreement between both. Koppers Coal Co., 6 T.C. 1209">6 T.C. 1209; Illinois Water Service Co., 2 T.C. 1200">2 T.C. 1200; Commissioner v. Ashland Oil & Refining Co., 99 Fed. (2d) 588; certiorari denied, 306 U.S. 661">306 U.S. 661; Prairie Oil & Gas Co. v. Motter, 66 Fed. (2d) 309; Tulsa Tribune Co. v. Commissioner, 58 Fed. (2d) 937; Anheuser-Busch, Inc., 40 B.T.A. 1100">40 B.T.A. 1100; affirmed, 115 Fed. (2d) 662; certiorari denied, 312 U.S. 699">312 U.S. 699; Ahles Realty Corporation v. Commissioner, 71 Fed. (2d) 150; certiorari denied, 293 U.S. 611">293 U.S. 611. It is a general rule that taxation is a practical matter dealing not with mere form but rather with the realities. Commissioner v. Court Holding Co., 324 U.S. 331">324 U.S. 331; Meurer Steel Barrel Co. v. Commissioner, 144 Fed. (2d) 282; certiorari denied, 324 U.S. 860">324 U.S. 860; Allen v. Trust Company of Georgia, 326 U.S. 630">326 U.S. 630. As we pointed out in the Illinois Water Service Co., supra, "It is, therefore, the situation at the beginning and end of the transactions to194 which we must look and determine whether there has been a reorganization within the meaning of the statute, or merely a sale or taxable exchange.' The answer therefore to the contentions herein depends primarily upon a question of fact, namely, whether Federal in acquiring the stock of Home and Skagit did so, not with the purpose of making an investment in such stock, but as a step in a plan to acquire the physical properties of these companies, and if so, whether that plan was followed and the later transactions where ownership of the physical assets was placed in a subsidiary corporation organized to operate the properties, were transactions carrying out the pre-conceived plan. The cited case of Illinois Water Service Co., supra, upon which petitioner relies, has many features of resemblance to those in the instant proceeding. In that case the Consumers Public Service Company was a holding company, and all of its authorized and outstanding common stock was owned by three individuals, namely, Edwin J. Smail, Claude F. Baker, and William J. Walsh. It owned all except 50 shares of the common stock of Freeport Water Company, an Illinois corporation. The Freeport Water195 Company owned the water plant and system at Freeport, Illinois. The W. B. Foshay Company had organized Peoples Light and Power Corporation (Peoples) in March of 1926, and Foshay owned the controlling stock of Peoples. An agreement was executed whereby Foshay purchased from Smail, Baker, and Walsh all of the stock of Consumers. The agreement provided that the physical properties of Freeport were to be sold to Foshay or its nominee. Thereafter Foshay and Peoples entered into an agreement under which Foshay agreed to purchase various securities of Peoples, and in payment Foshay agreed to deliver to Peoples the capital stock and first mortgage bonds of the corporation to which Foshay would cause to be transferred various plants and properties including the property of Freeport. Foshay caused Peoples Utilities Illinois Corporation (Peoples Illinois) to be organized and offered to subscribe to its stock and to purchase its first mortgage bonds and to pay for the same by causing the properties of Freeport to be conveyed to Peoples Illinois subject to authorization of the Illinois Commerce Commission. Foshay made an offer to Freeport which recited that Foshay had entered into an agreement196 to acquire all of the capital stock of Consumers and that upon the capital stock of Consumers and that upon the consummation of that contract Foshay would be the owner of Freeport's capital stock, and that Foshay desired that Freeport's property should be transferred to Foshay or its nominee, after which steps would be taken to dissolve Freeport and Consumers. In contemplation of such results Foshay submitted a proposal to Freeport which was accepted, whereby Freeport was to transfer to Peoples Illinois its water plant, distributing system, and franchises and was to transfer to Foshay all other property consisting of cash, accounts receivable, etc. It was also agreed that upon the transfer of the Freeport property to Peoples Illinois, Freeport would be dissolved. All of the contracts were closed on November 15, 1926, after approval had been obtained from the Illinois Commerce Commission. At the closing, Foshay paid the above individual stockholders of Consumers for their stock, and also provided funds for the satisfaction of the indebtedness of Consumers and its subsidiaries, all in accordance with the agreement. Freeport conveyed its physical properties to Peoples Illinois as Foshay's197 nominee, and its other assets consisting of cash, notes, etc. to Foshay. Peoples Illinois issued its bonds and stock which were transferred by Foshay to Peoples, and Peoples issued its securities to Foshay. Subsequently, Consumers and its subsidiaries, including Freeport, were dissolved. We found that all of these transactions which Foshay entered into on August 16, 1926, were interrelated and interdependent and were steps in a single plan and were undertaken to accomplish the transfer of all of the properties of Consumer's subsidiaries to Foshay, or its nominee. We pointed out that at the beginning of the transactions the Freeport property was owned by Freeport whose stock was owned by Consumers whose stock in turn was owned by Smail, Baker, and Walsh, and at the end of the transactions the Freeport property was owned by Peoples Illinois whose stock was owned by Peoples; and that, therefore, none of the interest at the beginning carried through to the end of the transaction, and there was not the continuity of interest in the same persons required for a reorganization. We said that: "The entire transaction was essentially in intent, purpose, and result a purchase of the Freeport198 property by Foshay itself, or by Foshay for a nominee." We held that such a purchase for cash was outside the purposes of the reorganization provisions of the statute. In the instant proceeding the facts are very similar to those in the Illinois Water Service Company case. The facts in this proceeding show that there was a pre-conceived plan of Messrs. Chenery and Ohrstrom to build up a water service company system with Federal as the parent holding company of wholly owned operating subsidiaries in the various states. This purpose was to be accomplished by acquiring water properties directly or through the acquisition of stocks of existing water companies and conveying the properties to a newly organized subsidiary of Federal. Federal, under this general plan, entered into contracts in April, 1927, to purchase directly for cash, certain water properties and franchises in Oregon and Washington and all of the stock of three Washington corporations, Home, Skagit, and Hoquiam, which owned water properties in Washington. Upon the execution of the contracts, Federal caused audits of the accounts and title examination of the properties, including those of Home and Skagit, to be made, and199 prepared to have these properties conveyed to its subsidiary which was to operate in those states. On June 6, 1927, Federal caused the petitioner to be organized under the name of Oregon-Washington Water Service Company, for the purpose of acquiring and operating the water properties to be acquired under the above contracts. On June 17, 1927, Federal offered to sell and convey, or cause to be sold and conveyed to petitioner the water properties and franchises of Home and Skagit for petitioner's preferred stock and first mortgage bonds. At the same meeting, Federal's directors agreed to sell to Ohrstrom the bonds and preferred stock which constituted the consideration to be paid by petitioner for the conveyance of the properties of Home and Skagit. Also, at the same meeting the directors of Federal authorized the dissolution of the three Washington companies, including Home and Skagit. On June 20th, Federal performed its contracts and purchased the stocks of the three Washington corporations, including Home and Skagit, for cash, and thereafter the stockholders of these companies had no interest in them after June 20th. On June 28, 1928, the properties which Federal had under contract200 together with properties of Home and Skagit, were conveyed to petitioner. Some cash was paid to Federal and the preferred stock and bonds called for by the agreement for the conveyance of the properties of Home and Skagit to petitioner were issued to Ohrstrom and sold to the public, and the cash proceeds thereof were paid to Federal. Thus, at the beginning of the transactions the water properties of Home and Skagit were owned by these corporations whose stock was owned by the Mount Vernon Investment Co., W. R. Morgan, and others. After the transactions were completed neither the stockholders of Home and Skagit nor Federal received any interest for the transfer of the property to petitioner, so that there is not the continuity of interest in the transferred property required for a reorganization. United Light & Power Co. v. Commissioner, 105 Fed. (2d) 866; certiorari denied, 308 U.S. 574">308 U.S. 574; Bassick v. Commissioner, 85 Fed. (2d) 8; certiorari denied, 299 U.S. 592">299 U.S. 592; Halliburton v. Commissioner, 78 Fed. (2d) 265. We think that considering all of the transactions together, the object and purpose planned and accomplished was a201 purchase for cash of the property of Home and Skagit by Federal. We hold, therefore, that the petitioner did not receive the property of Home and Skagit pursuant to a reorganization within section 203(h)(1) of the Revenue Act of 1926. Commissioner v. Ashland Oil & Refining Co., supra; Prairie Oil & Gas Co. v. Motter, supra; Illinois Water Service Co., supra; Koppers Coal Co., supra; Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462">287 U.S. 462. Since the transactions did not constitute a reorganization, the basis of the property is not established by section 113(a)(7) of the Revenue Act of 1932, i.e., the basis to petitioner is not the same as the basis to Home and Skagit. The next question for our consideration is what is the basis of the property to petitioner. The parties have stipulated that if we agree with petitioner's contention that the transactions here did not result in a reorganization, and that Federal in buying the stock of Home and Skagit in substance purchased the property for cash, then the cost basis of the property adjusted for additions and retirements to the date of sale on November 1, 1929, was202 a total cost of $460,344.65 less accumulated reserve for depreciation of $59,324.04 leaving a net tax cost of $406,920.61 or the so-called "new basis" referred to in our findings of fact. It was also stipulated that the loss on the sale of the property was as follows: Depreciable property $99,183.27, non-depreciable property $19,354.47, or a total of $118,537.74. Effect will be given to these stipulations in a recomputation under Rule 50. Decision will be entered under Rule 50. Footnotes. Allocated on above percentages.↩*. Allocated on above percentages.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624082/	FRANK J. VLCHEK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Vlchek v. CommissionerDocket No. 5301.United States Board of Tax Appeals7 B.T.A. 1244; 1927 BTA LEXIS 2982; September 6, 1927, Promulgated 2982 Gain upon the sale of stock transferred upon the books of the corporation from the name of the petitioner to that of his children, held to be taxable to petitioner. William S. Hammers, Esq., for the petitioner. J. W. Fisher, Esq., for the respondent. PHILLIPS 1244 The petitioner seeks a redetermination of a deficiency of $17,665.96 determined by the Commissioner for the year 1917, the amount of which was recomputed at $14,865.52 by the Commissioner after the notice of determination of the deficiency had been mailed to the petitioner and his appeal filed with the Board. The questions at issue arise out of the sale of 3,032 shares of the capital stock of the Vlchek Tool Co. and the issues presented for determination are as follows: (1) Did the taxpayer own 3,032 shares of the capital stock of such company at the time of sale or were 3,000 shares owned by his children? (2) What was the fair market value of stock of another company which was received as a part of the sales price? (3) What was the fair market value on March 1, 1913, of the good will of the Vlchek Tool Co.? (4) Did the Commissioner overrule a decision of his predecessor2983 and, if so, was such action proper? 1245 FINDINGS OF FACT. The petitioner is a citizen of the United States residing in Cleveland, Ohio. Prior to 1895 his business was that of blacksmith. In that year he began to manufacture tools. In 1909 his foundry building was destroyed by fire, some of the machinery and stock being saved. Thereafter, in the same year, the Vlchek Tool Co. was incorporated with a capital stock of $25,000, of which $7,000 was issued to the petitioner for the machinery and stock saved and for cash and $4,000 to the petitioner for good will. Seven thousand dollars par value of such stock was purchased by friends of the petitioner for cash. The Commissioner has determined the March 1, 1913, value of $25,000 par value of the stock then outstanding to be $81,142.35. Prior to 1913 the company paid no dividends, a part of the profits being put back into the business and a part spent in advertising. The company was engaged in the manufacture of small tools which it sold through jobbers and large retail organizations. To promote sales it furnished such jobbers and retailers with plates or cuts with which to illustrate their catalogues. In 19172984 there were outstanding 6,000 shares of common stock of the par value of $50 per share. The petitioner was the president of the company and owned 3,032 shares of its stock. On August 10, 1917, he gave to one Trunecek an option to purchase the stock owned and controlled by him and as much more as he might secure from the other stockholders in said company $100at per share payable in cash or as might be otherwise agreed upon after the acceptance of the option by Trunecek. The option provided that it should expire on November 10, 1917. Trunecek assigned such option to a syndicate which proposed to purchase the corporation. The syndicate, however, was unable to secure subscriptions for the purchase of such stock, or the assets of the corporation, in excess of $450,000. Shortly prior to the date when the option was to expire the syndicate managers approached the petitioner, advised him of the situation, and suggested that he accept, in lieu of $150,000 cash, stock in a new corporation to be organized to take over the assets of the Vlchek Tool Co. The petitioner agreed to do so. On November 14, 1917, Trunecek made an offer in writing to the Vlchek Tool Co. to purchase all its property2985 and assets as a going concern subject to all its obligations in exchange for 6,000 shares of the preferred stock and 2,250 shares of the common stock of a corporation about to be organized under the laws of the State of Ohio, which corporation was to have the same name and is hereafter referred to as the new company. The transfer of the property and payment of the purchase price was to be accomplished by the deposit of the stock of the new company with the National Commercial Bank 1246 of Cleveland, such certificates to be delivered by the bank to such party or parties as the seller should direct upon deposit with the bank on or before November 30, 1917, of the stock of the old corporation and of proper deeds or other instruments transferring title to the property and rights purchased. The proposition was accepted by a vote of the stockholders of the Vlchek Tool Co. held November 26, 1917. This contract was assigned by Trunecek to the members of the syndicate who had agreed to purchase the stock of the new company. During 1919 the petitioner received from the National Commercial Bank of Cleveland out of such transaction $153,200 in cash and $150,000 par value of the preferred2986 stock and $22,500 par value of the common stock of the new company. On November 6, 1917, the petitioner caused a certificate for 1,000 shares of the stock of the Vlchek Tool Co., theretofore owned by him, to be issued to each of his three children, Henry, Valerion, and Mary, thereby reducing the stock standing in his name to 32 shares. Such certificates when issued were delivered by the petitioner to his children and by them to their mother, who placed them in a strong box used by the family for papers, jewelry, and other valuables. The children were present at the meeting of the stockholders held on November 26, 1917, hereinabove referred to, and voted such stock. When the cash of $153,200 and the stock in the new company were received by the petitioner from the National Commercial Bank of Cleveland he delivered one-third of such cash to one of his sons and placed the balance on deposit in various banks in his own name. The stock of the new company was issued in his name. The interest upon the bank accounts and dividends upon the stock of the new company were paid to the children or added to the bank accounts. In 1919 the Vlchek Investment Co. was organized and the stock2987 of the new company and the cash on deposit in the banks were transferred to that company. Stock was issued in four equal parts to the three children and the wife of the petitioner. The intention to organize such investment company for the purpose of holding and investing the proceeds of the sale of the stock of the Vlchek Tool Co. existed prior to the transfer of the stock of the Vlchek Tool Co. from petitioner to his children. Upon his 1917 income-tax return the petitioner stated that he was the owners of 3,032 shares of the stock of the Vlchek Tool Co. and that he had received the proceeds attributable to such a number of shares. In various proceedings before the office of the Commissioner of Internal Revenue the petitioner stated in affidavits that he was the owner of such stock. In the first petition filed with the Board the petitioner did not claim any error in attributing ownership of such stock to him. In an amended petition the petitioner 1247 first claimed that 3,000 shares of such stock was the property of his children. The Commissioner determined the value of the stock of the new company received by the petitioner to the $150,000. Between September 22, 1922, and2988 December 18, 1922, a certificate of overassessment was issued from the office of the Commissioner of Internal Revenue, Income Tax Unit, wherein it was held that such stock should be eliminated from the computation in determining the income of the petitioner. OPINION. PHILLISP: There is not sufficient evidence from which we may determine a March 1, 1913, value of the stock different from that determined by the Commissioner. The determination made by him is based upon the capital and surplus of the corporation as shown by its books and includes no allowance for good will. The petitioner testified from memory that the earnings for the years from 1909 to 1912 were approximately $88,000. Since it appears that no dividends were paid and that the surplus of the corporation in 1913 was only $56,000, we are not inclined to attach much importance to the statement made with reference to the approximate earnings in the absence of any explanation of the discrepancy between the proper earnings and the surplus. Furthermore, there is nothing in the record from which we may determine whether an adequate salary for the service rendered by the petitioner to the corporation in those years was2989 deducted in determining the earnings. The record would indicate that it was doubtful whether such was the case. On the record the action of the Commissioner must be approved. It is the contention of the petitioner that the stock of the new company had no fair value and can not be included in the computation of the income. The evidence discloses that $450,000 of the $600,000 par value of the stock of the new corporation was sold. It is urged that because the syndicate was unable to secure subscriptions for the remainder, it had no fair market value. The petitioner had his choice of either accepting this stock or demanding cash, under the option granted, in which latter event the sale probably would not have been carried out. The other stockholders were all to receive cash. He accepted the stock in lieu of the cash. In view of all the surrounding circumstances, we are of the opinion that no error was made in treating this stock as worth its par value. The petitioner further alleges that the former Commissioner of Internal Revenue had decided that such stock had no fair market value and that any profit on the transaction should be taxed when disposition was made of the stock. 2990 The record, however, fails to 1248 show that any former Commissioner has passed upon the question. Apparently, the petitioner relies upon a certificate of overassessment issued in the latter part of 1922 at which time the present Commissioner was in office. The record does not present the question whether one Commissioner may overrule the determination of his predecessor on a question of fact. It is the petitioner's contention, raised for the first time in an amended petition filed with this Board, that the proceeds from only 32 shares of the capital stock of the Vlchek Tool Co. were his property at the time of the dissolution of that company or the sale of its stock and that the remaining 3,000 shares had previously been given to his children. The record is conflicting and it is difficult to know what is the truth. There is no doubt that such stock was transferred to the children on the books of the corporation and that they voted it at a meeting of the corporation which authorized the sale of the assets to the new corporation. There is no doubt that the petitioner had delivered the stock to his children and that the proceeds finally found their way into the hands2991 of the children except to the extent that their mother received an equal interest with them. All such facts indicate a bona fide gift of the stock to the children. The fact that the father thereafter handled the receipt of the proceeds and attempted to keep it intact for the children is entirely consistent with the contention that they were the owners. The action of the father was no more than natural, considering the age of the children and their lack of business experience. On the other hand, it appears that prior to the time when the transfer was made to the children the matter of forming a family corporation to hold the proceeds was discussed and it was agreed that the proceeds should be placed in such a corporation. It would seem that all the details for the sale had already been arranged. Nothing remained to be attended to except to receive the proceeds. In such circumstances there may be a very grave question whether the petitioner transferred and delivered the stock to his children with the intention that they should have such stock, or under an agreement that the proceeds of the sale should be theirs to be invested in a family corporation under the control of the2992 petitioner. A gift involves more than a delivery of the property. There must be the present intention that the property so delivered shall be the property of the donee. Ordinarily delivery implies such an intention but such is not the case here because it appears that the intention was not that the stock should belong to the children but that the proceeds should go to an investment corporation of which they should be the owners. The stock appears to have been delivered with the understanding that such should be the case. There are further facts which confirm this belief. In the original return 1249 filed by the petitioner and in affidavits furnished to the Commissioner of Internal Revenue which were produced on cross-examination of the petitioner, statements were made that he was the owner of all of this stock. In the original petition filed before the Board no claim was filed that he was not the owner and it was not until an amended petition was filed herein that it was claimed that any gift of the stock had been made to the children. The person who had handled petitioner's tax matters before the Commissioner, called to the stand as a witness, testified that the 19172993 return had been prepared by another accountant who had included the proceeds as income to the petitioner; that during the investigation and controversy with the Unit he had found the record showed that the proceeds had been considered as having been received and taxable to the petitioner and that it was not until the latter part of 1924, in examining the minute books and old stock records for other information that he had found the records showing the gift of the stock to the children prior to the date of the sale and that upon questioning the petitioner about such transaction the petitioner had stated that the transfer to the children was not made to avoid any tax and that on the advice of counsel petitioner had always included it in his tax returns. Considering the entire record we are of the opinion that the transfer and delivery of the stock to the children prior to its sale was not for the purpose of vesting ownership of such stock in them and did not do so and that the petitioner is taxable upon any income which results by reason of the ownership of such stock. Decision will be entered for the respondent.Considered by MARQUETTE and VAN FOSSAN. MILLIKEN not participating. *2994	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624083/	GEORGE H. CHISHOLM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. HARRY L. CHISHOLM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Chisholm v. CommissionerDocket Nos. 61664, 61665.United States Board of Tax Appeals29 B.T.A. 1334; 1934 BTA LEXIS 1400; February 28, 1934, Promulgated 1400 Petitioners and others gave an option on corporate stock, and after receiving notice of the optionee's election to exercise it, petitioners, in order to escape tax on the profit on the sale, organized a partnership consisting only of themselves, to which they transferred title to their stock and then caused the partnership to transfer title to the purchaser and receive the proceeds. Held, that the partnership was but a conduit for the passing of title for petitioners, who were the real vendors, and they are subject to tax on income computed on the basis of cost to them. Joseph H. Morey, Esq., and W. W. Spalding, Esq., for the petitioners. Mason B. Leming, Esq., for the respondent. ARUNDELL1334 The respondent determined deficiencies in income taxes of the petitioners for the year 1928 in the following amounts: George H. Chisholm (Docket No. 61664), $60,753.19; Harry L. Chisholm (Docket No. 61665), $60,686.97. The several errors alleged in each petition present but one question, that is, whether petitioners were the vendors of a block of stock and subject to tax on the gain based on their cost, or whether as the result of their1401 passing title to the purchaser through a partnership organized by them the partnership is to be regarded as the real owner and vendor of the stock. FINDINGS OF FACT. Each of the petitioners is an individual, resident of Buffalo, New York. More than two years prior to the year 1928 each of the petitioners acquired 300 shares of the capital stock of the Houde Engineering Corporation of Buffalo, New York, at a cost to each of $8,000. 1335 On September 26, 1928, each of the petitioners was owner and holder of said 300 shares of stock. Petitioner George H. Chisholm was then vice president of the Houde Engineering Corporation, and petitioner Harry L. Chisholm was treasurer. On September 26, 1928, the petitioners, George H. Chisholm and Harry L. Chisholm, together with certain other stockholders of the Houde Engineering Corporation, executed and delivered to Krauss & Co. of Buffalo, New York, the following written option: September 26th, 1928. IN CONSIDERATION of $1.00 receipt of which is hereby acknowledged, we the undersigned stockholders of the Houde Engineering Corporation, hereby give to Krauss & Company for a period of thirty (30) days from the date hereof, 1402 the right to purchase all the stock of the Houde Engineering Corporation at a price of ($4,000,000) Four Million Dollars in total. This option can only be exercised by the payment of cash before its expiration. It is understood that the net assets of the Houde Engineering Corporation, when, as, and if this option shall be exercised will be at least equivalent to the position as set forth in its balance sheet dated August 31st, 1928, and any accrual in these net assets occurring since the close of business August 31st, 1928, shall adhere to the vendors in this option. Inasmuch as Krauss and Company will act as a broker in this transaction, it is also understood that in the event of the sale of said stock being consummated, Krauss and Company will be entitled to a commission from the purchase price of 3%. If stockholders owning not more than a total of 265 shares of said stock, who do not sign this option, refuse to join in the sale at the price aforesaid, there shall be a reduction made in the purchase price of $1,640.19 per share for each share of said stock which the undersigned shall be unable to deliver to the purchasers. It is understood that the name of A. B. Shultz1403 is signed hereto in pursuance of verbal authority given by him to negotiate a sale of said stock. A. B. SHULTZ GEO. H. CHISHOLM HARRY L. CHISHOLM B. D. SCHULTZ J. SCULLY Krauss & Co. was a partnership consisting of officers of the Manufacturers & Traders-Peoples Trust Co. of Buffalo, New York, which acted as nominee for the bank, and an affiliated corporation of the bank and for customers of the bank. The above option was never changed or modified. No consideration was actually paid for the option, not even the $1 consideration mentioned therein. The bank, through Krauss & Co., obtained this option with the idea of obtaining a purchaser for the stock and reselling it, for which it would receive a commission, and the bank had various negotiations after obtaining the option, endeavoring to obtain a purchaser for the stock. 1336 Just prior to October 11, Krauss & Co. approached the New York Car Wheel Co., of Buffalo, to buy the stock at the option price. On October 11 three of the officers of the bank, Wurst, Harriman and Rea, executed a written agreement with Fred B. Cooley, who was president of the New York Car Wheel Co., as individuals, in which they1404 agreed that they would form a syndicate to take over from the New York Car Wheel Co. a substantial amount of the stock to be purchased by the New York Car Wheel Co., and that in the event of Cooley's death or disability before the syndicate was formed they as individuals would assume the obligations of the New York Car Wheel Co. in respect to the purchase of the stock, and upon this agreement Cooley then agreed with these three individuals to purchase the stock on behalf of the Car Wheel Co.The Car Wheel Co.'s financial responsibility was approximately $1,000,000. The financial responsibility of the three individuals who signed the agreement with Cooley was not sufficient to enable them as individuals to purchase the stock at the option price, but the group that was to comprise the syndicate for the resale of the stock was amply able to finance the purchase. At the same time, on October 11, 1928, Krauss & Co. sent the following letter to the petitioners and other stockholders who signed the option of September 26: Messrs. A. B. Schultz, George H. Chisholm, Harry Chisholm, B. Schultz and J. Scully: DEAR SIRS: Referring to the option dated September 26, 1928, which you have1405 given us for the purchase of all of the stock of Houdaille Engineering Corporation, at a price of $4,000,000.00, we beg to advise that we have secured as a purchaser the New York Car Wheel Company, of this city, which has agreed to purchase said stock upon the terms of our option, and has made available in our hands the sum of $4,000,000.00 therefor. We accordingly notify you that we elect to exercise our option as of this date, and tender you payment in full upon delivery to us of all the stock of the Houdaille Engineering Corporation, duly endorsed for transfer, less a possible maximum of 265 shares all as provided in the option. We shall be glad to suit your convenience as to time and place of delivery, and payment prior to October 25th, and suggest that you promptly arrange with us for an early closing. Yours very truly, [Signed] KRAUSS & COMPANY, By T. CANTWELL. No money or check or cash accompanied this letter. No money or check or draft or any part of the purchase price was ever actually produced or offered to be paid to either of the petitioners, or to any of the other stockholders signing the option before October 24, 1928, as hereinafter related. 1337 1406 No demand for payment of the stock was made by either of the petitioners prior to October 24, 1928. At the time the letter of October 11 was sent, no one had in fact deposited any money with Krauss & Co. or the Manufacturers & Traders-Peoples Trust Co., with which to purchase the stock. On October 20, 1928, petitioners executed an agreement wherein they constituted themselves a partnership under the name of H. L. & G. H. Chisholm. The purpose of the partnership was stated to be that of purchasing, investing, and dealing in stocks and other securities. It was to commence on October 22, 1928, and continue for 10 years. The capital contribution of each of the partners was stated to consist of 300 shares of Houde Engineering Corporation stock at a market value of $492,057. The petitioners were the only members of the partnership and they were to share equally in the profits and losses. On October 22, 1928, they acknowledged, before a notary public, their signatures to the partnership agreement. The petitioners had considered the advisability of forming a partnership several months prior to this time, but had taken no steps to that end. It was formed at this particular time1407 upon advice of their attorney for the purpose of avoiding income tax on the profit on the prospective sale of their Houde Engineering stock. On October 20, 1928, each of the petitioners endorsed his 300-share certificate over to H. L. & G. H. Chisholm. On the same date each of the petitioners executed a written assignment to the partnership of his 300 shares of stock and of his interest in "a certain oustanding option contract for the sale of said stock bearing date, September 26th, 1928." The assignments were made expressly subject to the option which the partnership by the acceptance thereof agreed to observe and perform. On October 22, 1928, the petitioners, signing individually and as copartners, gave a written notice to Krauss & Co. and the New York Car Wheel Co. of the assignment to the partnership, and stated that the partnership stood ready to fully perform its part of the option contract of September 26. On the same date a certificate for 600 shares of Houde stock was issued in the name of H. L. & G. H. Chisholm, and on the same date it was endorsed over to Fred B. Cooley. It was then, on the same date, delivered to the Manufacturers & Traders-Peoples Trust Co., which1408 gave a receipt therefor containing a provision that the stock was to be delivered to the New York Car Wheel Co. or its nominee pursuant to the terms of the option of September 26. Prior to October 20, 1928, no other stock had been deposited with the bank, but all of the stock subject to the option was deposited on or before October 24, 1928. 1338 Monthly reports of the financial condition of the Houde Engineering Corporation were made up and furnished to the treasurer, Harry L. Chisholm, but at October 22 no report had been prepared giving the earnings after August 31, 1928. On October 23 an outside firm of accountants, having been requested to do so, submitted a report to the Manufacturers & Traders-Peoples Trust Co., setting forth the estimated accrued earnings of the corporation for the period September 1 to October 11. inclusive. The amount of earnings so reported was accepted by all the parties as the basis for closing the transaction and computing the purchase price. On October 24 the bank made a loan to Fred B. Cooley of $2,500,000, secured by the Houde stock being purchased, as collateral with other collateral put up by Cooley, and the proceeds of the1409 loan were placed to the credit of Cooley's account at the bank on that date, Out of that account he paid by check for the stock which had been deposited in escrow with the bank by the petitioners and the other stockholders, except that by arrangement with one of the stockholders, A. B. Shultz, payment of a part of his share of the purchase price was deferred until November 1. The first deposit to Cooley's credit of any such sum of money as that required for the purchase of the stock was on October 24. The balance in any of his accounts at the bank prior to that time was entirely insufficient for the purchase of this stock. On October 24 the partnership, H. L. & G. H. Chisholm, received Cooley's check for $1,004,849.04 payable to the order of the partnership, in payment for the 600 shares of Houde stock, and thereupon the bank delivered to Cooley the certificate for the 600 shares which had been deposited with it in escrow by the partnership. The amount of $1,004,849.04 was computed as follows: Proportionate share of $4,000,000 option price$984,110.71Proportionate share of Houde earnings Sept. 1-Oct. 1151,816.13Total1,035,926.84Commission of 3 percent to Krauss & Co31,077.80Net price for 600 shares1,004,849.041410 The partnership on the same day deposited the check received from Cooley with the bank, opening an account in the name of the partnership, H. L. & G. H. Chisholm, to which account the check was credited. Upon the books of the partnership, opened some time after its formation, the capital account of each of the petitioners respectively was credited with $492,057, with the explanation that this represented "the agreed fair value of 300 shares of the Houde Engineering 1339 Corporation stock." The payment of $1,004,849.04, the purchase price of the said 600 shares of stock, was also subsequently entered upon the books of the partnership, as the cash received for the sale of the stock. In November 1928 the members of Krauss & Co. formed a syndicate and sold the stock for $6,000,000. A business associate of petitioners, one Wyckoff, was a member of the syndicate and offered petitioners an interest in his share in the syndicate, which offer was accepted by petitioners. Upon completion of the sale, petitioners' share of the profits was $7,694.24, which amount they received from Wyckoff and which was returned as income in the partnership return for 1928. The partnership1411 is still in existence and the partnership agreement has never been modified or amended. There has never been any distribution of the capital of the partnership to the partners. The partnership and each of the petitioners filed an income tax return for the year 1928. The accounts of the petitioners were kept on a cash receipts and disbursements basis and their returns were filed on that basis for 1928 and prior years. In the partnership return, in addition to reporting the $7,694.24 mentioned above as received from Wyckoff, the amount of $20,735.04 was reported as profit from the sale of the Houde stock, computed as follows: Selling price$1,004,849.04Cost (value at time of contribution)984,114.00Profit20,735.04In the individual returns of petitioners for the year 1928 each reported as "Income from Partnerships" one half the amount of net income shown on the partnership return. The respondent held that the option was exercised on October 11, 1928, which was prior to the formatiion of the partnership, and that, therefore, the stock was sold by petitioners rather than by the partnership, and in the case of each petitioner he determined that a gain1412 had been realized as follows: Sale price$502,424.52Cost8,000.00Gain494,424.52The gain so realized was treated by respondent as a capital gain and tax computed at the capital gain rate of 12 1/2 percent. OPINION. ARUNDELL: It is alleged in each case that the respondent erred in determining that the sale of Houde Engineering Corporation 1340 stock was made by the petitioner, when in truth and in fact the sale was made by the partnership of H. L. & G. H. Chisholm, and the purchase price was received by the partnership. There is no question but that the sale of the stock was, in form, a sale by the partnership. On the date that the stock was transferred to the purchaser the certificate for the 600 shares was in the name of the partnership, the certificate was endorsed over to the purchaser by the partnership, and the check for the sale price was made payable to and was received by the partnership. If we went no further into the matter than this and gave consideration only to the form of the transaction, we would be obliged to say that there was a sale by the partnership and the gain or loss thereon was that of the partnership. The Commissioner, 1413 upon consideration of the facts, concluded that the sale was made by the petitioners, individually, and not by the partnership, and determined that the difference between cost to the individual petitioners and the sale price was income to them. The difference between cost to the individuals and the selling price is much greater than the difference between value of the stock when the partnership was formed and the selling price; hence, the income on the basis of a sale by the individuals is a higher amount than on a sale by the partnership. See . Our task is to decide whether the Commissioner erred in his determination. In so doing it is obvious that we are not required to stop short with the surface indications of the case, but it is our right and duty to examine all the surrounding circumstances to find the substance of the matter, for, as has often been said, it is substance and not form that controls in the application of tax laws. . We should especially not be blinded by form and lose sight of the substance where, as here, the cloak of formality is donned for the express1414 purpose of tax avoidance. The avoidance or reduction of taxes effected through legal means is not prohibited, , and if the method used, whether a partnership or some other device, is a bona fide transaction occurring in the ordinary course of business and reflects the real rights of the parties, the tax must be levied accordingly. The question that arises here is not whether legal means were used to avoid tax; it is whether, at bottom, the intent of the petitioners was to make a bona fide transfer to a new entity so that it in truth and in fact was the owner of the property and entitled to enjoy the income from the sale as its own, or whether this entity of their creation was merely a conduit used for the purpose of passing title and receiving the proceeds of the sale for the petitioners as beneficial owners. 1341 The events with which we are concerned, all occurring in 1928, were as follows in chronological order: September 26 - Execution and delivery of thirty-day option. October 11 - Notice from optionee of election to exercise option. October 20 - Stock endorsed over to partnership; formal assignment1415 of stock and interest in "option contract" to partnership; partnership agreement signed. October 22 - Execution of partnership agreement acknowledged before notary public; notice to optionee and prospective purchaser of assignment to partnership; certificate for 600 shares of stock issued to partnership; certificate for 600 shares assigned, by endorsement by partnership, to purchaser and delivered to bank in escrow. October 23 - Receipt of earnings statement of Houde Corporation for period September 1 - October 11. October 24 - Check for $1,004,849.04 issued to partnership by purchaser of the stock; receipt for that sum executed by partnership. October 25 - New stock certificate issued to purchaser. It is claimed by petitioners that the letter of October 11 from the optionee was not an effective exercise of the option, because the option called for "payment of cash" and the cash was not produced and tendered with the letter. There are numerous cases to the effect that an option must be exercised in strict accordance with its terms. See 1416 , and cases there cited. However, wo do not understand this to be decisive of the questions here mentioned. Most of the cases cited to us deal with questions of specific performance and there is no such issue here. It is not claimed that the option given by petitioners and others was allowed to lapse and no performance had under it. In (affirming ), the option specified a cash consideration for timber lands and timber rights and within the period of the option the optionee gave notice that it would exercise the option and would pay over the money "as soon as the papers were prepared." The Supreme Court said that "An executory contract of sale was created by the option and notice * ." And so, even though there was no sale of the stock at October 11, when the stock was still in the name of petitioners, the acceptance of that date together with the option did constitute an "executory contract of sale." This contract, through the subsequent acts of the interested parties, including petitioner's assignee, which they completely controlled1417 at all times, within a few days was converted into an executed contract of sale. The assignee partnership, which it must be remembered consisted only of the two petitioners and so was dominated by them, entered into no new contract for the sale of the stock, but merely at the direction of the petitioners carried out their prior engagement. There is testimony that petitioners had for several 1342 months considered the advisability of forming a partnership, but it is admitted that the imminence of the sale of the Houde stock was the immediate occasion for its formation, and that it probably would not have been formed when it was except for the prospective tax liability. Their obvious purpose was to escape the tax on the profit from the sale. In these circumstances a proper regard for the substance of the transaction impels the conclusion that the partnership was acting on behalf of the individuals in taking title to and selling the stock. Under somewhat similar facts, but where the control over the recipient of proceeds was more remote than that of partners over partnership income, it has been held that recipient was nothing more than an agent, or conduit for passing title1418 and receiving the money, for the real party in interest. In , the petitioner had made an oral agreement to sell certain properties, both real and personal. Shortly thereafter his attorney caused to be organized a corporation which was controlled by the attorney. Petitioner then executed a bill of sale for one half the personalty to his wife and through an intermediary had the realty deeded to himself and his wife. He and his wife then offered to sell the entire property to the newly organized corporation, controlled by petitioner's attorney, which offer was accepted and the new corporation then sold the property to the purchaser with whom petitioner had made the oral agreement to sell. The new corporation received the proceeds of the sale and paid a portion thereof to petitioner. We held that all of the profit on the sale was taxable to the petitioner. As to the corporation organized and controlled by petitioner's attorney, we said that it "was created for the sole purpose of passing title in the properties * * * and passing payment therefor to petitioner. * * * As a conduit, it received * * * the purchase money due petitioner." 1419 Respecting the bill of sale and deed to petitioner's wife just prior to the sale, we pointed out that when these were given all arrangements for the sale had been made; it remained only to pass title and receive the consideration, and the sale was carried out as arranged. We concluded that: The transfers were a subterfuge, effected upon the eve of the consummation of the sale in the hope that it would serve to avoid a part of the tax to be imposed upon the profit derived therefrom. We conclude that the real owner and vendor of the properties was petitioner, and that the entire profit is taxable to him. In , the petitioner corporation owned a leasehold which it contracted to sell, the purchase price to be paid upon delivery of a proper deed. The petitioner then assigned the leasehold to its two stockholders, who a few days later 1343 assigned it to the purchaser and received the purchase price. We held the entire profit to be taxable to the corporation, saying that "A reasonable view of the substance of the transaction demands that we regard the individuals as acting on behalf of the corporation in taking title to and disposing1420 of the lease." In ; affd., , a corporation, on February 1, 1927, agreed to sell its property to its principal stockholder, MacQueen, for $85,000. The next day MacQueen agreed to sell the property to one Hatfield for $150,000. The transfers from the corporation to MacQueen and from him to Hatfield took place on March 1, 1927. On February 11, 1927, MacQueen executed an instrument wherein he declared that the profit on the transaction was to be received by him in trust for the stockholders of the MacQueen corporation. The Commissioner added the $65,000 profit to the income of the corporation, and we sustained his action on the theory that the transfer to MacQueen was merely one in trust. Our decision was affirmed on appeal, the Circuit Court saying: Although in form there were two sales of the corporation real estate, first the purported sale by the petitioner to MacQueen, and, second, the sale by MacQueen to Hatfield, in substance the transaction was a sale by the petitioner to Hatfield through the agency of MacQueen. So also, although in form MacQueen was a trustee for the distribution of the profits1421 earned by the sale of his own real estate to Hatfield, in substance he was the agent of the petitioner for the distribution of the profits from the sale of the corporation's real estate among its stockholders. The corporate tax rate imposed by the applicable taxing statutes is higher than the individual rate. The obvious purpose of the procedure followed by the petitioner, its directors, and stockholders, was to take advantage of the lower tax rate permitted individuals and thereby avoid the corporate tax rate on the profits of the ultimate sale of the real estate. Such anticipatory arrangements and contract, intended to circumvent the taxing statutes, are not looked upon with favor. . , certiorari denied, . The principle of the above cases we think should control those before us here. The evidence is that petitioners had offered to sell their property, that they were in receipt of a written acceptance, and that they caused their part of the bargain to be carried out through a partnership of which they were the only members. The intervention1422 of the partnership was nothing more than an anticipatory arrangement "intended to circumvent the tax statutes." The partnership was not a bona fide owner of property acquired in the ordinary course of business. The petitioners were the real owners and vendors of the stock, using the partnership as an instrumentality for passing title and receiving the proceeds for them. 1344 Our conclusion is in harmony with decisions of the Supreme Court, which have refused to give effect to transfers not in the ordinary course of business but resorted to solely for the purpose of escaping tax. Some devices for reduction or avoidance of taxes are, in the language of Mr. Justice Holmes in , on the "safe side", while others fall on the "wrong side of the line indicated by the policy if not by the mere letter of the law." In judging upon which side of the line a given act falls, a distinction may well be taken according to whether it is within the scope of the normal operating methods of the taxpayer with no more than a change in form so as to minimize future taxes, or whether the procedure adopted represents a radical departure from1423 normal methods for the sole purpose of escaping taxes on transactions already carried so close to consummation that the shadow of taxation hovers over them. Such is the trend of the court decisions as we read them. Typical of the one class of cases is united statesv. , where a corporation in the normal course of its business operations issued drafts drawn in such form as to fall outside the scope of the language of the statute designating certain kinds of drafts as subject to a stamp tax. That course of conduct, the Court said, was open to no legal censure. The decision there was put upon two grounds. First, that the drafts so drawn did not come within the several classes of instruments described in the statute as subject to tax. This follows the rule that the taxing statutes are construed most strongly against the Government. Second, that a holding which would bring such instruments within the scope of the statute, when on their face they were outside the list of taxed papers, would require an investigation into every paper presented in the form of nontaxable drafts or checks to see whether it was subject to tax, and that this "would produce1424 difficulties and inconveniences vastly more injurious than that complained of. Such a rule would destroy the circulating capacity of bills, or drafts or orders. * * * That the rule contended for is impracticable in a commercial country is too obvious to require further illustration." Considering the decision of the Court in the light of the facts in that case, we think it cannot with any show of reason be said to give unqualified approval to all cases of tax avoidance through means of legal forms. On the contrary, the reports contain numerous instances of transactions on the "wrong side of the line", which have been condemned as evasions although carried out through legal forms. Notable cases are those where persons normally carrying substantial bank balances converted their deposits into United States notes shortly prior to the date for assessment of personal property under state taxing statutes, 1345 solely for the purpose of escaping taxation. In one such case, , the taxpayer filed a bill in equity to restrain collection of the tax asserted against the amount of his bank balance so converted. 1425 The Supreme Court sustaining a dismissal of the bill by the state court, said that "a court of equity will not knowingly use its extraordinary powers to permit any such scheme as this plaintiff devised to escape his proportionate share of the burden of taxation. His remedy, if he has any, is in a count of law." Later another such case, , reached the Supreme Court through the law courts, and the conduct of the taxpayer was there condemned as severely as in the equity case. While the decision of the Court, in holding the device ineffectual, was based on the ground that the state statute was valid, it is significant that a large part of the opinion is devoted to numerous authorities to the effect that, since the transaction of conversion of the bank deposit into greenbacks was transitory and not in the ordinary course of business, it was an indefensible evasion of the revenue laws of the state. In the course of the opinion the Court concedes the proposition advanced that the state tax laws could not reach the United States "greenbacks" owned by the taxpayer on the day of assessment, but adds this important qualification: "if the1426 thing done had been done in the ordinary course of business, and the conversion of his general deposit in the bank into a private package of greenbacks, exempt from taxation, were free from illegal purpose or fraudulent motive." (Italics ours.) To the claim that a property owner in such cases might have relief in a court of law as distinguished from a court of equity, the Supreme Court, after citing several cases, including the Mitchell case, supra, answered: All these decisions show that the courts look upon this transaction as indefensible, and consider it an improper evasion of the duty of the citizen to pay his share of the taxes necessary to support the government which is justly due on his property. From the above cases we think it may be taken as the announced policy of the courts, both in cases at law and in quity, that they will not countenance a scheme to escape taxes which involves an abrupt departure from normal procedure, devised and adopted with reference to a transaction upon which the imposition of tax is imminent, and solely for the purpose of avoiding liability. Such is the case here. The petitioners owned property which had cost them $16,000 and1427 which they were about to sell for more than $1,000,000. They had been notified that the deal would be consummated and they were dealing with men who they believed were financially responsible. The tax on this transaction, if consummated, would be high. So in order to escape their just share of tax to which 1346 their profit would be subject, upon advice of their attorney, they transferred the property to an entity created and controlled by themselves from which at any time they could take the entire proceeds of the sale. The transitory holding of title by the partnership under these circumstances may not be regarded as a matter of substance which changed the substantive rights or tax liability of the real owners and vendors of the property, and the plan resorted to should not be permitted to alter the tax liability of petitioners upon income from the sale of their property. Our holding herein is not contrary to cases cited by petitioners. See ; ; affd., 1428 ; . The evidence in those cases satisfied us of bona fide transfers pursuant to prior agreements, and it did not appear that the income from the property transferred was subject to the control of the transferor to the extent that it was here by reason of petitioners, comprising the entire partnership. We accordingly affirm the action of the respondent in treating as income to petitioners the difference between cost to them of their stock and the price paid by Cooley, the purchaser. Reviewed by the Board. Decision in each case will be entered for the respondent.GOODRICH GOODRICH, dissenting: I disagree with the majority opinion in laying as a test for successful tax avoidance the adherence by the taxpayer to the so-called normal procedure in the conduct of his affairs. In the first place, from the number of controversies involving avoidance attempts, it might well be argued that the normal procedure of most taxpayers in the conduct of their affairs includes any acts necessary to carry out a determination to pay taxes in such amounts as the law demands, and no more - a fact of1429 which the majority opinion takes no cognizance. Next, I do not understand that a taxpayer must sit by idly twirling his thumbs until a tax liability alights upon him. If he is warned of its approach, if he sees it coming, he may seek such shelter as the law offers in an effort to escape it or diminish its blow. Of course, by examination, it must be determined whether the shelter he reaches is really constructed of statutory material, and by close scrutiny of the facts it must be determined whether the taxpayer really got himself and his transactions within it. But he should not be counted out merely because the shelter lies off his beaten path and he scurries for it. 1347 The suggestion of the majority that every taxpayer must needs plod along the path laid by the past requirements of his business, meeting and paying any and all tax liabilities encountered, is highly Utopian - at least from the governmental viewpoint - and offers an ethical canon, interesting but quite beyond the necessities of decision in the instant controversy. Apparently it does not recognize that high taxes, like high water, may make an old path unusable, nor that on occasion a new path may be*1430 charted during the survey preliminary to entering upon a transaction in order to reckon with the tax demands certain to come. To say that the old path must be blindly followed, that bypaths or new paths may not be laid out by proper strides within legal bounds, goes too far.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624084/	Matthew J. Hall v. Commissioner.Hall v. CommissionerDocket No. 45.United States Tax Court1948 Tax Ct. Memo LEXIS 121; 7 T.C.M. (CCH) 559; T.C.M. (RIA) 48151; August 11, 1948121 Upon the facts which have been stipulated, held, that the sale of certain shares of common stock in the Thompson Automatic Arms Corporation was made by the Borall Corporation as its own property and was not made for the account of petitioner, Matthew J. Hall, Borall Corporation v. Commissioner, 167 Fed. (2d) 865, decided May 4, 1948, followed. George R. Sherriff, Esq., for the petitioner. William A. Schmidt, Esq., for the respondent. BLACK Memorandum Findings of Fact and Opinion BLACK, Judge: The Commissioner has determined a deficiency in petitioner's income tax for the years 1939 of $3,388.76. The petitioner filed his income tax return for the year 1939 with the collector for the second district of New York. On this return he reported a net income of $34,533.86. The Commissioner in his determination of the deficiency has added to the net income as thus reported by petitioner, "Unallowable deductions and additional income" as follows: (a) Compensation for services$ 4,960.00(b) Short term capital gain2,200.39(c) Bad debt5,357.50(d) Taxes250.00Total$12,767.89To these adjustments thus made by the respondent, 122 petitioner assigns errors as follows: (A) The Commissioner erred in increasing the amount reported as compensation for services rendered by the sum of $3,960.00. (B) The Commissioner erred in increasing by $78.89 short-term capital gain originally reported. (C) The Commissioner erred in disallowing short-term capital loss originally reported of $2,121.80. (D) The Commissioner erred in disallowing as a bad debt deduction worthless note of M. J. Hall & Company, Inc. in the amount of $5,357.50. (E) The Commissioner erred in reducing deduction for miscellaneous taxes by the sum of $250.00. [The Facts] At the hearing in this proceeding the parties filed a stipulation of facts which, omitting formal parts, reads as follows: 1. The individual income tax return of the petitioner for the taxable year 1939 was filed with the Collector of Internal Revenue for the Second District of New York. 2. The value of the 16,500 shares of Thompson Automatic Arms Corporation stock received by the petitioner as compensation for services rendered was $1.24 per share at date of receipt in 1939 and the adjustment of net income of $3,960, as shown in the deficiency notice, is correct. 123 3. Petitioner transferred certain property to the Borall Corporation in 1939 in exchange for 7,700 shares of preferred stock of the Borall Corporation at a par value of $10 per share and 4,640 shares of common capital stock of the Borall Corporation at $1 par value. 4. The 7,700 shares of the Borall Corporation preferred stock received by petitioner in said exchange had a basis in his hands for the purpose of gain or loss of $2.65714 per share. 5. After receiving the Borall Corporation preferred stock, petitioner transferred 2,500 shares thereof in 1939 to Samuel Ungerleider, which transfer resulted in no gain or loss. 6. Thereafter in 1939, petitioner transferred to Mortimer S. Gordon 350 shares of the Borall Corporation preferred stock, and this transfer resulted in a short-term capital gain to petitioner of $1,470. Petitioner also transferred to Aaron Saphier and/or L. S. Saphier & Co. 120 shares of the Borall Corporation preferred stock in said year and this transfer resulted in a short-term capital gain of $881.14. Said amounts of $1,470 and $881.14 were not reported on the return or taken into account in the deficiency notice. Petitioner now concedes that said amounts124 should be included in the adjusted net income. 7. After the foregoing transfers, petitioner remained the owner of $4,730 shares of the preferred stock of the Borall Corporation. 8. Petitioner agrees to be bound by the decision of this Court after it has become final in the appeal of the Borall Corporation, Docket No. 2841, now pending in this Court, as to whether the sale of 11,200 shares of the Thompson Automatic Arms Corporation common stock which the Commissioner has determined resulted in a taxable gain of $24,837 to the Borall Corporation during its taxable year ended March 31, 1940, was a sale by the Borall Corporation of its own property, or whether 9,460 of said shares of the Thompson Automatic Arms Corporation stock were sold for the account of Matthew J. Hall, petitioner herein. 9. If in the Borall Corporation case, Docket No. 2841, it is decided that the Borall Corporation sold 9,460 shares of the Thompson Automatic Arms Corporation stock for the account of Matthew J. Hall (petitioner herein) in its fiscal year ended March 31, 1940, it is agreed that Matthew J. Hall realized a short-term capital gain of $25,271.72 in 1939, as a result of the receipt of 9,460 shares125 of the Thompson Automatic Arms Corporation stock as a distribution in liquidation of the Borall Corporation; and that he sustained a short-term capital loss in 1939 of $2,451.50 on the sale in 1939 by the Borall Corporation for his account of 6,821 shares of said Thompson Automatic Arms Corporation stock. 10. If, however, in the Borall Corporation case the Court decides that the Borall Corporation did not sell 9,460 shares of the Thompson Automatic Arms Corporation stock for the account of Matthew J. Hall, but sold all of the 11,200 shares for its own account, Matthew J. Hall realized a shortterm capital gain of $12,264.22 in 1939 as a result of the receipt of cash liquidating dividends in that year from the Borall Corporation of $24,832.50, on account of his ownership of 4,730 shares of the Borall Corporation preferred stock. 11. Petitioner concedes that the indebtedness of $5,357.50 represented by a note to him by Matthew J. Hall & Co., Inc., did not become worthless in 1939 and that the adjustment of this item in the deficiency notice is proper. Petitioner also concedes that the respondent has correctly disallowed a deduction for taxes claimed in the sum of $250. The parties126 are agreed that the foregoing stipulation of facts settles by agreement all issues between them except one. That issue is whether sales of certain common stock of the Thompson Automatic Arms Corporation made by the Borall Corporation in the taxable year 1939 were sales of Borall Corporation's own property or whether the sale of 9,460 of these shares was made for the account of petitioner, Matthew J. Hall. In his petition the petitioner alleges with reference to the sale of this stock, among other things, as follows: "(8) The sales of Thompson Automatic Arms Corporation stock by the Borall Corporation were made by said corporation for the account of its stockholders and was directly in pursuance of the resolution adopted at the stockholders' meeting of September 9, 1939, and the transactions involved herein were correctly reflected by the petitioner in his return filed for the period herein involved." This allegation of fact, as well as others made by petitioner with reference to said sale, was denied by respondent in his answer. [Opinion] The parties have agreed in the stipulation that they would be bound by the decision of this Court after it becomes final in the appeal*127 of the Borall Corporation, Docket No. 2841, as to the issues raised concerning the sale of this Thompson Automatic Arms Corporation common stock. In a Memorandum Findings of Fact and Opinion entered by this Court on October 30, 1946, we held upon the evidence that the sale of the stock in question was a sale by the corporation of its own property and that it was taxable on the profits derived from such sales. Our decision was appealed to the Second Circuit and on May 4, 1948, our decision was affirmed in Borall Corporation v. Commissioner, - Fed. (2d) -. Following that decision it is held that the 9,460 shares of common stock of Thompson Automatic Arms Corporation involved in this proceeding were sold by the Borall Corporation for its own account and as its own property and not for the account of petitioner Matthew J. Hall. The transaction should be so treated in a recomputation under Rule 50. As has already been stated, the parties are in agreement as to the facts which will enable such a recomputation to be made under Rule 50. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624086/	GEORGE N. GABRIEL AND KAREN B. GABRIEL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentGabriel v. CommissionerDocket No. 28619-90United States Tax CourtT.C. Memo 1993-524; 1993 Tax Ct. Memo LEXIS 538; 66 T.C.M. (CCH) 1283; November 16, 1993, Filed 538 Decision will be entered under Rule 155. For petitioners: Kevin P. O'Connell. For respondent: Catherine J. Caballero. RUWERUWEMEMORANDUM FINDINGS OF FACT AND OPINION RUWE, Judge: Respondent determined deficiencies in petitioners' Federal income taxes and additions to tax as follows: Additions to TaxYearDeficiency Sec. 6653(a)(1)Sec. 6653(a)(2)1981$ 73,501.32-- -- Additions to Tax YearDeficiency Sec. 6653(a)(1)Sec. 6653(a)(2)Sec. 66611982$ 7,067.52-- ----198447,663.26$ 2,383.1550 percent of$ 11,915.75the interest dueon $ 47,663.26After concessions and a stipulation of partial settlement, the sole issue for decision is whether the Form 872A (Special Consent to Extend the Time to Assess Tax) for the period ended December 31, 1981, executed by petitioners, extended the time during which respondent could assess income tax due with respect to losses that petitioners claimed were sustained from forward contracts in Government-backed securities. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable year in issue, and all Rule539 references are to the Tax Court Rules of Practice and Procedure. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference. Petitioners 1 resided in the State of Oregon when they filed their petition. During the years 1980 through 1984, petitioner participated in a program that purported to engage in forward contracts in Government-backed securities. This program was promoted by Gregory Government Securities (GGS) and Gregory Investment & Management, Inc. (GIM). On their 1981 Federal income tax return, petitioners claimed ordinary losses in the amount of $ 112,122 and short-term capital losses in the amount of $ 3,032 attributable to their participation in the program promoted by GGS and GIM. The parties have stipulated that the forward contracts, which petitioners purportedly participated in, are indistinguishable from the540 forward contracts that were the subject of Brown v. Commissioner, 85 T.C. 968 (1985), affd. sub nom. Sochin v. Commissioner, 843 F.2d 351 (9th Cir. 1988). In Brown, this Court concluded that the losses from the forward contracts were "not allowable because the disputed transactions constituted factual shams which were inspired, designed, and executed * * for the sole purpose of attempting to achieve tax losses for their investors." Id. at 1000. (Fn. ref. omitted.) There were over 1,400 other cases pending before this Court involving similar issues and factual situations. Id. at 970. During 1980, petitioner participated in the GGS and GIM program with others through accounts bearing the designations Mikado and Maggs, Gabriel, and Hall. On their 1980 income tax return, petitioners claimed a loss from the purported forward contracts. By letter dated May 17, 1983, respondent requested that petitioners file a partnership return for their 1980 participation with other individuals in the purported forward contracts. Paragraph 3 of the letter provided in541 part: We hereby request you file a partnership return. If a return is not filed * * within 30 days we will initiate procedures to process a "Substitute for Return" and assess applicable penalties under IRC 6698 for failure to file. * * In response, petitioner informed respondent by letter dated June 7, 1983, that he was a "nominee" for certain individuals who were coowners of undivided interests in the underlying forward contracts. Petitioner stated that it was his and the other coowners' understanding and intention that each person had acquired separate undivided interests in the forward contracts. Notwithstanding the 30-day deadline, respondent never took the action described in the above letter nor made any other attempt to treat petitioner and the other coowners as a partnership. On April 30, 1986, this Court entered a decision in which petitioners agreed to the disallowance of the 1980 losses from the purported forward contracts. During the taxable year 1981, petitioner participated in the GGS and GIM program through an account bearing the name G2MH (which stands for George Gabriel, Warren Maggs, and Peter Hall). Petitioner held a 50-percent ownership interest542 in the G2MH account, while Messrs. Hall and Maggs each held a 25-percent interest. In a letter dated March 30, 1981, to the attention of petitioner, GIM confirmed receipt of $ 7,000 from G2MH. The $ 7,000 consisted of checks made payable to GIM, not G2MH, individually written by petitioner and Messrs. Hall and Maggs. Petitioner did not intend or consider G2MH to be a partnership. Petitioner, Mr. Hall, and Mr. Maggs could withdraw their share of the "investment" without each other's consent. Petitioner and Messrs. Hall and Maggs did not execute a written partnership agreement for G2MH and did not apply for, or receive, a taxpayer identification number for G2MH. G2MH did not file a written statement electing exclusion from the provisions of subchapter K of the Internal Revenue Code. At no time did G2MH maintain a bank account. Petitioner made no investment decisions on behalf of G2MH. The only involvement petitioner had with G2MH was: (1) Depositing a check with GIM in 1981; (2) signing a client agreement with GIM and executing a limited power of attorney to GIM, both in an individual capacity; and (3) reporting the final results of the forward contracts to Messrs. Hall and543 Maggs. The total amount of time petitioner spent on matters related to G2MH was less than one-half day. For the taxable year 1981, petitioner and Messrs. Hall and Maggs reported losses with respect to the purported forward contracts in proportion to the amount each contributed to the G2MH account. On their 1981 return, petitioners reported the loss as "STCL From Trading Various Futures and Forward Contracts". The loss attributable to the G2MH account was not reported as a partnership loss on Schedule E. On Schedule E of their 1981 return, petitioners claimed losses from a partnership known as Eagle Creek Timber Co. (Eagle Creek) in the amount of $ 44,689. Petitioners also reported the activities of three other partnerships on their 1981 Schedule E, named Enertex Goodall #8, #11, and #12. Petitioners have consistently taken the position that G2MH was not a partnership. In a letter dated June 7, 1983, petitioner represented to respondent that the "transactions occurred in a tenancy-in-common". On April 15, 1985, petitioners executed a Form 872A (Special Consent to Extend the Time to Assess Tax). The Form 872A was executed on April 22, 1985, by revenue agent Ronald L. Giebenhain544 on behalf of respondent. The Form 872A provided: The amount of any deficiency assessment is to be limited to that resulting from any adjustment to: (A) the taxpayer's distributive share of any item of income, gain, loss, deduction, or credit of, or distribution from, any partnership (or any organization treated by the taxpayer as a partnership on the taxpayer's tax return), (B) the tax basis of the taxpayer's interests in such partnerships or organizations treated by the taxpayer as a partnership, (C) any gain or loss (or the character or timing thereof) realized upon the sale or exchange, abandonment, or other disposition of taxpayer's interest in such partnerships or organizations treated by the taxpayer as a partnership, (D) items affected by continuing tax effects caused by adjustments to any prior tax return, and (E) any consequential changes to other items based on such adjustment.Petitioner believed the Form 872A applied only to the Eagle Creek partnership. The cover letter transmitting the unsigned Form 872A from respondent's agent to petitioners made reference only to the Eagle Creek partnership. Before signing the Form 872A, petitioner contacted Revenue Agent545 Giebenhain to verify that the consent applied only to Eagle Creek. Mr. Giebenhain told petitioner that it was his intent to limit the consent agreement to Eagle Creek. Respondent's notice of deficiency for 1981 was mailed to petitioners on September 20, 1990. In the notice of deficiency, the Eagle Creek losses were referred to as Schedule E partnership losses. The G2MH activity was referred to as commodities and capital losses. 2OPINION Petitioners contend that the adjustments made by respondent, relating to G2MH, are barred by the statute of limitations. Section 6501(a) provides that the amount of any tax shall be assessed within 3 years after the return is filed. Respondent's notice of deficiency with respect to petitioners' 1981 return was mailed on September 20, 1990, which exceeded the normal 3-year period of limitations provided in section 6501(a). Petitioners, however, executed Form 872A546 on April 15, 1985, less than 3 years after filing their 1981 return. The executed Form 872A extended the time during which respondent could assess income tax due with respect to partnership items on petitioners' 1981 return. Under these circumstances, petitioners must establish that the executed Form 872A does not extend the period of limitations with respect to the portion of the deficiency attributable to the G2MH adjustment. Schulman v. Commissioner, 93 T.C. 623">93 T.C. 623, 639 (1989); Kronish v. Commissioner, 90 T.C. 684">90 T.C. 684, 692-693 (1988); Adler v. Commissioner, 85 T.C. 535">85 T.C. 535, 540-541 (1985). Petitioners argue that the losses attributable to G2MH were not within the scope of the special consent because G2MH was not a partnership. Petitioners also argue that there was no mutual assent between the parties to extend the special consent adjustments related to G2MH. Consequently, in petitioners' view, respondent's notice of deficiency was untimely. The Form 872A executed by the parties clearly extends the period of limitations to petitioners' "distributive share of any item of income, gain, loss, deduction, 547 or credit of, or distribution from, any partnership (or any organization treated by the taxpayer as a partnership on the taxpayer's tax return)." Thus, if G2MH was not a partnership, and was not treated as a partnership on petitioners' return, the Form 872A will not operate to toll the statute of limitations. Section 7701(a)(2) defines a "partnership" and "partner" as follows: (2) Partnership and Partner. -- The term "partnership" includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a trust or estate or a corporation; and the term "partner" includes a member in such a syndicate, group, pool, joint venture, or organization.The definition of a partnership in section 7701(a)(2) is virtually identical to that in section 761(a). Section 1.761-1(a), Income Tax Regs., further provides: A joint undertaking merely to share expenses is not a partnership. * * Mere coownership of property which is maintained, kept in repair, and rented or leased does not constitute a partnership. For example, if an548 individual owner, or tenants in common, of farm property lease it to a farmer for a cash rental or a share of the crops, they do not necessarily create a partnership thereby. Tenants in common, however, may be partners if they actively carry on a trade, business, financial operation, or venture and divide the profits thereof. For example, a partnership exists if coowners of an apartment building lease space and in addition provide services to the occupants either directly or through an agent. * Whether parties have formed a partnership is a question of fact, and while all circumstances are to be considered, the essential question is whether the parties intended to, and did in fact, join together for the present conduct of an undertaking or enterprise. Luna v. Commissioner, 42 T.C. 1067">42 T.C. 1067, 1077 (1964); Commissioner v. Tower, 327 U.S. 280">327 U.S. 280, 287 (1946) ("the question arises whether the partners really and truly intended to join together for the purpose of carrying on business and sharing in the profits or losses or both. And their intention in this respect is a question of fact".). In Commissioner v. Culbertson, 337 U.S. 733">337 U.S. 733, 742 (1949),549 the Supreme Court stated: The question is * * * whether, considering all the facts -- the agreement, the conduct of the parties in execution of its provisions, their statements, the testimony of disinterested persons, the relationship of the parties, their respective abilities and capital contributions, the actual control of income and the purposes for which it is used, and any other facts throwing light on their true intent -- the parties in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise. [Fn. ref. omitted.]In Luna v. Commissioner, supra at 1077-1078, this Court focused on certain factors as relevant in determining whether a partnership exists. The Court stated: The agreement of the parties and their conduct in executing its terms; the contributions, if any, which each party has made to the venture; the parties' control over income and capital and the right of each to make withdrawals; whether each party was a principal and coproprietor, sharing a mutual proprietary interest in the net profits and having an obligation to share losses, or whether one party was the550 agent or employee of the other, receiving for his services contingent compensation in the form of a percentage of income; whether business was conducted in the joint names of the parties; whether the parties filed Federal partnership returns or otherwise represented to respondent or to persons with whom they dealt that they were joint venturers; whether separate books of account were maintained for the venture; and whether the parties exercised mutual control over and assumed mutual responsibilities for the enterprise. [Id.]Mere coownership of property does not create a partnership for Federal tax purposes. Marinos v. Commissioner, T.C. Memo. 1989-492 (citing Estate of Appleby v. Commissioner, 41 B.T.A. 18">41 B.T.A. 18, 20 (1940), affd. 123 F.2d 700">123 F.2d 700 (2d Cir. 1941)); Powell v. Commissioner, T.C. Memo. 1967-32. The Board of Tax Appeals in Estate of Appleby v. Commissioner, supra at 21, stated that the statutory definition of a partnership does not include "income derived by tenants in common from simple ownership." In Powell, where551 (1) real property was owned jointly by the taxpayer and five others; (2) there was no partnership agreement; (3) the rental income was collected by an agent and reported on a partnership return; and (4) the joint owners paid an insurance premium, paid to have walls demolished, and paid to have the property appraised, this Court stated that, to find a partnership under such circumstances, "might very well destroy the separate validity for tax purposes of almost all forms of coownership." Powell v. Commissioner, supra.Partnership status cannot be avoided, however, by simply designating a joint undertaking as a "tenancy in common" rather than as a "syndicate, group, pool, joint venture" or by expressly providing that the venture is not to be considered a partnership. See, e.g., Madison Gas & Elec. Co. v. Commissioner, 633 F.2d 512">633 F.2d 512, 514-515 (7th Cir. 1980), affg. 72 T.C. 521">72 T.C. 521 (1979); Marinos v. Commissioner, supra; Underwriters Ins. Agency of America v. Commissioner, T.C. Memo. 1980-92. In Marinos v. Commissioner, supra,552 this Court stated: "The regulations and relevant case law indicate the distinction between mere co-owners and co-owners who are engaged in a partnership lies in the degree of business activity of the co-owners or their agents." In Madison Gas, the Court of Appeals for the Seventh Circuit referred to this as the "business activities test". In Underwriters Insurance, this Court held that the coowners were partners since the vessels were not held merely for investment, nor was the taxpayer a passive owner but, instead, actively engaged in the fishing business. Respondent argues that "investment groups need not carry on business" to be considered partnerships under the Code. In support, respondent relies upon section 761(a)(1) and section 1.761-2(a), Income Tax Regs.3 It is apparent from these sections that coowners of investment property need not actively conduct a business to fall within the statutory definition of a partnership. We note, however, that investment clubs are considered by the Commissioner to have an objective to carry on business for purposes of section 7701. See Rev. Rul. 75-523, 2 C.B. 257">1975-2 C.B. 257; G.C.M. 33,469553 (Mar. 28, 1967) ("it has been a long standing position of the Service that an objective to carry on business and divide the gains therefrom is a hallmark of a partnership, and that for purposes of classification, investment clubs have been held to possess this objective"). Indeed, investment partnerships and other "joint ventures" that fall within the statutory definition of a partnership normally engage in business-related activities. Thus, for purposes of the facts before us, the important distinction lies in whether the coowners passively or actively engage in activities that fall within the statutory definition of a partnership. 554 Respondent argues that G2MH meets the elements of section 1.761-2(a)(2), Income Tax Regs. We disagree. We interpret section 1.761-2(a)(2), Income Tax Regs., to apply only after coowners fall within the statutory definition of a partnership under section 761(a). See Madison Gas & Elec. Co. v. Commissioner, 633 F.2d at 515 ("In short, Section 761(a) allows unincorporated associations * * which fall within the statutory definition of a partnership, to elect out of Subchapter K." (Fn. ref. omitted; emphasis added.)) In other words, to be an investing partnership entitled to elect out of subchapter K, coowners must first form a partnership. We find that petitioner and Messrs. Hall and Maggs were merely passive copurchasers of an interest in the GGS-GIM program and that their interest in the G2MH account did not constitute a partnership as defined by section 761(a) or section 7701(a)(2). At no time did G2MH open a bank account. The extent of their activity with respect to G2MH was simply to pay $ 7,000 to GGS and GIM in order to participate in the program. Everything after that point was to be handled by GGS and GIM. In the notice of deficiency555 respondent contends that the alleged forward contracts were shams, that the losses were not shown to be bona fide, and that the transactions were not entered into for profit. 4 Petitioners have not shown that respondent's contentions are erroneous or incorrect. To the contrary, the parties agree that the forward contracts, which petitioners participated in, are indistinguishable from the forward contracts that were the subject of Brown v. Commissioner, 85 T.C. 968 (1985), affd. sub nom. Sochin v. Commissioner, 843 F.2d 351 (9th Cir. 1988). In Brown, we found that the purported forward contract transactions of GGS and GIM were factual shams set up solely for tax-avoidance purposes. Id. at 1000. Therefore, in this case, as in Brown, the forward contracts G2MH purportedly invested in never existed; consequently, there were no investment activities by GGS and GIM on behalf of G2MH. 556 Petitioners consistently represented G2MH as a tenancy in common and not a partnership or joint venture. Petitioner and Messrs. Hall and Maggs did not execute a written partnership agreement for G2MH and did not apply for, or receive, a taxpayer identification number. Petitioners reported the losses as "STCL From Trading Various Futures and Forward Contracts" and not as Schedule E partnership losses. During respondent's review of petitioners' 1981 Federal income tax return, petitioner described G2MH as a "tenancy-in-common". Respondent argues that Marinos v. Commissioner, T.C. Memo. 1989-492, and Press v. Commissioner, T.C. Memo. 1986-398, support the contention that G2MH was a partnership. We disagree. In Marinos and Press, the joint venturers were found to have been actively engaged in business activities, and they represented to respondent that they were "joint venturers". In Marinos, this Court stated that it was the "degree of business activity" that caused the relationship to be characterized as a partnership. The coowners in Marinos agreed to lease a master audio record from a company; agreed557 to contract with another company for production and distribution of the recording; and, on their tax return, referred to the venture as a "joint venture" and claimed an investment credit on the master recording. Marinos v. Commissioner, supra.Similarly, in Press, the decisive factor was that the coowners organized the joint venture to carry on the business of mining peat. Press v. Commissioner, supra. For example, the coowners entered into an organizational agreement stating that they would own, as tenants in common, a leasehold interest in land to mine peat. Id. They entitled the venture "Little Mud Pond Swamp Joint Venture". Id. Furthermore, they appointed an agent that executed a mining lease, giving the agent the exclusive right to mine peat from a 30-acre plot of land. Id. Therefore, Marinos and Press are distinguishable from the facts before us. We find that petitioner and Messrs. Hall and Maggs did not form a partnership and that the execution of Form 872A did not extend to adjustments related to G2MH. 5 Therefore, we hold respondent's notice of deficiency untimely with regard558 to the adjustments related to G2MH. Decision will be entered under Rule 155. Footnotes1. References to petitioner in the singular will refer only to George N. Gabriel.↩2. There is no mention of a partnership in relation to G2MH in the notice of deficiency. See infra↩ note 4.3. Sec. 761(a)(1) defines partnership as follows: Under regulations the Secretary may, at the election of all the members of an unincorporated organization, exclude such organization from the application of all or part of this subchapter, if it is availed of -- (1) for investment purposes only and not for the active conduct of a business,Sec. 1.761-2(a), Income Tax Regs., provides that certain investing partnerships may be excluded from all or part of the provisions of subchapter K. Sec. 1.761-2(a), Income Tax Regs., states: (2) Investing partnership. Where the participants in the joint purchase, retention, sale, or exchange of investment property-- (i) Own the property as coowners, (ii) Reserve the right separately to take or dispose of their shares of any property acquired or retained, and (iii) Do not actively conduct business or irrevocably authorize some person or persons acting in a representative capacity to purchase, sell, or exchange such investment property, although each separate participant may delegate authority to purchase, sell, or exchange his share of any such investment property for the time being for his account, but not for a period of more than a year, then such group may be excluded from the application of the provisions of subchapter K under the rules set forth in paragraph (b) of this section.↩4. In the notice of deficiency, respondent stated: It is determined that for the taxable year 1981 the gains and losses claimed by you on your income tax return from alleged forward contracts involving government securities cannot be recognized since such alleged transactions are shams entered into for tax avoidance purposes. It is determined that the gains and losses claimed by you on your income tax returns for 1981 from alleged forward contracts involving government securities cannot be recognized, as you have not established that such gains and losses occurred or occurred in the manner claimed. Moreover, it is determined that these transactions lack economic substance. Furthermore, none of the alleged transactions were completed and closed as each of the alleged transactions in question was but one step in a series of events which for tax purposes were fully integrated, and constitutes but a single transaction.In addition, such transactions do not represent a sufficient change in economic position to justify recognition for tax purposes of the losses or gains as claimed, and purported losses are a distortion of economic reality. It is also determined that none of the losses claimed by you in connection with such transactions (whether capital or ordinary), is deductible under Section 165, Internal Revenue Code, because you have not established that such losses were bona fide, or that the transactions were entered into for profit within the meaning of that section, but on the contrary, it would appear that they were entered into solely or primarily to reduce income taxes by converting short term ordinary income into a capital gain, and defer the reporting of same. Also, since your only reason for entering into the transactions was tax avoidance, amounts paid for investment counseling, commissions and cancellations fees are not allowable as deductions. Additionally, the claimed losses are disallowed because: 1. Such losses arose from the sale or disposition of securities and substantially identical securities were acquired close enough in time to the sale or disposition so that Section 1091 disallowed the claimed losses; 2. The alleged forward contracts were in substance option contracts and it has not been established what your basis in such option contracts [was]; or 3. Such losses cannot be allowed because it has not been established that you are at risk within the meaning of Section 465 in the amount of the claimed losses. Accordingly, taxable income is increased $ 112,122.00 for the taxable year 1981.↩5. This conclusion is consistent with the context in which Form 872A was solicited. In concluding that G2MH was not a partnership, we need not address petitioners' second argument regarding mutual assent. See supra↩ p. 8.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624087/	H. H. CHAMPLIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Champlin v. CommissionerDocket No. 22486.United States Board of Tax Appeals28 B.T.A. 264; 1933 BTA LEXIS 1144; June 6, 1933, Promulgated 1144 1. A business conducted by a husband alone, to which his wife contributed funds which she was willing to loss if the business were not successful, held, upon the evidence, not to be the business of a partnership with distributable income, but the business of the husband alone, the income being entirely taxable to him. 2. The transfer in 1920 by a taxpayer of the assets of his business, including an oil lease which was the subject of an action by the taxpayer to quiet his title, in exchange for shares of a newly organized corporation, held, upon the evidence, to result in taxable gain, and the shares received were not without fair market value. Harry O. Glasser, Esq., for the petitioner. P. M. Clark, Esq., and C. C. Holmes, Esq., for the respondent. STERNHAGEN 264 Respondent disallowed a claim in abatement of $26,474.21 income and excess profits taxes for 1917. He determined deficiencies of $57,576.10, $182,457.44 and $400,564.64 in income taxes for 1918, 1919 and 1920, respectively. Petitioner contends that respondent improperly taxed to him the entire income of an oil business which he alleges was owned by a partnership1145 composed of himself and wife, and that respondent improperly computed gain upon an exchange in 1920 of the oil business and properties for corporate stock alleged to have had less fair market value than determined. Respondent prays that in the event the latter issue is decided in petitioner's favor the deductions allowed for depletion of petitioner's oil wells be reduced to reflect the lower value of said wells resulting from a could on petitioner's title. FINDINGS OF FACT. Petitioner and his wife reside at Enid, Oklahoma. On August 30, 1916, petitioner leased from George Beggs and wife 160 acres of land in Garfield County, Oklahoma, for the purpose of mining and operating for oil and gas for a period of five years and as long thereafter as production continued. The lessors agreed "to warrant and defend the premises against all former leases." Petitioner paid them $12,000 in cash for the lease. Of this amount he borrowed $10,000 from a bank upon a note signed by him and his wife. The same land had been the subject of a prior lease entered into February 23, 1916, between the Beggs and the Chanute Refining Co. This lease provided that if no well was completed on the land1146 by August 23, 1916, it should terminate as to both parties unless on or before that date the lessee paid or deposited to the lessors' credit $80 which was to operate as a rental and extend the lessee's time for completing the well by six months. The Chanute Refining Co. immediately transferred the lease to the Garfield Oil Co. On August 265 23, 1916, no well had been commenced on the property and the $80 was not paid or deposited to the lessors' credit, but was later tendered by the Garfield Oil Co. and refused. On November 4, 1916, Beggs, his wife, and petitioner instituted an action in the District Court of Garfield County, Oklahoma, against the Garfield Oil Co., to quiet petitioner's title to the second lease. After eight years of litigation, during which the case was twice reviewed by the Supreme Court of the State, petitioner's title was held sound by decision rendered October 14, 1924. Throughout these proceedings petitioner represented himself to be, and was, the sole owner of the lease. The cloud on his title was constant from acquisition until termination of the litigation. Shortly after August 1916, petitioner began development of the property. He found1147 that the cost of the lease and the drilling of the first well would require about $25,000. In October he mentioned to his wife that the venture was new for him, that he expected to put in so much and no more, and that if the well were dry, the whole investment would be a loss. His wife proposed that she put in money of her own which she had received as gifts from her parents, and that if he lost what he put in, she would lose what she put in. Nothing was said about her sharing in the profits or losses in excess of the amount that she contributed. On December 21, 1916, her contributions totaled $13,495.33. None of this amount has been repaid to her, nor has she received any distribution of the profits or assets of the business. During the first six or eight months petitioner borrowed additional funds for development upon notes signed by himself and wife. Petitioner operated the business under his own name, and deposited proceeds from it in his personal bank account until August 1917, when he purchased a small refinery at Enid which he operated thereafter under the name of Champlin Refining Co., depositing the proceeds to an account in that name. The operations became very1148 profitable, many producing wells having been discovered by April 1920. On April 17, 1920, the Champlin Refining Co. was organized as a corporation under the laws of Maine, with an authorized capital stock of $10,000,000, divided into 5,000 common shares of the par value of $1,000, and 50,000 preferred shares of the par value of $100. On the following day petitioner assigned to the corporation the Beggs lease, together with all right, title and interest in and to the refining and marketing business owned by him. The assignment recites, inter alia:WHEREAS, the said lease and all rights thereunder or incident thereto are now owned by H. H. Champlin, * * 266 And for the same consideration, the undersigned for himself and his heirs, successors and representatives, do covenant with the said assignee its heirs, successors or assigns that he is the lawful owner of the said lease and rights and interests thereunder and of the personal property thereon or used in connection therewith; that the undersigned has good right and authority to sell and convey the same, and that said rights, interest and property are free and clear from all liens and incumbrances and that1149 all rentals and royalties due and payable thereunder have been duly paid. The corporation issued 1,351 of its common shares to petitioner, 1,345 to his wife, and four qualifying shares to others. The total par value of the shares issued was $2,700,000. The assets and liabilities transferred were entered on the corporate books, April 17, 1920, as follows: ASSETSCurrent Assets:Cash$196,701.82Accounts Receivable150,195.75Notes Receivable23,947.26Inventory75,877.53H. H. Champlin306,685.37Total Current Assets$753,407.73Fixed Assets:Real Estate11,446.50Refinery$319,452.58Construction24,010.00Pipe Line54,253.84Stations50,109.29Tank Cars447,951.28Drums & Barrels433.31Refinery Tools1,820.41Autos & Trucks14,043.98Furniture & Fixtures4,284.41$916,359.10Less Reserve for Deprec.87,726.86828,632.24Beggs Lease:Depleted Cost$6,578.27Appreciation869,198.05Total lease875,776.32Casing & Pipe194,205.20Rigs, Mchy. & Boilers40,600.00Tanks28,721.85Building8,196.63Total Value Beggs Lease1,147,500.00Total Fixed Assets1,987,578.74$2,740,986.47LIABILITIESCurrent Liabilities:Bills Payable$5,000.00Accounts Payable94,937.85Total Current $99,937.85LiabilitiesNet Worth2,641,048.62$2,740,986.471150 267 The values assigned to the assets other than the Beggs lease correctly reflect their cost or depreciated cost and their fair market values as of April 1, 1920. The liabilities of the business are fully set forth in the schedule. Petitioner and his wife have never disposed of any of the shares issued to them at incorporation. The fair market value of an unclouded title to the Beggs lease on April 1, 1920, was, as stipulated by the parties, $1,530,000. By reason of the cloud on petitioner's title, respondent determined that the value of his title on that date was 25 percent less than that of a sound title, or $1,147,500, which amount he included in the fair market value of the corporate stock exchanged therefor. He computed a gain on the exchange of the business assets and liabilities for the stock by deducting from the determined value of the title, $278,301.95, the agreed cost of the lease, buildings and operating equipment as reduced by depletion or depreciation to the date of exchange, and taxed petitioner for 1920 on the entire resulting gain of $869,198.05. The fair market value of the Beggs lease on April 17, 1920, was $1,147,500. Prior to the exchange, 1151 petitioner discovered eight oil wells on the lease, for which respondent determined the following discovery values: Well #1, Dec. 23, 1916$386,942.40Well #10, Aug. 1, 1917339,025.70Well #14, Apr. 17, 1918476,521.99Well #15, June 21, 1918298,774.56Well #19, Aug. 13, 1918181,788.80Well #22, Dec. 15, 1918343,493.85Well #24, Jan. 15, 1919177,781.20Well #27, Apr. 4, 191991,269.102,295,597.60In computing petitioner's net income, respondent allowed the following deductions for depletion: 1918$266,275.741919369,809.26Jan. 1 to Mar. 31, 192067,841.89Total703,926.89268 Of the total, $700,243.75 represents depletion of the wells; $3,683.14, depletion of the lease. The discovery values determined correctly reflect the values of a sound title to the wells; the depletion deductions were allowed without diminution because of the cloud on petitioner's title. The net value of the production obtained from the lease during 1917 was $95,420.41. Petitioner and his wife filed joint returns for 1917 and 1918; separate returns for 1919 and 1920. Partnership returns were filed by Mrs. Champlin for 1919 and1152 1920, showing profits of $98,423.79 and $27,821.18, respectively, from the business of the Champlin Refining Co. These amounts were assessed and paid, and no claim for refund has been filed. Taxes on the same profits were assessed against and paid by petitioner. The Commissioner tendered a refund, with interest, of the tax paid by Mrs. Champlin for 1920; this was refused by her. No partnership returns were filed for 1917 and 1918. OPINION. STERNHAGEN: 1. The first issue has been settled by the parties. The Commissioner had allowed the petitioner a deduction of $10,000 for salary, which petitioner claimed was inadequate and should be increased to $25,000. This the Commissioner now concedes, and thus removes the issue from consideration. 2. The petitioner contends that during all of the period in question the income from the oil and refining business inured to a partnership which existed by agreement between him and his wife. The respondent denies the partnership. In our opinion, the evidence fails to establish that such a partnership existed. It has been held that in tax cases a claim of partnership between husband and wife must be carefully scrutinized, and is1153 not to be lightly allowed. ; ; ; cf. ; ; ; (); ; . While, in Oklahoma it may be, as the petitioner contends, that a husband and wife may properly form a partnership, and that such state law would be controlling (but see ; ), the question here is whether the evidence is sufficient to establish such a partnership in fact. We are unable to find that it does. The wife merely contributed some of her own funds to the petitioner to be used in the acquisition and operation of the lease, being at the same time aware that the venture might prove unsuccessful and that her contribution might thus be lost. Nothing more was understood as to a partnership1154 relation, either 269 between themselves or by anyone else who did business with the petitioner. The wife had no authority to participate either in the management or the responsibilities of the business, and she never attempted to exercise any. The business was conducted entirely by the petitioner and in his own name. No distribution of profits was ever made to the wife. Under these circumstances the petitioner properly omitted to file partnership returns for 1917 and 1918, and the fact that such returns were improperly filed for 1919 and 1920 and the resulting tax was distributively paid by both, adds nothing to demonstrate the existence of a partnership. 3. The petitioner contends that for 1920 the Commissioner erroneously charged him with gain resulting from the exchange by him of the assets of his business, including the Beggs lease, for shares of the newly organized Champlin Refining Co. He contends that the transaction was within section 202(b), Revenue Act of 1918, 1 and that the shares received had no fair market value and thus the transaction involved no gain. The evidence offered to support this point is misconceived. 1155 It is directed not so much to the actual fair market value of the shares received as it is to the effect of the title litigation upon the scope of the market for the Beggs lease. Since the opening balance sheet shows that the corporation's shares were backed not alone by the Beggs lease, but also by the substantial value of various other apparently unrelated assets, there would still be value in the shares even if it could be said that the Beggs lease was itself without fair market value. . The balance sheet indicates that such assets included cash $196,000, accounts receivable $150,000, refinery $319,000, tank cars $447,000, and other items, all aggregating over $1,500,000. Nothing in the record indicates that this valuation was inflated. There is therefore no basis for a finding that the shares had no substantial fair market value. 1156 The parties have stipulated that, except for the effect of the litigation upon the petitioner's rights under the Beggs lease, the lease 270 was worth $1,530,000. This figure is substantially less than the aggregate discovery values of the eight wells which were brought in on the property prior to the incorporation, upon which substantial depletion deductions had been claimed and allowed. Throughout the litigation the petitioner and the corporation were successively in possession of and actually engaged in operating the property, and during this period the petitioner's right to operate and retain the proceeds was never sufficiently in doubt to impel the court by the appointment of a receiver or otherwise to restrict his use of either the property or the proceeds. One witness thought that the petitioner's chance of ultimate success in the litigation was one out of three. The witness translated this and other facts into a value for the lease while under the cloud amounting to "$400,000 or $500,000." Another witness thought that the major oil companies would not be interested in buying either the petitioner's shares or the leasehold, and this he translated into an opinion1157 that the leasehold and shares were unmarketable and without fair market value. His opinion of the value of the sound right under the lease was $750,000, which is one half of the value stipulated. As a matter of fact, no attempt was made by the petitioner or the corporation at any time to sell either the lease or the shares, and evidence of actual effect upon the market is not available. The opinions of the witnesses are conjectural estimates, cf. , and, as we have said, relate primarily not to the corporate shares but to the controverted lease. The corporation which the petitioner organized accounted for the leasehold at a total depleted value of $1,147,500. The respondent, having agreed with the petitioner that the sound, unclouded title to the lease was worth $1,530,000, recognized that the pendency of the title litigation served to diminish such market value and he determined the value thus diminished to be 25 percent less, or $1,147,500, which is the same figure appearing as the opening entry upon the corporation's books. We are unable, after a full consideration of the evidence, to say that1158 this determination overstates the fair market value of the lease or that the fair market value of the corporation's shares was less than the Commissioner's figure, which reflected the inclusion among the corporation's assets of the Beggs lease at $1,147,500. 4. The respondent raises an alternative issue as to the depletion allowance if his valuation be overruled. Since the valuation is sustained, there is no occasion to consider this alternative issue, there being no claim for an increase in the deficiency. Reviewed by the Board. Judgment will be entered under Rule 50.SMITH 271 SMITH, dissenting: I do not agree with the majority holding that the taxpayer realized a gain upon the incorporation of his oil business. Section 202(b) of the Revenue Act of 1918 provides that upon an exchange of property "the property received * * * shall * * * be treated as the equivalent of cash to the amount of its fair market value, if any." There is no warrant in the statute for resorting to the intrinsic value of the assets of the new corporation in determining the "fair market value, if any," of its stock. The statute uses terms connoting a concourse of*1159 willing buyers and willing sellers. The evidence of record discloses that there were neither sales nor offers to buy or sell; that there was a cloud upon the title of the petitioner to the Beggs lease; and that there was no market for the stock in 1920. In these circumstances I do not see how it can be said that the shares of stock had a fair market value. In my opinion there was no realized gain taxable as income to Champlin. See O'Meara v. Commissioner (C.C.A., 10th Cir.), 34 Fed.(2d) 390; Schoenheit v. Lucas (C.C.A., 4th Cir.), 44 Fed.(2d) 476; Mount v. Commissioner (C.C.A., 2d Cir.), 48 Fed.(2d) 550, wherein similar transactions have been held to result in no taxable gain. Footnotes1. SEC. 202. (b) When property is exchanged for other property, the property received in exchange shall for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of its fair market value, if any; but when in connection with the reorganization, merger, or consolidation of a corporation a person receives in place of stock or securities owned by him new stock or securities of no greater aggregate par or face value, no gain or loss shall be deemed to occur from the exchange, and the new stock or securities received shall be treated as taking the place of the stock, securities, or property exchanged. When in the case of any such reorganization, merger or consolidation the aggregate par or face value of the new stock or securities received is in excess of the aggregate par or face value of the stock or securities exchanged, a like amount in par or face value of the new stock or securities received shall be treated as taking the place of the stock or securities exchanged, and the amount of the excess in par or face value shall be treated as a gain to the extent that the fair market value of the new stock or securities is greater than the cost (or if acquired prior to March 1, 1913, the fair market value as of that date) of the stock or securities exchanged. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624090/	Gus Corey and Helen Corey, Petitioners, v. Commissioner of Internal Revenue, RespondentCorey v. CommissionerDocket No. 57238United States Tax Court29 T.C. 360; 1957 U.S. Tax Ct. LEXIS 31; 29 T.C. No. 39; November 26, 1957, Filed 31 Decision will be entered under Rule 50. Petitioners sustained a loss as a consequence of abandonment of their sublessee's interest in the permanent improvements affixed to leased business realty, which loss they characterize "accelerated amortization." Held, that such loss is not attributable to the operation of petitioners' business "regularly carried on" within the meaning of section 122 (d) (5), I. R. C. 1939, and cannot therefore be carried forward to the year 1953 as a net operating loss deduction. Clifford A. Jones, Esq., for the petitioners.Eugene F. Reardon, Esq., for the respondent. Forrester, Judge. FORRESTER361 OPINION.The respondent has determined a deficiency in petitioners' income tax for the calendar year 1953 in the amount of $ 3,362.74. All but one of the respondent's adjustments have been settled prior to trial. The sole issue submitted is whether respondent erred in disallowing a net operating loss carryover to the year 1953 in the amount of $ 14,683.45. This is in turn dependent on whether a loss sustained by petitioners in 1952 in the amount of $ 22,203.80 qualifies as a net operating loss under the terms of section 122 of the Internal Revenue Code of 1939. 133 Petitioners, husband and wife, reside in Santa Barbara, California. They filed their joint income tax return for the calendar year 1953 with the district director of internal revenue for the district of Nevada. All of the facts have been stipulated and are found accordingly.On April 18, 1952, petitioners opened a restaurant in Las Vegas, Nevada, under the name Restaurant Cinnabar. The restaurant occupied premises which petitioners had subleased at an earlier date. The terms of the sublease entitled petitioners to take possession of the subleased premises for the term beginning December 1, 1951, and ending August 31, 1956. The sublease also provided that they should pay a monthly rental in the amount of $ 250. In the event of any breach of condition or upon the failure of any rental payment, the sublessor reserved the right to take immediate possession of the premises and terminate the sublease.As mentioned above, petitioners opened their business to customers on April 18, 1952. In preparation for this event they expended $ 26,493.16 for permanent, immovable improvements.The business was not financially successful and in early December 1952, it was terminated and the restaurant34 was closed. The rent due the sublessor for the month of December 1952 and for the month of January 1953 was not paid.362 On February 6, 1953, a notice of termination of the lease was served on petitioner Gus Corey by the sublessor. Under the terms of the sublease the permanent, immovable improvements reverted to petitioners' sublessor.The issue of the net operating loss carryover arises as follows: In their 1952 income tax return, petitioners reported a loss from the operation of their business in the amount of $ 43,690.42. Of this amount $ 27,478.16 was listed in Schedule C of the return as losses from business property. The description "Lease abandonment loss" was applied to $ 25,589.54 of this latter amount.Subsequently, on March 16, 1953, petitioners filed a claim for refund of 1951 taxes paid. The refund claim states: "Net operating loss in 1952 ($ 42,002.31) sufficient to offset entire amount of 1951 income resulting in refund of 1951 tax paid."Petitioners intended thereby to claim a net operating loss carryback from 1952 to 1951 in an amount sufficient to eliminate all 1951 income tax liability. Their correct net income for the calendar year 1951 is $ 15,041.31, 35 without taking into account the claimed net operating loss carryback deduction.In the 1953 income tax return petitioners claimed a net operating loss deduction in the amount of $ 14,683.45. This sum represented, according to their calculations, the balance of the reported 1952 net operating loss after carrying back an amount sufficient to offset all of the income reported in their 1951 income tax return. Petitioners' correct net income for 1953, without taking into account any net operating loss carryover deduction, is $ 15,372.76.In the statutory notice of deficiency for 1953, respondent, in computing the amount of overassessment for the year 1951, allowed a net operating loss carryback deduction from 1952 in the amount of $ 9,903.11. Respondent's computations are as follows:EXPLANATION OF ADJUSTMENTYEAR: 1951* * * (c) A net operating loss deduction in the amount of $ 9,903.11 is allowed as the result of the carryback of the net operating loss incurred in 1952, computed as follows:Net operating loss as shown in 1952 return$ 43,690.42Add: (1) Loss from sale of food and supplies510.59Total44,201.01Less: (2) Abandonment loss$ 27,478.16(3) Decrease in depreciation and amortization1,819.7429,297.90Net operating loss as adjusted14,903.11Less: (4) Capital gain adjustment under the provisions of section 122 (d) of the Internal Revenue Code of 19395,000.00Net operating loss carryback deduction9,903.1136 363 In the same notice of deficiency respondent disallowed, in full, the reported net operating loss carryover to 1953 on the ground that the 1952 net operating loss was not in excess of $ 9,903.11, all of which was absorbed in being carried back to 1951.Petitioners agree that the sum of $ 27,478.16 claimed by them on Schedule C of their 1952 return as "Losses of Business Property" is excessive and now claim only $ 22,203.80. This amount is computed by subtracting an allowed amortization deduction for the year 1952 in the amount of $ 4,289.36 from the $ 26,493.16 cost of the permanent, immovable improvements. Respondent's disallowance of the asserted net operating loss carryover deduction is based on his determination that the sum of $ 22,203.80 does not represent a loss incurred in the ordinary operation of the business.Net operating loss is defined in section 122 (a) of the Internal Revenue Code of 1939 as the excess of deductions allowable under chapter 1 of subtitle A of the Code over gross income, subject to the exceptions, additions, and limitations provided for in subsection (d) of section 122. Paragraph (5) of subsection (d) excludes for the purposes of carryback37 and carryover, deductions otherwise allowed by law, but which are not attributable to the operation of a trade or business regularly carried on.In order for petitioners to prevail they must prove that the loss in question was attributable to the operation of a trade or business regularly carried on by them.Petitioners do not dispute respondent's position to the effect that they were engaged in the business of operating a restaurant business during 1952 and were not engaged in the business of disposing of business property by abandonment. They instead maintain that they erroneously listed the loss as "Lease abandonment loss" in their 1952 income tax return when in reality the facts make it "accelerated amortization." Petitioners cite one case from this Court and two appellate decisions as authority for this contention. See Washington Catering Co., 9 B. T. A. 743 (1927); George H. Bowman Co. v. Commissioner, (C. A., D. C., 1929) 32 F.2d 404">32 F. 2d 404, affirming 7 B. T. A. 399 (1927); Cassatt v. Commissioner, (C. A. 3, 1943) 137 F. 2d 745, affirming 47 B. T. A. 400 (1942).38 We have carefully studied each of the above three cases and find ourselves in agreement with their respective holdings but disagree as to their applicability to the net operating loss issue. Each holds that the proper year for deducting the unrecovered basis of leasehold improvements is the year in which the business lease is terminated. None of the cases describes the deduction as amortization. In fact, the implication instead is that the expense is a business loss and thus properly deductible under section 23 (e). See Helvering v. Manhattan Life Ins. Co., (C. A. 2, 1934) 71 F. 2d 292.364 The theory behind the amortization of the cost of leasehold improvements over the term of the lease is that the improvements will assist in producing income over the entire period of the lease. Cassatt v. Commissioner, supra, p. 749. Where, instead, the lease is ended, then the basis for further amortization of such expenditures is gone and any unamortized portion then remaining must be charged off at once. Helvering v. Manhattan Life Ins. Co., supra, is representative of this approach. 39 There the taxpayer lessor paid a broker $ 9,900 for procuring a new tenant. The lease agreed upon was for a term of 10 years. At the end of 1 year the lease was terminated by court order. The taxpayer sought to deduct the unamortized brokerage fee in the year of termination. Judge Learned Hand, speaking for the Court of Appeals, stated (pp. 293-294):When the lease ends, it is impossible to spread the unamortized installments retroactively over the past years, and there is certainly no warrant for accelerating them all as an expense for the last year. If they are to be allowed at all in that year it must therefore be as a loss * Characterization of the item in any event satisfies only one of the statutory tests of section 122. What is required is evidence that the loss or expense, which is an allowable deduction, be sustained as an incident to the ordinary and normal course of a trade or business regularly carried on by the taxpayer. Foreman v. Harrison, (N. D., Ill., 1948) 79 F. Supp. 987">79 F. Supp. 987.The clause "attributable to the operation of a trade or business" was construed by the Supreme Court in Dalton v. Bowers, 287 U.S. 404">287 U.S. 404 (1932).40 Referring to section 206 of the Revenue Act of 1924, that Court, quoting from the opinion of the Court of Appeals, stated (p. 408):By the statute, allowing the deductions and carrying over the loss for two years, Congress intended to give relief to persons engaged in an established business for losses incurred during a year of depression in order to equalize taxation in the two succeeding and more profitable years. It was not intended to apply to occasional or isolated losses * * Other courts following this rule have held that the sale or other disposition of all or a substantial part of the income-producing assets of a business constitutes an isolated transaction which is not incident to the ordinary and normal course of a trade or business regularly carried on by the taxpayer. Joseph L. Merrill, 9 T. C. 291 (1947), affd. (C. A. 2, 1949) 173 F. 2d 310; Joseph Sic, 10 T. C. 1096 (1948), affd. (C. A. 8, 1949) 177 F.2d 469">177 F. 2d 469, certiorari denied 339 U.S. 913">339 U.S. 913 (1950); Lazier v. United States, (C. A. 8, 1948) 170 F. 2d 521;41 Hartwig N. Baruch, 11 T. C. 96 (1948), affirmed per curiam (C. A. 2, 1949) 178 F. 2d 402; Foreman v. Harrison, supra; and Pettit v. Commissioner, (C. A. 5, 1949) 175 F. 2d 195, affirming per curiam a Memorandum Opinion of this Court dated June 10, 1948.365 The rationale of the courts has been that the sale or other disposition of the physical assets of a business is the equivalent of the liquidation of that business, and therefore the exact antithesis of the normal operation of a business regularly carried on. This rationale was stated in Lazier v. United States, supra, at 526, as follows:Congress was concerned with "net operating losses" sustained in the normal operation of a business regularly carried on by a taxpayer and was not concerned with losses attributable to the total or partial liquidation of the physical properties used in the conduct of the business. See Mertens, Law of Federal Income Taxation, Vol. 5, page 318, § 29.05. * In the instant case the termination of petitioners' restaurant business42 occurred in early December 1952. Petitioners sustained a loss in the amount of $ 22,203.80, representing the unrecovered basis of the permanent leasehold improvements. This loss is clearly traceable to the operation of petitioners' business. It is, however, not attributable to the operation of a business "regularly carried on" by the petitioners. Since the loss was an isolated transaction incident to the total liquidation of the business, we must hold in favor of the respondent.It should be mentioned that the parties have based their pleadings and proof on an assumption that the loss in question was sustained in the year 1952. We have made no holding on this issue nor do we do so here. It suffices to point out that the "Notice of Termination" of the sublease was received on February 6, 1953. The sublease agreement would lead us to believe that the breach of condition for failure of rentals could have been corrected at any time prior to that date. We, of course, cannot say whether the right to possession of the permanent leasehold fixtures was valueless after the termination of the business. If, however, there was any possibility of reopening the restaurant or assigning the43 lease it could be argued that the loss was not sustained until after the new year.The year of loss is especially important in the instant case because if the loss was in fact sustained in 1953, then petitioners would not be limited to proving a deductible 1952 net operating loss carryover but could, in the alternative, qualify their business loss under section 23 (e). 2The parties, however, have not raised the issue of a 1953 loss in their pleadings or proof and we are not free to do so here. Camp Wolters Enterprises, Inc., 22 T. C. 737 (1954); Earl V. Perry, 22 T. C. 968 (1954).44 Decision will be entered under Rule 50. Footnotes1. SEC. 122. NET OPERATING LOSS DEDUCTION.(a) Definition of Net Operating Loss. -- As used in this section, the term "net operating loss" means the excess of the deductions allowed by this chapter over the gross income, with the exceptions, additions, and limitations provided in subsection (d).* * * (d) Exceptions, Additions, and Limitations. -- The exceptions, additions, and limitations referred to in subsections (a), (b), and (c) shall be as follows: * * (5) Deductions otherwise allowed by law not attributable to the operation of a trade or business regularly carried on by the taxpayer shall (in the case of a taxpayer other than a corporation) be allowed only to the extent of the amount of the gross income not derived from such trade or business. * ↩2. SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions: * * (e) Losses by Individuals. -- In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise -- (1) if incurred in trade or business; or(2) if incurred in any transaction entered into for profit, though not connected with the trade or business; * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624091/	ESTATE OF GENE TUNNEY, Deceased, NELSON BUHLER, MARY LAUDER TUNNEY and BANKERS TRUST COMPANY OF NEW YORK, Executors, and MARY LAUDER TUNNEY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentTunney v. CommissionerDocket Nos. 3888-77, 11521-77United States Tax CourtT.C. Memo 1981-614; 1981 Tax Ct. Memo LEXIS 132; 42 T.C.M. (CCH) 1500; T.C.M. (RIA) 81614; October 20, 1981. Nelson Buhler and Albert Dib, for the petitioners. Kevin C. Reilly and Jay S. Hamelburg, for the respondent. WILBURMEMORANDUM FINDINGS OF FACT AND OPINION WILBUR, Judge: Respondent has determined the following deficiencies in petitioners' Federal income tax: Taxable PeriodDeficiency1972* $ 13,665.81197339,149.001974 ** 21,484.32132 This case resents the following issues for our decision: (1) Whether petitioners are entitled to a medical expense deduction under section 213(a); 1(2) Whether petitoners have adequately established the basis of stock for purposes of computing the amount of gain upon its sale; and (3) Whether amounts paid for the rental of a room qualify as a trade or business expense under section 162(a). FINDINGS OF FACT Some of the facts have been stipulated. The stipulation of facts and the attached exhibits are incorporated herein by this reference. Gene Tunney (Gene) and Mary Lauder Tunney (Mary) filed their joint 1972 Federal133 income tax return at the Andover Service Center, Andover, Massachusetts. They filed their 1973 and 1974 joint Federal income tax returns at the Brookhaven Service Center, Holtsville, New York. At the time of the filing of the petitions in these cases, Gene and Mary resided in Stamford, Connecticut. Gene died during the pendency of these actions and his estate is represented here by his executors: Nelson Buhler, Mary Lauder Tunney, and Bankers Trust Company of New York (Bankers). The Tunneys had 4 children: Gene L. Tunney (Gene L.), John Varick Tunney (John), Jonathan Rowland Tunney (Jonathan), and Joan Tunney Wilkinson (Joan). Some time prior to April of 1970, Joan, approximately 31 years of age at the time, became ill and required extended hospitalization. Her brother, Gene L., applied for and was appointed conservator of the estate of Joan Wilkinson by the Superior Court of the state of California (Marin County) on June 18, 1970. In his petition for appointment dated April 9, 1970, Gene L. described his sister's assets and income as follows: Cash$ 700Securities30,000Other personal property1,000Total estimated value of allpersonal property$ 31,700Estimated annual income fromreal property$ 15,600Estimated annual income fromall property$ 16,800134 Gene L's bond was set at $ 48,500 based upon this information. In order to raise money for his ward's continuing care, Gene L. was forced to sell certain real property belonging to the conservatee. The sale was made on January 15, 1971, for $ 236,522. Payment was made as follows: purchasers assumed an existing first mortgage on the property of approximately $ 169,000, cash of $ 29,522 was given by the purchasers to pay off an existing second loan of approximately $ 29,689.92, and the balance of $ 40,000 was received by the sellers in the form of a promissory note from the purchasers bearing interest at 10 percent per annum, payable monthly, with the principal sum due 5 years from the date of the note. The note was secured by a second deed of trust on the property. On March 5, 1971, Gene L. filed a petition with the Superior Court for authority to expend money for the support and maintenance of the conservatee. This petition estimated the value of the conservatorship and its annual income as follows: Cash$ 60,757.49Securities25,481.38Promissory note40,000.00Other personal property500.00$ 126,738.87Estimated annual income$ 7,200The135 court approved the conservator's petition and authorized him to expend up to $ 50,000 during the 12-month period commencing March 1, 1971, for the support and maintenance of the conservatee at the hospital. As a conservator, Gene L. paid Joan's medical expenses during 1970 and 1971 out of her estate. However, by early 1972 it became obvious to Gene L. that in spite of the sale of the realty, the conservatorship estate would soon be depleted. This knowledge led to discussions between Gene L. and Mary as to who would assume these expenses once the estate became insolvent. They decided that Mary would have to start paying the expenses at some point in time, but she did not reveal to Gene L. where she planned to obtain the funds. Gene L. filed a first accounting and report of conservator on January 12, 1973. The accounting includes a listing of all moneys received and disbursed from June 18, 1970 through October 31, 1972. Assets on hand at the close of the accounting period (October 31, 1972) were determined to be $ 46,014.27. The $ 46,014.27 was represented by the $ 40,000 promissory note received from the realty sale, two small bank accounts, and two uncashed interest checks. 136 On January 12, 1973, the conservator sold the promissory note at a discount for $ 36,000 less commissions of $ 2,160 for net proceeds of $ 33,840. No principal payment had been made as of that date. A second account and report of conservator was filed on January 12, 1976, covering the period October 31, 1972 to September 5, 1975. The assets of the conservatorship estate on hand at the end of the period consisted entirely of cash in three bank accounts in the amount of $ 33,379.23 computed as follows: Assets on hand at close of prioraccount period$ 46,014.27Income receipts during the accountperiod (e.g. interest) + 1,769.26Uncashed check (misplaced by payee)+ 1,950.00Available assets$ 49,733.53Cash disbursements during the accountperiod-12,354.30Loss on sale- 4,000.00Total$ 33,379.23A third and final report was filed September 12, 1978 for the period September 5, 1975 to August 31, 1978. It recited that Joan no longer required hospitalization and was now able to care for herself and her property. As a consequence, there was no longer137 a need for the conservatorship. Assets on hand at the end of this account period consisted entirely of cash in the sum of $ 3,484.67: Assets on hand at close of prioraccount period$ 33,379.23Income receipts (interest)+ 936.47Available assets$ 34,315.20Cash disbursements during theaccount period-30,831.03$ 3,484.57The conservatorship was ordered terminated, and after payment of all fees and expenses (including $ 1,250 for attorney's fees), the remaining cash was to be distributed to Joan. In terms of disbursements, the conservatorship accountings show that the conservator actually paid the following amounts for the support and care of Joan: 1972Doctor's bills$ 6,300.00Attorney's fees2,755.52Transportation for conservatee's1,050.50Children to visit$ 10,106.021973Doctor's bills$ 1,949.00Lodging for conservatee40.00Commission on sale of promissory note2,160.00Attorney's fees2,103.96Dental care for children of conservatee455.00Federal income taxes387.67$ 7,095.631974Hospitalization expenses$ 559.29Transportation for conservatee's childrento visit501.30$ 1060.59138 In addition to the above amounts, the first accounting reveals payments for Joan's hospitalization and incidental expenses, but fails to specify the day and year of payment. These are shown as follows: Hospital treatment and care, 2-16-71 to9-15-72$ 82,888.76Hospital, incidentals account, 2-16-71to 6-18-72537.87On March 5, 1971, Gene L. Tunney as conservator of the estate of Joan T. Wilkerson executed a financial agreement with the hospital whereby the estate agreed to pay "all charges incurred for the care and treatment of the * * * patient," "all personal expenses," and "additional charges for surgical, dental and other professional services which require a specialist." Statements for medical expenses were to be resented semimonthly, and were payable when rendered. Billings for personal expenses were to be presented monthly and were to be handled separately from the regular hospital bill. This agreement was in effect without any change in its terms throughout the entire time Joan was hospitalized at this particular institution, which was until 1975 when she was transferred to another facility. As explained earlier, knowing that Joan's estate was139 rapidly becoming depleted, her mother embarked upon a course of action designed to provide the necessary funds so that her daughter's treatment would not be interrupted. To this end she consulted with her attorney, Mr. Nelson Buhler, who in turn contacted Mr. Joseph F. Lord, a senior vice president at Morgan Guaranty Trust Company of New York. Through this consultation a plan was devised to effectuate Mary's intentions to provide her daughter's estate with a source of funds. The actual operation of the contemplated arrangement was quite complex. Bills and other notices requiring payment were sent directly to Mr. Buhler's law office. Mr. Buhler then sent a copy of the bill to Mr. Lord at Morgan, who tranged for Morgan to issue checks to the payee. The checks were then forwarded to Mr. Buhler's office, where he would forward the check, together with the bill, to the payee. To put the plan into effect, Mary apparently decided to borrow the needed funds. On May 19, 1913, George Lauder (Mary's father) had created a trust. As of February 6, 1972 the corpus of the trust was comprised of various stocks and bonds valued at $ 6,053,725. During 1972, Mary was the income beneficiary140 and the remaindermen were her issue (Gene L., Jonathan, John, and Joan). On February 22, 1972, Mary executed a demand note for $ 80,000, without interest, in favor of Thatcher M. Brown, Jr., and Morgan Guaranty Trust Company of New York, as trustees under the trust referred to above. As part of the same document, each of her 3 sons (Gene L., Jonathan, and John) signed an agreement to guarantee to the trustees prompt repayment of the note. As security, each assigned to the trustees their entire contingent remainder interest in the trust. By a separate demand note, also dated February 22, 1972, Gene L. Tunney, "as committee of the property of Joan Tunney Wilkinson," promised to pay to Mary Lauder Tunney $ 80,000, without interest. As of the time of trial, Mary had not yet repaid the $ 80,000 to the trust. On March 30, 1972, a letter was sent to Mary by Morgan Guaranty advising her that the loan proceeds had been paid over to her. The letter stated in relevant portion: Re: Mary L. Tunney Junior Trust - PV 4738We have today transferred $ 80,000 to your Fifth Avenue checking account representing the proceeds of a loan from the Junior trust pursuant to your note dated February 22, 1972. 141 Mary's share of income from the trust also would normally be deposited to the same checking account. Therefore her income from the trust and the loan proceeds were commingled in her checking account.A monthly statement from Mary's checking account with Morgan Guaranty (in the name of "Mrs. Mary Lauder Tunney Mrs. Gene Tunney") reveals a credit on March 30, 1972, in the amount of $ 80,000. On April 14, 1972, the same account shows a debit memo for $ 80,000. On April 14, 1972, Mary opened a savings account (in the name of "Mrs. Mary Lauder Tunney") at the Fifth Avenue Office of Morgan Guaranty. The initial deposit into the account was made on that same day in the amount of $ 80,000. On the books "New Account Report," under "description of original deposit," the notation was entered "80,000 transferred from checking." Mr. Buhler wrote to Mr. Lord of Morgan Guaranty of November 20, 1972. Attached to the letter was a handwritten note signed by Mary authorizing the bank to carry out Mr. Buhler's instructions with respect to disbursement of the sums in Mary's savings account: Nov. 15, 1972 Morgan Guaranty Trust Co. of N.Y., 44th St. and 5th Ave., N.Y.N.Y., 10017 Re: Mary142 L. Tunney, Savings Account Att: Joseph Lord Gentlemen:-- This will authorize you to carry out the written instructions of my attorney, Nelson Buhler, Esq., as to the disbursement of the sums in the above account, - (which funds are the property of my daughter, Joan Tunney Wilkinson). Thank you. -- /s/ Mary Lauder Tunney, Mary Lauder Tunney Mr. Buhler's letter also advised Mr. Lord that Mrs. Tunney desired checks to be drawn in order to pay $ 10,380.31 to the hospital for Joan's hospital bill through October 22, 1972 and to pay $ 650 for the doctor's services for October of 1972. On November 28, 1972, a checking account (No. XXX XX 004) was opened at the Fifth Avenue branch of Morgan Guaranty. The account was titled "Mary Lauder Tunney--J.T.W., Special Account." The address given was that of Mr. Buhler, with duplicate statements to be sent to Mary. The "New Account Report" contained, insofar as is relevant herein, the following information: CROSS REFERENCES: Fifth Avenue Checking and Saving Accounts: "Mrs. Mary Lauder Tunney". REMARKS AND SPECIAL INSTRUCTIONS: This account is open to pay for medical expenses of Joan Tunney Wilkinson and most of the time will143 be carried with a zero balance. No checkbooks will be issued and the only instructions will come from NELSON BUHLER or from MRS. TUNNEY herself and will be in letter form. DESCRIPTION OF ORIGINAL DEPOSIT: $ 11,031.31 transferred from the Savings Accont of Mrs. Mary Lauder Tunney. This $ 11,031.31 is within 1 dollar of the amount of the two checks requested in Mr. Buhler's letter of November 20, 1972, to Mr. Lord to pay the hospital and doctors. On December 1, 1972, savings account No. XXX XX 004was opened at the Fifth Avenue branch of Morgan Guaranty. The account was titled "Mary Lauder Tunney - J.T.W. Special Account." The address given was that of Mr. Buhler, with duplicate statement to be sent to Mary. The "New Report Account" contained, insofar as is relevant herein, the following information: CROSS REFERENCES: 5TH Avenue checking account "Mary Lauder Tunney-J.T.W. SPECIAL ACCOUNT".5TH Avenue checking account "Mrs. Mary Lauder Tunney". 5th Avenue checking account "Mrs. Mary Lauder Tunney" (To close). REMARKS AND SPECIAL INSTRUCTIONS: SUMMARY STATEMENT: NOTE: The Savings Account of Mrs. Mary Lauder Tunney" (123 41 960) should be closed and the balance144 transferred from that account in order to open this new account. DESCRIPTION OF ORIGINAL DEPOSIT: $ 70,649.50 transferred from Savings Account - Mrs. Mary Lauder Tunney. Although the necessary checking and savings account statements were not made available to us in order that we might confirm the order of transition between accounts, 2 it appears quite clear from the bank's other records that the $ 81,680.81 transferred from Mary's savings account into the special accounts represents the $ 80,000 borrowed by Mary from the trust, along with interest which had been earned on that amount. It is also evident from these documents that the design was to hold the funds in the savings portion of the account, where they would earn interest, and simply transfer as much into the checking portion as required to cover checks which had been drawn against the account. Additionally, it was the bank's position that under Federal Reserve regulations the bank could not charge a savings account and make payments to a third party.All transactions were to require written authorization from either Mr. Buhler or Mary Tunney. 145 In accordance with the practice of Morgan Guaranty, the social security number on an account is either (1) the owner of the account or (2) the person who is to report the interest. The depositor chooses whose number to give. Morgan Guaranty attempted to obtain Joan's social security number, but never was. successful. The three accountings filed by Gene L. on behalf of Joan's estate show no interest income from any accounts with Morgan Guaranty. Petitioners reported interest income from Morgan Guaranty of $ 2,149 in 1973 and $ 1,592 in 1974. 3 The interest credited to savings account No. XXX XX 004 during 1973 was at least $ 1,611.94 and was $ 1,493.15 for 1974. Petitioner was supplied copies of Morgan Guaranty treasurer's checks which correspond to many of the withdrawals from the special checking account in both date and amount. The following chart summarizes the transactions in this account: 1972Total checking account debits$ 16,026.21Payee: Hospitals10,380.31Doctors651.00Purpose unknown4,994.90146 1973Total checking account debits$ 38,358.24Payee: Hospital$ 27,231.59Doctors2,120.00Purpose unknown9,006.651974Total checking account debits$ 13,353.62Payee: Hospital$ 9,638.79Doctors and dentist2,392.32Purpose unknown1,322.51An additional $ 10,000 was deposited into the special savings account on December 31, 1974, from an unidentified source, but had not been withdrawn as of the end of 1974.According to the assistant comptroller of the hospital, their records show payments in the following amounts against the medical expense of Joan T. Wilkinson: 1971$ 44,916.02197248,353.05197340,014.491974559.29The hospital's ledgers reflect only the amount of credits applied to the bill and do not show the source of the credits. Joan Tunney Wilkinson is Mary Lauder Tunney's daughter and an American citizen. Insofar as the information available reveals, no one other than the conservatorship or possibly Joan's mother contributed to her support from 1972 through 1974. She received no gifts, inheritances, or distributions from the trust during those years. Petitioners made147 no claim on their joint 1972 Federal income tax return for any of Joan's medical expenses. The notice of deficiency, however, included a determination by the Respondent that petitioners were entitled to a net increase in medical deductions for 1972 of $ 8,790.97, this amount resulting from the allowance by respondent of $ 15,825.21 in expenses paid for the medical treatment of Joan. Respondent later changed his mind about the propriety of petitioners' claim and by means of an amended answer disallowed in full the claimed deduction for Joan's medical expenses. On their 1973 Federal income tax return, petitioners claimed $ 36,287.74 for medical expenses of Joan. Respondent disallowed the entire deduction in his deficiency notice. As for 1974, petitioners claimed $ 16,402.36 for Joan's medical expenses. No portion of this amount was disallowed in the notice of deficiency. Respondent filed an amended answer, however, disallowing the deduction and increasing taxable income by $ 16,402.36. 4148 On July 3, 1973, the Tunney Family Trust #2 sold 3,000 shares of Gimbel Brothers, Inc., common stock for $ 67,543.63. On July 5, 1973, the trust sold another 70 shares for $ 1,549.62. On their 1973 Federal income tax return, petitioners claimed a basis in the 3,000 shares and the 70 shares of $ 6,375 and $ 148.75, resulting in long-term capital gains of $ 61,168.63 and $ 1,400.87, respectively. The 3,070 shares in question were purchased at some unknown time from the brokerage firm of Montgomery Scott (now Janney Montgomery Scott, Inc.). On or about January 28, 1970, the shares were delivered to Bankers Trust Company as co-trustee of the Tunney Family Trust #2. The trust later sold the shares. The only evidence offered as to the basis of these shares is a schedule of securities prepared by Montgomery Scott for Gene Tunney. It shows 250 shares of Gimbel Brothers stock followed by the notation "(2.125/share)", with a cost balance as of December 31, 1970 of $ 531.25. Since petitioners reported a net capital loss for 1973, the respondent disallowed part of petitioners' capital loss carryforward from 1973 to 1974, thus resulting in an increase to 1974 taxable income of $ 149 3,262. This represents one-half of the sum of the claimed bases, the stock having been held long-term. Gene and Mary spent a large portion of the summer months on an island where there was no telephone. Mr. Tunney was a director of a number of corporations. He rented a small room equipped with a telephone on shore from one Christine Jones. Petitioners introduced two checks dated November 1, 1972 and November 1, 1973, both made payable in the sum of $ 600 to Christine Jones and both signed by Gene Tunney, which they contend represents payments on annual leases of the room, Christine Jones not wishing to rent it out merely for the summer months. Petitioners claimed deductions of $ 600 in both 1972 and 1973 on account of these rental payments. In his notice of deficiency, respondent disallowed these deductions. OPINION Joan Tunney Wilkinson, daughter of Mary Lauder and Gene Tunney, was hospitalized and in need of constant medical attention during the period from 1971 through 1976. Her condition necessitated the appointment of a conservator to manage her affairs. By the middle of 1972, the conservator had exhausted nearly all of Joan's readily available assets in paying150 for her care. A plan was devised to insure continued payment of these expenses. Mary was the life beneficiary of a very substantial trust, and its remaindermen were her four children (including Joan). Mary borrowed $ 80,000 from the trust by means of an interestfree demand note. Contemporaneously with Mary's borrowing, her three sons executed a document pleading their entire remainder interests to guarantee repayment of the $ 80,000 their mother had borrowed. Additionally, the conservator of Joan's estate executed an interest-free demand note in the same amount, $ 80,000, in favor of Mary. The $ 80,000 was first deposited into Mary's checking account, then transferred to her savings, and then finally was transferred into a new account which she created and titled "Mary Lauder Tunney--J.T.W. Special Account." This latter account included both checking and savings. Joan's medical bills were paid from this account from late 1972 through at least the end of 1974. Petitioners claimed medical expense deductions for amounts paid from the bank accounts to Joan's hospitals and doctors. They claim that Joan was their dependent since they provided over one-half of Joan's support; 151 and that they are thus entitled to a medical expense deduction as a result of Mary's payments. Conversely, respondent urges that Joan was not their dependent during the years 1972-1974; and that in any event the payments were made with Joan's own money and the purported loans to Mary by the trust should be disregarded as without economic substance. As respects the taxable year 1973, the burden of establishing entitlement to the claimed deduction rests upon the petitioners. Welch v. Helvering, 290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure. As to the years 1972 and 1974, however, respondent concedes that the burden of proof on the medical expense issue falls on his side since he first raised the issue by way of an amended answer. Graff v. Commissioner, 74 T.C. 743">74 T.C. 743, 748 n. 2 (1980); Tauber v. Commissioner, 24 T.C. 179 (1955); Rule 142(a), Tax Court Rules of Practice and Procedure.Generally, section 213(a) 5 allows a deduction for the amount of expenses in excess of 3 percent of adjusted gross income paid during the taxable year for the medical care of the taxpayer, his spouse, and dependents (as152 defined in section 152) and not compensated for by insurance or otherwise. It is undisputed that substantial sums were paid from the bank account in question for the "medical care" of Joan Tunney Wilkinson. 6 The principal question to be resolved is whose funds were used--Joan's or her mother's. We hold that all funds expended from this account during the years here in issue were the property of Joan Tunney Wilkinson, and therefore no deduction is allowable to petitioners on account of these payments. 153 On February 22, 1972, Mary purported to borrow $ 80,000 from a trust of which she was the income beneficiary. The "loan" was guaranteed by three of the remaindermen through a pledge of their interests worth many times the face of the note. Although respondent asserts that because of this guarantee Mary was never at economic risk, we refuse to base our decision on this fact. What is true is that the trust was virtually assured of repayment through this device and thus bore little if any risk; however, this does not alter the fact that Mary remained primarily obligated on the note. She thus still shouldered the responsibility for returning the $ 80,000 upon demand so long as she remained financially solvent. What is fatal to the petitioners' cause is the separate note, also of February 22, 1972, signed by Gene Lauder Tunney "as committee of the property of Joan Tunney Wilkinson," promising to pay Mary $ 80,000 upon demand. By signing this note, Gene L. borrowed from Mary on behalf of his ward, the $ 80,000154 which Mary had just borrowed from the trust. Our conclusion is made clearer by an analysis of the actual events subsequent to the signing of the notes. The $ 80,000 was placed into Mary's checking account--the delivery to her of the money which she had borrowed. Mary then placed her money into savings account to earn interest. When Joan's estate was almost depleted, Mary decided it was time to act. She opened the "special" accounts, transferred the $ 80,000 to them, and instructed her bank and her attorney to begin paying Joan's medical bills out of the money. It was at this point that Mary conveyed to Joan's estate the $ 80,000 which it had borrowed by the February 22, 1972 demand note. 7Our conclusion is based on several factors. First, were this not the case, Joan's estate would have given its unconditional obligation to pay $ 80,000 to Mary upon demand, yet would never155 have received the $ 80,000 it had borrowed. Second, the account title contained more than just Mary's own name--it also bore Joan's initials along with the notation "special account." Finally, that Mary herself considered the money in the special account to be her daughter's is graphically displayed in her letter of November 15, 1972 to Morgan Guaranty where, in referring to the money in the "special" bank accounts, she said "which funds are the property of my daughter, Joan Tunney Wilkinson." Petitioners claim the demand note given by Gene L. is of no consequence. They argue that since Joan's own funds were exhausted and Joan had no income the note was valueless when made. It is difficult to understand why one would wish to present another with a worthless piece of paper, but we need not be perplexed by this question since the note did indeed have sufficient financial underpinnings. While not covering the full $ 80,000, the reports of the conservator show assets of $ 46,014.27 on October 31, 1972 (a little more than 8 months after the making of the note), $ 33,379.23 on September 5, 1975, and even as late as August 31, 1978 there was still $ 3,484.67 remaining. Although small156 in amount, the conservatorship did continue to earn income throughout this period. Additionally, the conservator's final report reveals that as of the end of 1977, Joan had fully recovered, remarried, and was self-supporting. She was employed briefly from the fall of 1976 to the early summer of 1977, although she has not worked since her marriage. We can perceive no reason that Mary could not now look directly to her daughter for repayment. 8Moreover, petitioners have chosen to ignore the potentially valuable contingent remainder interest which Joan possessed. Petitioners presented no evidence regarding the nature of the contingency. It may be that survivorship and a lack of prior depletion were the prerequisites.No evidence was given at trial to indicate that Joan's condition, even though serious, was life threatening or that she would not be able to reach her life expectancy. We do not believe that a one-fourth contingent remainder interest in the157 corpus of a trust valued at over $ 6,000,000 can be ignored in the context of this case. From the foregoing it is obvious that the note was not valueless at the time it was issued nor at the time of trial. But even if it had been, or was worth something less than face, the note would still have been valid. The situation where a debtor does not have assets sufficient to cover the borrowed principal is not an unusual one--indeed, if he had the money he may not have needed to borrow it. Rather, some creditors look to other factors beyond mere economic wealth--to intangibles such as earning power and reputation. Other creditors simply make bad loans. And at other times it is hard to be objective in assessing the potential for repayment, particularly where the borrower is one's own daughter. Petitioners also argue that the statute specifically contemplates a situation in which the taxpayer incurs an expense in one taxable year and is reimbursed by insurance proceeds "or otherwise" in a subsequent taxable year. Therefore, petitioners reason, the medical expenses paid, although subject to reimbursement, are currently deductible and any future payment on the demand note would be158 reported as income when received. The simple answer to this contention, without repeating our earlier discussion characterizing the payments a loan disbursements which are not deductible, is that the language "or otherwise" found in section 213(a) generally refers to reimbursements in the nature of insurance. A loan, at least in the context of the facts before us, is not in the nature of insurance. Gene Tunney held an unknown quantity of Gimbel Brothers, Inc., common stock with the brokerage firm of Montgomery Scott. On or about January 28, 1970, he transferred 3,070 shares to Bankers Trust Company, who later sold those shares. Petitioners bear the burden of establishing the appropriate basis to be used for determining the amount of gain or loss on the sale, Rule 142(a), Tax Court Rules of Practice and Procedure, even though the necessary records may long since have been destroyed making proof of this fact virtually impossible. Interlochen Co. v. Commissioner, 232 F.2d 873">232 F.2d 873, 878-879 (4th Cir. 1956), affg. 24 T.C. 1000">24 T.C. 1000 (1955). The sole evidence proferred by the petitioners to prove the basis of these shares was a stock summary as of the end159 of 1970 prepared by Montgomery Scott. From this we can determine only the basis for the 250 remaining shares. We have no way to know for certain whether the $ 2.125 per share cost also applies to the 3,070 shares, or any part of them, since no evidence was offered to show that the 250 shares were purchased at the same time and at the same price. Nor were we informed of the approximate date of purchase so that an estimate could be made.No confirmation slip, bank withdrawal or other record was presented; in fact, nothing was made available to show even that the stock was purchased by Mr. Tunney rather than received as a gift or inheritance. Since the cost of the 250 shares does not necessarily reflect the cost of the stock in question, we must sustain respondent's determination on this issue. Finally, petitioners contend that when Gene and Mary spent their summers on an island with no communication lines, Gene was forced to pay $ 600 per year to rent a small room on mainland so that he could stay in telephone contact with the several corporations on whose boards of directors he served. This claim is based primarily upon two checks for $ 600 each and the testimony of petitioners' 160 attorney that the recalls Gene Tunney relating this arrangement to him in order to enable the attorney to prepare the Tunneys' 1972 and 1973 income tax returns. We find the entire story highly implausible. In the first place, no showing was made to demonstrate the need to rent an entire room in order to use a telephone. Furthermore, it is entirely possible that the Tenneys also slept in this room when visiting the mainland, which of course is a nondeductible personal expenditure.The mere fact that the room may have contained a telephone the incidental use of which served a business purpose cannot justify the deduction of the rent paid for the premises. No records were furnished showing the installation of a telephone and its use for business purposes. Accordingly, we cannot allow petitioners any of the deductions which they have sought. Decisions will be entered under Rule 155. Footnotes. The statutory notice sent to petitioners for 1972 proposed a deficiency of $ 4,409.89. By way of an amended answer, respondent proposed a $ 9,255.92 increase in the deficiency to the present amount. * The statutory notice for 1974 proposed a deficiency of $ 1,766. By way of an amended answer, respondent increased the proposed deficiency by $ 9,718.32 to the present amount.↩1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the taxable years here in issue.↩*. Includes interest income of $ 91.29 actually accrued during the prior account period.↩2. Pursuant to a subpoena, Mrs. Helen Lovell, a vice president of Morgan Guaranty, brought to trial bank statements on the abovementioned accounts covering the years 1972-1974. These statements were identified and received into evidence without objection. Unfortunately, several critical statements were not furnished including: (1) Statements concerning savings account XXX XX 960 subsequent to June 30, 1972 (thus failing to show the alleged transfer of the $ 80,000 into the special accounts), (1) Statements concerning savings account XXX XX 960 subsequent to June 30, 1972 (thus failing to show the alleged transfer of the $ 80,000 into the special accounts), (2) The statement for savings account XXX X2 004 covering the period September 29, 1973, and (2) The statement for savings account XXX X2 004 covering the period September 29, 1973, and (3) The statement for checking account XXX XX 004 covering October 1974.(3) The statement for checking account XXX XX 004 covering October 1974.↩3. Since savings account No. XXX XX 004 was not opened until December 1, 1972, no interest would have been credited during 1972. The first interest payment actually took place on January 2, 1974.Since savings account No. XXX XX 004 was not opened until December 1, 1972, no interest would have been credited during 1972. The first interest payment actually took place on January 2, 1974.↩4. Proof of payment was not presented for the total deductions claimed for each year. For 1972, petitioners claimed $ 15,825.71 and yet only presented checks totalling $ 11,031.31. For 1973, the claim was $ 36,287.74 and the checks totalled $ 29,351.59. It was the same story in 1974, with claims for $ 16,402.36 and checks to doctors and hospitals aggregating only $ 12,031.11.↩5. Sec. 213(a) provides: SEC. 213. MEDICAL, DENTAL, ETC., EXPENSES. (a) ALLOWANCE OF DEDUCTION.--There shall be allowed as a deduction the following amounts, not compensated for by insurance of otherwise-- (1) the amount by which the amount of the expenses paid during the taxable year (reduced by any amount deductible under paragraph (2)) for medical care of the taxpayer, his spouse, and dependents (as defined in section 152) exceeds 3 percent of the adjusted gross income, and (2) an amount (not in excess of $ 150) equal to one-half of the expenses paid during the taxable year for insurance which constitutes medical care for the taxpayer, his spouse, and dependents.↩6. In the context of the present case, "'medical care' means amounts paid for the diagnosis, cure, mitigation, treatment or prevention of disease." Sec. 213(e)(1)(A).↩7. It matters none whether we view the transfer into the "special accounts" as a lump-sum delivery of the loan, or whether each payment of a medical bill constituted a partial disbursement of the proceeds. In either event, it was money belonging to Joan's estate which paid her medical expenses.↩8. When a conservatorship is terminated, whatever rights existed a gainst the estate continue against the conservatee. See, Omansky v. Stewart, 276 Cal. App. 2d 211">276 Cal. App. 2d 211, 80 Cal. Rptr. 738">80 Cal. Rptr. 738, 740↩ (Ct. App. 1969).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624093/	ROBERT S. EATON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Eaton v. CommissionerDocket No. 81350.United States Board of Tax Appeals37 B.T.A. 283; 1938 BTA LEXIS 1059; February 4, 1938, Promulgated 1059 On June 1, 1932, the petitioner and his wife entered into a written agreement called "Articles of Copartnership", for the alleged purpose of "buying, selling, exchanging and dealing in stocks, bonds and other securities." The partnership was to continue to December 31, 1937, unless terminated at an earlier date. It was dissolved on July 12, 1935. The articles of copartnership provided that the petitioner should contribute the capital, which consisted of 5,000 shares of the capital stock of a corporation of which petitioner was president. Throughout the existence of the partnership these shares of stock stood in the name of the petitioner. The only income of the partnership was the dividends received upon this stock, which were imediately turned over to the petitioner's wife. All of the income of the partnership up to $25,000 a year was to belong to the wife. This was far in excess of the dividends received upon the 5,000 shares of stock. The wife contributed no capital, labor, or services to the partnership. The partnership transacted no business during its existence. Held, that the alleged partnership was not a partnership within the meaning of section 181 of the Revenue1060 Act of 1932 and that the petitioner is liable to income tax upon the dividends paid upon shares of stock standing in his name. Frank J. Maguire, Esq., for the petitioner. Paul E. Waring, Esq., for the respondent. SMITH 283 This proceeding is for the redetermination of a deficiency in income tax for 1932 in the amount of $3,476.95. The petition alleges that the respondent erred in including in the petitioner's gross income an 284 amount of $10,000 representing income from the partnership of R. S. Eaton & Co., which was not received by and did not belong to the petitioner. FINDINGS OF FACT. The petitioner is a resident of Norwich, New York, and is the president of the Norwich Pharmacal Co. During 1932 petitioner was married and lived with his wife, Mildred C. Eaton, at Norwich. Prior to June 1, 1932, Mildred C. Eaton's separate estate was negligible and her yearly income was less than $100. On June 1, 1932, the petitioner and his wife entered into a written agreement called "Articles of Copartnership", which provided in part as follows: THIS AGREEMENT, made the 1st day of June, 1932, by and between ROBERT S. EATON, party1061 of the first part; and MILDRED C. EATON, party of the second part, both of the City of Norwich, County of Chenango, and State of New York, WITNESSETH: WHEREAS, the parties from time to time prior to the date hereof have had joint property interests and have individually and/or jointly made investments in securities; and WHEREAS, the parties desire to create a partnership to engage in the business of buying, selling, exchanging and dealing in stocks, bonds and other securities, and in the making of investments generally; Now, THEREFORE, in consideration of the premises and of the mutual covenants hereinafter contained, and the mutual benefits which the parties expect to derive therefrom, the parties hereto agree that from and after the date hereof, they will be and become copartners in business upon the terms and conditions hereinafter stated: FIRST: The name of the partnership shall be "R. S. Eaton & Company." SECOND: The business to be carried on by the said partnership is that of buying, selling, exchanging and dealing in stocks, bonds and other securities and the making of investments generally in real or personal property, and such other business as shall be from time1062 to time mutually agreed upon. THIRD: The principal office of the partnership shall be located in the City of Norwich, County of Chenango and State of New York. FOURTH: The party of the first part shall contribute to the capital of the partnership the property described in Schedule "A" annexed hereto and made a part of this agreement. It is settled and agreed that the property listed in said schedule has a fair actual value as therein set forth and the amount stated therein as the capital contribution is fixed as the agreed value at which the same is contributed to the capital of the partnership. It is hereby agreed that the managing partner may allow the said property or any other property hereafter owned by the firm, to stand in the name or names in which they now stand registered, or may have the same transferred to the name of the partnership and so registered, or may have the same registered in so-called street name or in the name of a nominee, or that he may so far as possible take and hold the same in unregistered form. Upon the expiration of the term of the partnership or any extension of such term, the said capital contribution and any other capital contribution1063 of any partner shall be returned to the partner who contributed the same, either in cash or in kind, or partly in cash and partly in kind, in the sole discretion of the managing partner. 285 FIFTH: The party of the first part shall be the managing partner of the said partnership and as such shall be in general charge of the conduct of its business. In the investment of the funds of the partnership, the managing partner shall be vested with full power and authority in the course of conducting the business of the firm to incur such liabilities and make such investments and reinvestments as he may deem to be for the best interest of the firm, and may invest its property or loan its property or credit upon such terms and conditions as to him shall seem to be for the best interest of the firm; provided, however, that the capital funds of the partnership shall not be loaned to any partner except upon interest-bearing negotiable promissory notes. All of the net income of the partnership was to be paid to the wife up to $25,000 in each fiscal year. The net income above $25,000 up to $50,000 was to be paid to the petitioner and all of the distributable net income in excess of1064 that amount was to be divided 90 percent to the petitioner and 10 percent to the petitioner's wife. The alleged partnership agreement further provided: SEVENTH: Proper books of account of the transactions of the partnership business shall be kept in the place of business. Each partner shall cause to be entered into such books a just and true account of all dealings with, by or for the account of the said firm, showing in detail the business, receipts and expenditures of the firm. EIGHTH: All money and funds of the partnership shall be deposited in the name of the firm in such bank or banks as may be determined upon by the managing partner, and shall be drawn out and disbursed by check drawn in the name of the partnership and signed by either the managing partner or such authorized agent of the firm as may be designated by the managing partner. The partnership was to continue until December 31, 1937, unless terminated at an earlier date. The partnership was actually disolved on July 12, 1935. Schedule "A" attached to the partnership agreement provided in part: Annexed to and made a part of a certain agreement dated June 1, 1932. Being the contribution of Robert S. Eaton1065 to the capital of the partnership formed by and under the terms of the said agreement. Five Thousand (5,000) shares of the capital stock of The Norwich Pharmacal Company, evidenced by the following certificates: * * * the agreed value of the said shares being Sixty Dollars ($60.00) each, a total of Three Hundred Thousand Dollars ($300,000.00). During the calendar year 1932 and subsequent to June 1, 1932, $10,000 in dividends on the 5,000 shares of Norwich Pharmacal Co. stock, constituting the capital of the alleged partnership, was paid to "R. S. Eaton & Co." The petitioner, for the partnership, drew checks against the bank account of the partnership by which he transferred to Mildred C. Eaton the $10,000 in question. During the year 1932 the petitioner borrowed from his wife a part of the $10,000 286 paid over to her, but during the year repaid the amount, with interest. The distribution of the $10,000, as shown by the wife's books of account for 1932, was as follows: Life insurance$5,128.70Gifts114.50TaxesMildred C. Eaton (personal)1,415.99Vacations137.85Household expense2,960.44Cash balance in bank 12/31/32$288.52Less:Int. received$69.33Deposits (other)26.6796.00192.52Total recd. from R. S. Eaton & Co$9,950.001066 Mildred C. Eaton did not contribute any capital, labor or other services to the alleged partnership, R. S. Eaton & Company, during the entire year 1932, nor at any other time. [So stipulated.] Throughout the existence of the alleged partnership the books of account of R. S. Eaton & Co. show the receipt of the dividends on the 5,000 shares of Norwich Pharmacal Co. and the disbursement of them to Mildren C. Eaton. The alleged partnership never bought or sold any securities and never transacted any business aside from that indicated above. After the termination of the partnership, on July 12, 1935, the dividends on the 5,000 shares of stock constituting the capital of the alleged partnership were paid to the petitioner. OPINION. SMITH: The sole question presented by this proceeding is whether the petitioner is liable to income tax upon the dividends paid upon 5,000 shares of the capital stock of the Norwich Pharmacal Co. standing in his name. The petitioner contends that, by reason of the fact that he entered into the agreement with his wife on June 1, 1932, by which she was to receive all of the income of the partnership up to $25,000 per year, and inasmuch as the dividends1067 on the 5,000 shares set aside for the alleged partnership amounted in 1932 to less than $25,000, he is not liable to income tax in respect of them. All of the income tax acts from the Revenue Act of 1913 have provided that partnerships shall not be subject to income tax as entities but that the members of the partnership shall account annually for their shares of the net earnings of the partnership. In , the Supreme Court said: "The term partnership as used in these sections obviously refers only to ordinary partnerships." In section 181 of the Revenue Act of 287 1932, it is stated: "Individuals carrying on business in partnership shall be liable to income tax only in their individual capacity." * * * The requisites of a partnership are that the parties must have joined together to carry on a trade or adventure for their common benefit, each contributing property or services, and having a community of interest in the profits. * * * [, quoted in 1068 See also ; affd., ; . Was the alleged partnership of R. S. Eaton & Co. an "ordinary" partnership within the meaning of the applicable income tax act? We are of the opinion that it was not. The wife contributed no property, labor, or services to the alleged partnership. The petitioner was to receive no part of the income unless the income in any year exceeded $25,000, which was far in excess of the amount actually received. The petitioner, therefore, did not have any interest in the profits actually realized. Furthermore, the alleged partnership carried on no business whatever during its life. It was never seriously expected that it would. The arrangement was merely one by which a part of the petitioner's income was to be made available to the wife for the payment of expenses, the principal part of which was the husband's expenses. In 1069 , it was said: But taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed - the actual benefit for which the tax is paid. * * * Still speaking with reference to taxation, if a man disposes of a fund in such a way that another is allowed to enjoy the income which it is in the power of the first to appropriate it does not matter whether the permission is given by assent or by failure to express dissent. * * * Although R. S. Eaton & Co. was in form a partnership, it was not such in substance. It was only a means by which the petitioner might avoid the payment of income tax on a portion of his income, which was to be used in the major part for his own benefit. In , it was held that a partnership existed between the taxpayer and his wife. In that case, however, the wife contributed the original capital for the partnership and the partnership was clearly engaged in the carrying on of a business. We are of the opinion that, in any case where a partnership exists within the contemplation*1070 of the taxing statute, the partner must either contribute capital or services to the partnership and must have a community of interest in the profits. Such was not the case here. The respondent did not err in taxing to the petitioner the dividends paid upon the 5,000 shares of Norwich Pharmacal Co. stock which constituted the capital of the alleged partnership. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4669076/	[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as Lorain Cty. Bar Assn. v. Lewis, Slip Opinion No. 2021-Ohio-805.] NOTICE This slip opinion is subject to formal revision before it is published in an advance sheet of the Ohio Official Reports. Readers are requested to promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65 South Front Street, Columbus, Ohio 43215, of any typographical or other formal errors in the opinion, in order that corrections may be made before the opinion is published. SLIP OPINION NO. 2021-OHIO-805 LORAIN COUNTY BAR ASSOCIATION v. LEWIS. [Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as Lorain Cty. Bar Assn. v. Lewis, Slip Opinion No. 2021-Ohio-805.] Attorneys—Misconduct—Violations of the Rules of Professional Conduct—Two- year suspension with conditions. (No. 2020-0971—Submitted January 13, 2021—Decided March 18, 2021.) ON CERTIFIED REPORT by the Board of Professional Conduct of the Supreme Court, No. 2020-009. _______________________ Per Curiam. {¶ 1} Respondent, Kenneth James Lewis, of North Ridgeville, Ohio, Attorney Registration No. 0073002, was admitted to the practice of law in Ohio in 2000. {¶ 2} In 2009, we suspended his license for one year after finding that he had forged a judge’s signature on a previously time-stamped judgment entry. SUPREME COURT OF OHIO Medina Cty. Bar Assn. v. Lewis, 121 Ohio St.3d 596, 2009-Ohio-1765, 906 N.E.2d 1102. In 2018, we suspended his license for two years, with the final six months stayed, for giving a false written statement to the police about an alcohol-related traffic incident. Lorain Cty. Bar Assn. v. Lewis, 152 Ohio St.3d 614, 2018-Ohio- 2024, 99 N.E.3d 404. We conditioned the stayed portion of that suspension on Lewis’s compliance with a contract with the Ohio Lawyers Assistance Program (“OLAP”) and his continued involvement with Alcoholics Anonymous. Id. at ¶ 17. Although Lewis’s second suspension expired on May 30, 2020, he has not applied for reinstatement and therefore remains under suspension. {¶ 3} In February 2020, relator, the Lorain County Bar Association, charged Lewis with failing to communicate with and diligently represent a client in a domestic-relations matter. Relator alleged that the misconduct occurred in early 2018, i.e., before we imposed Lewis’s second suspension. Lewis stipulated to the charges. After a hearing, the Board of Professional Conduct issued a report finding that Lewis had engaged in the charged misconduct and recommending that we suspend him for two years, with the suspension retroactive to May 30, 2020. Neither party has objected to the board’s report and recommendation. {¶ 4} Based on our review of the record, we adopt the board’s findings of misconduct and recommended sanction. Misconduct {¶ 5} In June 2017, Sandra Deem retained Lewis to represent her in a marriage-dissolution proceeding, and on December 5, 2017, the court entered a judgment entry of dissolution. The entry required Lewis to prepare and submit qualified domestic relations orders (“QDROs”) by February 28, 2018, in order to divide the parties’ retirement assets. Lewis, however, failed to prepare the QDROs and had no further communication with Deem after the court’s December 5 judgment entry. By April 2018, none of the retirement funds had been distributed. Deem filed a grievance against Lewis in which she alleged that he had not only 2 January Term, 2021 failed to submit the QDROs but also failed to return phone calls from her and her ex-husband inquiring about the status of the matter. Deem was later forced to retain new counsel to complete the necessary QDROs. On May 4, 2020—about six weeks before his disciplinary hearing—Lewis made restitution to Deem in the amount of $2,490, which covered her costs for hiring new counsel and an outside company to prepare the QDROs. {¶ 6} Based on this conduct, Lewis stipulated and the board found that he had violated Prof.Cond.R. 1.3 (requiring a lawyer to act with reasonable diligence in representing a client), 1.4(a)(3) (requiring a lawyer to keep a client reasonably informed about the status of a matter), and 1.4(a)(4) (requiring a lawyer to comply as soon as practicable with reasonable requests for information from a client). We agree with the board’s findings of misconduct. Sanction {¶ 7} When imposing sanctions for attorney misconduct, we consider all relevant factors, including the ethical duties that the lawyer violated, the aggravating and mitigating factors listed in Gov.Bar R. V(13), and the sanctions imposed in similar cases. {¶ 8} The board found two aggravating factors—Lewis has a prior disciplinary record and committed multiple offenses. See Gov.Bar R. V(13)(B)(1) and (4). As mitigating factors, the board found that Lewis lacked a dishonest or selfish motive, made restitution to Deem, and displayed a cooperative attitude toward the disciplinary proceedings. See Gov.Bar R. V(13)(C)(2), (3), and (4). The board also noted that Lewis expressed sincere regret for mishandling Deem’s case. {¶ 9} The parties jointly recommended that Lewis serve a two-year suspension and submit to another OLAP assessment and that Lewis serve a one- year term of monitored probation upon his reinstatement. The board noted that if Lewis had had a clean disciplinary record, his misconduct here—neglect of a single client matter—would likely warrant a public reprimand or a fully stayed 3 SUPREME COURT OF OHIO suspension. But considering Lewis’s two prior suspensions, the board recommends the stipulated sanction, which it found to be within the range of appropriate sanctions for previously disciplined attorneys who committed misconduct similar to Lewis’s. See, e.g., Lorain Cty. Bar Assn. v. Haynes, 160 Ohio St.3d 308, 2020- Ohio-1570, 156 N.E.3d 867 (imposing a conditionally stayed six-month suspension on an attorney who failed to timely file a QDRO on behalf of a domestic-relations client; the attorney had one prior disciplinary case); Disciplinary Counsel v. Engel, 154 Ohio St.3d 209, 2018-Ohio-2988, 113 N.E.3d 481 (imposing a two-year suspension, with 18 months conditionally stayed, on an attorney whose misconduct included neglecting a single client’s matter; the attorney had two prior disciplinary cases); Trumbull Cty. Bar Assn. v. Braun, 133 Ohio St.3d 541, 2012-Ohio-5136, 979 N.E.2d 326 (indefinitely suspending an attorney in a default proceeding for misconduct that included neglecting a single client’s matter; the attorney had one prior disciplinary case and had been found in contempt of our disciplinary order in that case). {¶ 10} Because this disciplinary matter was pending when Lewis’s second suspension expired and because Gov.Bar R. V(24)(C)(4) prohibits us from reinstating a suspended attorney if formal disciplinary proceedings are pending against the attorney, the board recommends that Lewis’s suspension be retroactive to May 30, 2020, the date after which he would have been eligible to seek reinstatement but for the pendency of this action. The board also recommends that we subject Lewis’s reinstatement to certain conditions, including obtaining another OLAP assessment and appointing a probation monitor to help Lewis comply with OLAP’s recommendations. The board noted that there was no evidence that Lewis’s history of alcohol abuse—as described in Lorain Cty. Bar Assn. v. Lewis, 152 Ohio St.3d 614, 2018-Ohio-2024, 99 N.E.3d 404—contributed to the misconduct in this case. Nevertheless, the board accepted the parties’ stipulation that another OLAP assessment is warranted. 4 January Term, 2021 {¶ 11} As previously explained, “it is reasonable and proper to consider [an attorney’s] previous sanction * * * and to impose a harsher sanction than we might otherwise impose for an attorney who committed comparable conduct but had no prior discipline.” Disciplinary Counsel v. Dann, 134 Ohio St.3d 68, 2012-Ohio- 5337, 979 N.E.2d 1263, ¶ 20. After independently reviewing the record and considering the aggravating and mitigating factors and relevant precedent, we agree that a two-year suspension, with the board-recommended conditions on reinstatement, is the appropriate sanction in this case. Conclusion {¶ 12} For the reasons explained above, Kenneth James Lewis is suspended from the practice of law in Ohio for two years, with the suspension commencing on May 30, 2020. In addition to the requirements of Gov.Bar R. V(24), Lewis’s reinstatement shall be subject to the requirements that he (1) obtain an OLAP assessment and comply with any recommendations resulting from that assessment and (2) complete six hours of continuing legal education in law-office management, in addition to the other requirements of Gov.Bar R. X. Upon reinstatement, Lewis shall complete a one-year period of monitored probation in accordance with Gov.Bar R. V(21) focusing on his compliance with any recommendations made by OLAP. Costs are taxed to Lewis. Judgment accordingly. O’CONNOR, C.J., and KENNEDY, FISCHER, DEWINE, DONNELLY, STEWART, and BRUNNER, JJ., concur. _________________ O’Toole, McLaughlin, Dooley & Pecora Co., L.P.A., Matthew A. Dooley, and Michael R. Briach; and Charlita Anderson White, Bar Counsel, for relator. Kenneth J. Lewis, pro se. _________________ 5	01-04-2023	03-18-2021
https://www.courtlistener.com/api/rest/v3/opinions/4624095/	HUNTINGTON BEACH, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. DONBERRY CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Huntington Beach, Inc. v. CommissionerDocket Nos. 59239, 59240.United States Board of Tax Appeals30 B.T.A. 731; 1934 BTA LEXIS 1280; May 16, 1934, Promulgated 1280 AFFILIATED CORPORATIONS - BINDING EFFECT OF ELECTION TO FILE SEPARAGE RETURNS. - In 1927 three corporations were affiliated and elected to file separate returns. In January 1928 another corporation came into the affiliation. Held, the four corporations were not entitled to file consolidated returns for the year 1928, not having obtained the permission of the Commissioner so to do. Horace P. Griffith, C.P.A., and Robert H. Rissinger, C.P.A., for the petitioners. J. M. Leinenkugel, Esq., for the respondent. BLACK 732 OPINION. BLACK: These proceedings are for the redetermination of deficiencies in income tax for 1928 of $2,249.56 in the case of Huntington Beach, Inc., and $10,698.71 in the case of the Donberry Corporation. The petitions allege that the respondent erred in computing the tax liabilities of the petitioners upon the basis of separate returns instead of on the basis of a consolidated return as filed by the petitioners. The facts were stipulated as follows: 1. That during the year 1927 petitioners were members of an affiliated group, which was composed of the following corporations: Donberry Corporation, which1281 company had an authorized capital of $25,000 represented by 250 common shares of $100 par value, all of which was outstanding, and of which Fred W. Gordon owned 50% and Z. D. Berry owned 50%. Huntington Beach, Inc., which company had an authorized capital of $100,000, represented by 1,000 shares of $100 par value, all of which was outstanding and of which 100% was owned by the Donberry Corporation. 134 East 64th Street Corporation, which company was chartered April 20, 1927, and its entire authorized and outstanding capital stock was owned by Donberry Corporation. 2. That the three corporations listed above elected to file and did file separate income tax returns for the year 1927. 3. That on January 18, 1928, and thereafter during the year 1928, petitioner was a member of an affiliated group composed of Donberry Corporation, Huntington Beach, Inc., 134 East 64th Street Corporation, and 254 West 54th Street Corporation. The last named company had an authorized capital of $50,000, consisting of 500 shares of common stock of $100 par value, of which 50% was owned by Fred W. Gordon, and 50% was owned by Z. D. Berry from January 18, 1928 to December 31, 1928. 4. That1282 Donberry Corporation, Huntington Beach, Inc., 134 East 64th Street Corporation, and 254 West 54th Street Corporation joined in the filing of a consolidated return for the year 1928, without first having secured permission of the Commissioner of Internal Revenue to change the basis of filing which had been elected by Donberry Corporation, Huntington Beach, Inc., and 134 East 64th Street Corporation in 1927. Section 142 of the Revenue Act of 1928 provides in part as follows: SEC. 142. CONSOLIDATED RETURNS OF CORPORATIONS - TAXABLE YEAR 1928. (a) Consolidated returns permitted. - Corporations which are affiliated within the meaning of this section may, for the taxable year 1928, make separate returns or, under regulations prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income for the purpose of this title, in which case the taxes thereunder shall be computed and determined upon the basis of such return. If return for the taxable year 1927 was made upon either of such bases, return for the taxable year 1928 shall be upon the same basis unless permission to change the basis is granted by the Commissioner. 733 1283 Petitioners admit that the three corporations, Donberry Corporation, Huntington Beach, Inc., and 134 East 64th Street Corporation, which were affiliated in 1927, elected to file separate returns for that year, and they concede that if no change had been made in the affiliated group the corporations would not have been entitled to file a consolidated return for the year 1928 without first securing permission from the Commissioner. Petitioners contend however that by reason of another corporation coming into the affiliation on January 18, 1928, to wit, the 254 West 54th Street Corporation, there was a new affiliated group and the taxpayer became entitled to a new election and had the right to file a consolidated return for the period January 18 to December 31, 1928. For the year 1928 the Donberry Corporation had a net income of $112,974.84 and the Huntington Beach Corporation had a net income of $14,164.14. The 134 East 64th Street Corporation had neither income nor losses for 1928 and the new affiliate, the 254 West 54th Street Corporation, had a loss of $100,333.70. The Board has held contrary to the contention made by petitioners in several cases. 1284 ; . Cf. . . Petitioners cite our decision in , in support of their contention. In that case we held that where two affiliated corporations filed separate returns for 1927 and the affiliation was terminated at the end of that year and a new group of seven corporations was formed in 1928, which included the two corporations formerly affiliated, the new group had an election to file a consolidated return under section 142(a) of the Revenue Act of 1928. We based our decision in the Leon & Son, Inc., case on the fact that the affiliation of two of the corporations in the year 1927 was terminated at the end of that year and that an entirely new group was formed in 1928. That this was the basis of our distinction in the Leon & Son, Inc., case from the Board cases heretofore cited was made plain in our opinion, from which we quote as follows: 1285 The applicable statute, section 142(a) of the Revenue Act of 1928, has provided a limitation on the right of election for 1928 where an affiliation existed and an election was made in the prior year. Under earlier revenue acts (in which the applicable sections of the statute are practically identical with the one before us) it has been held that where an election has been made and separate returns filed by affiliated corporations, the addition to the affiliated group of one or more corporations in a succeeding year does not entitle the several companies to make a new election to file a consolidated return without the consent of the Commissioner. ; B. Mifflin734 ; ; . And in those cases where affiliation existed during the prior year and a consolidated return had been filed, the corporations thereafter coming into the group had no right of election to file a separate return because it was required that a consolidated return include the entire group. 1286 ; affd., ; certiorari denied, ; ; . Seemingly, the 1928 Act, together with Regulations 74, article 731 et seq., promulgated thereunder, requires no change in the rules laid by these decisions with respect to returns of affiliated corporations for the taxable year 1928, but, as we see it, we have in the case at bar not the addition of new members to a continuing affiliated group, but a dissolution of the group previously existing and the creation of a new group. [Emphasis supplied.] Another case which petitioners cite in support of their contention is , reversing the Board's decision at . In the Marvel Equipment Co. case the conclusion of the court appears to be based largely on the fact that the affiliated group in 1927 had a different parent company from that which the affiliated group had in 1925 and 1926. 1287 The emphasis on the importance of the parent corporation is touched upon by the court in its opinion in the recent case of , where the following language is used: Where one of several affiliated corporations, especially if it is the one having dominant control, elects to file a separate income tax return by filing such a return, the other affiliated corporations are deprived of the right to file a consolidated return in the absence of a granting by the Commissioner of Internal Revenue of a permission to do so. , certiorari denied, . The stipulated facts in the instant case show that the Donberry Corporation was the parent corporation when the election to file separate returns was made in 1927 and it continued to remain the parent corporation in 1928. We see no evidence that the affiliation which existed in 1927 was terminated or broken up in 1928. Hence we hold that petitioners have no right to file a consolidated return for 1928 without first securing the consent of the Commissioner. 1288 We think this holding is not in conflict with , and , but is entirely consistent therewith. We concede it is in conflict with , reversing the Board's decision at . The facts of that case were very similar to those of the instant case. The decision has given the Board much concern, and it is only after a full and most respectful consideration that we find ourselves unable to adopt it as the uniform rule for this Board to follow. This is especially so in view of the later emphasis by the court in the Marvel case of the 735 question whether the parent or dominant corporation remained identical, and also in view of the reasoning of the Circuit Court of Appeals for the Fifth Circuit in reaching its conclusion in For this reason we regard the present proceeding as requiring renewed consideration of the question. If the mere addition of a member to an affiliated group without any change in the1289 dominant parent worked such a change in the situation as to give the affiliated group a new election, then that part of section 142(a) of the Revenue Act of 1928, which reads "If return for the taxable year 1927 was made upon either of such bases, return for the taxable year 1928 shall be upon the same basis unless permission to change the basis is granted by the Commissioner" would not mean very much. An affiliated group which had elected to file separate returns could, by the mere creation of a new corporation, establish a new election and thus file a consolidated return as a matter of right, despite the Commissioner's nonpermission or even his express disapproval. We think it is not to be assumed that Congress would have imposed this express restriction upon the voluntary election given corporate taxpayers and yet leave open such an obvious means of its circumvention and frustration. It must be borne in mind that the requirement for securing the Commissioner's permission is not merely a regulatory requirement laid down by the administrative officer, but is an express statutory condition of the legislation itself. Congress might have withheld any recognition of consolidated returns1290 or any election, and therefore the condition is a necessary incident of the grant. Especially apt, in such circumstances, is the Supreme Court's admonition in , that "Men must turn square corners when they deal with the Government. If it attaches even purely formal conditions to its consent to be sued, those conditions must be complied with. * * At all events the words are there in the statute and the regulations, and the Court is of opinion that they mark the conditions of the claimant's right." A case often cited having to do with the effect of additions or subtractions to the affiliated group is . In that case there were 60 or more corporations, of which Swift & Co. was the dominant parent corporation. Suppose that Swift & Co., the dominant parent corporation in 1927, had elected that the group file separate returns and in 1928 another subsidiary had been added in the same manner as the 254 West 54th Street Corporation was added to the affiliated group in the instant case, without any change in the dominant parent corporation. Would1291 it be contended that the mere addition to the group of 736 this one new affiliate, without any change in the dominant parent corporation, would give the group the right of a new election and enable the corporations to file a single consolidated return without first securing the consent of the Commissioner? We think not. Under such circumstances the group would not be permitted to file a consolidated return without first securing the consent of the Commissioner. We think the weight of authority supports the Commissioner in his determination in the instant case and is against the contention made by petitioners. Reviewed by the Board. Decision will be entered for respondent.MARQUETTE, SMITH, and ARUNDELL dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624116/	CRYSTAL ICE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Crystal Ice Co. v. CommissionerDocket No. 13134.United States Board of Tax Appeals14 B.T.A. 682; 1928 BTA LEXIS 2939; December 12, 1928, Promulgated 2939 1. Actual cash value of property acquired by petitioner for its stock held to have been that at which the transferor had contracted to purchase such property. 2. Where a corporation sustains a deficit due to losses of operation, and thereafter pays dividends before such deficit is made whole and the original capital restored, such dividends represent a return to stockholders of a part of the capital of the corporation and, in computing invested capital, the paid-in capital is to be reduced by the amount of the deficit caused by the payment of such dividends. B. S. Womble, Esq., and Lee I. Park, Esq., for the petitioner. A. H. Murray, Esq., for the respondent. PHILLIPS 682 The petitioner filed its petition for a redetermination of deficiencies in income and profits taxes of $6,977.44 for 1920 and $12,155.38 for 1921. FINDINGS OF FACT. The Crystal Ice Co. was organized as a corporation under the laws of the State of North Carolina in March, 1912. On March 16, 1912, W. J. Payne made the following offer to the petitioner, which was accepted by petitioner on that date: I have recently purchased the Ice Manufacturing Plant2940 of the Fries Manufacturing & Power Company, located in the city of Winston-Salem, North Carolina, together with the real estate, buildings, machinery, wagons and other equipment thereto, and the "good will" of the business of the manufacturing and selling ice heretofore conducted by said company. I now offer to sell and convey, or cause to be conveyed, to you, said plant, property, business and "good will" for the consideration hereafter named. The real estate covered by the proposition is shown by the blue print which I submit for your examination, and also includes a lot near the foregoing on which is located the pumping house for the cooling water supply for said plant; said conveyance to be subject to certain reservations and easements in favor cf Fries Manufacturing & Power Company. I also submit for your examination and information the agreement of February 17th 1912, between said company and myself, under which said purchase was made, in order that you may be advised of the terms and conditions upon which I purchased said property and also of the reservations and easements above mentioned. 683 I will accept in full payment of same Seven Hundred and Forty-Seven2941 (747) shares of your capital stock, each of the par value of One Hundred Dollars ($100.00), to be issued as fully paid and nonassessable, and forty thousand dollars ($40,000.00) payable in ten equal installments with interest at the rate of six per cent, (6%) payable semi-annually; Said installments to be evidenced by ten negotiable notes to be executed in your corporate name and to be secured by a deed of trust upon all the property acquired by you under this proposition. In the event of your acceptance of this proposition I will for convenience, request the Fries Manufacturing and Power Company to make a deed direct to you for said property, and likewise request, in the event, that said notes shall be made to the order of the Fries Manufacturing and Power Company and that deed of trust securing said notes be drawn to the Equitable Trust Company of New York, as Trustee. This proposition is submitted for your prompt acceptance or rejection. On February 17, 1912, W. J. Payne had made the following offer to the Fries Manufacturing & Power Co., which said offer had been accepted by the executive committee of the board of directors of that company on said date: That I will purchase2942 from your company your ice manufacturing plant, located in Salem, N.C., including all of the real estate, buildings, machinery, wagons and all other equipment appurtenant thereto, and pay therefor the sum of $50,000.00, payments to be as follows: $10,000.00 in cash and the remaining $40,000.00 to be secured by negotiable notes of myself or those of a company to be formed by me for the purpose of taking over this property, to the amount of $40,000.00, divided into ten equal annual installments running from one to ten years inclusive, bearing interest at the rate of six per cent (6%) per annum, payable semi-annually. Said notes being secured by a deed of trust upon all the property and franchise so conveyed by you, containing all usual or required covenants. I will carry out this proposition in all respects immediately upon its acceptance, which shall be within ten days from date. The property so acquired by the petitioner from W. J. Payne had an actual cash value of $50,000 at the date of acquisition thereof by the petitioner. In addition to the 747 shares of stock issued for property at the time of the organization of the taxpayer in March, 1912, as set out above, stock of2943 the petitioner was also issued and fully paid for either in cash or tangible property, as follows: Shares of stockDateCommonPreferredA mount paid inMar. 16, 19123 $300Mar. 25, 1912404,000Dec. 20, 191221021,000Do58858,800Jan. 3, 1913101,000Mar. 3, 19135 $500Jan. 29, 1914404,000Feb. 11, 19147700Apr. 1, 191830030,000684 On December 31, 1914, the petitioner had an earned surplus of $23,171.83, being the amount of its undistributed earnings from the date of organization to December 31, 1914. The petitioner owned the capital stock of the Carolina Ice & Coal Co. In 1914 the plant of that company was destroyed by fire and the company was thereafter liquidated. Upon such liquidation the petitioner sustained a loss of $81,592.56, which was written off its books in 1915. The earnings of the petitioner from its operations, other than its loss on the liquidation on the stock of the Carolina Ice & Coal Co., were as follows for the years indicated: 1915$13,168.63191614,876.64191727,006.661918$3,878.5619196,577.22192037,841.29Dividends were2944 declared and paid as follows: DateDeclared and creditedDebited and paidFeb. 28, 1914$4,221$4,221Dec. 1, 19154,550Dec. 31, 19154,550Dec. 31, 19164,550Feb. 14, 19174,550Dec. 31, 19174,550Jan. 4, 19184,550Apr. 30. 19189,100Dec. 31, 1918$6,650Dec. 31, 19196,125Jan. 1, 1920$12,775Dec. 1, 19206,650Jan. 31, 19216,650Apr. 15, 19219,650Sept. 30, 19219,650The corporation had stock of a par value of $165,000 outstanding on March 3, 1917. The Commissioner determined that the invested capital of the petitioner for 1920, before adjustment for inadmissibles, was $99,306.83 and after adjustment for inadmissibles was $97,519.31. He determined that the invested capital for 1921 was $100,398.92. OPINION. PHILLIPS: Several of the issues framed by the pleadings have been disposed of by stipulation of the parties to the following effect: I. The taxpayer is entitled to additional deductions from income as follows: 19201921Additional depreciation$2,496.66$3,563.84Inventory adjustments3,541.291,663.92Ice tong expense110.006,037.955,337.76The answer2945 admits that invested capital for 1921 was erroneously reduced by $6,251.75 on account of taxes of a prior year, thus disposing of another issue. 685 One of the errors alleged was waived, leaving for our consideration only the following alleged errors: (1) The reduction of invested capital for 1920 by $95,675 and for 1921 by $86,555.36, for alleged capital deficit; (2) The reduction of invested capital for 1920 by $12,775 and for 1921 by $1,793.97 on account of dividends paid in such years; (3) Failure to compute the profits tax under section 328 of the Revenue Acts. The issues with respect to invested capital are so broad that it becomes necessary to review the petitioner's financial history and build up its invested capital step by step. In 1912 petitioner issued 747 shares of its capital stock to one Payne for the properties of the Fries Manufacturing & Power Co. Under the provisions of section 326 of the Revenue Acts of 1918 and 1921 the property so acquired is to be included in invested capital at its actual cash value at the time of acquisition. The petitioner contends that such property had a value of at least $114,700 against which is to be set off notes2946 of $40,000 issued in part payment for the property, making the actual value of the property received for the stock equal to the par value of the stock issued therefor, viz, $74,700. The agreement for the transfer of these assets to petitioner took place one month after Payne had arranged to acquire them from the Fries Company for $10,000 cash and $40,000 in notes. Apparently no transfer was made to Payne by the Fries Company, for it appears that petitioner issued its notes for $40,000 directly to the Fries Company. Furthermore, it appears that the property was encumbered by a mortgage which covered other property of the Fries Company and that it was necessary to secure a release from the trustee under such mortgage. The offer contemplated that the property would be conveyed to the petitioner by the Fries Company. From all the circumstances we conclude that at the time Payne made his offer, he had not yet taken over the business of the Fries Company. To sustain its contention that the property of the Fries Company had a value of at least $114,700 when acquired by it, petitioner offered the testimony of five witnesses, none of whom were especially well qualified to testify2947 to the actual cash value of such property. Their testimony appears to be based principally upon general knowledge of reproduction cost of a plant of similar capacity and the price paid by petitioner later in 1912 for the plant and business of a competitor. We have had occasion in the past to point out that reproduction cost is not necessarily related to fair market value. The plant of the Fries Company had a daily capacity of 65 tons of ice. Whether the machinery was old or modern, efficient or inefficient as compared with the latest improvements, or whether the plant was 686 laid out for most economical operation does not appear. Nor does it appear that the witnesses considered these factors. The opinions appear to be based in part upon their estimate that it would cost certain sums in 1912 to construct a plant of similar capacity. It does not seem that this is sufficient to overcome the very positive evidence of fair market value which is offered by an actual sale of this same property within the month. The Fries Company used its plant for the manufacture of ice. It sold it entire output to one Thomas who had built up a retail trade throughout the city. The2948 witnesses who testified as to value appeared to consider that petitioner had acquired from Payne the organization and business of Thomas. This appears to be an unjustifiable conclusion. The sale by the Fries Company left Thomas without any source of supply of ice within the city, since the only other plant was owned by the Carolina Cold Storage & Ice Co. which retailed its product. The petitioner, desiring to retail its ice, took over most of the men whom Thomas employed, and perhaps his delivery equipment, but there is nothing to indicate that this had been done by Payne before he agreed to convey the property of the Fries Company to the petitioner. There is nothing that would indicate that Payne ever attempted to establish delivery routes. It was the petitioner who took the chance that it might, on the one hand, fall heir to the routes theretofore operated by Thomas or might, on the other hand, have to fight Thomas as a competitor, should it go into the retail business. The stock of petitioner was issued for the assets of the Fries Company and it is the value of these assets which we must consider, not the value of these assets coupled with the retail routes operated by Thomas. 2949 It appears that later in 1912 petitioner acquired the plant and business of the Carolina Cold Storage & Ice Co., its only competitor, paying $85,000 therefor. This plant had a capacity of 50 tons daily and was operated in leased premises. It retailed its ice and the petitioner acquired its retail business as well as its manufacturing plant and thereby eliminated its only competitor. It is testified that the retailing of ice was more profitable than the manufacture. We are of the opinion that the market value paid for the manufacturing business and plant of the Fries Company can not properly be ascertained upon the basis of the price paid for this second plant and its delivery routes. The opportunities of the witnesses to learn the market values of ice plants had been extremely limited. As we said above, their opinions were based party on reproduction cost, partly on the assumption that petitioner acquired from Payne the retail route of Thomas, and partly upon the price paid in the purchase of the second 687 business. None of these form a proper basis for determining the fair market value of the assets acquired from the Fries Company, although they may all be considered2950 if given their proper weight. This we are satisfied has not been done. As between an actual transaction and this opinion testimony, we accept the value fixed by the sale to Payne. We are of the opinion that petitioner is entitled to include in its invested capital $10,000 on account of the assets paid in for $74,700 of its common stock. Between 1912 and 1918, inclusive, petitioner issued $120,300 par value of its capital stock for cash or assets having that value. In computing its invested capital we therefore start with a paid-in capital of $130,300. This is to be increased by any earned surplus and decreased by any part of the paid-in capital which has been returned to the stockholders. On December 31, 1914, the petitioner had an earned surplus of $23,171.83. In 1915 the petitioner sustained a loss of $81,592.56 in the liquidation of a subsidiary, whose property had been destroyed by a fire in the previous year. The evidence shows that during that year it opened a new set of books which were based upon an appraisal of its assets and which reduced the values at which assets were carried. These would appear to be, in part at least, the same assets which we have determined2951 may be included in invested capital at only $10,000, but which petitioner had carried at a net value of $74,700. We are not concerned with any adjustments in capital based on a revaluation, () and consequently we ignore the accounting entries which were made. It would appear that at this point, leaving out of consideration any earnings or dividends for 1915, the capital originally paid in had been impaired to the extent of $58,420.73. This impairment was not caused by the return to stockholders of any part of the capital paid in, but was due to losses sustained in the business. From January 1, 1915, to December 31, 1919, the earnings of the petitioner were $65,507.71. During this same period it had declared dividends of $30,975, all of which had been paid on or before January 1, 1920. We thus find, at the beginning of 1920, a corporation whose paid-in capital, for invested capital purposes, was $130,300. In 1915 this capital had been impaired by operating losses to the extent of $58,420.73. Between 1915 and the beginning of the first taxable years it had earnings of $65,507.71. Had these earnings been2952 retained, the losses would have been repaired. Instead, dividends were paid (including those paid on January 1, 1920) to the extent of $30,975, which left the original paid-in capital impaired by the amount of $23,888.02. The question then arises, Is this a deficit due to losses 688 of operations, in which case the amount of the paid-in capital may be allowed as invested capital ($130,300), or is it caused by the repayment to the stockholders of a part of the capital paid in, in which case the paid-in capital is to be reduced by the amount returned to stockholders? While the situation is not the same as that presented in , the principles involved are the same. So long as the capital was impaired by losses, there would be no profits out of which dividends could be paid. Any payment was necessarily an impairment of the original paid-in capital. It follows that the invested capital at the beginning of the year must be measured by the original paid-in capital reduced by the amount of the deficit. See 2953 . On December 1, 1920, the petitioner declared a dividend of $6,650, which was not paid until January 31, 1921. Inasmuch as the earnings of 1920 to the date of declaration were more than sufficient to pay the dividend declared in that year, such dividend did not operate to impair the original invested capital below the point at which it stood impaired at the beginning of the year. . At January 1, 1921, the petitioner had made good its deficit and had an earned surplus of $7,303.27, after deducting the dividend declared on December 1, 1920. On April 15, 1921, petitioner declared a dividend of $9,650, which was paid on September 30, 1921. The Commissioner has determined the income of the petitioner for 1921 to be $56,882.02 which, if prorated over the year, would establish that the current earnings to the date of declaration of the dividend were in excess of such dividend. The petitioner is therefore entitled to compute its invested capital for 1921 upon the basis of an earned surplus of $7,303.27 existing at the beginning of the year and which continued unimpaired throughout*2954 the year. The petitioner claims that it is entitled to have its tax computed under section 328 of the Revenue Acts of 1918 and 1921. Pursuant to Rule 62 of the Board, the hearing was confined to the issues defined in subdivisions (a) and (b) of that rule, viz, the issues other than those which arise under section 328 and the question whether petitioner has established its right to have its tax computed under section 328. The petitioner does not fall within subdivisions (a), (b) or (c) of section 327 of the revenue acts and we see no abnormal conditions affecting its capital or income which would bring this petitioner within subdivision (d) of that section. Its claim for assessment under section 328 is denied. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624117/	The Bagley and Sewall Company, Petitioner, v. Commissioner of Internal Revenue, RespondentBagley & Sewall Co. v. CommissionerDocket No. 38146United States Tax Court20 T.C. 983; 1953 U.S. Tax Ct. LEXIS 69; September 14, 1953, Promulgated 69 Decision will be entered under Rule 50. Petitioner, engaged in the manufacture and sale of paper mill machinery, contracted with the Government of Finland for the manufacture and delivery of such machinery at a cost of approximately $ 1,800,000, the contract specifying that petitioner would deposit in escrow, as a guarantee of performance, $ 800,000 in United States Government bonds. Petitioner possessed no Government bonds and had no intention of investing therein but, in compliance with the contract obligation, borrowed funds from its bank which, under its direction, bought and held in escrow the bonds in question, and upon completion of the contract and the release of such bonds from escrow, immediately sold them on the market. Held, that petitioner made no investment as such in Government bonds, and that the transaction was merely incident and necessary to the performance of its contract of manufacture and sale of machinery, and the bonds having been sold below the original cost, the loss incurred constituted a reasonable and necessary expense in its business regularly carried on. Western Wine & Liquor Co., 18 T. C. 1090, and Charles A. Clark, 19 T. C. 48,70 followed. Howard F. Farrington, C. P. A., for the petitioner.Francis J. Butler, Esq., for the respondent. Bruce, Judge. BRUCE 984 Respondent has determined a deficiency in income tax of $ 4,071.71 for the calendar year 1948. Certain minor adjustments made by respondent in determining the deficiency are not contested. Error is assigned upon the respondent's action in treating a loss realized in the taxable year on the sale of certain Government bonds as a capital loss, limited in its deduction by the provisions of section 117, Internal Revenue Code. Practically all of the facts were stipulated and are so found. Additional facts are determined upon the testimony of one witness.FINDINGS OF FACT.The petitioner is a New York corporation with place of business at 101 Pearl Street, 71 Watertown, New York. It has for many years been engaged in the manufacture and sale of papermaking machinery, apparatus, and equipment. The return for the year in question was filed with the collector of internal revenue for the twenty-first district of New York, at Syracuse, New York.In the year 1946 the petitioner negotiated with the Delegation of War Reparation Industry (Soveta), which appears to be a government instrumentality of Finland, a contract for the manufacture and delivery to the latter of two papermaking machines at a total cost of approximately $ 1,800,000. Under the contract as negotiated, the Government of Finland was to make certain periodic payments to petitioner during the progress of manufacture, and required, as a condition of the contract, that security be furnished by petitioner guaranteeing its performance. It expressed its desire that such security should be in the form of a deposit of United States bonds in the sum of $ 800,000 rather than by the filing of a surety bond.To this expressed desire on the part of Finland the petitioner agreed, and the contract was executed, requiring by its terms that 985 petitioner deposit in escrow with the Bank72 of the Manhattan Company, 295 Madison Avenue, New York City, $ 800,000 in United States bonds. The sum of $ 400,000 in United States bonds was to be deposited in escrow upon the execution of the contract and the payment by Finland of 20 per cent of the contract price. The additional $ 400,000 in bonds was to be deposited when the purchaser made its second 20 per cent payment. The deposited bonds were to be returned to petitioner when Finland made its last payment of 60 per cent under the contract.Petitioner owned no Government bonds and its available cash reserve was necessary for working capital in the carrying on of its business. It accordingly borrowed from the Bank of the Manhattan Company the sum of $ 400,000 and had that company purchase $ 400,000 in 2 1/2 per cent Government bonds and hold them in escrow in compliance with the terms of the contract. It later, upon the second payment being made by Finland, had the Bank of the Manhattan Company purchase an additional $ 400,000 bonds and hold them in escrow as provided. The first purchase of United States bonds in the sum of $ 400,000 was made at a cost of $ 411,375 on November 6, 1946, and the second purchase of a similar73 amount in bonds was made on May 27, 1947, at a cost of $ 408,687.50.Upon the completion of the contract the aforesaid bonds were released from escrow by the Bank of the Manhattan Company. The first $ 400,000 in bonds released was on September 7, 1948, and these bonds were sold by the petitioner through The Northern New York Trust Company on September 13, 1948, at a price of $ 401,000. The second deposit of bonds was released from escrow on December 22, 1948, and sold through The Northern New York Trust Company on December 24, 1948, at a price of $ 403,187.50. The two deposits of bonds in a total of $ 800,000 brought on sale a sum of $ 15,875 less than the price paid, and this amount was claimed by the petitioner as an ordinary and necessary expense, as a loss from the sale of property other than capital assets, on its tax return for 1948. During the time the aforesaid bonds were held in escrow interest accrued and was collected by petitioner in the sum of $ 15,012.98. Of this interest collected, the amount of $ 13,279.79 was returned as income. This lesser amount was arrived at by a bookkeeping mistake made in accruing a customer's allowance of $ 3,783.33. This adjustment 74 of accrued interest was erroneously made to the interest-earned account which should in fact show an additional amount of interest received of $ 3,783.33, and the amount shown as returns and allowance on Item 1 of petitioner's 1948 tax return should be increased by a similar amount.986 During the time that the aforesaid Government bonds were owned by petitioner they were carried on its books under a special account entitled "Government Bonds." The only entries made to this account were those recording the purchase and sale of these bonds. On the petitioner's balance sheet statements of December 31, 1946 and 1947, these bonds were shown under the caption "United States Government Bonds."OPINION.Respondent contends that the United States Government bonds acquired by petitioner for the purpose of being held in escrow to guarantee performance of its contract with the Government of Finland constituted capital assets under the definition of section 117 (a), Internal Revenue Code, 1 and that consequently the loss sustained upon their disposition must be treated as a capital loss to be allowed only to the extent of offsetting capital gains, of which petitioner had none, and the 75 deduction taken is subject to elimination. He argues that no matter what petitioner's purpose was in acquiring the bonds, their sale could not be considered as one of assets held for sale in the ordinary course of its business.76 It is petitioner's contention that though it is admitted that it is not in the business of buying and selling securities, the bonds in question were not bought as an investment but merely as an incident required and necessary in the performance of a contract carried out in the regular course of its business, and to be sold as soon as their use in performance of the contract was at an end. On this basis it contends that the bonds when released from escrow were, from that time until their sale a few days later, being held not as investments but for sale as an ordinary incident in the carrying on of its regular business, and, as such, not coming within the definition of capital assets.987 Both parties to the proceeding cite various cases as supporting their theories. Most of these are upon facts which differ materially from those here involved. The question seems to be narrowed down finally as to whether the situation here existing is similar to and controlled by Exposition Souvenir Corporation v. Commissioner, 163 F.2d 283">163 F. 2d 283, which affirmed a Memorandum Opinion of this Court, or by the decisions of this Court in Western Wine & Liquor Co., 1090">18 T. C. 1090,77 and Charles A. Clark, 19 T.C. 48">19 T. C. 48.Respondent argues that the reasoning underlying the decision in Exposition Souvenir Corporation, supra, as detailed by the court in its opinion, covers perfectly the situation we have here and requires a holding that the sale of the bonds here in question resulted in a capital loss. In that case the taxpayer, engaged in the business of selling souvenirs, desired a concession for such sale at the New York World's Fair which was being held by New York World's Fair 1939 Incorporated, a nonprofit corporation organized under the laws of New York and which was financed by the sale of debentures payable out of gate receipts. The Fair corporation required as a condition precedent to an application for the acquiring of a concession to do business on the fairgrounds that the applicant first acquire debenture bonds issued by it, the acquiring of a contract for a concession depending largely upon the amount of bonds subscribed for by the applicant. Under these conditions the taxpayer purchased a substantial amount in debentures of the Fair corporation, which it sold at a loss after the closing 78 of the New York World's Fair. On these facts we held, and were sustained by the circuit court, that petitioner had made an investment in the debentures of the Fair corporation and that these represented capital assets and the loss upon their sale a capital loss.The cases of Western Wine & Liquor Co., supra, and Charles A. Clark, supra, arose under facts identical to each other. In each of these cases the taxpayer was in the business of buying and selling liquor. A large distilling corporation with a heavy inventory of whiskey announced that it would sell this at book cost to holders of its outstanding stock, the right to purchase being limited by the number of shares held. In each of these cases the taxpayer was not a shareholder in the distilling corporation and had no desire or purpose to make an investment in its stock, but each purchased a block of stock in that corporation solely for the purpose of obtaining the agreed allotment of liquor, exercised its right and, immediately upon receiving the liquor, sold at a loss the stock acquired. In these cases we held that there was no intent on the part of the taxpayer79 to make an investment in the stock of the distilling corporation and that the purchase 988 and sale of such stock was merely an incident in its procurement of whiskey for resale, which was its business regularly carried on. On this basis, it was our conclusion that the loss realized upon the sale of stock represented merely an item to be reflected in the cost of goods sold, and that the stock must be considered as held by the taxpayer for sale in the regular course of its business of buying and selling liquor.It is argued by petitioner that the facts in the two last-cited cases are identical in principle with those before us in the present case. Upon careful consideration of the facts in connection with those existing in the three cited cases, we conclude that petitioner's contention must be sustained.In Exposition Souvenir Corporation, supra, the New York World's Fair was being financed by the sale of debenture bonds of that corporation payable out of gate receipts. It was vitally interested in selling its debentures, and thus laid down the condition that applicants for concessions must be investors in those securities. By this condition80 two objectives were obtained, the primary one being the securing of the finances necessary for operation, and secondly, securing the active participation of its concessionaires in the successful operation of the Fair. Such interest would be assured in the case of an investor in the debentures, as successful operation would be necessary to safeguard his investment. In that case it is true that the primary motive of the taxpayer in making his investment in the debentures was to secure a license for a concession, but the making of an investment was required of him, and the debentures necessarily were held as investments and sold as such. That case seems to fall clearly within the classifications represented by Logan & Kanawha Coal Co., 5 T.C. 1298">5 T. C. 1298, where the taxpayer, in the business of buying and selling coal, made investments in the stock of various coal mining companies for the purpose of securing a voice and influence in their management, aiding it in the carrying on of its regular business by making it possible to procure coal of the grades and sizes it needed for sale to customers. Certain of these investments proved unprofitable and the stock81 represented by them was sold at a loss. There it was held that irrespective of the basic reason for the taxpayer's action in making these investments, they were nonetheless investments in stock which represented capital assets at the time purchased and sold.The facts in the present case, we think, are clearly closer in principle to those involved in Western Wine & Liquor Co., supra, and Charles A. Clark, supra. In the present case it is clear that no investment 989 in United States bonds was intended by the petitioner. These bonds were acquired solely to carry out a condition imposed by the contract under which it was manufacturing and selling a large order of equipment in the regular course of its business. The Government of Finland was in no way interested in petitioner's making an investment in United States bonds. There was no requirement under the contract that petitioner make such an investment. The Government of Finland merely wished this form of security, and it would have satisfied the demand of the contract completely for petitioner, instead of acquiring the bonds for deposit in escrow, to have borrowed82 the bonds themselves from the Bank of the Manhattan Company under an agreement permitting it to deposit them as security and to have paid the bank a fee for such loan. The facts in connection with the acquisition of the bonds, like those in the two last-cited cases covering the acquisition of the distilling company stock, is, we think, shown clearly to have been with no intention of making an investment. It is not thought that any business concern in the exercise of the most ordinary prudence and judgment would borrow funds from a bank and pay interest thereon to buy Government 2 1/2 per cent bonds at a premium where the interest return would be less than that paid for the loan and the probability of any increase in market value of the bonds would be negligible. Also, as in the two cited cases, we have an immediate sale of the bonds when they had served their purpose as a security deposit and been released from escrow. The time elapsed in each instance between the release of the bonds from escrow and their sale shows definitely that the order of sale must have been coincident with the release.Under these circumstances we think that the purchase and sale of these bonds was merely83 an incident in the carrying on by petitioner of its regular business of manufacturing and selling papermaking machinery. The cost to it of making the required deposit was the interest paid the bank on funds borrowed for the purchase, together with the loss sustained in effecting the deposit, this being that which was realized upon the immediate sale of the bonds. There being no intent on the part of the petitioner to hold the bonds after they had served their business purpose requires the holding similar to that made by us in Western Wine & Liquor Co., supra, and Charles A. Clark, supra, that the sale of the bonds was of assets held for sale in the ordinary course of petitioner's business and that the loss incurred constituted an ordinary and reasonable expense.Decision will be entered under Rule 50. Footnotes1. SEC. 117. CAPITAL GAINS AND LOSSES.(a) Definitions. -- As used in this chapter -- (1) Capital assets. -- The term "capital assets" means property held by the taxpayer (whether or not connected with his trade or business), but does not include -- (A) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;(B) property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 23 (l), or real property used in his trade or business; * * *(D) an obligation of the United States or any of its possessions, or of a State or Territory, or any political subdivision thereof, or of the District of Columbia, issued on or after March 1, 1941, on a discount basis and payable without interest at a fixed maturity date not exceeding one year from the date of issue.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624118/	Walter G. Dennert and Mary Ellen Dennert v. Commissioner.Dennert v. CommissionerDocket No. 94012.United States Tax CourtT.C. Memo 1964-5; 1964 Tax Ct. Memo LEXIS 331; 23 T.C.M. (CCH) 18; T.C.M. (RIA) 64005; January 9, 1964331 Miscellaneous issues relating to income and deductions, decided. D. M. Statton, for the petitioners. Ivan L. Onnen, for the respondent. PIERCE Memorandum Findings of Fact and Opinion PIERCE, Judge: The Commissioner determined deficiencies in the income taxes of the petitioners for the calendar years 1958 and 1959 in the amounts of $513.64 and $861.47, respectively. The issues for decision are: 1. Where petitioners entered into a contract with a third party for the sale of real estate, under which they retained title to the property pending the buyer's payment of the purchase price in monthly installments over a period of several years (which installments were to include payments on principal together with interest), are petitioners chargeable with the interest income included in333 the installments which they received during the taxable years, notwithstanding their purported preassignment of such interest income to the husband-petitioner as trustee for their children? 2. Are petitioners entitled to deduct as casualty losses for the taxable years involved, the amounts of $35 and $28.25 which the husband-petitioner expended during said respective years for cleaning from his personal clothing a barium solution which was spilled thereon during his practice as a radiologist? 3. For the purpose of computing depreciation for the taxable years on a Buick automobile which the husband-petitioner converted from business to personal use in 1959, what value should be attributed to said automobile as of the time of such conversion? 4. For the purpose of computing depreciation on a Mercury automobile which the husband-petitioner purchased for business use in 1959, what period of useful business life should be attributed to said automobile? 5. For the purpose of computing depreciation on an apartment building which petitioners purchased in 1959, what portion of the aggregate price paid for both the building and land should be attributed to the cost of the depreciable334 building? 6. For the purpose of determining the amount deductible in 1959 as a charitable contribution consisting of used clothing donated to various charities, what value should be attributed to such clothing as of the time it was so contributed? The only remaining issue raised by the pleadings was settled by the parties. This involved the deductibility of bonuses paid by the husband-petitioner to certain hospital employees; and it is now agreed that petitioners are entitled to deduct in respect of the same, $100 of the $250 disallowed as a deduction for 1958, and $112.50 of the $312.50 disallowed as a deduction for 1959. Effect will be given to this adjustment in the recomputation of tax under Rule 50. Some of the facts of the case have been stipulated; and the stipulations of facts together with all exhibits identified therein are incorporated herein by reference. Hereinafter set forth are separate findings of fact and separate opinions in respect of the several above-numbered issues. Issue 1 - Interest Income from Real Estate Contract Findings of Fact The petitioners, Walter G. and Mary Ellen Dennert, are husband and wife who reside in Boone, Iowa. They filed a joint335 income tax return for each of the years 1958 and 1959 here involved, with the district director of internal revenue at Des Moines, Iowa. The husband-petitioner during both years practiced as a physician-radiologist. On July 13, 1956, both petitioners (as sellers) entered into a real estate contract with Violet A. Jones (as buyer) for the sale of certain real estate located in Polk County, Iowa. Under the terms of this contract, the sales price was fixed at $13,950, of which the buyer paid $1,000 upon execution of the contract and agreed to pay the balance of $12,950 in monthly installments of $96 or more, plus portions of the annual taxes and also plus six percent interest on the outstanding balances until the entire purchase price had been paid. The sellers allowed the buyer to have possession of the property; but they retained title thereto pending the receipt of full payment, after which they were to deliver a warranty deed to the buyer. Also, petitioners retained various rights respecting enforcement of the contract, including the right to cancel the contract in the event of default by the buyer and then to apply any previously paid installments as rental for the buyer's use336 of the property to the time of such default. On the back of the contract there was provided a form of "Conveyance of Interest," which could be used by either party for the purpose of assigning to others all "right, title and interest in and to the written contract and to the real estate described therein"; and which upon acceptance by the assignee would constitute an agreement by him to perform all the obligations of the assignor under said contract. One of the obligations specified in the contract was: "In the case of assignment of this contract by either party, prompt notice shall be given to the other party." Under date of September 7, 1957, which was more than a year after the above real estate contract had been executed and after the unpaid balance of the purchase price had been reduced to $12,564.52, the two petitioners, alone, executed an instrument entitled "Deed of Trust" which provided in part as follows: THIS INDENTURE made between Walter G. Dennert and Mary Ellen Dennert, hereinafter called First Parties and Walter G. Dennert, Trustee, hereinafter called the Trustee, WITNESSETH: The First Parties do hereby sell, transfer, assign and convey to the Trustee and to337 his successors in Trust the following described property, to-wit: All of their right, title and interest in and to the interest income due by virtue of one certain contract dated July 13, 1956, wherein First Parties were the Sellers and Violet A. Jones was the Buyer of certain real estate situated in Polk County, State of Iowa, to-wit: Lot 58, Wakonda Manor, An Official Plat now included in and forming a part of Polk County, Iowa, and the said First Parties do hereby from and after this date relinquish all payments, including both principal and interest, due unto them to the said Trustee by virtue of said contract above described, subject, however, upon the express condition that the principal sum in the amount of $12,564.52 shall revert to and be the property of First Parties upon the occurrence of the event described in Paragraph (b) hereunder. * * b) The purpose of this Trust is to provide funds for the education of James Walter Dennert, Vicki Ann Dennert and Margaret Ellen Dennert, children of the First Parties and also any other child or children of the First Parties born hereafter and added to and included as a beneficiary hereof by endorsement by the First Parties338 and to no others, and the Trustee shall keep the principal and income invested as hereinbefore directed until such time as the said oldest child of the First Parties attains his or her eighteenth birthday, at which time the Trust fund and all accumulations therefrom shall be divided into as many equal parts as there are then living children, who have previously been designated as beneficiaries of this Trust as aforesaid. It is expressly provided however, that in the event the equal share of James Walter Dennert should be less than the sum of $6000.00 that he shall be entitled to all of said Trust fund and accumulations therefrom up to the sum of $6000.00 and the balance if any, shall be divided equally between such designated beneficiaries. The remaining portions of the instrument defined various powers and duties of the trustee relative to the administration of the trust and the distribution of the trust property. At the time of execution of said instrument, the age of the oldest of six children of petitioners was approximately 7 1/2 years. The above indenture (Deed of Trust) was not executed by the husband-petitioner as "trustee," but only by the two petitioners individually, 339 as the "First Parties" thereto. Also, there is no evidence that the husband-petitioner, either by a separate Declaration of Trust or otherwise, at any time indicated his acceptance of the trust, or his acceptance of any obligation to act as a trustee in holding and administering trust property for the future benefit of the children as beneficiaries. The real estate contract between petitioners and Violet Jones was not expressly assigned in said Deed of Trust, nor was it mentioned therein except by way of describing the source of the future "interest income" which was purported to be assigned. Petitioners did not execute either the "Conveyance of Interest" form provided on the back of said real estate contract, or any other instrument under which they purported to assign to the trust their rights under said real estate contract; nor did the husband-petitioner execute any other instrument by which he agreed to assume and perform the obligations of "seller" under said contract. Also petitioners did not execute any deed to the husband-petitioner as trustee covering the real estate involved in said real estate contract, until January 2, 1962, which was nearly 5 years subsequent to their340 execution of said Deed of Trust; and even then such subsequently executed deed for the real estate was neither acknowledged nor filed of record by the petitioners. Furthermore, no notice of any assignment of either the real estate contract or of the real estate mentioned therein was at any time herein material given either to Violet Jones (the purchaser of said real estate) in accordance with the terms of said real estate contract, or to the loan company to which the petitioners had mortgaged said real estate prior to their execution of said Deed of Trust. Following petitioners' execution of said Deed of Trust, Violet Jones continued to pay to them individually, as she theretofore had done, her monthly installments on said real estate contract. All these monthly payments were made by checks issued by her to the order of "Dr. Walter G. Dennert"; and the latter upon receipt of the same, endorsed the checks in his individual capacity, and then either cashed or deposited the same at the Boone State Bank & Trust Company. Most of these checks which said petitioner so received during the period from January 13, 1958, through March 19, 1959, were in the amounts of $118 each; and most of341 those which he so received from May 29, 1959, through December 30, 1959, were in the amounts of $150 each; but in several instances, the checks were in the larger amounts of $236 or $300, and for some months no installment was paid. The totals of the installment payments thus made by Violet Jones under the real estate contract for the taxable years here involved were at least $1,197.19 for che year 1958, and at least $1,672 for the year 1959. On September 16, 1957, which was shortly after the time when the two petitioners had executed the above-mentioned Deed of Trust, the husband-petitioner opened a savings account at the Hawkeye Savings & Loan Association in Boone, Iowa, under the name of "Walter G. Dennert, Trustee." Thereafter and throughout the 2 taxable years here involved, he made monthly deposits in this account in the uniform amounts of $96 each. In general, these deposits represented portions (but not all) of the installment payments which he received from Violet Jones under the real estate contract. In several instances, the dates of such deposits preceded the dates on which he received the installment payments from Violet Jones; and the amounts of such deposits were always342 $96 per month, even in months that Violet paid no installment or in months that the amount of her installment was larger than usual. 1 The total of the amounts so deposited in said savings account during each of the taxable years here involved was $1,152. Other unestablished portions of the installment payments which Dennert received from Violet Jones were paid over by him to the loan company to whom petitioners had mortgaged the real estate, in payment of taxes and special assessments on said real estate. 343 By July 15, 1959, the aggregate amount of said savings account at the Hawkeye Savings & Loan Association (consisting of said $96 monthly deposits plus interest paid therein by the savings association) was $2,275.71. Thereupon and on said date, petitioner Walter G. Dennert withdrew therefrom the amount of $2,275 (leaving a remaining balance of only 71 cents); and he and his wife then used all of the sum so withdrawn for their personal use in purchasing real estate in their individual names. Also on three subsequent occasions, petitioner Walter G. Dennert made further withdrawals from said "trustees savings account" for similar personal use, as follows: On January 8, 1960, after the accumulated balance in said savings account had increased again through his $96 monthly deposits to a total of $553.15, he withdrew $550 therefrom (leaving a remaining balance of only $3.15); on July 5, 1960, when the balance in the account had increased to $681.29, he withdrew $675 (leaving a remaining balance therein of only $6.29); and on July 19, 1961, when the balance in the account had increased again to $776.96, he withdrew $775 (leaving a remaining balance of only $1.96). Up to the time of the trial344 herein, none of the sums so withdrawn from said savings account had been repaid; and also no interest on the amounts of such withdrawals had been paid. The petitioners, in their income tax returns for the taxable years here involved, did not include in their gross incomes any of the "interest income" from their real estate contract with Violet A. Jones, which they had purported to assign prior to its accrual, to the husband-petitioner as "trustee." Also at no time proximate to said taxable years was such "interest income" reported either on a fiduciary return of said "trustee," or otherwise. The Commissioner of Internal Revenue, in his notice of deficiency herein, determined that the petitioners had realized taxable interest income from said real estate contract in the amounts of $741.97 for the year 1958, and of $723.65 for the year 1959. Opinion The respondent, on brief herein, has presented two principal contentions in support of his determination that petitioners are taxable on the "interest income" which they purported to assign to the husband-petitioner as "trustee": (1) That the purported transfer was an anticipatory assignment of income, consisting of the interest345 income which they expected would accrue and be paid in the future by Violet A. Jones, in respect of the real estate contract and the realty mentioned therein - neither of which items was assigned by them, and both of which they continued to retain and control during the taxable years involved. (2) That, in the alternative, the husband-petitioner's action in repeatedly withdrawing for his own personal use, substantially all of the monthly deposits which he from time to time made in the "trustee savings account," requires that he be "treated as the owner" of such deposits under sections 674(a), 675(a)(1), 676(a), and 677(a)(1) of the 1954 Code. However, we find it unnecessary to discuss the second of these contentions, for our following conclusions with respect to the first of these contentions are dispositive of the issue. We are convinced from our consideration and weighing of all the evidence on this first issue, and we here find as an ultimate fact and hold, that the petitioners did not, either during or prior to the taxable years involved, convey or transfer to the husband-petitioner as "trustee," all their rights and interests in and to their real estate contract with Violet346 A. Jones or in and to the realty to which said contract pertained; and that the only item which they intended and purported to assign to such "trustee," was the future "interest income" that they expected would thereafter accrue and be paid to them by Violet A. Jones under said real estate contract. It is now a well settled principle that a taxpayer may not avoid liability for tax on his income by assigning the right to receive it. In the leading case of , it was held that where a husband had entered into a contract with his wife giving her portions of the income from his personal services, this would not result in a shift of the tax burden on such income from himself to her. In that case, Mr. Justice Holmes used the oft quoted phrase, "anticipatory arrangements * * * by which the fruits are attributed to a different tree from that on which they grew," in deciding that such anticipatory arrangements and contracts will not shift the tax burden. Also, in the subsequently decided case of , (which we regard to be here applicable and here controlling), it was held that the holder of interest-bearing347 bonds could not shift the burden of tax on the interest therefrom, by detaching and giving the bond coupons to his son prior to their due date. To the same effect, see also , affirming a Memorandum Opinion of this Court. We decide this issue in favor of the respondent. Issue 2 - Alleged Casualty Loss Findings of Fact Petitioner Walter G. Dennert is, as before stated, a physician-radiologist. During the course of such practice, a barium solution that he used in treating patients would from time to time be spilled or splashed on his personal clothing, notwithstanding his attempt to protect such clothing by wearing an apron; and in the taxable years involved, he expended the respective amounts of $35 and $28.25 for cleaning such personal clothing in order to remove barium deposits therefrom. There is no evidence that the clothing was permanently damaged; or that there was a difference in its value before the barium solution was spilled thereon and after such solution was removed by the cleaning process. Said petitioner, on his income tax returns, deducted said cleaning expenditures as casualty losses; but the respondent, 348 in his notice of deficiency, disallowed these deductions. Opinion Section 165(c)(3) of the 1954 Code provides that an individual may deduct: "[Losses] of property not connected with a trade or business, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft." In construing the term "other casualty," this Court has held that the rule of ejusdem generis is applicable, and that for a loss to be deductible under said statute, it must be similar in character to those losses which are more specifically described therein. ; . Also, as we pointed out in the latter case, the term "casualty" excludes the deterioration of property through a usual or steadily operating cause. It is our opinion that the mere soiling of personal clothing, which may be remedied by cleaning or laundering, is not sufficient, in the absence of any evidence that the value of the clothing was less after the cleaning than it was prior to being soiled, to qualify the cleaning expense as a "casualty loss" within the meaning of said statute. Petitioner has not claimed or attempted to qualify said expense349 of cleaning his personal clothing as a "trade or business expense" under section 162(a) of the statute; and accordingly we do not reach or pass upon such a question. We decide this second issue in favor of the respondent. Issue 3 - Depreciation on Buick Automobile Findings of Fact In March 1956, the husband-petitioner purchased a Buick automobile; and thereafter until February 1959, he used the same in his professional practice. On the latter date he converted the car solely to personal use. At the end of the year 1958, the mileage that the car had been driven was approximately 58,000 miles. The respondent, in his notice of deficiency, determined that the fair market wholesale value of said automobile at the time of its conversion to personal use in February 1959, was $1,500; and that the amounts of depreciation which petitioners had claimed thereon for the taxable years involved (being $683.50 for 1958, and $41.01 for 1959), should be adjusted as follows: Cost of 1956 Buick with accessories$4,722.50 meaning of said statute. Petitioner has not claimed or attempted to qualify said expense of cleaning his personal clothing as a "trade or business expense" under section 162(a) of the statute; and accordingly we do not reach or pass upon such a question. We decide this second issue in favor of the respondent. Issue 3 - Depreciation on Buick Automobile Findings of Fact In March 1956, the husband-petitioner purchased a Buick automobile; and thereafter until February 1959, he used the same in his professional practice. On the latter date he converted the car solely to personal use. At the end of the year 1958, the mileage that the car had been driven was approximately 58,000 miles. The respondent, in his notice of deficiency, determined that the fair market wholesale value of said automobile at the time of its conversion to personal use in February 1959, was $1,500; and that the amounts of depreciation which petitioners had claimed thereon for the taxable years involved (being $683.50 for 1958, and $41.01 for 1959), should be adjusted as follows: 350 Cost of 1956 Buick with accessories$4,722.50Depreciation claimed 1956 & 1957$2,713.76Depreciation claimed 1956 & 1958833.50Depreciation claimed 1956 & 195948.513,595.77Adjusted basis February 1959$1,126.73Fair market value February 19591,500.00Over depreciated$ 373.27Depreciation claimed and disallowed for 195948.51Depreciation decreased for 1958$ 324.76Opinion Said petitioner contends that the respondent erred in determining the value of the automobile to be $1,500 at the time of its conversion to personal use in 1959; and that such value was not more than $1,100. In support of such lower value he testified that his examination of the N.A.D.A. valuation book at a garage, disclosed that the average cash value of an average driven car of the make and age of his, was $1,100; but the usual mileage for such average driven car was from 10 to 15 thousand miles per year, whereas he had driven his car nearly 25,000 miles per year. On the basis of all the evidence herein, we decide this issue in favor of the petitioner. We direct that in the recomputation of tax herein, the value of petitioner's Buick automobile at the351 time of its conversion to personal use be allowed in the amount of $1,100; and that the amounts of depreciation allowable thereon for the years 1958 and 1959 be adjusted accordingly. Issue 4 - Depreciation on Mercury Automobile Findings of Fact In February 1959, the husband-petitioner purchased a new Mercury automobile; and thereafter during said year, he used the same in the practice of his profession. The respondent, in his notice of deficiency, determined the allowable depreciation on this car by employing the double declining balance method of depreciation as claimed by the petitioner; but he also used a 5-year estimated future life for the car, rather than a 4-year useful life as claimed by said petitioner. Opinion The evidence herein establishes that the average annual mileage that the petitioner drove his automobile in the practice of his profession was about 25,000 miles; and that at the end of 4 years, said Mercury automobile would probably be driven approximately 100,000 miles, and would then have little or no remaining useful business life. time of its conversion to personal use be allowed in the amount of $1,100; and that the amounts of depreciation allowable352 thereon for the years 1958 and 1959 be adjusted accordingly. Issue 4 - Depreciation on Mercury Automobile Findings of Fact In February 1959, the husband-petitioner purchased a new Mercury automobile; and thereafter during said year, he used the same in the practice of his profession. The respondent, in his notice of deficiency, determined the allowable depreciation on this car by employing the double declining balance method of depreciation as claimed by the petitioner; but he also used a 5-year estimated future life for the car, rather than a 4-year useful life as claimed by said petitioner. Opinion The evidence herein establishes that the average annual mileage that the petitioner drove his automobile in the practice of his profession was about 25,000 miles; and that at the end of 4 years, said Mercury automobile would probably be driven approximately 100,000 miles, and would then have little or no remaining useful business life. We decide this issue in favor of the petitioners; and we direct that in the recomputation of tax herein, the depreciation on said Mercury automobile be computed in accordance with the double declining balance method of depreciation, and on the353 basis of a useful life of 4 years. Issue 5 - Depreciation on Apartment Building Findings of Fact In July 1959, the petitioners entered into a contract, pursuant to which they purchased an apartment house property, including both the land and the apartment house together with a small garage, for $33,000. The measurements of the land were 180 feet by 60 feet. The sellers reserved an option to repurchase the rear 48 feet of said 180-foot depth on which the small garage was located for $1,000. The garage was about 30 years old. For the purpose of claiming depreciation on the apartment house, petitioners allocated thereto $32,000 of said total purchase price; and they allocated only $1,000 to all the land. The Commissioner determined however, that $2,500 of the total cost of the property should be allocated to the land; and that $30,500 of said total cost should be allocated to the depreciable apartment house. Such adjustment reflected the proportionate values at which the land and the building had been assessed for local tax purposes; and the result of such adjustment was to reduce the allowance for depreciation for the year 1959 to $406.67 as compared with $426.67 which the354 petitioners had claimed in their income tax return (being a reduction of $20). Opinion The petitioners' evidence herein is insufficient to establish the fair market value of either the apartment house or the land, as of the date that the same were acquired; nor is such evidence sufficient to establish that the portion of their total cost which is properly allocable to the apartment house, is less than the amount of $30,500 which the Commissioner determined. We decide this fifth issue in favor of the respondent. Issue 6 - Charitable Contributions Findings of Fact During the year 1959, the petitioners donated various used clothing to a school for a rummage sale, and they also donated various other used clothing to a church. Included in these donations were articles of clothing which their oldest son and their oldest daughter had worn and outgrown, and also articles of adults' worn winter clothing. None of such articles was otherwise specifically identified; and some of the articles had been in storage for a period of 2 years. No appraisal of any of the separate articles was made at the time of their donation. The petitioners estimated that the original cost of all said355 clothing was approximately $525; and in their 1959 income tax return they claimed a deduction of $200 for "clothes donated to charity drives" (being approximately 40 percent of said estimated cost of the clothing when new). The Commissioner, in his notice of deficiency, determined that the value of the clothing donated did not exceed $100, at the time when it was donated; and he adjusted the amount of the claimed charitable deduction accordingly. Opinion The evidence herein is insufficient to estab lish that the value of the worn and outgrown clothing donated to charities was greater than the $100 which the Commissioner determined and allowed. donations were articles of clothing which their oldest son and their oldest daughter had worn and outgrown, and also articles of adults' worn winter clothing. None of such articles was otherwise specifically identified; and some of the articles had been in storage for a period of 2 years. No appraisal of any of the separate articles was made at the time of their donation. The petitioners estimated that the original cost of all said clothing was approximately $525; and in their 1959 income tax return they claimed a deduction of $200 for356 "clothes donated to charity drives" (being approximately 40 percent of said estimated cost of the clothing when new). The Commissioner, in his notice of deficiency, determined that the value of the clothing donated did not exceed $100, at the time when it was donated; and he adjusted the amount of the claimed charitable deduction accordingly. Opinion The evidence herein is insufficient to estab lish that the value of the worn and outgrown clothing donated to charities was greater than the $100 which the Commissioner determined and allowed. We decide this issue in favor of the respondent. Decision will be entered under Rule 50. Footnotes1. The evidence does not establish what portions of the $96 deposits made in said account at the Hawkeye Savings & Loan Association represented "interest income" from the real estate contract with Violet A. Jones; but at least part of the same represents payments of principal (i.e., on the $12,564.52 unpaid sales price of the real estate) which under the terms of the Trust Deed was to "revert" to the petitioners. It is obvious that, as the installments received from Violet Jones gradually reduced the unpaid balances of said sales price for the real estate, the amounts of "interest" payable on such balances decreased; and that at the same times, the portions of the installment payments which were allocable to principal (as distinguished from interest) continually increased.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624119/	CAROL M. BRAGG, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBragg v. CommissionerDocket No. 4411-77.United States Tax CourtT.C. Memo 1977-418; 1977 Tax Ct. Memo LEXIS 24; 36 T.C.M. (CCH) 1697; T.C.M. (RIA) 770418; December 6, 1977, Filed 24 Carol M. Bragg, pro se. W. Terrence Mooney, for the respondent. FEATHERSTONMEMORANDUM OPINION FEATHERSTON, Judge: In this case, involving an income tax deficiency of $74 for 1975, respondent has filed a motion to dismiss for failure to state a claim upon which relief can be granted. Petitioner claimed a "war tax credit" on her income tax return for 1975 and reported no liability. Respondent determined that the credit was not allowable. The petitioner alleges that payment of "taxes for war" would "constitute a violation of her rights under the First Amendment to the United States Constitution, which prohibits Congress from establishing laws which interfere with the free exercise of religion." To the petition is attached a letter in which petitioner states that she is closely associated with the Religious Society of Friends. The letter quotes a portion of the "Declaration of 1660" presented to King Charles II of England and argues that the First Amendment provides legal ground for petitioner's refusal to pay taxes. Respondent's motion must be granted. This Court's position that the First Amendment does not relieve a pacifist of his duty to pay25 taxes was stated in Muste v. Commissioner,35 T.C. 913">35 T.C. 913, 919 (1961), as follows: On brief and in the statements which the petitioner filed with the respondent in lieu of filing returns, he emphasizes that in his opinion one who has conscientious or religious scruples against war should not only refuse to engage in war but should go even further and refuse to pay a tax which may be used in whole or in part for the prosecution of war. He seems to premise his argument upon the assumption that the Constitution safeguards a pacifist or conscientious objector from a requirement of military service. In this he is wrong; it is well established that no man has a constitutional right to be free from a call to military service and that it is only by virtue of acts of Congress that conscientious objectors are exempt in whole or in part from military service. Arver v. United States,245 U.S. 366">245 U.S. 366 (selective draft cases); United States v. Palmer,223 F.2d 893">223 F.2d 893 (C.A. 3); and George v. United States,196 F.2d 445">196 F.2d 445 (C.A. 9). It would seem to follow, afortiori, that the Constitution does not relieve a pacifist or a conscientious*26 objector of the duty to pay taxes, even though they may be used for war or for preparation for defense. Indeed, article I, section 8, of the Constitution specifically provides that the Congress shall have power to lay and collect taxes and provide for the common defense and general welfare of the United States, and to provide for and maintain an Army and a Navy. This article and the 16th amendment to the Constitution empower the Congress to lay and collect taxes on incomes from whatever source derived. If petitioner is to be relieved of her duty under the law to pay taxes, such relief must come from Congress, not the courts. Respondent's motion will be granted.An appropriate order will be entered.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624124/	ELMWOOD CASTINGS CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Elmwood Castings Co. v. CommissionerDocket Nos. 11280, 19672.United States Board of Tax Appeals13 B.T.A. 131; 1928 BTA LEXIS 3308; July 30, 1928, Promulgated 3308 James B. O'Donnell, Esq., for the petitioner. Harold Allen, Esq., for the respondent. VAN FOSSAN 131 In the first of the above proceedings the respondent has determined a deficiency of $3,177.49 for the calendar year 1919, while in the second there is an alleged deficiency of $1,818.73 for the calendar year 1920. Of five errors alleged in the petitions but two are before us for consideration, the others having been abandoned at the hearing. These are special assessment for 1919 and depreciation on buildings and equipment for both years. The proceedings were duly consolidated for hearing and decision. FINDINGS OF FACT. The petitioner is an Ohio corporation located at St. Bernard, Ohio. It was engaged in the production of grey iron castings. Previous to 1916 the bulk of petitioner's business was transacted with two or three concerns on cost-plus contracts, it being a subsidiary company. Until this date it had no bookkeeper and kept almost no books of account, except a list of bills payable. On representations duly made special assessment was granted for the years 1917 and 1918. The petitioner had a main building 110 feet by 300 feet3309 of steel and brick construction, fully equipped with necessary supports for electric traveling cranes and other machinery useful in its business. It had a second building 80 feet by 200 feet of concrete and steel sash; a pattern storage building 150 feet by 30 feet, two stories high; one truscon steel building, and other sheds and small buildings. In the main building the equipment consisted of 3 ten-ton cranes and several smaller cranes, several jarring machines, molding machines, an engine, dynamo and motors, blowers, 2 cupolas, 5 steel rattlers, core ovens and 35 small molding machines. It also had two automobile trucks. During 1919 petitioner employed an average of from 225 to 250 men; in 1920 an average slightly in excess of 250; in 1921 to 1926 approximately one-half as many as in the preceding two years. Before 1916 it had 100 men or less. The cost and values of the buildings and equipment are not in dispute, the only controversy being as to the rates of depreciation on buildings and equipment. In the production of iron castings there is a frequent change of temperature of the building, much moisture is released and sulphuric 132 and other fumes escape. The*3310 effect of these conditions is to cause excessive rust and rapid deterioration. Reasonable annual rates of depreciation for the years 1919 and 1920 are as follows: on the buildings 5 per cent; on the equipment 10 per cent; on the motor vehicles 20 per cent. OPINION. VAN FOSSAN: The evidence in this case clearly established the reasonableness of the rates of depreciation set forth in the findings of fact and depreciation should be computed by employing such rates. The evidence does not justify the granting of special assessment. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624125/	Daniel D. Palmer and Agnes H. Palmer, Petitioners v. Commissioner of Internal Revenue, RespondentPalmer v. CommissionerDocket No. 2557-71United States Tax Court62 T.C. 684; 1974 U.S. Tax Ct. LEXIS 57; 62 T.C. No. 75; August 27, 1974, Filed 57 Decision will be entered for the petitioners. 1. Palmer College was owned and operated by a profit-making corporation. The assets of the college comprised approximately 80 percent of the assets of the corporation. Approximately 70 percent of the outstanding shares of the corporation stock was owned by a trust of which the petitioner was trustee and income beneficiary. The remaining shares were owned outright by the petitioner. On Aug. 31, 1966, a charitable organization, of which the petitioner was controlling trustee, purchased the shares owned by the trust. On the same day, the petitioner contributed enough shares to the foundation so that it thereafter owned 80 percent of the outstanding shares. On the next day, the corporation redeemed all the shares held by the foundation in return for the college assets. Held, in substance and form, the contribution was of stock and not the proceeds of the redemption.2. In 1961, the estate of the petitioner's father demanded that the corporation redeem shares of its stock in accordance with an agreement between the petitioner's father and the corporation which set forth the formula for determining the redemption price. In 1964, 58 after vigorous negotiations concerning the validity of the agreement, the stock was redeemed. Held, the corporation was not a willing buyer of the stock, and therefore, the redemption is not a comparable sale from which the fair market value of the stock in 1966 can be determined. Bernard J. Long, Jr., and James A. Treanor III, for the petitioners.Robert D. Grossman, Jr., and Ava D. Poe, for the respondent. Simpson, Judge. SIMPSON685 The respondent determined a deficiency of $ 178,309.72 in the Federal income tax of the petitioners for the year 1966. Two issues are presented for decision. The first is whether in substance, as well as in form, a contribution of stock by the petitioners preceded the redemption of such stock, when the redemption took place the very next day. In the event we find that the contribution, in substance, preceded the redemption, we must determine whether the fair market value of the stock was less than claimed by the petitioners in their return.FINDINGS OF FACTSome of the facts have been stipulated, and those facts are so found.The petitioners, Daniel D. Palmer and Agnes H. Palmer, are husband and wife, who maintained their60 residence in Davenport, Iowa, at the time their petition was filed in this case. They filed their joint Federal income tax return for the year 1966 with the district director of internal revenue, Des Moines, Iowa. Dr. Daniel D. Palmer will be referred to as the petitioner.The petitioner's grandfather, Daniel David Palmer, was the creator and founder of what is now the nonmedical profession of chiropractic. In 1895, he established the first school of chiropractic in Davenport, Iowa, and was its owner and president until his death in 1913. In about 1906, the school was incorporated under Iowa law as a corporation operated for profit, and in 1947, its corporate charter was renewed for a perpetual term.In 1961, the school changed its name from "The Palmer School of Chiropractic" to "Palmer College of Chiropractic." The Palmer College of Chiropractic as a corporate entity was empowered to, and actually did, engage in the sale, leasing, and ownership of real estate. It will be referred to as the corporation, as will its predecessor corporation, the Palmer School of Chiropractic. The educational facilities operated by the corporation will be referred to as the college.Upon the death61 of the petitioner's grandfather, the petitioner's father, Dr. Bartlett Joshua (B.J.) Palmer, succeeded to the presidency of the college and the corporation. On November 7, 1959, an agreement 686 between the corporation and Dr. B. J. Palmer was executed. That agreement granted cross-options to his estate (the estate) and the corporation -- the estate could require that the corporation purchase all its stock in the corporation, and the corporation could require that the estate sell all of such stock to it. The purchase price for such sale was to be the book value of the shares as of the last day of the month preceding the month in which Dr. B. J. Palmer died.The petitioner's father died in May 1961, and the relationships which developed between the petitioner and the executors of the estate were marked by disagreement, hostility, and ill will.A recitation in the will of Dr. B. J. Palmer stated that he and his wife had amply endowed their son during their lifetimes, and therefore, no provision was made for the petitioner. As a result, the petitioner brought a legal action against the executors and trustees to invalidate his father's will. Judgment was entered for the estate, 62 an appeal was taken, and the Supreme Court of Iowa affirmed. Palmer v. Evans, 255 Iowa 1176">255 Iowa 1176, 124 N.W. 2d 856 (1963).Another area of controversy involved the cross-option agreement between the corporation and the estate. By letter dated July 20, 1961, the executors of the estate notified the corporation that it desired to exercise its option and require redemption of the 649.01 shares of the corporation stock owned by the estate. The book value of such stock as of April 30, 1961, the last day of the month preceding the death of the petitioner's father, was $ 286.35 per share. The petitioner objected to the redemption and thought the terms of payment called for in the cross-option agreement were too costly. Eventually, after final judgment had been entered in the litigation between the estate and the petitioner concerning the validity of the will, a negotiated settlement was agreed upon. Such settlement, which was embodied in an agreement dated July 24, 1964, resolved not only the controversy surrounding the redemption agreement, but also resolved other controversies outstanding at that time, and not relevant to the issue herein. 63 Under the terms of the settlement agreement, the shares of the corporation were redeemed from the estate at the 1964 book value of $ 264.74 per share, rather than at the date-of-death value. Such amount was paid for the estate's shares without interest. The negotiations which led to the final settlement were hostile, vigorously contested, and arm's length.As early as before the death of his father, the petitioner contemplated the possibility of making the college into a nonprofit institution. It was felt that alumni financial support in the form of gifts and bequests was being withheld principally because would-be donors were reluctant to contribute and thereby enrich the holdings of the Palmer family. In addition, it was felt that contributions were not made because they were not deductible for purposes of the Federal income 687 and estate taxes, and that participation in certain Federal funding programs was denied the college because it was not a nonprofit institution. Moreover, because the corporation was operated for profit, graduates of the college encountered difficulty obtaining licenses to practice chiropractic in at least one State. Accordingly, the petitioner64 caused the Palmer College Foundation (the foundation) to be organized in 1964 as a corporation not for pecuniary profit.In general, the foundation was organized to engage in religious, charitable, educational, and scientific activities. Specifically, it was intended and empowered to take over ownership of the college from the corporation. In addition, the foundation was empowered to accept gifts, to make loans to students, and to award scholarships, research grants, and prizes for meritorious essays.By letter dated January 13, 1965, IRS determined that the foundation qualified as a tax-exempt organization pursuant to section 501 (c)(3) of the Internal Revenue Code of 1954. 1The bylaws of the foundation provided for two distinct series of certificates to be issued to the trustees of the foundation. The first group of certificates, series A, were transferable only by gift, bequest, or devise, and were limited in number65 to nine. The bylaws provided that six such certificates were to be issued to the petitioner, and that the remaining three certificates were to be issued to Mrs. Palmer. The second group of certificates, series B, were not transferable and were limited in number to two certificates. The bylaws of the foundation provided that such certificates were to be held only by the treasurer of the corporation. The bylaws also provided that each certificate, regardless of its classification, was entitled to one vote for each vacancy on the board of directors, and that at a meeting of the trustees, the presence of the trustees entitled to vote a majority of the total votes constituted a quorum.During the entire year in issue, 1966, the certificates were held as specified in the bylaws. As a result, the petitioner controlled the foundation. Not only was he the controlling trustee by virtue of having personal control over the majority of the certificates, but he was also its president and a director. Moreover, Mrs. Palmer was a trustee and director, and the other directors and officers of the foundation were personally chosen by the petitioner and were the same individuals as the officers66 and directors of the corporation.In 1966, the corporation had outstanding 2,896.97 shares of common stock, par value $ 100, prior to September 1 of that year. Of those shares, 2,078.97 shares were owned by a trust (the trust) created under 688 the last will and testament (the will) of Mabel H. Palmer, the petitioner's mother, and the remaining 818 shares were owned by the petitioner. Under the terms of the will, the petitioner was trustee and income beneficiary of the trust, Mrs. Agnes H. Palmer was a contingent income beneficiary, and the three minor daughters of the petitioner were the ultimate remaindermen.The petitioner exercised effective control of the corporation and the college throughout 1966. Prior to September 1, 1966, he was president of the college, president of the corporation, and a member of the latter's board of directors. Of the three other officers of the corporation at that time, two were close friends and longtime associates of the petitioner, and of such three officers, two were directors.The petitioner, as president of the corporation, was actively engaged in the operations of the college. One of his major concerns was the continuation of the pure67 essence of chiropractic as taught by his grandfather and father, and the petitioner had the final say with respect to curriculum selection, employment and assignment of the faculty, and other staff and budgetary considerations. In addition, he was involved in fund-raising activities among alumni.The business offices of the corporation and the foundation were located in the same building at all times relevant to the proceedings herein, and the petitioner, as director and president of the corporation and as director, president, and trustee of the foundation, maintained a single office in the administration building on the college campus.The petitioner engaged counsel to devise a plan that would accomplish the transfer of the college from the corporation to the foundation, that would enable the petitioner to maintain his control over the direction and operation of the college, and that would yield the most favorable tax consequences. In connection with the development of such plan, a local real estate appraiser was engaged to value the land and improvements owned by the corporation. His conclusions on valuation were summarized in a covering letter dated September 14, 1965, which68 was addressed to the treasurer of the corporation and attached to his appraisal report. In that letter, he determined the fair market value of the college assets appraised by him was $ 2 million.Next, a national accounting firm was employed, in part, for the purpose of making a pro forma allocation of corporate assets between those relating to the educational facilities to be transferred to the foundation and the other assets to be retained by the corporation. Using information provided by the treasurer of the corporation, the accounting firm allocated $ 776,744.85 to the corporation and $ 2,468,827.35 to the foundation.Based upon the appraisal, counsel for the petitioner advised that the assets attributable to the college were valued at $ 2 million, and 689 that such assets comprised approximately 80 percent of the total assets of the corporation, which were valued at $ 2,500,000. In addition, counsel advised that the 2,078.97 shares of the corporation stock owned by the trust represented 71.76 percent of the corporate assets and that the petitioner's shares represented the remaining 28.24 percent of such assets. Finally, counsel advised the petitioner that if the foundation69 were to receive the college assets by virtue of a redemption of stock, it would be necessary for the foundation to relinquish $ 2 million worth of stock in the redemption.On August 31, 1966, the foundation acquired the shares of stock in the corporation held by the trust in return for a promissory note in the face amount of $ 1,794,000. The purchase price, which amounted to $ 863 per share, was determined on the basis of the aforementioned appraisal of the real estate owned by the corporation, an estimate concerning the value of the name and goodwill of the college, and the book value of its other assets and liabilities. Under the terms of the promissory note, the principal was payable in annual installments of $ 51,257 over a 35-year period, with the final payment being somewhat larger in amount. Simple interest at the rate of 4 percent per annum was payable upon each installment. No downpayment was required.Prior to the purchase of the stock from the trust, the foundation did not have assets with which to pay the promissory note. In its application for exemption in the year 1964, the foundation listed its current assets as $ 4,246.90, and for the period ending December 31, 70 1965, it reported total assets of $ 37,087.50. It was intended that the foundation would obtain the funds necessary for payment of the installment obligations primarily from the operations of the college.Also on August 31, 1966, the petitioner transferred 238 shares of stock of the corporation to the foundation. Thereafter, the foundation owned 2,316.97 shares, which represented 79.979 percent of the total issued and outstanding shares of the corporation. The parties have treated such amount as 80 percent, and so shall we.At the meeting in which the board of directors and trustees of the foundation authorized the purchase of stock from the trust, it was resolved that the foundation, as owner of in excess of 70 percent of the stock of the corporation, would convene a joint directors and stockholders meeting, for the purpose of considering the redemption of the stock held by the foundation. In addition, the board of directors and the trustees were authorized to effectuate the redemption.At 10 o'clock in the morning of the next day, September 1, 1966, the board of directors and shareholders of the corporation met and approved an agreement whereby the shares of the corporation 71 stock held by the foundation were to be redeemed in return for the operating assets of the college. At 2 o'clock in the afternoon of the same day, the 690 board of directors and trustees of the foundation met specially to consider and approve that redemption. All these meetings took place in the administration building of the college.After the performance of the redemption agreement of September 1, 1966, all of the operating assets of the college were owned directly by the foundation, and the primary business of the corporation became the ownership, leasing, and sale of real property. After such transfer, the petitioner exercised the same degree of control over the direction and administration of the college as he did when the college was operated by the corporation.In his return for the year 1966, the petitioner claimed a charitable deduction of $ 52,640.72 attributable to the transfer of 238 shares of stock of the corporation to the foundation. The stock was treated as having a value of $ 863 per share. In his notice of deficiency, the respondent determined that the contribution of stock followed by its redemption was in substance a distribution to the petitioner essentially72 equivalent to a dividend, and determined that the amount of such distribution was $ 205,394, the value of the assets represented by such stock. He also determined that the petitioner's charitable contribution deduction should be increased by $ 62,706.40 as a result of the increase in his gross income. In an amended answer, the respondent determined that the entire deduction for the charitable contribution should be disallowed.OPINIONThe respondent has challenged the gift of stock to the foundation. He claims that the ultimate objective of the petitioner was to bring about a transfer of assets to the foundation and that the gift of stock was meaningless. In support of that contention, the respondent argues that the gift was illusory, incomplete, and transitory, and that in any event, it should be disregarded as an intermediary step of a single, integrated transaction. If not disregarded, the gift by the petitioner was, according to the respondent, an anticipatory assignment of the proceeds of the redemption which would otherwise be taxable to the petitioner as a distribution under sections 302 and 301. Finally, the respondent challenged the deduction on the grounds that the73 stock was worth a great deal less than that claimed by the petitioner.Section 170 allows a deduction for any charitable contribution made during the taxable year. If we find that in fact the petitioner did make a contribution of the 238 shares in 1966, he is entitled to deduct the fair market value of such contribution, subject to the percentage limitations on such a deduction. However, if we were to find that the petitioner arranged for a redemption of such shares and then contributed the assets so acquired to the foundation, the tax consequences would be 691 significantly different. Under section 302, the amounts distributed to a shareholder in redemption of his stock may be taxed to him as a dividend under section 301 or may be treated as the proceeds of the sale of a capital asset. In either event, the petitioner would most likely be taxable on some income as a result of the redemption, but he would be allowed a charitable contribution deduction with respect to the value of the assets contributed to the foundation. Thus, the heart of the controversy is whether the petitioner is taxable on any income as a result of the series of transactions which took place on August74 31 and September 1, 1966.In Humacid Co., 42 T.C. 894">42 T.C. 894, 913 (1964), we said:The law with respect to gifts of appreciated property is well established. A gift of appreciated property does not result in income to the donor so long as he gives the property away absolutely and parts with title thereto before the property gives rise to income by way of a sale. * * * 2Carrington v. Commissioner, 476 F. 2d 704 (C.A. 5, 1973), affirming a Memorandum Opinion of this Court; Behrend v.United States, an unreported case ( C.A. 4, 1972, 31 A.F.T.R.2d (RIA) 73">31 A.F.T.R. 2d 73-406, 73-1U.S.T.C. par. 9123); DeWitt v. United States, 503 F. 2d 1406 (Ct. Cl. 1974); Sheppard v. United States, 361 F. 2d 972 (Ct. Cl. 1966); Winton v. Kelm, 122 F. Supp. 649">122 F. Supp. 649 (D. Minn. 1954); Apt v. Birmingham, 89 F. Supp. 361 (N.D. Iowa 1950). 3 However, the respondent contended that such principles of law are not applicable in this case and presented a variety of arguments in support75 of his position. He urged that tax consequences are determined on the basis of the substance of the transaction, and not its form, and that because the petitioner conceived the plan for the transfer of the college to the foundation and controlled all parties to that transfer, there was, in substance, no gift of stock to the foundation. He invoked the step-transaction doctrine and suggested that since the various steps toward the accomplishment of the petitioner's objective were interdependent, they should be ignored for tax purposes. Finally, he asserted that the petitioner had the power to bring about a redemption of his stock and that, therefore, there was in effect merely an assignment of income by him.76 The principles urged by the respondent are sound and well established in our tax law. The incidence of taxation depends upon the substance of the transaction and not mere formalism. Commissioner v. Court Holding Co., 324 U.S. 331">324 U.S. 331, 334 (1945). Taxation is not so much concerned with refinements of title as it is with actual command 692 over the property. Corliss v. Bowers, 281 U.S. 376">281 U.S. 376, 378 (1930); see also Commissioner v. P. G. Lake, Inc., 356 U.S. 260">356 U.S. 260 (1958); Helvering v. Clifford, 331">309 U.S. 331 (1940); Griffiths v. Commissioner, 355">308 U.S. 355 (1939); Sachs v. Commissioner, 277 F. 2d 879, 882-883 (C.A. 8, 1960), affirming 32 T.C. 815">32 T.C. 815 (1959). Under such cases, a mere transfer in form, without substance, may be disregarded for tax purposes. Commissioner v. P. G. Lake, Inc., supra;Commissioner v. Court Holding Co., supra;Commissioner v. Sunnen, 333 U.S. 591">333 U.S. 591 (1948);77 Helvering v. Clifford, supra;Corliss v. Bowers, supra;Richardson v. Smith, 102 F. 2d 697 (C.A. 2, 1939); Howard Cook, 5 T.C. 908 (1945); J. L. McInerney, 29 B.T.A. 1">29 B.T.A. 1 (1933), affd. 82 F. 2d 665 (C.A. 6, 1936).As a corollary to the general proposition of those cases, it has been stated by the Supreme Court that "A given result at the end of a straight path is not made a different result because reached by following a devious path." Minnesota Tea Co. v. Helvering, 302 U.S. 609">302 U.S. 609, 613 (1938). Accordingly, where a taxpayer has embarked on a series of transactions that are in substance a single, unitary, or indivisible transaction, the courts have disregarded the intermediary steps and have given credence only to the completed transaction. E.g., Redwing Carriers, Inc. v. Tomlinson, 399 F.2d 652">399 F. 2d 652, 654 (C.A. 5, 1968); May Broadcasting Co. v. United States, 200 F. 2d 852 (C.A. 8, 1953); Whitney Corporation v. Commissioner, 105 F. 2d 43878 (C.A. 8, 1939), affirming 38 B.T.A. 224">38 B.T.A. 224 (1938); Commissioner v. Ashland Oil & R. Co., 99 F. 2d 588 (C.A. 6, 1938), reversing sub nom. Swiss Oil Corporation, 32 B.T.A. 777">32 B.T.A. 777 (1935), certiorari denied 306 U.S. 661">306 U.S. 661 (1939); James Kuper, 61 T.C. 624 (1974); Kimbell-Diamond Milling Co., 14 T.C. 74 (1950), affirmed per curiam 187 F. 2d 718 (C.A. 5, 1951), certiorari denied 342 U.S. 827">342 U.S. 827 (1951). Transactions that are challenged as intermediary steps of an integrated transaction are disregarded only when found to be so interdependent that the legal relations created by one transaction would have been fruitless without the completion of the series. American Bantam Car Co., 11 T.C. 397">11 T.C. 397, 405 (1948), affd. 177 F. 2d 513 (C.A. 3, 1949), certiorari denied 339 U.S. 920">339 U.S. 920 (1950); see Scientific Instrument Co., 17 T.C. 1253">17 T.C. 1253 (1952), affirmed per curiam 202 F. 2d 15579 (C.A. 6, 1953).As a general rule, a taxpayer cannot insulate himself from taxation merely by assigning a right to income to another. Commissioner v. Sunnen, supra;Helvering v. Horst, 311 U.S. 112">311 U.S. 112 (1940); Corliss v. Bowers, supra;Lucas v. Earl, 281 U.S. 111">281 U.S. 111 (1930). If the putative assignor performs services (Lucas v. Earl), retains the property (Helvering v. Horst), or retains the control over the use and enjoyment of the income (Commissioner v. Sunnen; Corliss v. Bowers), the liability for the tax remains on his shoulders. However, if the entire interest in the property is transferred and the assignor retains no incidence of either 693 direct or indirect control, then the tax on the income rests on the assignee. Blair v. Commissioner, 300 U.S. 5 (1937); Carrington v. Commissioner, supra; Behrend v. United States, supra; DeWitt v. United States, supra;Humacid Co., 42 T.C. 894">42 T.C. 894 (1964);80 Winton v. Kelm, supra;Apt v. Birmingham, supra.Despite the undoubted validity of those doctrines, we find them to be inapplicable in this case. Similar attacks have been presented by the respondent in a variety of cases involving gifts of stock followed by its redemption, and the attacks have generally been rejected by the courts. Grove v. Commissioner, 490 F. 2d 241 (C.A. 2, 1973), affirming a Memorandum Opinion of this Court; Carrington v. Commissioner, 476 F. 2d 704 (C.A. 5, 1973); Behrend v.United States, an unreported case ( C.A. 4, 1972, 31 A.F.T.R.2d (RIA) 73">31 A.F.T.R. 2d 73-406, 73-1U.S.T.C. par. 9123); DeWitt v. United States, 503 F. 2d 1406 (Ct. Cl. 1974); Sheppard v. United States, 361 F. 2d 972 (Ct. Cl. 1966); Winton v. Kelm, 122 F. Supp. 649 (D. Minn. 1954); Apt v. Birmingham, 89 F. Supp. 361">89 F. Supp. 361 (N.D. Iowa 1950); see Humacid Co., supra.81 The petitioner wished to have the college become a nonprofit organization, and there were two paths which he could have taken -- he could have had the stock redeemed and then made a contribution of the assets, or he could have contributed the stock and let the donee arrange for the redemption. The tax consequences to the donor turn on which path he chooses, and so long as there is substance to what he does, there is no requirement that he choose the more expensive way. Gregory v. Helvering, 293 U.S. 465 (1935). He arranged for the transfer to precede the redemption, and there is no reason for us to conclude that such a sequence of events lacked any more substance than for the redemption to precede the transfer, as suggested by the respondent. Carrington v. Commissioner, 476 F. 2d at 706. The only question is whether he really made a gift, thereby transferring ownership of the stock prior to the redemption.Even though the donor anticipated or was aware that the redemption was imminent, the presence of an actual gift and the absence of an obligation to have the stock redeemed have been sufficient to give such 82 gifts independent significance. Carrington v. Commissioner, supra;DeWitt v. United States, supra;Sheppard v. United States, supra.It is true that the petitioner controlled the foundation. However, the foundation was a charitable organization that was organized for certain specific purposes. Under Iowa law, the petitioner was subject to the responsibilities and duties of a fiduciary when he acted as director and trustee of the foundation ( Schildberg Rock Products Co. v. Brooks, 258 Iowa 759">258 Iowa 759, 140 N.W. 2d 132, 136-137 (1966); Des Moines Bank & Trust Co. v. George M. Bechtel & Co., 243 Iowa 1007">243 Iowa 1007, 51 N.W. 2d 174, 215-217 (1952)), and there is nothing in the record to indicate that he exercised command over the use and enjoyment of property 694 of the foundation in violation of his fiduciary duty. There has been no allegation or evidence that the foundation was a sham. In these circumstances, it appears clear that the foundation was not an alter ego of the petitioner, and in fact 83 it had dominion and control over the shares of stock received by gift from the petitioner, notwithstanding the fact that the petitioner was the controlling trustee. United States v. Morss, 142">159 F. 2d 142 (C.A. 1, 1947); Theodore D. Stern, 15 T.C. 521 (1950); Crosby v.United States, an unreported case ( S.D. Miss. 1973, 31 A.F.T.R. 2d 73-1191, 73-1U.S.T.C. par. 9399); Winton v. Kelm, supra; see William Waller, 39 T.C. 665">39 T.C. 665 (1963).Although, after the gift and the redemption, the petitioner retained power and control over the curriculum and policies of the college, such control was not tantamount to the control and dominion of an owner over the use and enjoyment of property. His control of the affairs of the college was akin to the manager of a business, but he had no right to share in its profits. In an analogous situation involving a gift to a family member of a partnership interest to be held in trust, retention by the donor of the control of the business was not sufficient reason, alone, to restructure84 the gift and the resulting interest in the profits of the partnership. Kuney v. United States, 448 F. 2d 22 (C.A. 9, 1971); Theodore D. Stern, supra;Edward D. Sultan, 18 T.C. 715 (1952), affirmed per curiam 210 F. 2d 652 (C.A. 9, 1954); compare Commissioner v. Sunnen, 333 U.S. 591 (1948). In Behrend v. United States, supra, the donor's control over the charity and the corporation was not sufficient to cause the restructure of the gift and the redemption of the stock there in issue. There is no discernible difference between the facts of that case and those before us.In Hudspeth v. United States, 471 F. 2d 275 (C.A. 8, 1972), the taxpayer owned 80 percent of the stock in a closely held, family-owned corporation. In April 1964, the directors adopted and the shareholders ratified a plan of complete liquidation. Before the corporation filed articles of dissolution with the proper State authority and before the assets were distributed to the shareholders, the taxpayer donated 67 shares, 85 or less than 7 percent, of the stock to a charity. Regardless of that transfer, the court held that in substance, the taxpayer transferred the proceeds of dissolution. Under the court's reasoning, it was significant that the gift was made after the vote for liquidation. That vote signified the taxpayer's intent to convert the corporation into the essential elements of his investment. Moreover, the donee was powerless to reverse or have revoked the decision to liquidate. See John P. Kinsey, 58 T.C. 259">58 T.C. 259 (1972), affd. 477 F. 2d 1058 (C.A. 2, 1973); Howard Cook, 5 T.C. 908 (1945). The court considered that those facts made the case distinguishable from cases in which either no plan had been adopted at the time of the gift even though liquidation was anticipated 695 and planned (e.g., Winton v. Kelm, supra;Apt. v. Birmingham, supra), or the donee was given sufficient interest to reverse the decision to liquidate (e.g., W. B. Rushing, 52 T.C. 888 (1969), affd. 441 F. 2d 59386 (C.A. 5, 1971)).In our opinion, the facts herein are more akin to those in W. B. Rushing, supra,Winton v. Kelm, supra, and Apt. v. Birmingham, supra, and are distinguishable from those in Hudspeth v. United States, supra,John P. Kinsey, supra, and Howard Cook, supra. When the foundation received the gift of stock from the petitioner, no vote for the redemption had yet been taken. Although we recognize that the vote was anticipated, nonetheless, under the Hudspeth reasoning, that expectation is not enough. We have found that the foundation was not a sham, was not an alter ego of the petitioner, and that it received his entire interest in the 238 shares of the corporation stock. On the same day, it acquired enough shares of stock from the trust to hold in the aggregate 80 percent of the outstanding shares of the corporation. Thereafter, the foundation voted for the redemption. It did so because the redemption was in its interest. At the time of the gift, that vote had not yet been taken, 87 and by the afternoon of August 31, 1966, the foundation had the voting power to prevent the redemption, if it wished to do so. In these circumstances, at the time of the gift, the redemption had not proceeded far enough along for us to conclude that the foundation was powerless to reverse the plans of the petitioner. In light of the presence of an actual, valid gift and because the foundation was not a sham, we hold that the gift of stock was not in substance a gift of the proceeds of redemption.The remaining issues involve the fair market value of the shares donated by the petitioner. Such issues were raised initially by the respondent in an amended answer. Under Rule 142 of the Tax Court Rules of Practice and Procedure, the respondent has the burden of proof. Morris M. Messing, 48 T.C. 502">48 T.C. 502, 511 (1967).The respondent contends that the fair market value of the shares donated did not exceed $ 310. He argues that the petitioner made his donation in expectation of the sale by the trust at an inflated price, that the two transactions were related, and that in light of what he contends is the fair market value, no contribution, as that term is used88 in section 170, was received by the foundation. In the alternative, he argues that because the gift and the sale were related, the foundation sustained a net economic detriment upon the conclusion of the transactions by virtue of the inflated purchase price. Finally, he contends that the deduction should be limited to the actual fair market value, subject to the percentage limitations of section 170 not here in issue.The respondent's arguments hinge on whether he has carried his burden of proving that the fair market value of the stock was less than 696 the amount originally claimed by the petitioner. In the absence of such proof, there is no basis to support any of his contentions.With respect to contributions of property, section 1.170-1(c)(1) of the Income Tax Regulations provides, in pertinent part:(c) * * (1) General rules. If a contribution is made in property other than money, the amount of the deduction is determined by the fair market value of the property at the time of the contribution. The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or89 sell and both having reasonable knowledge of relevant facts. * See also O'Malley v. Ames, 197 F. 2d 256 (C.A. 8, 1952); Daniel S. McGuire, 44 T.C. 801 (1965).The respondent has chosen to rely on the testimony of one expert, a senior valuation engineer in the employ of the Internal Revenue Service. That expert determined the fair market value by reference to the sale of the stock from the estate of the petitioner's father to the corporation in 1964. Initially, he determined the price per share was $ 264.74. Next, he determined that the average net income of the corporation, after taxes, for the period 1961 through 1963 was $ 69,710, and that the average earnings per share outstanding was $ 19.66. The price/earnings ratio, therefore, amounted to 13.47 to 1.00 as of the date of that sale. From his calculations, he determined that on the same date, the price/earnings ratio for Standard & Poor's index of 425 industrial stocks was approximately 17.61 to 1.00 and that the price/earnings ratio of the corporation was 76.5 percent of the Standard & Poor's ratio. He then determined the approximate price/earnings ratio90 of Standard & Poor's index for August 31, 1966, multiplied that figure by 0.765, and applied the product to the average earnings of the corporation for the period 1963 through 1965. He thus arrived at a value of $ 310 per share. He used no other method to check his findings and had no independent knowledge of the corporation or the college.The respondent claims reliance on the 1964 sale between the estate and the corporation is justified because the parties negotiated vigorously, dealt at arm's length, and had knowledge of all the relevant facts. However, the respondent overlooks the fact that the corporation was compelled to enter the transaction. That element of compulsion precludes a determination of value by reference to that sale.Ordinarily, the price at which the same or similar property has changed hands is persuasive evidence of fair market value. Grill v. United States, 303 F. 2d 922, 927 (Ct. Cl. 1962); Augustus E. Staley, 41 B.T.A. 752">41 B.T.A. 752, 769 (1940). Where the parties to the sale have dealt with each other at arm's length and the sale is within a reasonably close period of time to the valuation date, 91 the price agreed upon is considered to have accurately reflected conditions in the market. However, 697 not all sales accurately reflect market conditions. Heiner v. Crosby, 24 F. 2d 191 (C.A. 3, 1928); Estate of Alexia DuPont Ortiz DeBie, 56 T.C. 876">56 T.C. 876 (1971); Daniel S. McGuire, supra;Acme Mills, Inc., 6 B.T.A. 1065 (1927).In Acme Mills, Inc., supra, the property at issue was sold by the trustee of the bankrupt's creditors 5 months prior to the valuation date. There was no indication that the negotiations preceding the sale were conducted in a manner other than at arm's length. Nonetheless, that sale did not establish the fair market value. The Court stated at 6 B.T.A. 1067">6 B.T.A. 1067:While not, perhaps, under a strict compulsion to sell, the action of the trustees was impelled by a very decided pressure from creditors whom they represented to dispose of property which, under existing conditions, was to them a white elephant. There was not an open market and willingness to sell, free of compulsion92 or necessity. [Emphasis supplied.]Turning to the facts before us, we observe that the negotiations between the estate and the corporation may have been vigorously contested, but the fact still remains that both parties were locked into the sale by virtue of the cross-options found in the agreement between the petitioner's father and the corporation. In 1961, the estate exercised its option to have the shares redeemed. Thereafter, the parties were forced to deal with each other. It is possible that no discernible market existed for such shares other than with the corporation. The attorney for the estate so testified at trial. Nonetheless, such fact only demonstrates that the estate was a willing seller; it does not demonstrate that the corporation was a willing buyer. Section 1.170-1(c)(1) of the regulations defines fair market value in terms of both a willing buyer and a willing seller. The transaction relied on by the respondent and his expert fails to shed light on the price a buyer would pay in the absence of compulsion.Moreover, the price finally paid for the stock was not determined by the forces of the marketplace. The agreement between the petitioner's father and93 the corporation provided that the price should be based on the book value of the stock at the end of the month preceding his death, and although there were vigorous negotiations concerning the price to be paid for the stock, the price finally paid was in substantial conformity with the provisions of the agreement. The respondent contends that if the value of the stock had been substantially greater, the estate would not have been willing to sell for the agreed price, and the corporation would not have been so reluctant to pay that price. However, the existence of the agreement restricted the seller's opportunities to sell and placed the corporation in a strong bargaining position. For those reasons, we are not satisfied that the 698 price agreed upon by them reflects the price that would have been reached by parties bargaining freely in the marketplace.The respondent contends that this situation is analogous to one in which a shareholder acquires stock from a corporation, subject to an option reserved by the corporation to repurchase that stock at a stated price. In such situation, the fair market value does not exceed the option price. Estate of Albert L. Salt, 17 T.C. 92">17 T.C. 92 (1951).94 However, the respondent is mistaken in his analogy. That case merely held that the value of the stock subject to the option was determined by reference to the option price. Here, the stock to be valued was not subject to any option, and the price paid for the stock subject to the agreement between the petitioner's father and the corporation has no bearing on what a willing buyer would pay to a willing seller for the stock in the marketplace. Cf. Jack I. LeVant, 45 T.C. 185">45 T.C. 185, 203-205 (1965), affirmed on this issue 376 F. 2d 434 (C.A. 7, 1967); Edith G. Goldwasser, 47 B.T.A. 445">47 B.T.A. 445, 455-457 (1942), affirmed per curiam 142 F. 2d 556 (C.A. 2, 1944), certiorari denied 323 U.S. 765">323 U.S. 765 (1944) (involving specific shares of "letter" stock).The respondent has introduced no other evidence of value. In these circumstances, the respondent has failed to prove that the fair market value of the corporation stock as of August 31, 1966, was less than $ 863.In their reply brief, the petitioners asked, for the first time, that we find that the value of the stock95 was $ 1,096 per share on the date it was given to the foundation. The petitioners have raised such issue too late. An issue raised for the first time in the reply brief cannot, in fairness to all parties, be considered. Estate of Isabelle M. Sparling, 60 T.C. 330">60 T.C. 330, 349-350 (1973); James G. Maxcy, 59 T.C. 716">59 T.C. 716, 728 (1973); Kate Froman Trust, 58 T.C. 512">58 T.C. 512, 518-519 (1972). Although the respondent vigorously challenged the petitioners' evidence as to the value of the stock, he was not put on notice that they were going to claim that the value of such stock exceeded $ 863 per share. Since he was not given notice of that claim, he was deprived of any opportunity to present any objections with respect to it.What is more, the petitioners have failed to establish that the value of the stock actually exceeded $ 863 per share. They have the burden of proving that the value exceeded that claimed on their return and relied on in the notice of deficiency. Estate of Harry Schneider, 29 T.C. 940">29 T.C. 940, 956-957 (1958); cf. Lovell & Hart, Inc. v. Commissioner, 456 F. 2d 14596 (C.A. 6, 1972), affirming per curiam a Memorandum Opinion of this Court. They called two experts who testified with respect to valuation. One expert dealt merely with the value of the land and improvements owned by the corporation. The other expert 699 had experience in acquiring proprietary educational institutions, and he testified as to the value of the college as a going business. His opinion as to the value of the stock was merely that it was worth at least $ 863 per share, but the petitioner's claim for a higher value of the stock is based on his determination of the value of the college.The petitioners have offered no expert opinion that the value of the stock exceeded $ 863 per share. Although they offered evidence as to the value of the assets of the corporation, such evidence is ordinarily unconvincing as to the value of the stock of a corporation. Weber v. Rasquin, 101 F. 2d 62, 64 (C.A. 2, 1939); Williams v. Commissioner, 44 F. 2d 467, 470 (C.A. 8, 1930), affirming 15 B.T.A. 227">15 B.T.A. 227 (1929). Furthermore, the 238 shares donated by the petitioner were a minority interest, 97 and ordinarily the value of a minority interest must be discounted. Central Trust Co. v. United States, 305 F. 2d 393, 405 (Ct. Cl. 1962); George F. Collins, Jr., 46 T.C. 461">46 T.C. 461, 476 (1966), affirmed on another issue 388 F. 2d 353 (C.A. 10, 1968), vacated and remanded per curiam on another issue 393 U.S. 215">393 U.S. 215 (1968), reversed on another issue 412 F. 2d 211 (C.A. 10, 1969); Bader v. United States, 172 F. Supp. 833">172 F. Supp. 833 (S.D. Ill. 1959). The expert gave no consideration to the fact that the 238 shares constituted a minority interest. The petitioners argued, for this purpose, that those shares were transferred as a part of a plan to acquire a controlling interest, but they have convinced us that for other purposes in this case, the acquisition of the shares contributed by the petitioner should be viewed as a separate and independent transaction. In the light of these circumstances, we believe that the petitioners have failed to carry their burden of proving that the value of the stock exceeded that value claimed*98 on their return.Decision will be entered for the petitioners. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, unless otherwise indicated.↩2. In the Tax Reform Act of 1969, Congress dealt with contributions of income and appreciated property, and by the enactment of sec. 170(e), it modified the law applicable to gifts made after 1969. See sec. 170(e) and sec. 1.170A-4, Income Tax Regs.↩3. See also Robert L. Fox, 37 P.-H. Memo. T.C. par. 68,205, 27 T.C.M. (CCH) 1001">27 T.C.M. 1001 (1968); but see Russell E. Phelon, 35 P.-H. Memo. T.C. par. 66,199, 25 T.C.M. (CCH) 1024">25 T.C.M. 1024↩ (1966).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624155/	ALBERT D. AND VIVIAN M. CHEESMAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentCheesman v. CommissionerDocket No. 12411-90United States Tax CourtT.C. Memo 1994-509; 1994 Tax Ct. Memo LEXIS 513; 68 T.C.M. (CCH) 925; October 12, 1994, Filed 513 Decision will be entered under Rule 155. Albert D. and Vivian M. Cheesman, pro se. For respondent: Randall B. Pooler. CLAPPCLAPPMEMORANDUM OPINION CLAPP, Judge: Respondent determined deficiencies in, and additions to, petitioners' Federal income taxes as follows: Additions to TaxSec. Sec. YearDeficiency6653(b)(1)(A)6653 (b)(1)(B)Sec. 66611986$ 14,477$ 10,8581$ 3,619198722,48316,86225,621After concessions by respondent, the issues for decision are: (1) Whether petitioners are entitled to cost of goods sold in the amounts of $ 3,308 and $ 43,341 in 1986 and 1987, respectively. We hold that they are not. (2) Whether petitioners are entitled to Schedule C deductions in 1986 for electric and rent expenses in excess of the amounts allowed by respondent. We hold that they are not. (3) Whether petitioners had unreported income according to the source and application of funds method, in addition to the Schedules C adjustments, in 1986 and 1987. We hold that they did in 1986, but not in 1987. (4) Whether Albert D. Cheesman514 (Mr. Cheesman) is liable for self-employment tax for income earned in 1986 and 1987, and whether Vivian M. Cheesman (Mrs. Cheesman) is liable for self-employment tax for income earned in 1987. We hold that they are. (5) Whether petitioners are liable for additions to tax for fraud under section 6653(b). We hold that they are. (6) Whether petitioners are liable for an addition to tax for a substantial understatement of income tax under section 6661 for 1986 and 1987. We hold that they are. Petitioners' earned income credit will be adjusted automatically based on our resolution of the above issues. Respondent concedes that petitioners are entitled to dependency exemptions for their sons, Byron and Bruce, in 1986. Respondent also concedes that funds held in two accounts with Crossland Savings are not funds belonging to petitioners. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. Some of the facts have been stipulated and are found accordingly. We incorporate by reference the stipulation of facts and attached exhibits. Petitioners515 are husband and wife, who resided in Bradenton, Florida, at the time they filed their petition. BackgroundDuring 1986 and 1987, petitioners operated two videotape rental businesses in Bradenton, Florida. One store was located on 26th Street West (26th Street store) and the other on Carlton Arms Boulevard (Carlton Arms store). In 1986, petitioners also operated two other videotape rental businesses that ceased operation in that year. One store was located in Arcadia, Florida (Arcadia store). The other was located on 14th Street West in Bradenton, Florida (14th Street store). The four stores were operated individually by petitioners and their son Byron. Each time a customer rented a videotape, petitioners recorded the amount paid on an invoice. Most of the transactions involved cash. Petitioners used either a cash register or a cash drawer in their stores. Petitioners totaled the amount in the register or drawer at the end of each day, recorded that amount, and discarded the cash register tape of their daily receipts. Petitioners used cash from the stores to pay both business and personal expenses, but did not keep records of these transactions. Petitioners did not516 deposit all business receipts into bank accounts and did not record the amounts that were deposited. The income and expenses of all the stores were reported on Schedules C attached to petitioners' income tax returns. For the years in issue, petitioners reported income (loss) from the businesses as follows: Schedule C19861987 Carlton Arms Store$ 10,723.96 ($ 110.87)Arcadia store2,092.29 -- 14th Street store(4,171.69)-- 26th Street store111.42 8,819.87 8,755.98 8,709.00 Petitioners did not report any other source of income and did not receive any nontaxable or excludable income, gifts, inheritances, or legacies during the years in question. DiscussionRespondent's determinations are presumed correct, and petitioners bear the burden of proving otherwise. Rule 142(a); . However, respondent has the burden of proof with respect to the additions to tax for fraud. Sec. 7454(a); Rule 142(b). Cost of Goods SoldIn 1986 and 1987, petitioners claimed cost of goods sold in the amounts of $ 3,308 and $ 43,341, respectively. Respondent determined that petitioners517 are not entitled to these amounts as the beginning and ending inventory amounts had not been established. Petitioners presented no evidence on this issue; consequently, we sustain respondent's determination. Rent and Electric ExpensesIn 1986, petitioners claimed $ 3,732 on Schedule C as a rent expense for the 26th Street store. Respondent disallowed $ 669 of the deduction, determining that petitioners failed to substantiate any amount of the expense in excess of $ 3,063. Similarly, petitioners claimed a total of $ 3,722 on their Schedules C as electric expenses in 1986. Respondent disallowed $ 209 of the deduction, thus allowing $ 3,513. 1 Petitioners did not present any evidence on these issues; thus, we sustain respondent's determinations. 518 Unreported IncomeAfter making the Schedule C adjustments discussed above, respondent determined that petitioners' books and records were inadequate to properly reflect their income and accordingly, using the source and application of funds method, reconstructed petitioners' income for 1986 and 1987. Thus, respondent determined not only that petitioners had failed to substantiate the cost of goods sold and deductions for rent and electric expenses, but also that their reported income for 1986 and 1987 should be increased by amounts determined by the source and application of funds method. In the absence of adequate books and records, it is well established that the Commissioner has the authority to compute the income of a taxpayer by whatever method, in the opinion of the Commissioner, clearly reflects income. Sec. 446(b); . The source and application of funds method is an acceptable method. , affd. per curiam on another issue ; ,519 affd. in part, revd. in part and remanded ; . A source and application of funds analysis is accomplished by comparing known cash expenditures with known receipts. If a taxpayer's expenditures for a given year exceed reported income and the source of funds is unexplained, the excess expenditures represent unreported income. The method is based on the assumption that the amount by which a taxpayer's application of funds during a taxable period exceeds his reported sources of funds for that same period has taxable origins. The taxpayer may show that the excess application is attributable to such nontaxable items as loans, gifts, or cash on hand at the beginning of the period. ; . At trial, the Court ruled that petitioners were collaterally estopped from arguing that they had a cash hoard in 1986 and 1987. 2520 Exhibits A and A1 of the notice of deficiency reflect the following computations: 19861987Application of FundsIncrease in bank account balances: The Bank of Bradenton $ 133.56 $ 1,627.27 Florida Federal #70530008816 175.65-- Coast Federal 411.61-- Key Savings Bank -- 19.00Crossland Savings #0480019785 781.56637.641 Increase in ending inventory 8,974.61-- Personal living expenses: House payments 6,800.007,200.00Downpayment - residence 3,000.00-- Household operations 289.00289.00House furnishings 751.00751.00Utilities 1,487.001,487.00Food 3,002.003,002.00Apparel and services 1,003.001,003.00Transportation Gas and oil 1,111.001,111.00All other 2,687.002,687.00Health care 863.00863.00Other expenditures 2,374.002,374.00Insurance 280.00280.00Personal taxes 2,626.002,626.00Payments to Chrysler First 3,010.942,823.96Payments to Cooper Finance 403.09322.68Payments to Mutual Federal 10,803.768,313.78Downpayment - automobile -- 2,200.00Monthly payments on automobile -- 2,744.80Total applications50,967.7842,362.13Sources of IncomeDecrease in bank account balances: First State Bank of Arcadia 982.0117.96Crossland Savings #9550214826 2,386.21-- Florida Federal #70530007658 1,265.7852.09Florida Federal #70530008816 -- 175.65Coast Federal -- 411.612 Decrease in inventory -- 14,784.35Adjusted gross income reported on your return 8,755.988,709.00Total sources of income13,389.9824,150.66Total applications less total sources37,577.8018,211.47Unreported income (rounded)37,578.0018,211.00521 These amounts of unreported income were then carried over to Schedule 1 of the notice of deficiency, entitled "Statement -- Income Tax Changes", as follows: Taxable Years EndedDec. 31 Dec. 3119861987 1.Adjustments to incomea. Unreported income$ 37,578$ 18,211b. Cost of goods sold3,30843,341c. Schedule C - Electric expense209-- d. Schedule C - Rent expense669-- e. Exemptions2,160-- 2.Total Adjustments43,92461,552While respondent's use of the source and application of funds method was reasonable in light of petitioners' failure to present books and records, respondent has erred in her calculation of petitioners' unreported income. The problem stems from respondent's use of petitioners' adjusted gross income as shown on their returns as a source of funds in the source and application of funds analysis. Having made adjustments to the amounts claimed on petitioners' Schedules C, respondent failed to take those corrections into account when using petitioners' adjusted gross income as a source of funds. For example, respondent disallowed the amounts petitioners claimed on Schedules C in each year for the cost 522 of goods sold. However, respondent then failed to take into account for purposes of the source and application of funds analysis that the result of this disallowance is an increase in petitioners' adjusted gross income in each year and a concomitant increase in petitioners' sources of funds. The same is true of respondent's disallowance of a portion of the deductions in 1986 for rent and electric expenses. For 1986, the result of these computational errors is that petitioners' unreported income is larger than it should be. Petitioners' adjusted gross income for 1986 should be increased by $ 4,186, which is the total of the disallowances for the cost of goods sold, rent, and electric expense. For 1987, petitioners' adjusted gross income should be increased by $ 43,341, the amount disallowed for cost of goods sold. The result of this correction to the calculation for 1987 is that applications of funds no longer exceed sources; thus, there is no unreported income for 1987. However, there still remains the increased income resulting from the Schedule C adjustments. Respondent's concessions regarding the Crossland Savings accounts also alter the amount of unreported income in 1986. 523 Removing the Crossland Savings accounts from the unreported income calculations causes an increase of $ 1,604.65 in the amount of unreported income for 1986. For 1987, removal of the Crossland Savings accounts simply eliminates an application of funds, and consequently, does not change the result of the source and application of funds analysis. Petitioners stipulated some of the applications of funds listed in the notice of deficiency, but would not stipulate the amounts respondent determined for household operations, house furnishings, utilities, food, apparel and services, transportation, health care, and other expenditures, which respondent determined based on U.S. Bureau of Labor Statistics, Consumer Expenditure Survey: Interview Survey, 1982-83, Bulletin 2246 (1986). In the First Interrogatories to Petitioners, respondent requested that petitioners explain why the amounts were incorrect and provide amounts they believed to be correct. Nevertheless, petitioners did not provide any explanation for their rejection of those amounts, nor did they provide any alternative amounts, and they did not present any argument on this issue at trial. Petitioners did not submit a brief. 524 We find that the figures respondent used in arriving at petitioners' personal expenditures are proper. Other than to say that they believed respondent had miscalculated their tax liability, petitioners presented no testimony or other evidence regarding their alleged understatements of income. As the corrected computations for the source and application of funds analysis fail to demonstrate that there was any unreported income for 1987, respondent's determination that petitioners had unreported income in that year is not sustained. For 1986, however, we find that petitioners failed to carry their burden of proof, and sustain respondent's determination that petitioners had unreported income, although in a reduced amount. The foregoing is summarized as follows: 19861987SCHEDULE C ADJUSTMENTS:Schedule C income as reported on return$ 8,755.98 $ 8,709.00 Adjustments to Schedule C:Cost of goods sold 3,308.00 43,341.00 Electric expense 209.00 -- Rent 669.00 -- Corrected adjusted gross income fromSchedule C (rounded) 12,942.00 52,050.00 UNREPORTED INCOME:ApplicationsTotal applications per notice of deficiency 50,967.78 42,362.13 Less Crossland Savings accounts (conceded by respondent) (781.56)(637.64)Total corrected applications 50,186.22 41,724.49 SourcesDecrease in bank account balances (Crossland Savings accounts removed) 2,247.79 657.31 Decrease in inventory -- 14,784.35 Corrected adjusted gross income from Schedule C 12,942.00 52,050.00 Total corrected sources 15,189.79 67,491.66 Total applications less total sources34,996.43 (25,767.17)Unreported income (rounded)34,996.00 -- SUMMARY:Corrected adjusted gross income fromSchedule C 12,942.00 52,050.00 Unreported income34,996.00 -- Corrected adjusted gross income47,938.00 52,050.00 Less exemptions(4,320.00)(3,800.00)Corrected taxable income43,618.00 48,250.00 525 Self-Employment TaxRespondent determined that Mr. Cheesman received self-employment income in 1986 and 1987 in the amounts of $ 50,520 and $ 36,720, respectively. Respondent determined that Mrs. Cheesman received self-employment income in 1987 of $ 33,542. Petitioners did not present any evidence to demonstrate that they were not liable for self-employment taxes. Therefore, while the amounts of self-employment income need to be adjusted to reflect our findings with respect to petitioners' unreported income, we hold that Mr. Cheesman is liable for such tax in 1986 and 1987, and Mrs. Cheesman is liable for such tax in 1987. Additions to Tax for FraudThe next issue for decision is whether petitioners are liable for the addition to tax for fraud under section 6653(b) for 1986 and 1987. To establish fraud, respondent must prove by clear and convincing evidence that: (1) An underpayment exists for 1986 and 1987, and (2) petitioners intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent collection of such taxes. , affg. ;526 . In order to prove an underpayment, the first prong of the fraud test, respondent is not required to establish the precise amount of the deficiency. , affd. ; . However, respondent cannot discharge her burden by simply relying on the taxpayer's failure to prove error in the determination of the deficiency. ; If respondent establishes that any portion of an underpayment is attributable to fraud, the entire underpayment is to be treated as attributable to fraud, except with respect to any portion of the underpayment that petitioners establish is not attributable to fraud. Sec. 6653(b)(2). Petitioners failed to keep books and records that could establish the exact amounts of income earned by the businesses. They primarily received cash in operating their businesses 527 and paid business expenses with cash. They regularly used business receipts to pay personal expenses without maintaining any records. We hold that respondent has demonstrated that the likely source of the underpayment was the videotape rental businesses operated by petitioners. Under the second prong of the fraud test, respondent must prove by clear and convincing evidence that petitioners had the requisite fraudulent intent. Mr. Cheesman previously was found to have intentionally failed to report taxable income from petitioners' businesses in 1984 and 1985. . In the instant case, Mr. Cheesman testified that petitioners' business practices in 1986 and 1987 were approximately the same as they were in 1984 and 1985. We find that very little had changed. As in the earlier years, petitioners dealt extensively in cash, failed to maintain adequate books and records, and discarded cash register tapes. Each of these facts indicates an intent to conceal income. See ,528 affg. ; , affg. in part ; . Petitioners said little in their own defense, and when asked why they did not produce records to demonstrate that respondent's calculations were incorrect, petitioners' answers were evasive. Finally, we find that petitioners consistently and substantially have understated their income. This is strong evidence of intent to evade taxes. , affg. . We conclude that respondent has satisfied her burden of proof with respect to the addition to tax for fraud for 1986 and 1987. Addition to Tax for Substantial UnderstatementIf there is a substantial understatement of income tax for a taxable year, section 6661(a) imposes an addition to tax equal to 25 percent of the underpayment attributable to that understatement. An understatement exists where the amount of tax529 shown on the taxpayer's return is less than the amount required to be shown on his or her return. Sec. 6661(b)(1)(A). In the case of individuals, an understatement is substantial if it exceeds the greater of $ 5,000 or 10 percent of the tax required to be shown. Sec. 6661(b)(1)(A). The amount of the understatement is reduced by items with respect to which the taxpayer had substantial authority for his or her position or for which relevant facts affecting the tax treatment were adequately disclosed. Sec. 6661(b)(2)(B). Respondent determined that petitioners substantially understated their income taxes in 1986 and 1987. Petitioners have not shown that there was substantial authority for the treatment of these items or that the facts affecting the tax treatment of these items were adequately disclosed. In addition, petitioners do not claim that respondent should have waived the addition to tax under section 6661(a) pursuant to section 6661(c). Therefore, unless the recomputation of tax, taking into account respondent's concessions and our opinion, reduces the underpayment to less that the statutory floor for either year, the additions to tax under section 6661 will apply. To530 reflect the foregoing and concessions by the parties, Decision will be entered under Rule 155.Footnotes1. Fifty percent of the interest due on $ 14,477.↩2. Fifty percent of the interest due on $ 22,483.↩1. It is unclear from the record why respondent determined that petitioners' claimed electric expense for 1986 totaled $ 3,385, which is the total for only three stores, apparently omitting $ 337 claimed on the Schedule C for the 26th Street store. We will assume that respondent did not intend to disallow any portion of the electric expense deduction for the 26th Street store.↩2. Petitioners had an opportunity to litigate the cash hoard issue when it was raised with respect to similar facts in a case involving their 1984 and 1985 tax years. . The Court in that case concluded that "petitioners' claim of a cash hoard is incredible, implausible, and contrary to the objective evidence." Id.↩1. We find it odd that respondent determined that there was an increase in ending inventory for 1986 and a decrease in inventory for 1987, in view of the fact that respondent disallowed the amounts petitioners claimed for cost of goods sold, because beginning and ending inventory amounts had not been established. However, as petitioners have not challenged respondent's determinations on this issue, respondent's determinations are sustained.↩2. See supra note 1.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624128/	Merlin E. Mitton v. Commissioner.Mitton v. CommissionerDocket No. 66744.United States Tax CourtT.C. Memo 1959-40; 1959 Tax Ct. Memo LEXIS 206; 18 T.C.M. (CCH) 191; T.C.M. (RIA) 59040; February 27, 1959206 Merlin E. Mitton, pro se., 1002 Woodlawn Avenue, Beckley, W. Va. Mark H. Berliant, Esq., for the respondent. TRAINMemorandum Findings of Fact and Opinion TRAIN, Judge: The respondent determined deficiencies in the petitioner's income tax in the years and amounts as follows: YearDeficiency1953$196.48195484.201955130.39The issues are (1) whether the respondent erred in his determination of the basis for depreciation of a rental dwelling house, and (2) whether the respondent erred in his disallowance of petitioner's deduction of depreciation on an automobile. Findings of Fact The petitioner resides at Beckley, West Virginia. He filed joint income tax returns with his wife, Mary E. Mitton, for the calendar years 1953, 1954, and 1955 with the director of internal revenue, Columbus, Ohio. The rental dwelling house with respect to which the basis for depreciation is in question is located in Marion, Ohio. The petitioner claimed no depreciation on the house on the returns as filed. The respondent, having determined the basis of the property, including both the land and the improvements situated thereon, made an allocation of basis207 as between the house and the land and determined depreciation allowable with respect to the house in accordance with that allocation. At no time did the petitioner furnish the respondent with any information which would have assisted him in making the allocation involved. The petitioner was reimbursed by his employer at the rate of seven and one-half cents per mile for the use of his automobile. The depreciation claimed by the petitioner in addition was disallowed by the respondent in its entirety. Opinion The petitioner maintains primarily that the respondent's determination was in error because it was discriminatory. The alleged discrimination is grounded upon the petitioner's assertion that his returns were selected for audit only because he was an employee of the Internal Revenue Service. However, for whatever reason the respondent may have selected the petitioner's returns for audit, the petitioner has introduced no evidence whatsoever to establish that the respondent's determinations were in error. He claims that the respondent's allocation of basis for purpose of depreciation of the dwelling house was based upon purely arbitrary assumptions. However, such evidence as*208 there is on this point indicates simply that the respondent made the best estimate possible in the absence of any information from the petitioner. That the respondent's determination was based upon assumptions and estimates was doubtless true. He had no other alternative. The petitioner offered no evidence to show that the assumptions and estimates which the respondent used were unreasonable, nor did he offer any evidence that would suggest a different allocation. With respect to the automobile depreciation, the petitioner introduced no evidence whatsoever. The petitioner here has failed to meet his burden of proof. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624129/	TIMES-PICAYUNE PUBLISHING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Times-Picayune Publishing Co. v. CommissionerDocket Nos. 48892, 49539.United States Board of Tax Appeals27 B.T.A. 277; 1932 BTA LEXIS 1092; December 9, 1932, Promulgated 1092 Expenditures made by petitioner in maintaining a chair in journalism in Tulane University for the purpose of bettering its service to the public as a news gatherer and dispenser, which were reasonably expected to bring returns to it in dollars and cents, constituted deductible items of expense under section 234(a) of the Revenue Act of 1926. Esmond Phelps, Esq., for the petitioner. John H. Pigg, Esq., for the respondent. LOVE277 These proceedings are for the redetermination of deficiencies in income tax in the amount of $1,554.07 for the year 1927 in Docket No. 48892, and $1,225.51 for the year 1928 in Docket No. 49539. There is only one contested issue involved and that issue is whether or not an expenditure of $6,000, made by petitioner in each of the two years herein involved for the purpose of maintaining a chair, or department of journalism, in Tulane University, is deductible as an ordinary and necessary expense item. The facts are not controverted. The two cases were consolidated for hearing. FINDINGS OF FACT. The petitioner is a corporation, with its principal office and domicile in New Orleans, Louisiana. Its business1093 is the publication of a 278 daily newspaper in New Orleans, known as the Times-Picayune. Its circulation is about 100,000 daily, and 139,000 Sunday. Its circulation is much larger than any other paper published in New Orleans. It is the oldest paper in New Orleans. As a news gatherer and dispenser, it serves the public in the City of New Orleans and its vicinity in a radius of about fifty miles. Tulane University is a long established institution of learning, with a student enrollment of about three thousand. Prior to 1926 it had not maintained a chair of journalism and apparently no facilities for taking such a course were furnished students by any school in that city. The profit-producing factor of a newspaper is its advertisements. Its advertisements in volume and in rates of prices paid are very largely determined by the size of its circulation. The size of its circulation depends on the quality of service which it renders the public as a news gatherer and dispenser. That service depends upon the efficiency of the reporters. Prior to 1926 petitioner had experienced trouble in procuring efficient reporters and felt the need of a school that would give such1094 training. In 1926 petitioner's board of directors directed its vice president, A. P. Howard, to negotiate with Tulane University in an effort to establish and maintain such a school. He tried to get the University to maintain such a school at its own expense, but was not successful. Finally, he effected an agreement and entered into a contract between the University and petitioner, by the terms of which petitioner agreed to pay to the University $6,000 per annum for a period of ten years, beginning in 1926, and the University agreed to establish and maintain during that period such a school. That agreement was carried out and petitioner made the payments annually, and the University maintained the school. In its tax returns for 1927 and 1928, petitioner treated the $6,000 payment as one of its ordinary and necessary expense items, and deducted such amount from its gross income. The Commissioner refused to allow the deduction, and charged the amount back into taxable income, which gave rise to most, though not all of, the deficiencies for those years. The University used the $6,000 in question solely for the maintenance of that chair of journalism, and the $6,000 per annum1095 was the only income that department of the University received. OPINION. LOVE: The sole question here involved is whether or not the annual payment by petitioner of $6,000, in the manner and for the purposes disclosed in our findings of fact, is deductible from gross income as an ordinary and necessary expense item, under section 234(a) of the 279 Revenue Act of 1926 (which is the same as section 23(a) of the Revenue Act of 1928). The evidence in the case clearly justifies the conclusion that petitioner was not actuated in making the payments herein described by philanthropic or charitable motives. It was a clear, cold-blooded business proposition on the part of the petitioner's board of directors. They expected to get returns of value in dollars and cents. In their judgment it was a sound business proposition, and subsequent history seems to have proven the wisdom of their action. While it is true that, when the question here involved is to be decided each case must to a very large extent be viewed separately and decided on its own merits, and no effort be made to lay down a general rule, yet we believe it may be safely stated that when the board of directors, 1096 in the exercise of their sound, conservative judgment, decide that an expenditure of a sum of money will bring actual money returns to the corporation, though such returns may come to the corporation through indirect channels, we believe that such expenditures are within the purview and spirit of the statute and should be allowed as deductions. We believe such to be the clear import declared by the court in the case of Harris & Co. v. Lucas, 48 Fed.(2d) 187. In that case, the court, among other things, said: It is evident that the words "ordinary" and "necessary" in the statute are not used conjunctively, and are not to be construed as requiring that an expense of a business to be deductible must be both ordinary and necessary, in a narrow, technical sense. On the contrary, it is clear that Congress intended the statute to be broadly construed to facilitate business generally, so that any necessary expense, not actually a capital investment, incurred in good faith in a particular business, is to be considered an ordinary expense of that business. This in effect is the construction given the statute by the Treasury Department and the courts. While the Treasury1097 Department has held as a general rule that only expenditures commonly recognized as operating expenses are deductible, the rule has been applied with great liberality, and practically any reasonable expenditure that has benefitted the business has been allowed to be deducted as an expense * . * * Of course, each case depends for decision upon its own facts, and it would be impossible to formulate a uniform rule to govern all cases. Generally speaking, business men should be free to exercise their ingenuity in devising methods of increasing business. This rebounds to the benefit of the government by creating more taxable income. Considering the above stated examples, it would seem clear by analogy that petitioner was entitled to deduct the amounts paid to its former creditors. It was under no legal obligation to make the payments, and they were made entirely to promote the business by restoring its credit with the wholesalers from whom it purchased goods. Practically to the same purport is the case of American Rolling Mills v. Commissioner, 41 Fed.(2d) 314. Also 1098 Corning Glass280 Works v. Lucas, 37 Fed.(2d) 798; Rodeo-Vallejo Ferry Co.,24 B.T.A. 936">24 B.T.A. 936, 941; Old Mission Portland Cement Co.,25 B.T.A. 305">25 B.T.A. 305. Since the issuance of the deficiency notices here involved, the Commissioner has liberalized his policy with respect to such questions as here under consideration. See I.T. 2653, Internal Revenue Bulletin No. 44, dated October 31, 1932, p. 6. The deficiencies should be redetermined and the payment made by petitioner to Tulane University for each of the years 1927 and 1928 allowed as an expense deduction from gross income. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624130/	JAMES R. FORBES & MARY E. FORBES, ET AL., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentForbes v. CommissionerDocket Nos. 7723-86, 1567-87United States Tax CourtT.C. Memo 1991-214; 1991 Tax Ct. Memo LEXIS 239; 61 T.C.M. (CCH) 2622; T.C.M. (RIA) 91214; May 16, 1991, Filed 239 Appropriate orders and decisions will be entered. Michael S. Noble, for the respondent. DAWSON, Judge. NAMEROFF, Special Trial Judge. DAWSONMEMORANDUM OPINION These cases were assigned to Special Trial Judge Larry L. Nameroff pursuant to section 7443A(b) 1 and Rule 180 et seq. The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE NAMEROFF, Special Trial Judge: In docket No. 7723-86, respondent determined deficiencies in Federal income taxes and additions to tax of petitioner James R. Forbes as follows: Additions to TaxYearDeficiencySection 6653(b) 1979$ 102,369$ 51,1851980339,141 169,5711981325,259 162,630By separate notice of deficiency, respondent determined a deficiency with respect to Mary E. 240 Forbes for the taxable year 1981 in the amount of $ 325,259. A stipulation of settlement has been filed reflecting that Mary E. Forbes and respondent have resolved all issues with respect to her notice of deficiency. Accordingly, "petitioner" will hereinafter refer to James R. Forbes. In docket No. 1567-87, respondent determined a deficiency in petitioner's Federal income tax for the taxable year 1982 in the amount of $ 42,721, plus additions to tax under section 6653(b)(1) in the amount of $ 21,361, section 6653(b)(2) in the amount of 50 percent of the interest due on the deficiency of $ 42,721, and section 6661(a) in the amount of $ 4,272. In each docket number, petitioner alleged that the notices of deficiency were barred by the statute of limitations and, accordingly, each answer contained respondent's allegations in support of his contention that the statute of limitations does not bar assessment or collection of the income tax deficiencies. In docket No. 7723-86, respondent alleged that agreements were executed by petitioner and respondent, extending the period of time for assessment to include the date of the mailing of the notice of deficiency. In docket No. 1567-87 241 respondent alleged that the statute of limitations does not bar assessment and collection of the deficiency in income tax for 1982 because the petitioner filed a false or fraudulent income tax return. In neither docket did petitioner file a Reply nor did respondent file a motion under Rule 37(c). In addition, in his answer in docket No. 1567-87, pursuant to section 6214(a), respondent claimed an increase in the addition to tax under section 6661(a) from 10 percent of the underpayment, as set forth in the notice of deficiency, to 25 percent of the underpayment, as provided in section 6661(a), for additions to tax assessed after October 21, 1986. Accordingly, respondent asks the Court to approve an addition to tax under section 6661(a) in the amount of $ 10,680.25, rather than in the amount of $ 4,272 as determined in the notice of deficiency. At the time the petitions in these cases were filed, petitioner resided in Laguna Beach, California. Pursuant to notice to the parties, these cases were set for trial during the Court's trial session in Los Angeles, California, on January 28, 1991. On that date, petitioner failed to appear. Respondent filed a "Motion to Hold the Petitioner242 in Default and for Entry of Decision." Respondent asks that we enter decisions against petitioner for the deficiencies and additions to tax as determined (or redetermined). Dismissal of a case is a sanction resting in the discretion of this Court. . It is well settled that a taxpayer's failure to appear at trial can result in a dismissal of the action against the taxpayer for failure to prosecute, in actions where the taxpayer seeks the redetermination of a deficiency. ; , affd. without opinion . In view of petitioner's failure to appear when his case was called for trial, we will grant respondent's motion to dismiss with respect to the deficiencies and those additions to tax, as determined in the deficiency notices, for which petitioner bears the burden of proof. The expiration of the period of limitation on assessment is an affirmative defense, and the taxpayer raising the issue must specifically plead it and carry the243 burden of proving its applicability. Rules 39, 142(a). . To establish this defense, the taxpayer must make a prima facie case establishing the filing of his return, the expiration of the statutory period, and receipt or mailing of the notice after the running of the period. ;; . Where the taxpayer pleading the defense makes such a showing, the burden of going forward with the evidence shifts to the Commissioner, who must then introduce evidence to show that the bar of the statute is not applicable. ; . Where the Commissioner makes such a showing, the burden of going forward then shifts back to the taxpayer to show that the alleged exception to the expiration of the period is invalid or otherwise inapplicable. ;244 the burden of proof, i.e., the burden of ultimate persuasion, however, never shifts from the party who pleads the bar of the statute of limitations. ;In view of petitioner's failure to appear at trial, he has failed to show the dates of the filing of his returns. Accordingly, the burden of going forward never shifted to respondent. Therefore, we need not consider petitioner's statute of limitations claims on their merits, and we may enter a decision for the deficiencies in income tax and the addition to tax under section 6661(a), per the notices of deficiency, without the need for further discussion. We now turn to the issues pertaining to the additions to tax for fraud for which respondent bears the burden of proof. Respondent's motion asks that we hold petitioner in default. It is clear to us that petitioner has failed to proceed within the meaning of Rule 123(a). Petitioner has intentionally abandoned his case and we find him in default. "Entry of a default has the effect of admitting all well-pleaded facts in respondent's answer, and a default judgment must be supported by245 respondent's well-pleaded facts." . In , affd. , we held that "the Commissioner's pleadings must allege specific facts sufficient to sustain a finding of fraud before he will be entitled to a decision that includes an addition to tax for fraud upon the failure of a taxpayer to appear for trial." In his answer in docket No. 7723-86, respondent denied all substantive allegations of the petition and further alleged: 10. FURTHER ANSWERING the petition, and in support of the determination that a part of the underpayments of tax required to be shown on petitioner James R. Forbes' income tax returns for the taxable years 1979, 1980 and 1981 are due to fraud, the respondent alleges: (a) During each of the taxable years 1979, 1980 and 1981, petitioner James R. Forbes was engaged in various sales and promotion activities generally involving mining and minerals. (b) Petitioners resided in the Denver, Colorado area at the time of filing their 1979, 1980 and 1981 tax returns. (c) A preponderance of the 246 books and records relating to petitioner James R. Forbes' business activities were maintained at the Offices of Terra Oil Corporation located at 8000 East Girard, Suite 304, Denver, Colorado. (d) During the taxable years 1979, 1980 and 1981 petitioners receive [sic] items of income which were not reported on their income tax returns for said years summarized as follows:197919801981Cash diverted from Rocky MountainResources, Inc.$ 159,000.00Cash diverted from Terra OilCorporation$ 115,000.00$ 37,719.0058,901.00Other personal expenses paidby Terra Oil Corporation83,341.0078,000.00Terra Oil loan to Janus, Ltd.-cash diverted225,000.00T-Minerals loan to Jason, Ltd.-cash diverted75,000.00Jason, Ltd. deposit-cash diverted80,000.00Aztecca Exploration, Ltd.funds diverted201,532.00$ 198,341.00$ 495,719.00$ 419,433.00(e) In each of the taxable years 1979, 1980 and 1981 petitioners claimed deductions for carryover of 1976 net operating losses of approximately 278 partnerships related to Cal-Am Corporation, the amounts of the deductions being $ 3,323,024.00 for 1979, $ 2,499,309.00 for 1980 and $ 2,437,372.00247 for 1981, but petitioners realized tax benefits from these deductions only to the extent they had reported income on their returns with the remaining unused deductions carried over to the subsequent years. (f) Petitioner James R. Forbes fraudulently and with intent to evade taxes for his taxable years 1979, 1980 and 1981, filed false income tax returns for said years that omitted income in the amounts of $ 198,341.00 for 1979, $ 495,719.00 for 1980 and $ 419,433.00 for 1981. (g) Petitioner James R. Forbes fraudulently and with intent to evade taxes for his taxable years 1979, 1980 and 1981, carried over and deducted purported 1976 net operating losses of partnerships related to Cal-Am Corporation when he well knew that no such losses had been incurred. (h) On November 26, 1980, petitioner James R. Forbes entered an agreement with the Los Angeles U.S. Attorney's office in which he was granted immunity from federal prosecution, "based upon acts, transactions, or practices in which he may have participated in the course of his employment with Cal-Am Corporation", and thereafter provided testimony concerning the operations of that firm and the activities of the principals. (i) Petitioner248 James R. Forbes' fraudulent omission of specific items of income and fraudulent deduction of losses he knew had not been incurred are part of a three years [sic] pattern of intent to evade taxes. (j) The petitioners understated their taxable income on their income tax returns for the taxable years 1979, 1980 and 1981 in the amounts of $ 3,528,325.00, $ 2,981,587.00 and $ 2,913,646.00, respectively, but the returns as filed reported negative taxable incomes in the amounts of $ 3,335,093.00, $ 2,449,563.00 and $ 2,395,572.00, respectively, with the result that the effective understatement of taxable income was $ 193,232.00 for 1979, $ 532,024.00 for 1980 and $ 518,074.00 for 1981. (k) The petitioners understated their income tax liabilities on their income tax returns for the taxable years 1979, 1980 and 1981 in the amounts of $ 102,369.00, $ 339,141.00 and $ 325,259.00, respectively.(l) A part of each deficiency in income tax for taxable years 1979, 1980 and 1981 is due to fraud on the part of petitioner James R. Forbes with intent to evade taxes.In docket No. 1567-87 in his answer, respondent denied all substantive allegations in the petition and further alleged: 7. 249 FURTHER ANSWERING the petition and in support of the determination that a part of the underpayment of tax required to be shown on petitioner James R. Forbes income tax return for the taxable year 1982 is due to fraud, the respondent alleges: a. During the taxable year 1982, petitioner James R. Forbes was engaged in various sales and promotion activities generally involving mining and minerals. b. Petitioner resided in the Denver, Colorado area at the time of filing his 1982 tax return. c. During the taxable year 1982, petitioner received items of income which were not reported on his income tax return for 1982, these items being summarized as follows:Personal expenses paid by Rocky MountainResources, Inc.$ 4,252.78Cash diverted from Terra Oil Corporation2,761.57$ 7,014.35d. On his 1982 income tax return, petitioner James R. Forbes claimed a deduction of $ 13,929.00 for home mortgage interest paid to Energo USA, Inc. when in fact there was no indebtedness in favor of Energo and no interest paid to Energo. e. On his 1982 income tax return, petitioner claimed a deduction for carryover of 1976 net operating losses of approximately 278 partnerships250 related to Cal-Am Corporation, the amounts of the deduction being $ 2,202,780, but petitioner realized tax benefits from this deduction only to the extent that he reported income on his return and the remaining unused deduction would have been carried over to the subsequent years. f. Petitioner James R. Forbes fraudulently and with intent to evade taxes for his taxable year 1982 filed a false income tax return that omitted income in the amount of $ 7,014.35. g. James R. Forbes fraudulently and with intent to evade taxes for his taxable year 1982 filed a false income tax return for said year on which he claimed a deduction of $ 13,929.00, when he well knew that no interest had been paid. h. James R. Forbes fraudulently and with intent to evade taxes for his taxable year 1982 carried over and deducted purported 1976 net operating losses of partnerships related to Cal-Am Corporation when he well knew that no such losses had been incurred. i. On November 26, 1980, petitioner James R. Forbes entered an agreement with the Los Angeles United States Attorney's Office in which he was granted immunity from federal prosecution, "based upon acts, transactions, or practices in which he251 may have participated in the course of his employment with Cal-Am Corporation," and thereafter provided testimony concerning the operations of that firm and the activities of the principals. j. Petitioner James R. Forbes' fraudulent omission of specific items of income and fraudulent deduction of losses he knew he had not incurred are part of a four year pattern of intent to evade taxes. k. Petitioner understated his taxable income on his 1982 income tax return in the amount of $ 2,377,605.00 but the returns as filed reported a negative taxable income of $ 2,272,142.00 with the result that the effective understatement of taxable income for 1982 was $ 105,463.00. 1. Petitioner understated his income tax liability on his income tax return for the taxable year 1982 in the amount of $ 42,721.00. m. A part of the deficiency in income tax for the 1982 taxable year is due to fraud on the part of petitioner James R. Forbes with intent to evade taxes.Section 6653(b) for 1979 through 1981 and section 6653(b)(1) for 1982 provide for an addition to tax equal to 50 percent of an underpayment, if any portion of such underpayment was due to fraud. Section 6653(b)(2), for 1982, provides252 for an addition to tax in the amount of 50 percent of the interest on the portion of the underpayment attributable to fraud. Fraud is an intentional wrongdoing motivated by a specific purpose to evade a tax known or believed to be owing. , affg. a Memorandum Opinion of this Court; . Respondent has the burden of proof, and he must meet that burden by clear and convincing evidence. Section 7454(a); Rule 142(b); ; . Fraud is a factual question to be determined by an examination of the entire record. . The facts, as established through respondent's affirmative pleadings, lead us to conclude that respondent has proved fraud by clear and convincing evidence. 2 Petitioner received substantial amounts of unreported income, which is evidence of fraud. , affg. a Memorandum Opinion253 of this Court. Petitioner's failure to report substantial amounts of income continued over a 4-year period, which pattern of evasion is evidence of fraud. ; , affg. a Memorandum Opinion of this Court. Deliberately overstated deductions are another badge of fraud. . Petitioner also failed to appear at trial, an additional indication that he deliberately tried to conceal the true facts concerning his tax liability. . The well-pleaded facts in respondent's answers satisfy us that part of the underpayment for each year was due to fraud. For 1982, we hold that the entire underpayment was due to fraud. We sustain respondent as to the fraud issue. 254 Finally, we consider respondent's claim for the increased addition to tax under section 6661(a). Respondent has the burden of proof as to the increased addition to tax claimed pursuant to section 6214(a). Respondent's answer, in connection with the fraud issue, contained allegations that there was a substantial understatement of income tax (see section 6661(a) and (b)(1)(A)). In view of the allegations as to fraud, there can be no doubt that there is no "substantial authority" for petitioner's treatment of any item (section 6661(b)(2)(B)(i)), or that the treatment of any items of omitted income was "adequately disclosed" on the return (section 6661(b)(2)(B)(ii)). Therefore, respondent's answer in docket No. 1567-87 also contains well-pleaded facts supporting respondent's claim of an increased addition to tax under section 6661(a) for the taxable year 1982. We, therefore, sustain respondent's claim for an increased addition to tax in that regard. Appropriate orders and decisions will be entered. Footnotes1. All section references are to the Internal Revenue Code as amended and in effect for the years at issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩2. During the course of the proceedings of these cases, respondent had filed a motion under Rule 91(f) to have voluminous records deemed stipulated, which motion was granted. When the case was called at the calendar, respondent referred to these records both orally and in his trial memorandum. However, no specific request for findings had been made with regard to these records, and we have not conducted an audit thereof in order to support our finding of fraud in this case.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624131/	J. A. Byerly v. Commissioner. J. A. Byerly v. Commissioner. J. A. Byerly Trust, J. M. Beck, Mae Ward Byerly and George Carruthers, Trustees v. Commissioner.Byerly v. CommissionerDocket Nos. 463, 464, 465.United States Tax Court1944 Tax Ct. Memo LEXIS 326; 3 T.C.M. (CCH) 245; T.C.M. (RIA) 44090; March 21, 1944326 J. H. Amick, C.P.A., 809 Majestic Bldg., Detroit, Mich., for the petitioners. Philip M. Clark, Esq., for the respondent. STERNHAGEN Findings of Fact and Memorandum Opinion Deficiencies in income tax of J. A. Byerly were determined as follows: 1937, $18,990.63; 1938, $19,834.45; 1939, $39,821.86; 1941, $38,491.44. Byerly assails all the determinations because they attribute to him the income of a trust of which he was the settlor; and, as to the 1937 and 1938 deficiencies, because they are barred by the statute of limitations. Deficiencies in income tax were determined as to the J. A. Byerly Trust as follows: 1938, $6,046.14; 1939, $17,170.42; 1940, $33.69. These are assailed by the Trust; but it is agreed that, if the Trust income is not taxable to Byerly, it is taxable to the Trust, in which event, a deduction shall be made for taxes paid for the beneficiaries. Findings of Fact James A. Byerly, of Owosso, Michigan, is president of the J. A. Byerly Company, a Michigan corporation, organized in 1924 to take over his established business. The Corporation operates 41 retail food stores. Prior to December 31, 1935. Byerly held 16,990 of the 19,250 shares outstanding, the remaining327 2,260 shares being held, until some time in 1939, by five employees of the Corporation. A "Trust Indenture" dated December 31, 1935, was executed by Byerly creating the J. A. Byerly Trust. Mae Ward Byerly, his wife, Jens M. Beck and Carl O. Uhlman were named as trustees, and the beneficiaries were Byerly's wife and two sons, James Arthur, born November 27, 1920, and Robert William, born June 11, 1925. To the trustees Byerly transferred 8,100 shares of the Corporation. The Trust Indenture is as follows: "TRUST INDENTURE "THIS INDENTURE made at Owosso, Michigan, this 31st day of December, A.D. 1935, WITNESSETH: "WHEREAS, James Arthur Byerly of Owosso, Michigan, hereinafter sometimes called "Settlor", has, by diligent effort and prudent business methods, pursued by him throughout the past thirty-five years or more, accumulated a sizeable estate in his own right, consisting of Real Estate, Corporate Stock, a going business, etc., etc., and "WHEREAS, the several members of said James Arthur Byerly's immediate family have in the past assisted him greatly in the accumulation of said estate, and feeling grateful to them for such assistance, as well as having a desire to assist his two328 sons financially so that they may secure a start in business without the necessity of being subjected to the hardships, deprivations and menial toil which was the lot of said James Arthur Byerly when he was a young man, and "WHEREAS, Settlor's experience dictates the inadvisability of making substantial gifts to inexperienced young men unless the control and management of such gifts be properly safeguarded and directed by persons of more mature experience and judgment, "NOW, THEREFORE, I, James Arthur Byerly, in consideration of the above and in consideration of the love and affection that I hold for my wife, Mae Ward Byerly, and my sons, James Arthur Byerly, Jr., and Robert William Byerly, by these presents, do hereby set aside, give, assign and transfer to: "The Trustees of the 'J. A. Byerly Trust' Mrs. Mae Ward Byerly Jens M. Beck Carl O. Uhlman the following described property: 8100 shares of the Common Capital Stock of J. A. Byerly Company, a Michigan corporation, said shares having a present fair value of $ . TO HAVE AND TO HOLD, NEVERTHELESS, IN TRUST, for the use and benefit of the persons herein designated as Beneficiaries of this trust, and under the provisions, 329 conditions and limitations hereinafter set forth. "1. TRUSTEES: "Legal title and control of the property and all benefits that may accrue to said property, the subject matter of this Trust Indenture, shall at all times vest in and be under the exclusive control of the Trustees herein named, or their successors in trust, and for the purposes herein outlined, to-wit: "(a) The Trustees shall collect the income that may accrue to said property and shall have the right to sell, assign, transfer and convey any part or all of the corpus of the trust and benefits that may have accrued that have not been distributed, whether said trust res be real, personal or mixed, and shall have exclusive discretion in making investments or sales, and deal with said property when and if they may deem it prudent so to do, for the benefit of the trust. "(b) The Trustees shall pay all taxes and expenses and costs of administering the trust, and distribute the net income and principal arising therefrom as hereinafter directed. "(c) Out of the net income of the trust estate the Trustees shall pay to each of the beneficiaries his or her proper share of said net income from said trust estate in periodic payments330 to be determined by the Trustees, but in any event, not less than once in each calendar year, provided, however, that if in the better judgment of the Trustees they deem it advisable not to make payments to the Beneficiaries during the calendar year, but to hold such income, or any part thereof, or make investments for their benefit, the Trustees shall then make credits to the account of each Beneficiary of that amount which would have been paid to each Beneficiary had payment been made, but not less than once in each calendar year. "(d) In the vent that a vacancy occurs of a Trustee, either by death, resignation, legal incapacity to act, or refusal to act, the remaining Trustees are emplowered to fill said vacancy by appointment, but said appointment shall be by unanimous consent of the remaining Trustee, or Trustees. "(e) The Trustees are emplowered to accept as additions to the corpus of the trust any and all gifts, whether they be given by the Settlor of this trust, or any other person, and said additions to said trust shall be dealt with and distributed in accordance with the provisions of this indenture, and in the manner outlined herein and for the benefit of the Beneficiaries331 herein named. "(f) The Trustees may at any time in the future in their uncontrolled discretion, with the written consent of each of the Beneficiaries then entitled to the benefits of the trust estate, convey any part or all of the corpus and/or income of this trust estate to James Arthur Byerly, the Settlor, or to his nominee, whereupon the trust in respect to such property as may be so transferred shall terminate and cease and the Trustees discharged from any further duty or responsibility in respect thereto. "(g) The Trustee shall receive, as their compensation for acting as Trustees, a sum equal to % of the yearly income of said trust. "2. BENEFICIARIES: "(a) The persons who are entitled to the use, benefit and enjoyment of the property herein conveyed, and the increment thereof, and who are to be known as Beneficiaries of this trust estate, are: My wife - Mrs. Mae Ward Byerly My son - James Arthur Byerly, Jr. My son - Robert William Byerly Each of the parties herein named as Beneficiary during their respective lifetime shall be entitled to an undivided one-third beneficial interest in the income as well as the corpus of the trust and the Trustees are directed to hold332 and pay to the Beneficiaries under the conditions herein elsewhere mentioned. "(b) In the event of the death of any of the Beneficiaries specifically named in Subdivision (a) of this paragraph, the beneficial interest of the deceased to share in this trust estate shall cease. All interests of the deceased shall remain as part of the trust res and the remaining Beneficiaries shall share in the interest formerly enjoyed by the deceased, and the Trustees are directed to treat such share as the beneficial income or property of the surviving Beneficiaries, share and share alike, provided, however, that should either James Arthur Byerly, Jr., or Robert William Byerly, or both, die during the life of this trust, leaving lawful issue, the Trustees are then directed to treat said lawful issue as it would have treated the deceased beneficial parent of said issue, and said issue shall be entitled to share and share alike, per stirpes, for that portion of the beneficial estate or corpus, in thesame manner that its deceased parent would have been entitled to had said parent been living. "(c) Should all of the persons named as Beneficiaries in subdivision (a) of this paragraph die leaving no 333 living lawful issue, then in that event this trust shall immediately terminate and the trust estate shall thereupon be distributed to Settlor, if he be living, otherwise to the legal heirs of Settlor, according to the Statutes of Descent and Distribution. "3. TERM OF THE TRUST: This trust shall continue in full force and effect during the lifetime of the last surviving Beneficiary named in paragraph (1) and until the youngest of any living lawful issue of said named Beneficiary reaches the age of twenty-one (21) years, unless sooner terminated in accordance with the provisions of this Trust Indenture, or by operation of law. "Witness my signature this 31 day of Dec., A.D. 1935. (Signed) James Arthur Byerly, SETTLOR." Beck is a director, vice-president and merchandise manager of the Corporation. His salary in 1937 was about $5,000 a year; in 1941, $10,000, and now is $12,000. When the trust was made, Byerly asked Beck, who was then manager of the business of the Corporation, to be a trustee because of his familiarity with the business of the Corporation the shares of which composed the corpus of the trust. Byerly, who is president, could remove him from his position with the Corporation334 at any time. Beck has handled no investments other than those of the Trust, except his own. Uhlman had been with the Corporation a long time and was secretary. He died in the latter part of December, 1940, and George Carruthers was then appointed trustee. Carruthers was appointed by the two trustees at Beck's suggestion, with Mrs. Byerly's acquiescence, because Carruthers had been associated with Beck in several businesses and was "very familiar with the food business." Carruthers was not a regular employee but was consulting accountant for the Corporation, for the Trust and for Byerly, individually, and prepared their income tax returns. The account books of the Trust were kept under the supervision of Carruthers by a bookkeeper employed by Byerly. None of the trustees has ever received any compensation for services as trustee. The meetings of the trustees were informal and at odd times; no minutes were kept. As a rule, matters were discussed by Beck and Uhlman (later Carruthers) at odd times during business hours, Mrs. Byerly being later informed, sometimes by telephone, and acquiescing in their plans. "There were not many decisions to be made and they were rather ordinary." 335 The accounts of the Trust were kept in a book containing general ledger, receipts, disbursements and beneficiary accounts. A bank account was kept with the State Savings Bank, and the trustees signed the checks. In 1936, at a cost of $116,160.56, the Trust acquired 4,639 additional Corporation shares from Byerly, after which, until January 1, 1942, Byerly held 4,251 shares. For the 4,639 shares, the Trust gave Byerly two notes, for $40,660.83 and $40,660.84, and cash for the balance. The notes were paid in 1937 and 1938. In 1939, the 2,260 Corporation shares held by employees were acquired by the Trust at a cost of $43,731. During 1941, 6,000 additional Corporation shares were acquired by the Trust from the Corporation at a cost of $60,000, and 4,000 shares were distributed to the beneficiaries - 1,334 to Mae Ward Byerly, and 1.333 to each of the two sons. The 25,250 shares then outstanding were held as follows: Numberof SharesByerly Trust16,999J. A. Byerly4,251Mae Ward Byerly1,334James Arthur Byerly, Jr1,333Robert William Byerly1,333Total25,250Mrs. Byerly had no separate investments of her own. In 1936, the Trust purchased mortgages at a cost336 of $25,447.38, and they were reduced each year to a balance of $4,414.50 as of December 31, 1941. The total income of the trust from December 31, 1935, to December 31, 1941, was $248,664.52. Of this amount, $3,676.70 was on deposit in the bank on December 31, 1941. The remainder of $244,987.82 had been expended as follows: 4,639 Byerly Company shares$116,160.562,260 Byerly Company shares43,731.006,000 Byerly Company shares60,000.00Mortgages of $25,447.38 of whichon December 31, 1941, remained4,414.50Federal income taxes paid for bene-ficiaries20,681.76$244,987.82As of December 31, 1935, each beneficiary account on the trust books was credited with $60,750, being one-third of the value of the 8,100 Corporation shares transferred by Byerly to the Trust. At the end of 1935 and of 1936, each of these accounts was credited with one-third of the annual income of the Trust; at the end of 1937, of 1938 and of 1939. the trust income, less federal income taxes paid for the account of the beneficiaries, was credited to the beneficiary accounts; at the end of 1940, of the trust income of $889.65, one-third was credited to each beneficiary account; and at the end337 of 1941, of $5,374.67 (the income over $40,000 representing the distribution of Corporation shares), one-third was credited to each beneficiary account. In 1938, 1939 and 1940, the Trust paid federal income taxes of $2,746,97, $2,690.39 and $7,506.27, for the account of the beneficiaries, but no actual distributions of trust income were otherwise made. Byerly's individual income tax return for 1937 was filed on March 15, 1938, and the return for 1938 was filed March 15, 1939. The notice of deficiency covering both years was mailed October 12, 1942. From the gross income shown on the 1937 return, the taxpayer omitted the trust income of $37,826.19; and from the gross income shown on the 1938 return, he omitted the trust income of $37,644.56. This was in each of those years an omission from gross income of more than 25 per cent of the amount of gross income stated on the return. Memorandum Opinion STERNHAGEN, Judge: 1. These two determinations of deficiency are recognized by the Commissioner to be inconsistent; and he concedes that the income of the Trust is to be taxed to the Trust only if it is held to be not attributable to Byerly. So the primary question is whether, under the338 doctrine of , the trust income is to be taxed to Byerly, the settlor. We think the Commissioner was correct in including the trust income in Byerly's income as income upon which he is taxable. The Trust is for the benefit of Byerly's wife and children, both of whom were minors when the Trust was made in 1935 and during all the years in question until November 27, 1941, when the older boy became twenty-one. Therefore the Trust was a means of reallocating the family income within the family group. From the evidence, we are convinced that, notwithstanding the existence of the Trust, Byerly was still in substantial control of the shares and income which were in the name of the trustees or credited on the trust books to the beneficiaries. Beck and Uhlman or Carruthers were named trustees by Byerly not for their independence of judgment as fiduciaries but because they were employees of the Corporation which he had set up and controlled. As witnesses, they made it quite clear that they knew little about the affairs of the Trust. They were at least tractable before Byerly's authority as president of the Corporation and indicated339 no separate discretion in the management of the Trust. Mrs. Byerly did not testify, and the testimony of Beck shows that she did not make any independent contribution to the management; she merely acquiesced in the informal "plans" suggested by her two co-trustees. She had no independent investments and was therefore entirely dependent upon her husband, the settlor of the Trust. The income of the Trust, which was all derived from the shares of the Corporation which Byerly controlled, was not distributed to the beneficiaries, except the amounts used to pay their income taxes and the amount ($40,000) used to buy from the corporation the 4,000 shares which were distributed in 1941. The evidence shows no act by the trustees to indicate any diversity of interest between Byerly and the Trust. As the Commissioner's brief puts it, "The power which Byerly retained is not to be determined by considering the niceties of construction of the trust instrument, but is established by the actualities of the factual situation." Byerly's interest after the creation of the Trust still blended imperceptibly with his individual ownership as it had been before. The income from his business was still the340 means whereby he assured the support and maintenance of his family, and he still controlled the business, even though a majority of the shares were in the name of the Trust. Indeed, by the terms of the indenture, he could receive the income himself if his wife and minor children consented. We are, therefore, of opinion upon the evidence that the Trust is not sufficiently substantial to require that the income from the shares in its name be not taxed to Byerly, and the determination is in that respect sustained. 2. Because of the omission of the trust income from gross income shown on the returns for 1937 and 1938, the question arises whether the statutory period of limitation expired when the deficiency notice was mailed. The mailing was after the expiration of three years, the period of Section 275(a), but before the expiration of five years, the period of Section 275(c). If the amount of the trust income omitted was more than 25 per cent of the gross income stated on the return, the five year period is open to the Commissioner. Both parties agree upon the amount omitted ($37,826.19 for 1937 and $37,644.56 for 1938), but disagree upon the amount stated on the return to be used 341 as the basis of the percentage. Therefore, mathematically, the five year period of Section 275(c) is open unless the gross income stated in the return is less than $151,304.76 for 1937 and $150,578.24 for 1938. The disagreement comes down to the taxpayer's contention that some items are being improperly excluded by the Commissioner from the amount of gross income stated in the return, and that if those items were counted the resulting figure would be sufficiently high to bring the omitted amounts below 25 per cent. On the face of Byerly's returns "Total Income" was shown as $65,734.32 for 1937 and $75,193.76 for 1938, and these are the figures which the Commissioner used as the basis of the 25 per cent, - obviously low enough for Section 275(c). The taxpayer contends that the basis of the percentage is $255,691.13 in 1937, and $224,949.76 in 1938, the result of computations from figures shown not on the face of the return but in schedules filed as part of it. Meanwhile, the Commissioner now in his brief says that the outside figures which may be used are $97,869.02 for 1937, and $110,002.46 for 1938, both figures being still less than enough to take the case out of Section 275(c). 342 Although we have doubt as to whether the application of Section 275(c) requires a detailed analysis of the schedules appended to the return, it is apparent that, even so, the taxpayer's position cannot be sustained. On the face of the return, Item 10, "Gain (or loss) from sale or exchange of property," is shown as a loss of $1,875.38. In the appended schedules the details show that it is the net result of combining a group of losses on transactions in securities amounting to $17,613.54 and a group of gains amounting to $14,210.48. The taxable amount of gains in the latter group by reason of the percentage provision of the statute (Section 117 (a)) is $13,154.19. Clearly, the taxpayer is entitled to have the $13,154.19 taxable gain included in his gross income for the purposes of Section 275(c), even though he may not include therein the amount of actual gain in excess of the taxable percentage. . $10,573.39 farm income was apparently omitted by the Commissioner from the gross income; but he does not adhere to this and we may take it to be incorrect. Item 9 on the face of the return shows $13,911.24 which the Commissioner343 used as an item of gross income, and he now concedes that this should be increased to $25,721.09. The taxpayer, after claiming that $144,269.42 is the amount of gross income from his bakery business, now reduces this to $66,831.73. This figure of $66,831.73 is still too high since it fails to subtract substantial amounts shown on the return as items of cost of goods sold, and such subtraction is necessary ( in order to avoid confusing gross receipts with gross income. It is apparent that with the adjustments of the later figures of $97,869.02 and $110,002.46 used by the Commissioner the ultimate figures are substantially less than the necessary $151,304.76 and $150,578.24, and that the omitted amounts are more than 25 per cent of the gross income stated in the returns. The determinations for 1937 and 1938 are not barred by the statute of limitations. Decisions will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624157/	Hazel Porter v. Commissioner.Porter v. CommissionerDocket No. 5839-64.United States Tax CourtT.C. Memo 1966-79; 1966 Tax Ct. Memo LEXIS 202; 25 T.C.M. (CCH) 448; T.C.M. (RIA) 66079; April 18, 1966Thomas E. Meister, 505 Walnut St., Cincinnati, Ohio, for the petitioner. L. B. Terry, for the respondent. MULRONEY Memorandum Findings of Fact and Opinion 203 MULRONEY, Judge: Respondent determined a deficiency in petitioner's income tax for 1961 and 1962 in the respective amounts of $1,541.75 and $211.54. The issues are (1) whether certain payments received by petitioner in 1961 and 1962 are includable in her income as alimony under section 71 of the Internal Revenue Code of 1954, 1 and (2) whether petitioner is entitled to a deduction in 1961 under section 212 for legal fees incurred by her in connection with her divorce action. Findings of Fact Some of the facts were stipulated and they are so found. Petitioner Hazel Porter is a resident of Cincinnati, Ohio. She filed her individual Federal income tax returns for 1961 and 1962 with the district director of internal revenue, Cincinnati, Ohio. Petitioner was married to Walter G. Porter on October 24, 1936. At the time of the trial, Walter was president of Porter Precision Products Company, a corporation organized in 1946 and engaged in the punch manufacturing business. Walter had been connected with the corporation's predecessor since prior to204 1936. He acquired stock in Porter Precision Products Company when it was organized in 1946 and at the time of trial held 13,500 shares of stock in the corporation (approximately 30 percent of the total stock). Petitioner was a regular employee (as a stenographer or secretary) of Porter Precision Products Company from 1953 through 1958 or early 1959. She was never a stockholder in the corporation. Petitioner and Walter separated in November 1959. After that date, Walter continued to make some payments towards home maintenance and other expenses for the petitioner. In addition, Walter paid petitioner a living allowance of about $150 each week from November 1959 to April 1960, and from April to August 1960 Walter reduced the weekly payments to petitioner for living allowance to $100. Walter discontinued the weekly payments to petitioner in August 1960 on advice of his attorney. On November 12, 1960 petitioner filed a petition for alimony in the Court of Common Pleas, Division of Domestic Relations, Hamilton County, Ohio. On the same date Walter filed an answer and cross-petition for divorce in which he requested, in part, that "he be declared the sole owner of all shares of stock205 in the Porter Precision Products Company: [and]t hat he be awarded his just and equitable share of all other properties of these parties, real and personal." Petitioner's reply was filed on December 22, 1960, and an amended petition for divorce and alimony was filed by petitioner on March 16, 1961. On May 8, 1961 petitioner was divorced from Walter, and the decree of divorce provided in part as follows: It is also ordered that Plaintiff [petitioner herein] forthwith list the real estate at 615 Heatherdale Drive, Cincinnati 31, Ohio for sale with a real estate broker at a selling price of not less than Fifty-two thousand ($52,000.00) Dollars, and that said real estate be sold within a reasonable length of time, in the determination of the Court, and that the net proceeds of said sale, after deducting all expenses (including one-half of any payments which may be made by either of the parties) in connection with said real estate and the sale thereof, be divided equally between Plaintiff and Defendant. It is also ordered that the following stocks be divided equally between Plaintiff and Defendant: Alpha Portland Cement Co., Benquet Mining Co., Kerr-McGee Oil Co., American St. 206 Gobain Co., Wesco Financial Corp., and West Driefontaine, Inc., or in lieu thereof Plaintiff may retain said stocks as her own, including any rights, dividends, stock dividends or stock splits or otherwise, and credit Defendant with the payment of Twenty-four hundred and fifty ($2,450.00) Dollars to apply on the alimony order against Defendant as hereinafter described. It is ordered that the bank account of Plaintiff, in the amount of Nine thousand, eight hundred and sixty-seven ($9,867.00) Dollars, be divided equally between the parties, but in lieu thereof Plaintiff may retain said account in full, and credit Defendant with the payment of Fortynine hundred thirty-three and 50/100 ($4,933.50) Dollars to apply on the alimony order against Defendant as hereinafter described. It is further ordered that Defendant pay to Plaintiff the sum of Seventy-eight thousand ($78,000.00) Dollars as alimony, the payment of same to be a charge against the estate of the Defendant, Walter G. Porter, payable at the rate of Fifty-two Hundred ($5,200.00) Dollars per year, in equal monthly instalments, from date hereof, until fully paid, except that in the event of the death of the Defendant prior to207 payment in full, then the balance due as of the date of death shall immediately become due and payable in full from the estate of the Defendant. At the time of the divorce the two children of petitioner and Walter, Carol Porter Rice and Gerry Porter, were 21 years old and 19 years old, respectively. Petitioner obtained custody of Gerry, who at the time was employed and earning about $100 per week. In 1961 petitioner (under the terms of the divorce decree) applied a one-half interest in the bank account ($4,933.50) and a one-half interest in the listed securities ($2,450) to Walter's obligation for alimony under the divorce decree, or a total of $7,383.50 in 1961. Since the alimony due from the date of the decree until the end of the year 1961 was only about $3,200, the difference between $7,383.50 and $3,200, or $4,183.50, was applied to the alimony payments due in 1962. Walter paid the petitioner in 1962 the amount of $1,017 which was the amount of alimony remaining due in 1962. Petitioner did not report any of these payments from Walter in her income tax returns for 1961 and 1962, which returns show total income from other sources in the respective amounts of $626.46 and $1,060.21. 208 Respondent determined in his notice of deficiency that the amounts of $7,383.50 and $1,017 were alimony payments includable in petitioner's income in 1961 and 1962, respectively, under the provisions of section 71. Petitioner paid legal fees in connection with her divorce action in 1961 in the total amount of $5,500. Walter was ordered by the court to pay $2,000 to petitioner for expenses of suit. Petitioner did not claim any portion of these legal fees as a deduction in her income tax return for 1961. Opinion The first issue is whether the payments received by petitioner in 1961 and 1962 from her former husband are periodic payments in discharge of a legal obligation which because of a marital or family relationship were incurred by the former husband under a written instrument incident to divorce or separation. Section 71(a)(1). Since the lump sum of $78,000, which the divorce decree labels as "alimony", is payable over a period of time ending more than 10 years from the date of the decree, the installment payments of $5,200 per year qualify as periodic payments. Section 71(c)(2). The decisive question is whether the payments were incurred by Walter for petitioner's support209 because of the marital relationship. Petitioner contends that these payments were not intended for her support but, instead, represented a part of the property settlement. Whether the payments in question were for petitioner's support, i.e., alimony, or whether they represent consideration for petitioner's interest in property is a question that turns upon the facts and not upon any labels that may be placed upon them. Elizabeth H. Bardwell, 38 T.C. 84">38 T.C. 84, affd. 318 F. 2d 786. We are convinced on this record that the payments to petitioner were designed for her support and were not for any interest she had in property. At the outset we note that the express terms of the divorce decree refer to the disputed payments as "alimony". This would seem to reflect accurately the intention of the parties. When Walter and petitioner were separated in November 1959, Walter made weekly payments for petitioner's support, and for several months prior to August 1960 (when the payments were discontinued on the advice of Walter's attorney) the support payments were $100 per week. It does not appear that petitioner had any significant income-producing property of her own, 210 and in the conferences between the legal representatives of the parties prior to the divorce decree in May 1961, petitioner's support requirements were of primary concern. Bernard J. Gilday, Jr., who was Walter's attorney, testified that in his conferences with petitioner's attorney they sought to anticipate petitioner's reasonable living costs and "we tried to reach an agreement of so much per week or per month to allow her reasonably and comfortably to live." A settlement agreement, which was embodied in the divorce decree, was finally reached under which petitioner would receive $100 per week for a period of 15 years. Walter testified that in agreeing with this settlement it was his intention "to give her support", and that the 15-year period was chosen "to carry her over to the social security time, more or less." Walter also testified that the reason for continuing the payments to petitioner even if she remarried was "that it might make it a little easier for her to find a remarriage." 2 He also testified that the settlement agreement reflected an understanding that the payments would be taxable to the petitioner. 211 Petitioner argues that the payments totaling $78,000 represented her interest in the 12,845 shares of stock in the Porter Precision Products Company held by Walter in 1961. But the record fails to show that petitioner had any property interest in this block of stock. Walter was employed by the corporation's predecessor when he married petitioner in 1936 and the record suggests that it was a family business. There is no indication that petitioner had any separate money or property at that time. When Porter Precision Products Company was formed in 1946, Walter acquired shares in the corporation and it also appears that he acquired additional shares as gifts from his mother. Petitioner never was a stockholder and, in fact, her only connection with the corporation appears to be some five or six years (1953 through 1958) in the corporation's employ as a stenographer or secretary. Moreover, while the divorce decree carefully mentions the assets which were divided between the parties, i.e., the home, the bank account, and certain stocks in other corporations, 3 there is no mention of the stock in Porter Precision Products Company. This appears to be an accurate reflection of the intention212 of the parties. Walter's attorney in the divorce proceeding testified that the settlement agreement as adopted by the court in its decree "wasn't based upon any division of any stock or anything like that. It was based upon what this woman needed to live on." Similarly, Walter testified that "I at no time ever understood or ever agreed that the stock was in any way involved in this thing." Petitioner seems to feel that simply because the weekly payments of $100 over a period of 15 years (amounting to $78,000) were necessarily carved out of Walter's property, such payments qualify as a settlement of property rights. To the extent all payments made by a former husband to his divorced wife come from property on hand, such payments may, in a sense, be regarded as a division of property, but such payments must be treated as alimony under section 71 if their purpose is that of support. In view of the complete absence of any evidence of a property interest held by petitioner in these corporate shares, we do not see how the payments in dispute were213 intended to be or were consideration for the release by her of any property interest in such shares. It may be true that the court in the divorce proceedings expressed some interest in the valuation of this stock. However, in doing so, it would appear that the court was merely apprising itself of all the pertinent facts about the financial situation of the parties in the divorce proceedings within the intent of the Ohio statutes. 4We hold, on the basis of this record, that the payments to petitioner in 1961 and 1962 were includable in her income in those years as alimony within the meaning of section 71. The next issue is whether petitioner214 is entitled to a deduction in 1961 under section 212(1) for legal fees incurred in the divorce action. It has been stipulated that, while she paid legal fees of $5,500, her husband was ordered by the court to pay $2,000 to her for expenses of suit. Any deduction claimed by petitioner under this issue will, of course, be limited to $3,500. Section 212(1) allows a deduction for all ordinary and necessary expenses incurred "for the production or collection of income." Respondent's only argument on this issue is that, in view of the Supreme Court's recent decision in United States v. Gilmore, 372 U.S. 39">372 U.S. 39, and United States v. Patrick, 372 U.S. 53">372 U.S. 53, the petitioner is not entitled to deduct in 1961 any legal fees for services in her divorce action. In both of those cases the court disallowed deductions for legal fees under section 212(2), or its predecessor section under the Internal Revenue Code of 1939, incurred by husbands who were resisting their wives' claims to income-producing property incident to divorce proceedings. However, in Ruth K. Wild, 42 T.C. 706">42 T.C. 706, this Court distinguished the Gilmore case and the Patrick case and held that the legal*215 fees incurred by the wife in divorce proceedings to obtain monthly alimony payments, which were includable in her gross income, were deductible by her under section 212(1). Here we have found that the weekly payments to petitioner under the divorce decree are taxable to her as alimony under section 71. Although we are not favored with any breakdown of the legal fees incurred by the parties in the 1961 divorce proceedings, we note that Walter paid $2,000 of the total $5,500 legal fees. In addition, we can infer from the evidence that much of the legal work involved the size and duration of the support payments to petitioner. We believe it would be a fair interpretation of the facts in this record to find that the legal fees to the extent of $3,500 were incurred by petitioner to obtain alimony includable in her gross income. Petitioner is entitled to deduct this amount in 1961 under section 212(1) under our holding in Ruth K. Wild, supra.Decision will be entered under Rule 50. Footnotes1. All section references will be to the Internal Revenue Code of 1954, as amended, unless otherwise noted.↩2. The requirement that the payments to petitioner be continued even in the event of her remarriage does not affect that status of such payments as alimony. See Thomas E. Hogg, 13 T.C. 361">13 T.C. 361↩.3. Although it is not too clear, the testimony of Walter at the trial indicates that these other stocks were held jointly with his wife.↩4. Section 3105.18 of Title 31 of the Ohio Revised Code, which is entitled "Alimony", is as follows: The court of common pleas may allow alimony as it deems reasonable to either party, having due regard to property which came to either by their marriage, the earning capacity of either and the value of real and personal estate of either, at the time of the decree. Such alimony may be allowed in real or personal property, or both, or by decreeing a sum of money, payable either in gross or by installments, as the court deems equitable.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624133/	Minnie Powell v. Commissioner.Powell v. CommissionerDocket No. 33031.United States Tax Court1952 Tax Ct. Memo LEXIS 328; 11 T.C.M. (CCH) 112; T.C.M. (RIA) 52032; February 8, 1952328 1. Where depreciation allowable exceeded the amount of depreciation allowed in previous years, held, in computing the adjusted basis for determining petitioner's loss on the sale of the store-apartment building the Commissioner did not err in using depreciation allowable under section 113(b)(1)(B) of the Internal Revenue Code. 2. Deduction for Federal excise taxes paid during 1947 and 1948 by petitioner, an employee, disallowed under section 23(c)(1)(F) of the Code. Jay Evens, Esq., for the petitioner. Homer F. Benson, Esq., for the respondent. BLACK Memorandum Findings of Fact and Opinion The respondent determined deficiencies in the petitioner's income tax for the calendar years 1947, 1948, and 1949 in the respective amounts329 of $146.89, $17.06, and $18.37. Certain adjustments made by respondent in the deficiency notices are not contested by petitioner. Two issues are presented for our decision: (1) whether the respondent erred in computing the adjusted basis of a building which was sold by petitioner during 1947, and (2) whether petitioner may deduct Federal excise taxes paid in 1947 and 1948. Findings of Fact The petitioner Minnie Powell, a resident of Nashville, Tennessee, filed her individual income tax returns for each of the taxable years 1947, 1948, and 1949 with the Collector for the District of Tennessee. During the taxable years involved petitioner was employed as a saleslady by Harvey's, a department store in Nashville, Tennessee. In computing the net income reported in her return for the year 1947, the petitioner claimed the amount of $6,120 as a deductible loss from the sale of real property. The property with respect to which the loss is claimed consists of a two-story stone building situated on the Murfreesboro Pike near Nashville, Tennessee. Construction of the building was begun by petitioner in 1919 and it was completed in 1920 at a cost of $14,000. The first floor was rented330 and used as a store and the second floor was rented and used as apartments. Neither floor of the building was rented continuously from the date of completion to date of sale. The building had a useful life of 50 years. For the purpose of computing depreciation for the years prior to 1947, the petitioner used a cost basis of $2,500 and a depreciation rate of two per cent, based on a useful life of 50 years. For the year 1947, petitioner used a cost basis of $14,000, a depreciation rate of two per cent, and claimed a depreciation deduction $280of. The depreciation deduction as claimed by petitioner during all these years was allowed by the respondent. The allowable depreciation on the building computed at the rate of two per cent on the cost of $14,000 for the years 1920 through 1947, was in the total amount of $7,840. During the taxable year 1947, petitioner sold the property at the gross sale price of $6,500, and in so doing incurred expenses $560.82. Petitioner paid certain taxes amounting to $16 during 1947 and $4.16 during 1948, and these amounts were claimed by petitioner as deductions. On her individual income tax returns petitioner identified these taxes as amusement and331 cosmetic taxes in 1947 and as picture show taxes in 1948. Opinion BLACK, Judge: The parties are in agreement as to the cost ($14,000) and the useful life (50 years) of the building sold by petitioner during 1947. The parties are not in agreement, however, as to the amount of depreciation to be used in computing the adjusted basis of the building. In computing the adjusted basis of the building for determining the amount of her loss in 1947, petitioner reduced the original cost by the amount of depreciation claimed and allowed in the total amount of $1,380. The building was sold for $6,500 and petitioner reported a loss of $6,120 from the sale. Respondent determined that petitioner sustained a loss of only $220.82, which amount was allowed in full as a deduction from petitioner's gross income during 1947. In determining the amount of the loss respondent gave effect to the expense of sale in the amount of $560.82, which was not used in the computation of the loss deducted on her tax return. The only controverted difference in two computations is in respect to the respondent's reduction of cost by the amount of $7,840 for depreciation, the amount of depreciation allowable. 332 Respondent contends that the adjusted basis of the building must be computed by reducing the cost of the depreciation allowable for the years 1920 to 1947, since the amount of depreciation allowable during each of those years is greater than the amount claimed and allowed. The respondent's position is supported by the applicable Code provision which is set forth in the margin, 1 and the cases as well. This Court had occasion in Beckridge Corporation, 45 B.T.A. 131">45 B.T.A. 131, affirmed 129 Fed. (2d) 318, to consider the333 same issue that is presented here. The taxpayer, a corporation, had operated at a loss during each year of its existence up to and including the taxable year. Though depreciation was incurred on certain property, the taxpayer had not deducted such depreciation on its Federal income tax returns. The property was sold in the taxable year. We held that the cost basis of the property sold must be adjusted by the depreciation allowable, though no income existed from which to deduct such depreciation. In the opinion of that case we discussed the meaning of "amount allowable" as used in the Code provision, and we need not repeat it here. In affirming, per curiam, the Court of Appeals said: "* * * the Board approved the commissioner's adjustment of the cost basis and confirmed the deficiencies. "Such adjustment was authorized by section 113(b)(1)(B) of the Revenue Act of 1936, 26 U.S.C.A. Int. Rev. Code § 113(b)(1)(B), which specifically provides that the adjusted basis for determining the gain or loss from the sale of property shall be the cost with proper adjustment for depreciation, in respect of any period since February 28, 1913, 'to the extent allowed (but334 not less than the amount allowable) under this Act [chapter] or prior income tax laws.' * " Our decision in Breckridge Corporation, supra, is not inconsistent with subsequent decisions of this or any other Court: Virginian Hotel Corporation v. Helvering ( 1943), 319 U.S. 523">319 U.S. 523; A. L. Carter Co. v. Commissioner ( 1944), 143 Fed.(2d) 296, affirming B.T.A. Memorandum Opinion [2 TCM 1002,]; P. Dougherty Co. v. Commissioner ( 1946), 159 Fed. (2d) 269, affirming 5. T.C. 791. This provision of the statute requires an adjustment of the basis irrespective of any statute of limitations applicable to the year of deduction. We hold that respondent did not err in computing the amount of the loss incurred by petitioner from the sale. Since petitioner realized during the taxable year an adjusted gross income after deducting the loss in the amount determined by the respondent, the question of the loss carry-over is moot. Respondent did not err in disallowing the loss carry-over claimed by petitioner on her returns in each of the subsequent taxable years. On her income tax returns petitioner claimed as deductions on page three certain taxes335 which were described as amusement and cosmetic taxes in 1947 and picture show taxes in 1948. At the hearing petitioner made no attempt to further identify these taxes. Neither the State of Tennessee nor the City of Nashville, where petitioner resided, levied taxes of the type described by petitioner. The taxes claimed as a deduction by petitioner were obviously the admissions tax levied by sections 1700-1704 of the Internal Revenue Code, and the toilet preparations tax levied by section 2402 of the Internal Revenue Code. Petitioner contends she is entitled to a deduction for these taxes. In respect to the deduction for taxes, section 23(c) of the Code is controlling and we are here concerned particularly with section 23(c)(1)(F) of the Code which provides: "SEC. 23. DEDUCTIONS FROM GROSS INCOME. "In computing net income there shall be allowed as deductions: * * "(c) Taxes Generally. - "(1) Allowance in general. - Taxes paid or accrued within the taxable years, except - * "(F) Federal import duties, and Federal excise and stamp taxes (not described in subparagraph (A), (B), (D), or (E)), but this subsection shall336 not prevent such duties and taxes from being deducted under subsection (a)." Subsection (a) of section 23 of the Code which is cited in the quotation above refers to the deduction allowed for trade or business expenses. Since petitioner offered no evidence indicating that she was engaged in a trade or business during 1947 and 1948, except as an employee, we hold that the respondent did not err in denying the deduction claimed by petitioner as taxes. Decision will be entered for the respondent. Footnotes1. SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS. * * (b) Adjusted Basis. - The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis determined under subsection (a), adjusted as hereinafter provided. (1) General Rule. - Proper adjustment in respect of the property shall in all cases be made - * (B) in respect of any period since February 28, 1913, for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent allowed (but not less than the amount allowable) under this chapter or prior income tax laws. * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624134/	Estate of James W. Flanagan, Deceased, J. Albert DeCamp, Henry F. Pelkey and City Bank Farmers Trust Company, Executors, Petitioner, v. Commissioner of Internal Revenue, RespondentFlanagan v. CommissionerDocket No. 35722United States Tax Court18 T.C. 1241; 1952 U.S. Tax Ct. LEXIS 83; September 30, 1952, Promulgated 83 Decision will be entered under Rule 50. Pension payments received in 1944 and 1945 attributable to compensation of United States citizen for services rendered during more than 2 years' previous residence abroad but received after taxable year of change of residence to the United Statesheld not exempt under Internal Revenue Code, section 116 (a) (2). Wood v. United States, 104 F. Supp. 1020">104 F. Supp. 1020, followed. Lemuel Skidmore, Esq., for the petitioner.Ellyne E. Strickland, Esq., for the respondent. Opper, Judge. OPPER1241 OPINION.Deficiencies 84 in income tax for 1944 and 1945 in the respective amounts of $ 19,124.98 and $ 8,218.26 are in controversy. 1242 All of the facts have been stipulated and they are hereby so found. The returns of petitioner's decedent (sometimes herein called "decedent") were filed with the collector for the second district of New York.The factual background, the question involved and the contentions of the parties are well summarized in respondent's brief:James W. Flanagan, who died on July 24, 1950, and is referred to herein as the decedent, was a citizen of the United States at all times mentioned in this brief. Decedent was an employee of the Standard Oil Co. (N. J.) from January 1, 1912 to 1919, and of Andian National Corporation, Limited, sometimes referred to herein as "Andian", from 1919 until the date of his retirement in October, 1942. From January 1, 1926 until October, 1942, decedent was a bona fide resident of Canada. When he retired in 1942, at the age of 70 years, decedent changed his residence to the United States and continued a resident of the United States until the date of his death.Upon his retirement in 1942 decedent became a beneficiary under the annuity plan of85 Imperial Oil, Ltd., and entitled to receive an annual pension of $ 25,031.00, Canadian funds. In his income tax returns for the years 1944 and 1945 decedent reported as income from Imperial Oil Pension Fund the pension received by him in those years in the respective sums of $ 22,420.68 and $ 22,507.61, United States funds. The compensation decedent received as an employee of Andian from January 1, 1926 through February 28, 1939, was included in computing the pension paid to him after his retirement, which compensation was for personal services performed without the United States. The period of decedent's employment from January 1, 1912 to January 1, 1926 was also included in the computation of the pension to which decedent was entitled.The petitioner contends that the proportion of the pension paid to him in each taxable year which is attributable to the compensation he received from Andian during the period of his residence in Canada should be excluded from gross income under the provisions of section 116(a)(2) of the Internal Revenue Code.It is the position of the respondent that since the decedent was a resident of the United States for both taxable years involved herein, 86 the pension payments received by him in those years are taxable income in their entirety. Respondent maintains that the exemption granted in section 116 (a) (2) applies only to the year of the change of residence from the foreign country back to the United States and that in all later years pension payments or any other income are taxable in full to an individual, a resident of the United States in such years, regardless of the fact that they may be said to be attributable in part to the period of foreign residence, or constitute compensation for services rendered in foreign countries.The subsection referred to and the ones preceding and following it are set out in the margin. 187 1243 When this proceeding was heard, at the end of March, it was apparently regarded as a case of first impression. But see Herman Frederick Baehre, 15 T.C. 236">15 T. C. 236, 242, 243. In the meantime, however, on June 3, 1952, the Court of Claims handed down its decision in Wood v. United States, 104 F. Supp. 1020">104 F. Supp. 1020, which both parties accept as dealing with the same question. As petitioner says in its reply brief: "The Wood case is adverse to the contention of petitioner in the instant case to the extent that it holds that section 116 (a) (2) is applicable only to the year in which taxpayer changes his residence and is not applicable to a subsequent year." Its position, as we gather it, is that the Wood case was erroneously decided and that we are not bound by it.While the latter statement may be technically correct, decisions of tribunals of the United States construing Federal taxing statutes should obviously attain as great a consistency as possible. It is highly unfortunate if two taxpayers, circumstanced identically and governed by the same legislation, are required to pay unequal exactions depending upon88 the court in which the proceeding happens to be decided. Unless Wood v.United States is clearly and demonstrably wrong, it should, as the leading case, accordingly be followed here.We are not persuaded that the Wood case was incorrectly decided. Section 116 (a) (2) is not, as petitioner contends, free from ambiguity on its face. It does not state expressly the taxpayer's taxable years to which it is to be applied, and in this respect is clearly different from Frances Bartow Farr, Executrix, 33 B. T. A. 557. On the other hand, Carl J. Batter, 37 B. T. A. 667, also cited by petitioner declares the 1244 principle that (p. 670) "Search should be made for an interpretation which will give full meaning, not only to the words used in the provision itself, but to the words used in the title." [Emphasis added.] In the course of the discussion, the same opinion quotes as follows from Ozawa v. United States, 260 U.S. 178">260 U.S. 178:It is the duty of the court to give effect to the intent of Congress. Primarily this intent is ascertained by giving the words their natural significance, 89 but if this leads to an unreasonable result plainly at variance with the policy of the legislation as a whole, we must examine the matter further. We may then look to the reason of the enactment and inquire into its antecedent history and give it effect in accordance with its design and purpose, sacrificing, if necessary, the literal meaning in order that the purpose may not fail.And the Farr case, supra, 564, itself recognizes that "The heading of a section may be considered as an aid to the interpretation of the text, when the text is ambiguous * ." The title of section 116 (a) (2) clears up the ambiguity and expressly limits the scope of the subsection to the "year of change of residence."If that were not sufficient, resort to the legislative history would confirm that conclusion. S. Rept. 1631, 77th Cong., 2d Sess., 1942-2 C. B. 504, 549, describes the section as providing "that if such citizens establish that they are bona fide residents of a foreign country during the entire taxable year, their earned income from sources without the United States will be exempt. If they have been residents of a foreign country for two years or more, 90 this same treatment will be accorded them for the year in which they return to the United States." [Emphasis added.]Nor do the other portions of the Committee reports, and respondent's regulations, referring to "earned income from sources without the United Statesderived during the period of his foreign residence * * ," [emphasis added] lead to a different result. See e. g., Regulations 111, section 29.116-1. Bearing in mind the special sense in which the word "derived" 2 is employed in Eisner v. Macomber, 252 U.S. 189">252 U.S. 189, as including the concept of actual receipt (or possibly accrual), we think it unreasonable that the intention of Congress thus manifested was to do more than grant a cash basis taxpayer "this same treatment" in the year of change of residence, permitting the exclusion during that year of funds earned -- and also received -- during the period of residence abroad.91 1245 There being so much to reinforce it, we are entirely unwilling to ignore the Wood case as a precedent. Without being required to consider what result would otherwise have been reached, it suffices to sustain the deficiency on its authority.Decision will be entered under Rule 50. Footnotes1. SEC. 116. EXCLUSIONS FROM GROSS INCOME.In addition to the items specified in section 22 (b), the following items shall not be included in gross income and shall be exempt from taxation under this chapter:(a) [as amended by Sec. 148 (a) of the Revenue Act of 1942, c. 619, 56 Stat. 798, and Sec. 107 (b) of the Revenue Act of 1943, c. 63, 58 Stat. 21] Earned Income From Sources Without the United States. -- (1) Foreign resident for entire taxable year. -- In the case of an individual citizen of the United States, who establishes to the satisfaction of the Commissioner that he is a bona fide resident of a foreign country or countries during the entire taxable year, amounts received from sources without the United States (except amounts paid by the United States or any agency thereof) if such amounts constitute earned income as defined in paragraph (3); but such individual shall not be allowed as a deduction from his gross income any deductions properly allocable to or chargeable against amounts excluded from gross income under this subsection.(2) Taxable year of change of residence to United States. -- In the case of an individual citizen of the United States, who has been a bona fide resident of a foreign country or countries for a period of at least two years before the date on which he changes his residence from such country to the United States, amounts received from sources without the United States (except amounts paid by the United States or any agency thereof), which are attributable to that part of such period of foreign residence before such date, if such amounts constitute earned income as defined in paragraph (3); but such individual shall not be allowed as a deduction from his gross income any deductions properly allocable to or chargeable against amounts excluded from gross income under this subsection.(3) Definition of earned income. -- For the purposes of this subsection, "earned income" means wages, salaries, professional fees, and other amounts received as compensation for personal services actually rendered, but does not include that part of the compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered. In the case of a taxpayer engaged in a trade or business in which both personal services and capital are material income producing factors, under regulations prescribed by the Commissioner with the approval of the Secretary, a reasonable allowance as compensation for the personal services rendered by the taxpayer, not in excess of 20 per centum of his share of the net profits of such trade or business, shall be considered as earned income. * * ↩2. " * * 'Derived-from-capital'; 'the gain-derived-from-capital', etc. Here we have the essential matter: not a gain accruing to capital; not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value, proceeding from the property, severed from the capital, however invested or employed, and coming in, being 'derived' -- that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal -- that is income derived from property. Nothing else answers the description."The same fundamental conception is clearly set forth in the Sixteenth Amendment -- 'incomes, from whatever source derived' -- the essential thought being expressed with a conciseness and lucidity entirely in harmony with the form and style of the Constitution." (Emphasis as in original.) Eisner v. Macomber, supra↩, 207-208.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624135/	VIRGIL C. WATKINS, JR., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentWatkins v. CommissionerDocket No. 926-82.United States Tax CourtT.C. Memo 1983-603; 1983 Tax Ct. Memo LEXIS 199; 46 T.C.M. (CCH) 1540; T.C.M. (RIA) 83603; September 26, 1983. Laurence J. Pino, for the petitioner. John F. Driscoll, for the respondent. WILBURMEMORANDUM FINDINGS OF FACT AND OPINION WILBUR, Judge: Respondent determined the following deficiencies, in, and additions to, the Federal income tax of petitioner Virgil C. Watkins, Jr.: Addition to TaxYearDeficiencyunder Sec. 6653(b) 11978$2,106$1,053.0019793,2951,647.50The sole issue remaining for our decision is whether petitioner is liable for the addition to tax under section200 6653(b). 2FINDINGS OF FACT Some of the facts have been stipulated, and those facts are so found. The stipulations and attached exhibits are incorporated by this reference. Petitioner resided in Brandon, Florida when the returns and petition in this case were filed. Virgil Watkins worked as a pipefitter and a steamfitter during the years at issue. He received wages totalling $12,246.36 in 1978 and $16,452.48 in 1979. He wrote "incorrect" across the W-2 forms he received, and reported no gross income on the Form 1040A he filed for 1978. That return was filed on July 14, 1981. No return was filed for 1979. Petitioner timely filed a return for 1977 showing gross income of $8,530.84; on July 18, 1981 he filed an amended return for that year showing gross income of zero. Petitioner stated on the Form 1040X that he was thereby making a claim for refund, and that the information on the W-2 form was erroneous. In 1978201 petitioner filed W-4 forms claiming 20 and 15 allowances for purposes of Federal withholding. In 1979 he claimed to be exempt. All of the W-4's were signed under penalties of perjury. On April 20, 1980, petitioner completed, signed and mailed a form entitled "Request for Corrected Form W-2" to the companies he had worked for in 1978. This "notice" stated that (a) the amounts shown on the Form W-2 did not properly reflect amounts includable in gross income; (b) that the amount shown in box 12 should be corrected to comply with sections 71 through 84 of the Internal Revenue Code; (c) that the amount shown in box 14 should be corrected to show the proper amount of FICA wages includable in gross income; and (d) that the amount of FICA wages erroneously withheld should be returned to V. C. Watkins. Petitioner Watkins followed a similar course of conduct in 1980 by claiming exemption from withholding, filing returns showing gross income of zero with W-2's marked "incorrect" attached, and requesting corrected W-2's from his employers.During the fall of 1980 respondent's agent Barbara Ellis contacted petitioner about his 1978 and 1979 tax liabilities.He never responded to any of the202 requests for information.OPINION Petitioner Virgil Watkins failed to file an adequate return in 1978, filed no return in 1979, submitted false withholding statements to his employers, and failed to cooperate with respondent's agents. Respondent contends that these actions constitute fraud, and says petitioner is liable for an addition to tax under section 6653(b). We agree. 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). Respondent bears the burden of proof, and must show clear and convincing evidence of each element of fraud. Section 7454(a); Rule 142(b), Tax Court Rules of Practice and Procedure; Stratton v. Commissioner,supra.He must show that the taxpayer intended to commit fraud, which has been described an an "intentional wrongdoing * * motivated by a specific purpose to evade a tax known or believed to be owing." Stoltzfus v. United States,398 F.2d 1002">398 F.2d 1002, 1004 (3d Cir. 1968); Webb v. Commissioner,394 F.2d 366">394 F.2d 366 (5th Cir. 1968). The elements to be shown are (1) an underpayment of tax, and (2) 203 that some part of this underpayment was due to fraud. Plunkett v. Commissioner,465 F.2d 299">465 F.2d 299, 303 (7th Cir. 1972). By an order dated August 31, 1982 this Court found that petitioner had underpaid his taxes in both of the years at issue. We need, therefore, only to determine whether any part of such underpayment was due to fraud. We believe that the W-4 forms on which petitioner claimed excessive allowances or total exemption from withholding constitute evidence of fraudulent intent. Petitioner had paid taxes in prior years, and must have known that he, like all other citizens, was required to pay Federal income tax. By claiming to be exempt from Federal withholding, and certifying that he took the correct number of allowances, petitioner knowingly gave false information to the Federal Government; this resulted in inaccurate W-2 forms being filed with and as a part of his "return." Second, we find that the evidence produced by respondent shows that petitioner intended to evade tax in 1978 and 1979. The form he filed for 1978 did not constitute an adequate return, Reiff v. Commissioner,77 T.C. 1169">77 T.C. 1169, 1177 (1981), and he filed no document for204 tax year 1979. While failure to file is not conclusive evidence of fraud, it is a factor worthy of consideration by the Court. Habersham-Bey v. Commissioner,78 T.C. 304">78 T.C. 304 (1982). This evidence is particularly weighty when coupled with the submission of a false Form W-4. Habersham-Bey v. Commissioner,supra.3Petitioner also demonstrated his fraudulent intent by writing "incorrect" on the W-2 form attached to his return. Regardless of petitioner's thoughts about his liability for Federal income tax, he did receive wages during the years at issue, a fact he acknowledged in the petition. In deliberately altering the W-2 as he did petitioner intended to mislead respondent, delay his investigation, and to evade his taxes.Petitioner Watkins is one of many taxpayers who engaged in similar courses of conduct. The practices were described in detail in Hebrank v. Commissioner,T.C. Memo. 1982-496 and Hebrank v. Commissioner, 81 T.C. (issued this date). As noted there, we believe that the facts of Raley v. Commissioner,676 F.2d 980">676 F.2d 980 (3d Cir. 1982),*205 revg. on this issue T.C. Memo 1980-571">T.C. Memo 1980-571, are unusual and did not bar a finding of fraud in that case. There are minor factual differences between the Hebrank cases and the one at bar, but none is sufficient to compel a different result. Petitioner's false withholding statements, inadequate returns, and failure to cooperate convince us that he intended to thwart the mechanics of the income tax so as to evade payment of a tax he knew he owed. On the facts before us this behavior is clearly fraudulent. 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 at issue.↩2. Petitioner was found liable for the deficiencies by an order of this Court entered on respondent's motion for partial summary judgment. Entry of a decision was held in abeyance until a determination was made with respect to the additions to tax.↩3. See also Hebrank v. Commissioner,T.C. Memo. 1982-496↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624137/	APPEAL OF U. N. ROBERTS CO.U. N. Roberts Co. v. CommissionerDocket No. 1270.United States Board of Tax Appeals2 B.T.A. 1176; 1925 BTA LEXIS 2142; November 4, 1925, Decided Submitted August 10, 1925. 2142 John E. McClure and J. R. Little, Esqs., for the taxpayer. A. H. Fast, Esq., for the Commissioner. 1176 Before MARQUETTE and MORRIS. This appeal is from the determination of deficiencies in income and profits taxes for the year 1918 in the amount of $9,036.37 and an overassessment for 1919 of $814.07. The only question is whether the taxpayer and the Gordon-Van Tine Co. were affiliated during the years 1918 and 1919. A stipulation was signed by the parties on April 17, 1925, but was not submitted to the Board until July 7, 1925, at the hearing. The deposition of a witness, Edward C. Roberts, Taken in Yreka, Calif., on April 17, 1925, was filed with the Board on May 3, 1925. Depositions of four other witnesses, taken in Davenport, Iowa, on May 11, 12, and 13, 1925, were filed with the Board on June 15, 1925. The evidence disclosed by these depositions conflicts with facts agreed to in the stipulation, that "the invested capital of the Gordon-Van Tine Co. for 1918 and 1919 was $250,000," and that the Gordon-Van Tine Co. had capital stock "of $250,000 fully paid up." 1177 Neither party has suggested a repudiation of the stipulation. 2143 The counsel for both parties who signed the stipulation were different from counsel who represented the parties at the taking of the depositions. FINDINGS OF FACT. The taxpayer is an Iowa corporation with principal office in Davenport. It was organized in 1893 and thereafter engaged in the business of manufacturing and selling at wholesale lumber and building materials, such as sash, doors, blinds, and similar articles. The Commissioner conceded that the taxpayer was affiliated during 1918 and 1919 with the Goodfellow Lumber Co. In 1906 the taxpayer was bound by agreement with other manufacturers and wholesalers not to sell its products to retailers. In the latter part of 1906 the taxpayer devised the name "Gordon-Van Tine Co." and under that name sold its products to retailers. The name was combined from the middle names of Horace Gordon Roberts and Harry Van Tine Scott, both of whom were stockholders and officers of the taxpayer. In April, 1907, the Gordon-Van Tine Co. was incorporated with an authorized capital stock of $250,000, of which stock to the par value of $249,500 was issued on April 27, 1907, represented by certificate No. 6, in the name of the taxpayer, 2144 and $500 to individuals to qualify them as directors. The taxpayer delivered its check for $250,000 to the Gordon-Van Tine Co. for the stock received, and the Gordon-Van Tine Co., on the same day, delivered a check to the taxpayer for $250,000 and charged its with a loan, but took therefor no note or other evidence of indebtedness. On December 30, 1909, the taxpayer delivered its check to the Gordon-Van Tine Co. for $249,500, and the loan account of the taxpayer was reduced by that amount. On December 31, 1909, the Gordon-Van Tine Co. acquired, as treasury stock, the $249,500 of stock standing in the name of the taxpayer, and a check was delivered to the taxpayer in that amount. The cashbook of the Gordon Van-Tine Co. showed that the cash on hand at the close of business was: December 29, 1909$2,549.35December 30, 1909252,959.74December 31, 19093,459.74The stub of certifiate No. 6 contained the notation, "Cancelled and bought back and put in the Treasury, December 31, '09." The back of that certificate bore no indorsement. On December 31, 1909, certificate No. 7 was issued by the Gordon-Van Tine Co. for 2,495 shares of stock to Edward C. Roberts. 2145 The cash book contained the entry, "Treasury stock account $249,500. 1178 Sale of 2,495 shares of Gordon-Van Tine Co. stock to E. C. Roberts." Under date of December 31, 1909, the cash book also showed, "E. C. Roberts' loan account, $249,500. For cash loaned to E. C. Roberts." The Gordon-Van Tine Co. did not have cash on hand sufficient to loan E. C. Roberts $249,500, unless it had issued the stock as aforesaid. No note was received from E. C. Roberts for the loan. The transaction was carried out by E. C. Roberts delivering his check for $249,500 to the Gordon-Van Tine Co. and he either received back the same check indorsed by the Gordon-Van Tine Co., or the check was put through a bank simultaneously with the check of the Gordon-Van Tine Co. to E. C. Roberts for the loan. No checks or bank statements were submitted in evidence. The stub of certificate No. 7 bore the notation, "January 3, 1910. Notice has been received from the U. N. Roberts Co. of a claim of purchase of this stock. (Signed) W. J. Hobson, Secretary." The certificate had written across the face, "Cancelled by issue of certificate No. 11." On the back was the following: For value received, I hereby2146 sell and assign to The U. N. Roberts Company, 2,495 shares of stock represented in the within certificate and do hereby appoint and authorize K. Spelletich as my attorney in fact to make the necessary transfer upon the books of said Company. Witness my hand this 7th day of May, A.D. 1923. (Signed) Edward C. Roberts, in presence of (Signed) Horace C. Roberts. Certificate No. 11 was issued May 7, 1923, to the U. N. Roberts Co. The cash book of Gordon-Van Tine Co. showed, under date of May 7, 1923, an entry of cash received in the amount of $249,500, the entry being "Loan account, E. C. Roberts," and the explanation, "In full payment." Under the same date there was an entry in the cash book of disbursements of $249,500 payable to the U. N. Roberts Co., with the explanation "Gordon-Van Tine Co. of Iowa investment," and a notation in red pencil "Loan account." From December 31, 1909, to May 7, 1923, Edward C. Roberts held the 2,495 shares of stock in the Gordon-Van Tine Co. for the U. N. Roberts Co. No actual cash was bona fide paid in for the stock of the Gordon-Van Tine Co. No tangible or intangible property having an actual cash value was paid in for the stock of the2147 Gordon-Van Tine Co.The Gordon-Van Tine Co. had no income during the years 1918 and 1919. Its officers and directors were the same persons who served as officers and directors of the taxpayer. It occupied the same officers, for which it paid no rent to the taxpayer. It solicited orders from retailers for the sale of goods manufactured or sold by the taxpayer. It bought goods from no one but the taxpayer. Shipments were made by the taxpayer in the name of the Gordon-Van Tine Co. Purchasers were billed in the name of the latter and 1179 money received was paid over in full to the taxpayer by the Gordon-Van Tine Co. with no deduction for commissions, profits, or other remuneration to the Gordon-Van Tine Co. All expenses of the latter, including taxes, salaries, advertising, which amounted to over $50,000 each year, printing of catalogues, and all other items connected with the name Gordon-Van Tine Co., were paid directly by the taxpayer and in no instance by the Gordon-Van Tine Co.The taxpayer and the Gordon-Van Tine Co. were affiliated corporations during the years 1918 and 1919. DECISION. The deficiency should be computed in accordance with the foregoing*2148 findings of fact. Final determination will be settled on seven days' notice, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624138/	Estate of James E. Frizzell, Deceased, Roy Burns, E. A. Jackson and Mary George Frizzell, Executors, Petitioners, v. Commissioner of Internal Revenue, RespondentFrizzell v. CommissionerDocket No. 6704United States Tax Court11 T.C. 576; 1948 U.S. Tax Ct. LEXIS 62; October 12, 1948, Promulgated 62 Decision will be entered under Rule 50. Issue 1. -- Upon reconsideration of the question of whether a trust for the son of the decedent was created in contemplation of death within section 811 (c), I. R. C., it is held that the trust was created in contemplation of death. See Estate of James E. Frizzell, 9 T.C. 979">9 T. C. 979. Joseph B. Brennan, Esq., for the petitioners.Bernard D. Hathcock, Esq., for the respondent. Harron, Judge. Black, J., dissenting. Leech, J., agrees with this dissent. HARRON 576 The respondent determined a deficiency in estate tax in the amount of $ 24,834.80. The main question is whether a transfer of property to a trust for the benefit of an incompetent son of the decedent was made in contemplation63 of death, within the meaning of section 811 (c) of the Internal Revenue Code, so as to render the property includible in the decedent's estate, as the respondent has determined.This proceeding has been considered by the Court heretofore. The respondent's determination under the first issue was sustained. See Estate of James E. Frizzell, 9 T.C. 979">9 T. C. 979. In that report, a second question was considered, upon our rejection of the contention of the petitioners under the first issue, but if the first question had been decided in favor of the petitioners, there would not have been occasion for considering the second question.This proceeding is before the Court again pursuant to motion of the petitioners for reconsideration of our holding under the first issue, the motion having been granted. By that motion, petitioners requested 577 the Court to make additional findings of fact. The record supports the findings which have been requested. The facts which are covered by the motion of petitioners for further findings of fact were given full consideration in the first instance. However, in the interest of removing any doubt on that score, additional64 findings of fact are now made which cover, in general, the following matters: (1) The amount of net losses sustained by the decedent in six transactions in 1937 (see p. 982, vol. 9 T. C.); (2) the explanation which the decedent gave on the gift tax return for the gift of 1,132 shares of Coca-Cola stock to the trust for the benefit of William Pitts Frizzell; and (3) further findings relating to considerations of the decedent just prior to creating the trust.Petitioners do not object to the findings of fact which have been made, except that they object to the ultimate findings of fact that the trust was created and the transfer of property to the trust was in contemplation of death.The facts which were found in our former report are restated (see pp. 980 to 983, vol. 9 T. C.), and additional findings of fact are made as follows, with notation in parentheses of the additional findings.FINDINGS OF FACT.Petitioners are the executors of the estate of James E. Frizzell, who died testate on August 23, 1940, a resident of Waverly Hall, Georgia.Decedent was born January 24, 1856. He died at the age of 84 after an illness of 4 weeks following a heart attack.On October 14, 1937, the decedent65 executed a trust agreement under which he created an irrevocable trust for the benefit of his son, William Pitts Frizzell. On that date he transferred 1,132 shares of common stock of the Coca-Cola Co. to Trust Co. of Georgia, trustee under the trust agreement.The decedent was 81 years old when he created the trust. At that time his family consisted of his wife, who was 66 years old; a daughter, Mary George Frizzell, who was 38; and a son, William Pitts Frizzell, who was 40. There was also a married daughter, Annie Frizzell Jackson, age 36, the wife of E. A. Jackson, who had a son 13 years old.The decedent's son, William Pitts Frizzell, is an incompetent person. His mental development had been retarded and his mind was that of a child of 12 years. However, his physical condition, as distinguished from his mental condition, was good. William was unable to care for himself or to earn a livelihood. His parents bought his clothes and took care of him in every way. He was unable to take care of money or property. He was never given any large sum of money. William lived with his parents.578 Roy Burns is a certified public accountant in Columbus, Georgia, which is located66 about 20 miles from Waverly Hall. He prepares income tax returns for clients, in addition to his auditing and accounting work for the Columbus Bank & Trust Co. and other corporations, but he did not prepare the tax returns of the decedent until 1938, when he prepared the decedent's return for the year 1937. (Additional paragraph.)In September of 1937, prior to creating the trust, the decedent consulted Roy Burns about his desire to make some provision for his son William so that he would be cared for during his (the son's) life, and so that property which would be set aside for the son's benefit would not be wasted by the son or anyone else, and so that the son would never be financially dependent upon anyone. Burns recommended that the decedent consult some lawyer about creating a trust. Burns advised the decedent that he would have to pay a gift tax in connection with transferring property to a trust, and that the gift tax would be about two-thirds of the estate tax. Burns brought up the point about taxes; the decedent did not express concern about taxes. (Additional paragraph.)The decedent selected the Trust Co. of Georgia to be the trustee, because he knew the head of 67 that company and believed that it was capable and competent to handle such trust fund. (Additional paragraph.)The decedent was financially able to create the trust for his son in October 1937. (Additional sentence.)The decedent filed a Federal gift tax return in March 1938, in which he reported a gift on October 14, 1937, of 1,132 shares of Coca-Cola Co. stock to Trust Co. of Georgia, trustee for William Pitts Frizzell. The decedent stated in the return that the "motive" of the gift was "Love and affection and to protect William Pitts Frizzell against his own improvidence and inability to care for his own property." (Additional paragraph.)The decedent directed the trustee not to distribute any income or corpus to William, but to make the distributions to his mother, sisters, or some person selected by the trustee. The decedent directed the trustee to distribute whatever amounts of trust income it should determine, in its discretion, to be necessary to provide for the reasonable needs of William, during his life; and to accumulate in the trust all of the undistributed income. He gave the trustee authorization to encroach upon the corpus for the benefit of William in the event68 of illness or emergencies which the trust income was insufficient to meet. He authorized the trustee to make and change investments, and to receive and add to the trust corpus any additional property from the settlor.579 The trust could be terminated at any time after the death of William, and upon such termination the trust was to be distributed to the surviving sisters of William, or their lineal descendants. Or, if the trust was not terminated after the death of William, it was to be divided in equal parts and held in trust for the surviving sisters of William, or their lineal descendants. Other provisions for the eventual termination of the trust and the distribution thereof are not material to the issues presented.The trust indenture is incorporated herein by this reference.The trustee did not distribute all of the annual trust income, but paid William's mother $ 50 per month, as follows:YearTrust incomeDistributions1937$ 3,113$ 15019385,09460019395,6606001/1/40 to 8/23/40(Not shown)400The trustee invested about $ 9,193 of the undistributed, accumulated trust income during the period up to the decedent's death, about three years, 69 in stocks and bonds; and when decedent died, the trustee held uninvested, accumulated cash in the corpus amounting to $ 4,792. At the death of the decedent, the securities held in the trust consisted of the 1,132 shares of Coca-Cola stock, having a value of $ 108,592.28; 174 shares of stock of Lee Tire & Rubber Co., having a value of $ 4,219.50; and Federal Land Bank bonds having a value of $ 2,216.17, including accrued interest. The value of the trust corpus at the date of death was $ 119,820.80.At one time the decedent was in the private banking business in Waverly Hall with W. I. H. Pitts, Sr. In June 1937 he acquired a one-third interest in a potato-selling business which was conducted as a partnership. He was active in that business until the time of his fatal illness. During the period from 1937 until his death the decedent devoted time and attention to his investments; he followed the securities market and bought and sold securities. He also dealt in commodities futures and negotiated about six transactions in 1937 in lard and cottonseed oil. On five of these transactions which were closed before July 1, 1937, he sustained losses in the net amount of $ 5,777.50. (Additional70 sentence.)During the year 1937, the decedent was not suffering from any illness. On and prior to October 14, 1937, the date of the trust, the decedent was in good health. His health record in prior years, including 1935 and 1936, was good. He did not suffer any serious illnesses during his lifetime, nor have any accidents or operations. In 1938 he had some gall bladder disturbance caused by gall stones, 580 for which he received treatment in an Atlanta hospital, but there was no operation; the gall stone passed, and there was no recurrence of gall bladder trouble. In the latter part of 1938 the decedent had some disturbance from arthritis in leg joints, which was relieved by treatment. In July 1940 the decedent suffered a heart attack, which was the cause of death. He was ill about four weeks. There had not been prior heart attacks.After 1930 Dr. Steward Roberts of Atlanta was the physician of the decedent and of his family. Decedent and his family went to Atlanta once a year for annual physical check-ups. On September 17, 1937, the decedent was given a complete physical examination. Dr. Roberts wrote to decedent on October 1, 1937, reporting the results of the 71 examination. The letter indicated that the decedent's physical condition was good and stated that the condition of the blood, urine, heart, and lungs was normal for a man 82, that "for your age of 82 on January 24, 1938, you are extraordinarily well preserved," and that the decedent did not need any medicines.During the period 1937 until his death, the decedent was active in his business affairs and in his church. He was active physically in 1937 and went down to his place of business every morning, where he stayed all day. He walked to and from his office every day. In 1937 the decedent was chairman of the board of stewards of his church, superintendent of the Sunday school, and leader of a Sunday school class. He often led a prayer meeting. He took trips to Florida. The decedent had a bright and happy disposition.The decedent executed his last will and testament on April 22, 1940, four months before his death. He executed a codicil to his will on July 24, 1940. By the will and the codicil the decedent devised and bequeathed to a trustee of three trusts for the benefit of his wife and two daughters equal thirds of his residuary estate. He did not make any bequests direct72 to his son. He stated in clause 5 of his will that the reason he had not made further provision in his will for his son was that he had heretofore made a gift in trust in which he had made full provision for his benefit and protection.The transfer in trust of 1,132 shares of Coca-Cola common stock on October 14, 1937, was made in contemplation of death. The trust was established in contemplation of death.SUPPLEMENTAL OPINION.Issue 1. -- Consideration has been given to the contentions of the petitioners which are set forth in their motion for reconsideration under the first issue in this proceeding. Reconsideration of the record and of the pertinent authorities does not move us to set aside our previous finding of fact that the trust for William Pitts 581 Frizzell and the transfers of stock to that trust were made in contemplation of death, and our conclusion as to the question of law to the same effect.Petitioners stress a short part of the testimony of Roy Burns to the effect that the decedent had sustained losses in six commodities transactions in 1937, shortly before he created the trust; and upon this evidence they argue that this proceeding comes within the 73 rationale of Colorado National Bank of Denver v. Commissioner, 305 U.S. 23">305 U.S. 23. We do not agree with this contention.In the case of Colorado National Bank of Denver, the evidence clearly established that the decedent, Hendrie, intended to and did speculate on the market to a considerable degree, particularly during the last five or six years of his life, and that his dominant purpose in creating a trust for the benefit of his daughter and grandchildren was to remove his sound assets from the hazards of losses from his own speculations on the market, which he desired to and did continue up to the time of his death. See Commissioner v. Colorado National Bank of Denver, 95 Fed. 160, 162; reversed, 305 U.S. 23">305 U.S. 23.In this proceeding there is practically no evidence that the decedent, Frizzell, speculated on the market before or after the trust was created; or that the decedent believed that his business activities were attended by risks which might or could reduce his assets so that he deemed it prudent to isolate part of his assets from the hazards of losses, and thereby assure for his 74 incompetent son means for his support at the time and for the rest of the son's life. At the time of death the decedent owned stocks and bonds of the value of about $ 425,000, exclusive of the stock given to the trust in 1937. There is no evidence that the decedent was a trader or speculator on the market in stocks in 1937 or thereafter, or that his business activities at that time were speculative or hazardous. The only evidence on this point is testimony of the witness Burns that in 1937 the decedent made six purchases on the commodities market which resulted in a net loss of about $ 5,700, which Burns learned about in 1938 from his preparation of the income tax return of the decedent for the year 1937. Burns had no knowledge otherwise of any market transactions of the decedent and he did not testify that the decedent speculated on the market. We can not make a finding from this fragment of evidence that the dominant purpose of the decedent in creating the trust in 1937 was to isolate part of his property from risk of losses from speculation, as was the basis for the holding in the Colorado National Bank case, supra, of the Board of Tax Appeals in its memorandum opinion75 that the Hendrie trust was not created in contemplation of death. (The memorandum opinion of the Board of Tax Appeals was entered on September 19, 1936, and is reported by Prentice-Hall in 1936 B. T. A. Memorandum 582 Decisions, vol. 5, par. 36,314, p. 442.) Since this Court does not have before it substantial evidence to make such finding and conclusion in this proceeding, and does not so hold, this proceeding does not come within the rationale of the Supreme Court in Colorado National Bank of Denver v. Commissioner, supra.We have reviewed again the testimony dealing with the motive of the decedent in creating the trust for the benefit of William Pitts Frizzell. The testimony shows that the son was unable to look after himself in every respect; that is, he had to be under the care of guardians who would buy his clothes and look after him; he was unable to care for himself even though he were provided with an income. Mary George Frizzell, a daughter of the decedent, testified about her deceased father's reasons for creating the trust as follows:Well, he said that he wanted to fix this trust so that my brother would have something to76 live on under any circumstances that might happen. * * Well, I guess maybe he thought that there might come a day when he might be left alone in the world; that we might all be taken. * Yes, I mean if something should happen to all of us because that is something you never know. * The beneficiary of the trust was 40 years old when the trust was created; the grantor was 81 years old. The evidence does not show that the decedent intended by his creation of the trust in 1937 to relieve himself of the care of the son during the remainder of his (the decedent's) life, so as to make the son independent in that sense.It is our judgment that the evidence shows that the dominant purpose of the decedent in creating the trust was to arrange for such time as the incompetent son might be alone. Such provision could be made either by will or by an inter vivos trust. In this proceeding the evidence shows, in our opinion, that the trust was created in 1937 in lieu of making the same provision under a will. Therefore, the trust comes within the scope of section 811 (c) as a transfer in contemplation of death.Decision will be entered under Rule 50. BLACKBlack, J., dissenting: 77 I realize, of course, that whether a transfer in trust such as we have in the instant case was made in contemplation of death is largely a question of fact. The majority opinion, after finding certain facts, makes an ultimate finding of fact as follows:The transfer in trust of 1,132 shares of Coca-Cola common stock on October 14, 1937, was made in contemplation of death. The trust was established in contemplation of death.I do not agree with this ultimate finding. Upon the same facts upon which it is based, I would find as an ultimate fact:583 The transfer in trust of 1,132 shares of Coca-Cola common stock on October 14, 1937, was not made in contemplation of death. The trust was not established in contemplation of death.In these contemplation-of-death cases the important thing is to search for the dominating motive which prompted the transfer. If that dominating motive was associated with life rather than death, then the decision should be for the taxpayer; if associated with death, then the decision should be for the Government. In this case I think the evidence shows that the dominant motive which prompted the decedent to make the transfer was associated with 78 life rather than death. I realize, of course, that each of these contemplation-of-death cases depends upon its own facts and that the study of other cases which have been decided by this Court and other courts, including the Supreme Court of the United States, is only relatively helpful. However, they do lay down certain principles which serve as guides in evaluating evidence. One of the cases which I think is helpful in evaluating the weight of the evidence in the case at bar is Griffith v. United States, 32 Fed. Supp. 884. In that case the Court of Claims said in the concluding part of its opinion:The record in the case at bar discloses that paramount to all other considerations in the decedent's mind was the particular concern which he felt for his invalid daughter so far as the 1928 transfers are concerned; and the assurance of an adequate income for himself in later years so far as the 1929 transfers are concerned. These were the dominant motives which impelled the decedent to act, and any other considerations that might have occurred to him were purely incidental. Only by an inference altogether unwarranted under all the evidence of record79 could it be said that the decedent intended to effect a testamentary disposition, and to us it is clear from a consideration of all the evidence submitted that it cannot be said that the decedent in making transfers did so in contemplation of death. * It seems to me that in the instant case the facts show that the dominant motive which impelled the decedent to make the transfer was concern for his mentally incompetent son and to provide safely for his support and maintenance, regardless of what might happen to decedent's own financial resources in the future, and that, as said by the court in the Griffith case, "any other considerations that might have occurred to him were purely incidental."Our own recent case of Estate of Ernest Hinds, Deceased, 11 T.C. 314">11 T. C. 314, seems to me to be in point in petitioner's favor. In that case General Hinds, a good many years before his death, had created a trust for the benefit of his wife, Minnie Hinds. Upon the request of his wife, he had made that trust revocable. In 1940 Mrs. Hinds suffered a serious accident, followed by a nervous breakdown, and General Hinds feared that she might remain an invalid the80 remainder of her life. In order to provide for her support and maintenance 584 regardless of what might happen in the future to his own financial resources, he and Mrs. Hinds executed a new trust and made it irrevocable. The Commissioner determined that this latter trust was executed by General Hinds in contemplation of death. We held to the contrary, basing our holding upon the fact that the evidence showed that the dominant motive of General Hinds in making this transfer was associated with life, namely, the providing for the certain support of his wife, whom he feared might become a permanent invalid, with the assurance that this support would be available regardless of what might happen in the future to his own financial resources. In arriving at our decision in that case we quoted from the Supreme Court's decision in Allen v. Trust Co. of Georgia, 326 U.S. 630">326 U.S. 630, in which the Court, among other things, said: * * Many gifts, even to those who are the natural and appropriate objects of the donor's bounty, are motivated by "purposes associated with life, rather than with the distribution of property in anticipation of death." United81 States v. Wells, supra * . Those motives cover a wide range. See 1 Paul, Federal Estate & Gift Taxation (1942) §§ 6.09 et seq. "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, supra * . Whether such a desire was the dominant, controlling or impelling motive is a question of fact in each case. * *Because I believe that the evidence in this case shows that the dominating motive which impelled the decedent to make the transfer here involved was in recognition of the special needs of his mentally incompetent son, William Pitts Frizzell, and to discharge the moral obligation which decedent felt to insure his adequate support and maintenance in the future, regardless of what might happen to his own financial resources, I respectfully dissent from the majority opinion.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624140/	Frank W. and Mary W. Oman v. Commissioner.Oman v. CommissionerDocket No. 5423-70 SC.United States Tax CourtT.C. Memo 1971-183; 1971 Tax Ct. Memo LEXIS 150; 30 T.C.M. (CCH) 767; T.C.M. (RIA) 71183; July 28, 1971, Filed Frank W. Oman, pro se, 127 S. Harrisonst., Easton, Md.L. Buck Fowler, for the respondent. 768 SACKS Memorandum Findings of Fact and Opinion SACKS, Commissioner: Respondent determined a deficiency of $297.99 in petitioners' Federal income tax for the year 1967. Petitioners and respondent have agreed that the respondent properly barred the claimed deduction of $31.21 as a casualty loss deduction, leaving $288 as the amount now in controversy. The only issue for decision is whether petitioners Frank W. and Mary W. Oman sustained a deductible casualty loss under section 165(c)(3), Internal Revenue Code of 1954, as a result of a collision involving an automobile purchased151 with petitioners' funds for the benefit of their minor son. Findings of Fact The stipulation of facts and exhibits attached thereto are incorporated by reference and to the extent deemed pertinent are summarized below. Frank W. Oman and Mary W. Oman (hereinafter referred to as petitioners) are husband and wife who at all relevant times resided at 127 S. Harrison Street, Easton, Maryland. Petitioners filed their joint Federal income tax return for the taxable year 1967 with the internal revenue service center at Philadelphia, Pennsylvania. During the taxable year 1967 petitioners had two children, Andrew Oman and Michael Oman. Michael was born on October 27, 1946, and was employed by Dr. Vannevar Bush in South Dennis, Massachusetts during the summer of 1967. Petitioners sent Michael $1,000 shortly before July 31, 1967, for the purpose of purchasing an automobile. On July 31, 1967, Michael acquired a 1954 Austin Healy two-door Roadster for the sum of $1,000 from J. Albert Bassett, Jr. Mr. Bassett delivered a Bill of Sale in Michael's name for the said automobile to Michael. At the time the Austin Healy was purchased, petitioners anticipated the vehicle would be included under152 their existing insurance policy with the GEICO insurance company. After being informed by GEICO that petitioners' existing ploicy would not cover vehicles permanently garaged at a residence other than that of petitioners, they directed Michael to register the automobile in Massachusetts under Michael's name. The automobile was legally registered accordingly on August 21, 1967. GEICO was instructed to bill petitioners for liability insurance on the Austin Healy under a policy separate from petitioners' existing policy. In order for Michael's automobile to be inspected according to Massachusetts law, Michael left the vehicle under the care of a friend, William O. Beaulier, with instructions for William to have the vehicle inspected while Michael was visiting petitioners at petitioners' residence in Easton. On September 10, 1967, William was operating the said automobile when it went out of control and collided with a tree resulting in the car being completely destroyed. Although, at the time of the collision the car was registered and covered by liability insurance, it had not been inspected and was not covered by collision insurance. On petitioners' 1967 Federal income tax return,153 petitioners claimed a $900 casualty loss - $1,000 purchase price of the automobile less the $100 floor as provided in section 165(c) of the Internal Revenue Code of 1954. Neither petitioners nor Michael Oman received any insurance recovery. The respondent disallowed the stated casualty loss in his statutory notice of deficiency. Opinion It is a settled proposition of tax law that an automobile may be the subject of a casualty loss for its owner, section 165, Internal Revenue Code of 1954; section 1.165-7(a)(3), Income Tax Regs. Petitioners are therefore entitled to a deduction if they possessed the necessary elements of ownership required by the statute. Michael was given the $1,000 by petitioners to purchase an automobile. In so doing, we find petitioners relinquished all control over the $1,000 and therefore cannot be considered owners of property purchased with these funds by Michael for his own use. The loss incurred by the destruction of the Austin Healy was a loss that was suffered by Michael, not petitioners. Such a finding obviates any determination by us as to whether the automobile was a necessity or as to Michael's status154 as a dependent of petitioners. See Thomas J. Draper, 15 T.C. 135">15 T.C. 135(1950). Reviewed and adopted as the report of the Small Tax Case Division. Decision will be entered under Rule 50. 769	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624142/	JOHN D. DALBY and GERRY L. DALBY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentDalby v. CommissionerDocket No. 8786-81.United States Tax CourtT.C. Memo 1983-449; 1983 Tax Ct. Memo LEXIS 340; 46 T.C.M. (CCH) 892; T.C.M. (RIA) 83449; July 28, 1983. 340 In 1977, P, a pilot and veteran of the Armed Forces, attended flight training courses, which maintained or improved skills required of him in his trade or business. The Veterans' Administration reimbursed P for 90 percent of the cost of such courses pursuant to 38 U.S.C. sec. 1677 (1976). P did not and was not required under 38 U.S.C. sec. 3101(a) to report this educational allowance as income. He deducted the entire cost of the flight training courses, including that portion for which he was reimbursed. Held, P is not entitled to deduct the reimbursed portion of the flight training expenses under sec. 265(1), I.R.C. 1954. Manocchio v. Commissioner,78 T.C. 989">78 T.C. 989 (1982), on appeal (9th Cir., Sept. 20, 1982), followed. Allen Melton, for the petitioners. Donald W. Hicks, Sr., for the respondent. SIMPSONMEMORANDUM FINDINGS OF FACT AND OPINION SIMPSON, Judge: The Commissioner determined a deficiency in the petitioners' Federal income tax of $1,582.00 for 1977. The sole issue for decision is whether the petitioners are entitled to deduct as educational expenses under section 162 of the Internal Revenue Code of 19541 certain payments for flight training courses for which they received 341 nontaxable reimbursement from the Veterans' Administration. FINDINGS OF FACT Some of the facts have been stipulated, and those facts are so found. The petitioners, John D. and Gerry L. Dalby, husband and wife, were legal residents of Dallas, Tex., at the time they filed their petition and amended petition in this case. They filed their joint Federal income tax return for 1977 with the Internal Revenue Service in Dallas, Tex. Mr. Dalby will sometimes be referred to as the petitioner. Mr. Dalby served as a pilot and flight instructor in the Armed Forces. During 1977, he was employed by the Vought Corporation (Vought) as an engineering specialist. His prime assignment during 1977 with Vought was developing training syllabi and determining the use and mix of training aircraft and flight simulation. In 1977, Mr. Dalby attended flight training courses in order to maintain skills required in his trade or business. The total cost of these courses was $5,437.00, and Mr. Dalby paid that amount in 1977. As a veteran, he was entitled under 38 U.S.C. sec. 1677 (1976)342 to receive an educational assistance allowance from the Veterans' Administration (VA) equal to 90 percent of the costs incurred for the flight training. Consequently, he received reimbursement from the VA in the amount of $4,893.30 in 1977, and such reimbursement is not taxable under 38 U.S.C. sec. 3101 (a) (1976). The petitioners claimed an educational expense deduction for the entire cost of the flight training courses. In claiming this deduction, they relied on IRS publications available to them, including Publication 17. In his notice of deficiency, the Commissioner disallowed the deduction for that portion of the flight training expenses for which the petitioner received reimbursement from the VA. OPINION The sole issue for decision is whether the petitioners are entitled to deduct as educational expenses under section 162 certain payments for flight training courses for which they received nontaxable reimbursement from the VA. We thoroughly considered this issue in Manocchio v. Commissioner,78 T.C. 989">78 T.C. 989 (1982), on appeal (9th Cir., Sept. 20, 1982), where we held that the reimbursed flight training expenses were allocable to a class of tax exempt income and therefore were 343 not deductible under section 265. We further held that the Commissioner was not estopped from disallowing a deduction for reimbursed flight training expenses in years prior to the issuance of Rev. Rul. 80-173, 2 C.B. 60">1980-2 C.B. 60. The petitioners attempt to distinguish Mannochio and establish adequate grounds for an estoppel by proving that their reliance on the Commissioner's prior position 2344 was greater and more reasonable than that of the petitioner in Manocchio. The petitioners contend that, unlike the petitioner in Manocchio,3 they claimed deductions for flight training expenses for which they were reimbursed by the VA in several years prior to 1977, and again in 1978, without contest by the Commissioner. This factual distinction, if it exists, is without consequence. The Commissioner's acceptance of the petitioners' returns for prior and subsequent years does not of itself estop the Commissioner from pursuing a deficiency in 1977. Niles Bement Pond Co. v. United States,281 U.S. 357">281 U.S. 357 (1930); Booth Newspapers, Inc. v. Commissioner,17 T.C. 294">17 T.C. 294 (1951), 345 affd. per curiam 201 F. 2d 55 (6th Cir. 1952). Furthermore, no matter how great or how reasonable the petitioners' reliance on the Commissioner's prior position, such reliance, alone, cannot generate an estoppel. Dixon v. United States,381 U.S. 68">381 U.S. 68 (1965); Graff v. Commissioner,74 T.C. 743">74 T.C. 743 (1980), affd. per curiam 673 F. 2d 784 (5th Cir. 1982). Unless the taxpayer has sustained a "profound and unconscionable injury" in reliance on the Commissioner's action, the Commissioner is not barred from correcting a mistake of law and from applying the corrected position retroactively. Schuster v. Commissioner,312 F. 2d 311, 317 (9th Cir. 1962), affg. 32 T.C. 998">32 T.C. 998, and revg. 32 T.C. 1017">32 T.C. 1017 (1959); Manocchio v. Commissioner,supra; see Automobile Club of Michigan v. Commissioner,353 U.S. 180">353 U.S. 180 (1957). In Manocchio, we held that the petitioner failed to prove that his reliance on the IRS rulings led to the type of extraordinary injury which might justify the remedy of estoppel. 78 T.C. at 1002. The petitioners in the present case have not sustained a different or greater injury than the petitioner in Manocchio. Consequently, the Commissioner is not estopped from applying the position of Rev. Rul. 80-173, 2 C.B. 60">1980-2 C.B. 60, 346 to these petitioners. The petitioners have directed our attention to Beckley v. United States,490 F. Supp. 123">490 F. Supp. 123 (S.D. Ga. 1980), in which the court held that the deduction for the costs of flight training need not be reduced by reason of the reimbursement by the VA. The court followed the position taken by the Commissioner in Rev. Rul. 62-205, 2 C.B. 43">1962-2 C.B. 43. However, such case was decided before the Commissioner's change of position and our decision in Manocchio upholding the retroactive application of Rev. Rul. 80-173, and therefore, it will not be followed. The petitioners further contend that Rev. Rul. 80-173 unfairly discriminates between two classes of veterans, those receiving flight training reimbursement pursuant to 38 U.S.C. sec. 1677 and those receiving educational assistance allowances pursuant to 38 U.S.C. sec. 1681. This argument was also considered and rejected in Manocchio, where we held that the differing tax treatment of these benefits was not "so devoid of rational basis" as to constitute an abuse of discretion. 78 T.C. at 1002-1003. Because our decision in Manocchio is dispositive of the issue in this case, we hold that the petitioner is not entitled to a deduction 347 for the reimbursed portion of his flight training expenses in 1977. Decision will be entered for the respondent.Footnotes1. All statutory references are to the Internal Revenue Code of 1954 as in effect during the year in issue, unless otherwise indicated.↩2. The Commissioner's earlier position was announced in Rev. Rul. 62-213, 2 C.B. 59">1962-2 C.B. 59. This ruling held that "expenses for education, paid or incurred by veterans, which are properly deductible for Federal income tax purposes, are not required to be reduced by the nontaxable payments received during the taxable year from the Veterans' Administration." This position was reiterated in general terms in IRS Publication 17, which the petitioners had read and relied on in preparing their 1977 return. The Commissioner subsequently issued Rev. Rul. 80-173, 2 C.B. 60">1980-2 C.B. 60, which purported to "distinguish and clarify" Rev. Rul. 62-213 as it pertained to educational benefits received pursuant to 38 U.S.C. sec. 1677. It provided that flight training expenses for which the taxpayer is reimbursed by the VA under 38 U.S.C. sec. 1677 are not deductible because the taxpayer "suffers no economic detriment and incurs no expense in making the expenditure to the extent of the reimbursement." 1980-2 C.B. at 61. Since Rev. Rul. 80-173 does not state that it is to be applied prospectively only, it is deemed by the Commissioner to have retroactive effect. See Rev. Proc. 78-24, 2 C.B. 503">1978-2 C.B. 503↩; sec. 7805(b). 3. It is unclear whether the petitioner in Manocchio↩ had similarly been allowed a deduction in years prior to 1977; the deduction was disallowed for 1977 and 1978.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624143/	Estate of William W. Paulosky, Deceased, Joseph A. Paulosky, Executor v. Commissioner.Estate of William W. Paulosky v. CommissionerDocket No. 12926.United States Tax Court1947 Tax Ct. Memo LEXIS 45; 6 T.C.M. (CCH) 1176; T.C.M. (RIA) 47297; October 29, 194745 Fred L. Rosenbloom, Esq., Packard Bldg., Philadelphia, Pa., for the petitioner. William H. Best, Jr., Esq., for the respondent. MURDOCKMemorandum Findings of Fact and Opinion The Commissioner determined a deficiency of $11,413.62 in the income tax of the decedent for the year 1943. The only issue for decision is the cost of certain brewery buildings, machinery, and equipment for the purpose of establishing the proper basis for depreciation. Findings of Fact William W. Paulosky died on December 13, 1944. He filed his income tax return for 1943 with the collector of internal revenue for the first district of Pennsylvania. A brewery, including land, building, machinery and equipment was conveyed to the decedent on February 24, 1932 by a deed which recited that the consideration was $1.00. There was a mortgage in the amount of $56,000 then on the property. The decedent paid the mortgage and it was satisfied on July 8, 1943. The decedent also paid liens on the property in the amount of $6,553.83. The decedent, in his return for 1943, claimed depreciation of $2,400 on buildings and $9,148.80 on machinery. He showed $79,215.09 as the cost of the buildings and46 $130,694.73 as the cost of the machinery. Corresponding costs had been shown on previous returns and the deductions based thereon had been allowed. The Commissioner, in determining the deficiency, disallowed $10,852.03 of the depreciation claimed. He said the amount disallowed was excessive and explained: "The basis of the brewery properties acquired by the decedent has been determined under section 113 (a) of the Internal Revenue Code, to be the cost of such properties in the total amount of $62,500.00, allocated as follows: Buildings$23,437.50Machinery and equipment31,250.00Land7,812.50"The stipulation of facts is incorporated herein by this reference. Opinion MURDOCK, Judge: The Commissioner has determined that the total cost of the brewery property to the decedent was $62,500. The parties have stipulated that the decedent paid a mortgage debt on the property in the amount of $56,000 and also paid liens which were on the property at the time acquired in the amount of $6,553.83. The total of those two figures is $62,553.83 as compared to the $62,500 used by the Commissioner. No point is made of this small difference. The47 petitioner, nevertheless, asks the Court to find that the cost to the decedent was $75,000 for buildings and $100,000 for machinery and equipment. A former owner of the brewing company gave a mortgage on the property to Mutual Realty Company in 1927 and defaulted on the mortgage. The property was sold at sheriff's sale to the president of Mutual who then conveyed the property to a "straw man". The straw man gave the president a mortgage for $56,000 secured by the property and immediately transferred the property to the decedent. Thereafter, two stockholders of Mutual filed a bill in equity against the president, the straw man, and the decedent, alleging that the president had no authority to take title to the property in his own name or to make the conveyances, all of which was known to the decedent. The stockholders prayed for a nullification of the transfers and a conveyance of the premises to Mutual. That litigation was settled by an agreement of the parties on November 6, 1933. The petitioner accounts for the additional cost by contending that the decedent made payments of money to the disgruntled stockholders in order to effect the settlment. The petitioner did not introduce48 any direct and reliable evidence that the property cost the decedent any more than the amount stipulated. He says that the property was acquired 13 years prior to the date of the revenue agent's examination upon which the deficiency is based; all of the principals involved in that transaction are now dead; and none of the taxpayer's records other than his general ledger can be found. He says further: "Under such circumstances, and particularly in view of the absence of any evidence to support the respondent's determination, the petitioner's burden of proof is not where, the cost basis used by the decedent taxpayer is substantiated by entries in the original general ledger, by the oral testimony of three individuals who had discussed the subject with the decedent and have examined the books and records in which the decedent had recorded the expenditures made and liabilities incurred in the acquisition of the property in question, and by the respondent's long acquiescence in the continued use of such cost by decedent in determining his income tax liability from year to year." The stipulation supports the respondent's determination. The costs used in determining deductions for prior49 years are not the costs which the petitioner now claims but are substantially larger amounts which the petitioner has not attempted to support by evidence. The revenue agent who made the examination for those years testified for the petitioner but was unable to recall that he had investigated beyond seeing the figures in the ledger and the memorandum book. The ledger is not a book of original entry. The origin of the entries in the "Buildings" and "Brewing Machinery" accounts in the general ledger are explained in the record. There is testimony that the decedent carried in his pocket a small black memorandum book in which he kept a record pertaining to the acquisition and operation of this brewing property. The witnesses had not seen the book for several years prior to the decedent's death and it was not found among his effects after his death. A certified public accountant testified that he had seen the book and had discussed the entries therein with the decedent after which he had made the original entries in the ledger of the decedent. The evidence does not show what, if anything, was in the book entries in addition to amounts. The accountant made an entry of $75,000 in the buildings50 account, an entry of $100,000 in the brewing machinery account, and an entry of $25,000 in the land account, all under date of April 30, 1934. The first two have journal entry references which are unexplained. There is an entry of $500 in the buildings account under date of March 31, 1934, which is not explained. The first two accounts also contain a number of entries under later dates, none of which are explained except an entry in each to increase the balance in those accounts to show supposed appreciation of the assets. The witness testified that, after examining and discussing the items in the black book, he had eliminated a few items because he thought they related to the operation of the brewery, had added the other items, and had allocated the total thereof $25,000 to land, $75,000 to buildings, and $100,000 to brewing machinery. He said he told the decedent at that time that the decedent would have to have evidence to substantiate those figures if the Bureau of Internal Revenue ever questioned them. Asked whether he had ever seen any evidence to substantiate the figures, he replied that it was the Bureau of Internal Revenue which the decedent would have to satisfy and not him. 51 It seems apparent from his testimony that he made no attempt to determine whether or not the figures used by him actually represented costs of the property to the petitioner but simply accepted the decedent's word that they were the costs and thereafter made entries in the ledger. He does not now remember any of the details shown in the black memorandum book. The executor, the brother of the decedent, testified that he had seen the little black book and that the decedent had recorded in that book amounts which he had paid to disgruntled stockholders of Mutual Realty Company. He did not mention amounts. He was unable to remember much when cross-examined. The certified public accountant did not indicate whether or not any of the entries which he saw might have been payments to disgruntled stockholders. Checks of the decedent were mentioned but none were introduced in evidence. Justice is sometimes served by reliance upon secondary evidence where, due to death or loss, the best evidence is not available. J. H. McCallum, 14 B.T.A. 805">14 B.T.A. 805. But here the evidence offered is so unreliable that it does not justify any change in the determination of the Commissioner. It is possible52 that the decedent paid something to the disgruntled stockholders. It is also possible that they were satisfied in some other way as, for example, by receiving a part of the $56,000. Any change from the determination of the Commissioner here would be purely arbitrary and would not be supported by reasonably reliable evidence in this record. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624144/	ILA C. BEARDS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBeards v. CommissionerDocket No. 16071-81.United States Tax CourtT.C. Memo 1984-438; 1984 Tax Ct. Memo LEXIS 236; 48 T.C.M. (CCH) 890; T.C.M. (RIA) 84438; August 14, 1984. 236 Held, although petitioner had to carry her books to and from work, her commuting expenses were solely personal and not incurred in carrying on any trade or business. Thus, secs. 162(a) and 167, I.R.C. 1954, are not applicable and no deduction for her automobile expenses is allowed. Held further, petitioner is not allowed an investment tax credit on her car because it was not sec. 38 property. Ila C. Beards, pro se. John E. Becker, Jr., for the respondent. STERRETTMEMORANDUM FINDINGS OF FACT AND OPINION STERRETT, Judge: By notice of deficiency dated April 9, 1981, respondent determined a deficiency of $2,254 in petitioner's Federal income tax for the taxable year ended December 31, 1978. After concessions, the issues before us are: (1) whether petitioner is entitled to depreciation on her automobile and deductions for automobile expenses incurred while operating it between her home and her place of employment, and (2) whether petitioner is entitled to an investment tax credit on her automobile. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and supplemental stipulation of facts, together with the exhibits attached thereto, 237 are incorporated herein by this reference. Petitioner, Ila C. Beards, resided in Scarsdale, New York at the time she filed her petition in this case. She filed a timely income tax return for 1978 with the appropriate office of the Internal Revenue Service. In 1978, petitioner was employed as an associate professor at the Borough of Manhattan Community College, The City University of New York.The college had five buildings which were located in both the uptown and downtown parts of New York City. Petitioner used taxis to travel between the various buildings of the college. 1At this college, petitioner taught Pitman and Gregg stenography, legal and executive advanced options, medical and regular typing, office practice, and other business subjects. These classes were taught by petitioner in the afternoons and evenings on Monday through Thursday. 2 On Fridays, petitioner attended meetings or performed other non-teaching functions at the college. The one-way distance 238 between petitioner's residence and New York City is approximately 30 miles. Petitioner almost exclusively drove her car to and from work 3 transporting, in two expandable cases, books necessary to teach her classes. Petitioner, in transporting her books, incurred no added expense in the cost of operating her automobile above that which she would have incurred if she had commuted to work by car without the books. It was necessary for petitioner to carry her teaching materials to and from school because she did not have access to storage or work areas at the college. On the days petitioner taught, she would leave home at 12:00 noon and school at 10:00 p.m. The driving time was approximately one hour each way. If petitioner had gone to work by public transportation, it would have been necessary for her to walk 3 blocks to the bus stop, ride the bus for 10 to 30 minutes, take the train to Grand Central Station, and walk 12 blocks to school. To get home from work without her car, petitioner probably would have to take a taxi from school to the train, ride the train, ride the bus, and walk 3 blocks to her home. The 239 train petitioner would have taken was the Harlem Line, Harlem Division, which made approximately 12 local stops between Grand Central Station and the bus stop. This trip home by public transportation would have taken approximately 1-1/2 hours. On her 1978 tax return, petitioner claimed the following deductions and credit which are at issue before the Court: ItemAmountSchedule C Automobile Expenses$4,032.25Schedule C Automobile Depreciation3,465.00Investment Credit (Automobile)462.00In the notice of deficiency, respondent disallowed these expenses on the grounds they were personal expenditures. OPINION Section 162(a) 4 provides that there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Section 262 provides that, except as otherwise provided, no deduction is allowed for personal, living, or family expenses. Generally, the cost of commuting between a taxpayer's residence and his place of employment is a personal expense and nondeductible. 240 Secs. 1.62-1(g), 1.162-2(e), 1.262-1(b)(5), Income Tax Regs.; Fausner v. Commissioner,413 U.S. 838">413 U.S. 838, 839 (1973); Commissioner v. Flowers,326 U.S. 465">326 U.S. 465, 470 (1946). This rule is subject to an exception, however, where employees incur expenses in addition to their ordinary costs of commuting because their employer requires them to transport job-related tools to and from work. 5 In Fausner v. Commissioner,supra at 839, the Supreme Court said: Congress has determined that all taxpayers shall bear the expense of commuting to and from work without receiving a deduction for that expense. We cannot read § 262 of the Internal Revenue Code as excluding such expense from "personal" expenses because by happenstance the taxpayer must carry incidentals of his occupation with him. Additional expenses may at times be incurred for transporting job-required tools and material to and from work. Then an allocation of costs between "personal" and "business" expenses may be feasible. * * [Emphasis added; fns. omitted.] Unfortunately, the Court did not provide guidance as to what circumstances trigger an allocation, but it is clear that an additional 241 expense must first be incurred before any allocation issue will arise. 6 In Feistman v. Commissioner,63 T.C. 129">63 T.C. 129, 135 (1974), the Court elaborated on the meaning of additional expense. There the Court stated: It is not enough, howeer, that the taxpayer demonstrate that he carried tools to work. He must also prove that the same commuting expenses would not have been incurred had he not been required to carry the tools. Thus, if he would have driven to work in any event, the fact that he carries "tools" with him is not an additional expense, and no part of the commuting cost is deductible. * * Petitioner claims it was necessary for her to transport her books to and from school. 7 She maintains that these books were too heavy for her to carry on public transportation. Thus, she asserts she drove to work solely because she was required by her employer to transport her teaching materials and not because of personal considerations. Petitioner has the burden of proof, 8 and her position is not supported by the record. We are not convinced petitioner would have traveled by public transportation if she did *242 not have to transport her books. 9 We find that petitioner could have carried her books on public transportation but chose to drive because of safety, convenience, and other personal considerations. Since petitioner would have driven to work whether or not she carried her books, she incurred no additional expense. Her commuting expenses were solely personal in nature and not incurred in carrying on any trade or business. Thus, sections 162(a) and 167 are not applicable and no deduction for her automobile expenses is allowed. 10 Furthermore, petitioner is not allowed an investment tax credit on her car because it was not section 38 property. Decision will be entered under Rule 155.Footnotes1. Petitioner was allowed a deduction for these nonreimbursed costs.↩2. Petitioner taught classes between the hours of 2:00 p.m. and 10:00 p.m. The record, however, is vague regarding the number of classes she taught each day.↩3. Petitioner occasionally stopped to shop on her way home from work.↩4. Unless otherwise stated, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the year here in issue.↩5. McLaughlin v. Commissioner,T.C. Memo. 1982-636↩.6. McLaughlin v. Commissioner,supra.↩7. Respondent does not contest this fact.↩8. Welch v. Helvering,290 U.S. 111">290 U.S. 111↩ (1933). 9. Petitioner did not teach classes on Fridays, yet she failed to show that she regularly took public transportation on those days.↩10. At trial, petitioner presented another argument for the deductibility of her automobile commuting expenses, namely, that respondent had allowed such expenses in prior years. Petitioner's argument is without merit.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624160/	IRA BLUMBERG AND ELISA BLUMBERG, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentBlumberg v. CommissionerDocket No. 5823-90United States Tax CourtT.C. Memo 1992-545; 1992 Tax Ct. Memo LEXIS 565; 64 T.C.M. (CCH) 746; September 15, 1992, Filed 565 Decision will be entered for respondent. For Petitioners: Sanford Amdur.For Respondent: William T. Lyons. GERBERGERBERMEMORANDUM FINDINGS OF FACT AND OPINION GERBER, Judge: Respondent, by means of a statutory notice of deficiency, determined a $ 10,822.78 deficiency in Ira and Elisa Blumberg's (petitioners) Federal income tax for taxable year 1983. Respondent also determined that petitioners were liable for additions to tax under section 6651(a)(1)1 in the amount of $ 883.95, under section 6653(a)(1) in the amount of $ 669.63 plus 50 percent of the interest due on the entire deficiency under section 6653(a)(2), and under section 6661(a) in the amount of $ 2,705.69. In the amendment to answer respondent asserted an increased income tax deficiency of $ 20,528.10 and increased additions under section 6651(a)(1) in566 the amount of $ 3,104.83, under section 6653(a)(1) in the amount of $ 1,026.41, plus 50 percent of the interest due on $ 20,528.10 under section 6653(a)(2), and under section 6661(a) in the amount of $ 5,132.03. The issues presented for our consideration are: (1) Whether for taxable year 1983, petitioners understated their income in the additional amount asserted in respondent's amendment to answer; 2 (2) whether petitioners are liable for an increase in additions to tax under sections 6653(a)(1) and (2), 6651(a)(1), and 6661; and (3) whether petitioner Elisa Blumberg is entitled to relief as an innocent spouse. FINDINGS OF FACT Some of the facts have been stipulated and the stipulation of facts and attached exhibits are incorporated by this reference. At the time of filing the petition herein, petitioners were married and resided in South Salem, New York. Petitioners' Federal567 income tax return for taxable year 1983 was due April 15, 1984, and respondent granted timely requests for extensions for filing until October 15, 1984. Petitioners' 1983 jointly filed Federal income tax return bears a signature date of December 26, 1984, and was stamped received by respondent's service center on December 31, 1984. During 1983 and 1984 petitioner Ira Blumberg was employed by Longfellow Industries Inc. (Longfellow) as its controller. On their 1983 joint Federal income tax return petitioners reported $ 48,200 in wages which petitioner husband received from Longfellow. Petitioner husband was an accountant for 10 years prior to his employment with Longfellow and he retained some of those clients during the term of his employment with Longfellow. Elisa Blumberg was not involved in her husband's accounting practice or business activities. Ira Blumberg's employer discovered that he had been embezzling company funds. On September 25, 1985, petitioners filed a New York State amended resident income tax return on which they reported $ 68,800 3 as additional miscellaneous income and/or compensation received by Ira Blumberg from his employer. On July 13, 1988, pursuant568 to charges brought by the Manhattan District Attorney's Office, Ira Blumberg was convicted of the crime of offering a false instrument for filing in New York State. 4 This conviction was directly attributable to the additional income which he had embezzled from Longfellow during tax year 1983. In 1989 petitioners agreed to a further increase of $ 52,499 in unreported income to New York State. Petitioner wife received a bachelor of arts degree in music and education from Queens College in 1976. While in college petitioner wife did not take courses in accounting, business, or finance nor does she have any569 experience or training in these subjects. She has been a professional songwriter for 20 years and a music producer for approximately 4 years. Following the birth of their son in November 1983, petitioner wife remained at home and conducted her business from a workroom in the family residence. On Schedule C of their 1983 Federal income tax return petitioners reported gross receipts from petitioner wife's music production business, Lisa Ratner Music Production, in the amount of $ 5,034. On their 1983 Federal income tax return petitioners reported interest income of $ 2,239. For taxable year 1984, petitioner wife filed her New York State resident income tax return as married filing separately. On her New York State resident return for 1984 petitioner wife reported "Interest income" as related to her songwriting activities of $ 8,339. In connection with her New York State resident return for 1984, petitioner wife also claimed a depreciation deduction for recording equipment placed in service in 1984 with a depreciable basis of $ 11,211. Petitioners maintained joint bank accounts at Fidelity Cash Reserves (Fidelity) and Manufacturers Hanover Trust (Manufacturers). In tax year 570 1983 deposits totaling $ 104,688.54 and $ 113,790.28 were made into the Fidelity and Manufacturers accounts, respectively. The monthly bank statements for these accounts bear both petitioners' names and were addressed to the marital residence. Petitioners also maintained a joint checking account at National Westminster Bank. Petitioner wife utilized this account to pay for general household expenses, such as groceries, telephone, babysitters, and clothes. Petitioner husband paid the mortgage, utility bills, and car payments, and was generally responsible for handling the family finances. Although petitioners reported $ 48,200 in wages from Longfellow on their joint Federal return, petitioner wife was told by her husband that his salary at Longfellow was about $ 70,000. Petitioner wife was aware that the family's household budget was approximately $ 2,000 a month. Ira Blumberg began using cocaine sometime in July 1984. Petitioner husband concealed his drug usage from his wife. It was not until September 1984, when she found her husband in a seizure-like state from a drug overdose, that Elisa Blumberg became aware that her husband was using drugs. Prior to that time petitioner571 wife believed the changes in her husband's appearance and behavior were attributable to his father's recent death and the emotional distress caused by a family dispute over his father's will. After the overdose petitioner wife, along with the couple's infant son, moved out of the family home for approximately 1 month. Petitioner wife agreed to return home based on her husband's assurances that he was no longer using drugs and would seek counseling for his problems. Petitioners began seeking an out-patient treatment program for petitioner husband and in late January 1985 petitioners began counseling at Liberation Clinic with Dr. Bette Kolodney. Although the incident in September 1984 alerted Elisa Blumberg to the drug problem, it was not until March 1985, in the course of their therapy with Dr. Kolodney, that she became aware of the degree of her husband's substance abuse and the costs of his drug abuse. Sometime in 1980 or 1981, petitioners purchased a home on West Mountain Road in South Salem, New York, for approximately $ 120,000. Petitioners sold this property in August 1984, realizing a gross profit of approximately $ 60,000. By an agreement dated April 25, 1984, petitioners572 contracted to purchase a parcel of land in Pound Ridge, New York. The purchase price was $ 100,000, $ 10,000 payable upon signing the contract and $ 90,000 upon delivery of the deed. The agreement was notarized on May 22, 1984, and the contract of sale was recorded by the Westchester County Clerk's Office on June 13, 1984. Petitioners contracted with Mr. Robert Rubin to construct a home on the Pound Ridge property. The original contract price was $ 250,000; however, the ultimate cost of the construction was somewhat higher. Sometime in the late summer of 1984, petitioners rented a home in Stamford, Connecticut, in which they lived for 1 year while they were involved in the building of a house on the Pound Ridge property. Petitioners obtained $ 100,000 of financing from the Dime Savings Bank of New York on December 21, 1984. Petitioner wife was aware of all facets of the house construction, including the costs. OPINION 1. Understatement of IncomeOn brief, petitioners contend respondent has failed to prove that the additional $ 52,499 in income agreed to with New York State and determined by respondent in the statutory notice of deficiency was not previously included573 in the $ 68,800 reported by petitioners on their New York State amended tax return. Petitioners argue that, if anything, respondent's determination of additional gross income should have been the $ 68,800 reflected in the amended return, or a total increase of $ 16,301 from the statutory notice of deficiency. Respondent contends that the stipulation of facts and attached exhibits are sufficient to carry her burden of proof. 5Paragraph 6 of the parties' stipulation reads as follows: In his capacity as controller, during taxable year 1983 petitioner Ira Blumberg received additional miscellaneous income and/or compensation from his employer in the amount of $ 68,800.00, as evidenced by the Form IT-201-X, New York State Amended Resident Income Tax Return which was filed with New York State by petitioners. A copy of this Form IT-201-X is attached as Exhibit 3-C. Paragraph 8 of the stipulation reads as follows: In 1989, petitioners agreed to an increased amount of $ 52,499.00 in unreported income to New York State, as evidenced by the Department of Taxation and Finance, Income - Audit Report, a copy of which is attached as Exhibit 5-E 574 Generally, a stipulation of fact is controlling on the parties, and the Court is bound to enforce it. Rule 91(e). Rule 91(e) provides in relevant part: (e) Binding Effect: A stipulation shall be treated, to the extent of its terms, as a conclusive admission by the parties to the stipulation, unless otherwise permitted by the Court or agreed upon by those parties. The Court will not permit a party to a stipulation to qualify, change, or contradict a stipulation in whole or in part, except that it may do so where justice requires. * * * Accordingly, this Court does not lightly disregard facts which the parties have stipulated; however, where such facts are clearly contrary to facts disclosed by the record, the Court may refuse to be bound by the stipulation. Jasionowski v. Commissioner, 66 T.C. 312">66 T.C. 312, 318 (1976). Petitioners' argument hinges upon the distinction between the "received" language in paragraph 6 and the "agreed to" language contained in paragraph 8. Although paragraph 6 denotes receipt and is an admission, paragraph 8 also admits that petitioners agreed with the State to an additional increased amount in unreported income. The fact that petitioner575 husband did not stipulate that he "received" the increase is, in the setting of this case, a distinction without a difference. The stipulation is clear and unambiguous and the record does not disclose any facts to refute or contradict the stipulation. Although petitioners have tried to capitalize on a difference in the wording of the stipulation, we consider petitioners' argument to be superficial and unsupported by the evidence. Petitioners have not advanced contrary evidence to overcome the evidence offered by respondent and we are not persuaded by petitioners' semantic hairsplitting. We also note that if petitioners believed the stipulation to be in error, they had ample opportunity to raise and clarify this matter during the stipulation process and at the time of trial. Accordingly, respondent is sustained on this issue. 2. Increase in Additions to Tax -- Section 6653(a)Respondent's amendment to answer asserted an increase in the addition to tax for negligence under section 6653(a)(1) and (2). Section 6653(a)(1) imposes an addition to tax equal to 5 percent of the underpayment if any part of the underpayment is due to negligence or intentional disregard of rules576 or regulations. Section 6653(a)(2) imposes a further addition to tax in an amount equal to 50 percent of the interest payable on the portion of the underpayment attributable to negligence or intentional disregard of rules or regulations. For purposes of this statute, negligence is the "'lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances.'" Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 947 (1985) (quoting Marcello v. Commissioner, 380 F.2d 499">380 F.2d 499, 506 (5th Cir. 1967)). In light of petitioners' concessions with respect to the underreporting of income and our conclusion that respondent has put forth evidence sufficient to satisfy the burden of proof with respect to the underreporting of income as asserted in the amendment to answer, we hold that petitioners were negligent. 3. Increase in Additions to Tax -- Section 6651Section 6651(a)(1) imposes an addition to tax for failure to timely file a return (determined with regard to any extension of time for filing) at the rate of 5 percent of the amount of tax due per month up to 25 percent in the aggregate. The failure to file addition577 to tax is applicable unless it can be shown that the failure to file a tax return was not due to willful neglect and was due to reasonable cause. These two standards have been discussed in case law over a 70-year period and were defined by the Supreme Court as follows: As used here, the term "willful neglect" may be read as meaning a conscious, intentional failure or reckless indifference. See Orient Investment & Finance Co. v. Commissioner, 83 U.S.App.D.C. 74, 75, 166 F.2d 601">166 F.2d 601, 602 (1948); Hatfried, Inc. v. Commissioner, 162 F.2d 628">162 F.2d 628, 634 (CA3 1947); Janice Leather Imports Ltd. v. United States, 391 F. Supp. 1235">391 F.Supp. 1235, 1237 (SDNY 1974); Gemological Institute of America, Inc. v. Riddell, 149 F. Supp. 128">149 F.Supp. 128, 131-132 (SD Cal. 1957). Like "willful neglect," the term "reasonable cause" is not defined in the Code, but the relevant Treasury Regulation calls on the taxpayer to demonstrate that he exercised "ordinary business care and prudence" but nevertheless was "unable to file the return within the prescribed time." 26 CFR § 301.6651(c)(1) (1984); accord, e.g., Fleming v. United States, 648 F.2d 1122">648 F.2d 1122, 1124 (CA7 1981);578 Ferrando v. United States, 245 F.2d 582">245 F.2d 582, 587 (CA9 1957); Haywood Lumber & Mining Co. v. Commissioner, 178 F.2d 769">178 F.2d 769, 770 (CA2 1950); Southeastern Finance Co. v. Commissioner, 153 F.2d 205">153 F.2d 205 (CA5 1946); Girard Investment Co. v. Commissioner, 122 F.2d 843">122 F.2d 843, 848 (CA3 1941) * * * [United States v. Boyle, 469 U.S. 241">469 U.S. 241, 245-246 (1985); fn. ref. omitted.] Whether the late filing of an income tax return is due to reasonable cause or willful neglect is a question of fact. Commissioner v. Walker, 326 F.2d 261">326 F.2d 261, 264 (9th Cir. 1964), affg. on this issue 37 T.C. 962">37 T.C. 962 (1962). As an accountant, petitioner husband was aware of his obligation to timely file an income tax return. Although petitioners sought and were twice granted extensions for time to file, they nonetheless failed to timely file their return. The record shows that petitioners' failure to timely file was not due to reasonable cause and was due to willful neglect. Accordingly, we sustain respondent on this issue. 4. Increase in Additions to Tax -- Section 6661Section 6661 imposes an addition579 to tax equal to 25 percent of an underpayment attributable to an understatement that exceeds the greater of 10 percent of the tax required to be shown on the return or $ 5,000. Sec. 6661(b)(1). Section 6661(b)(2) provides an exception in cases where the taxpayer had substantial authority for the position taken on the return or adequately disclosed the relevant facts affecting the item's tax treatment. An understatement is defined as the tax required to be shown on the return less the tax shown on the return, reduced by any rebates. Sec. 6661(b). An understatement is substantial if it exceeds the greater of 10 percent of the tax required to be shown on the return or $ 5,000. Sec. 6661(b)(1)(A). Petitioners have not argued for a reduction based on a position supported by substantial authority or attributable to facts adequately disclosed on the return. In light of our determination that respondent has satisfied her burden with respect to the increased deficiency in tax, and as the original amount of the deficiency determined in the statutory notice exceeds the greater of $ 5,000 or 10 percent of the tax required to be shown on the return, respondent's burden with respect to 580 the increase in the addition to tax under section 6661 has also been satisfied. Accordingly, respondent is sustained on this issue. 5. Innocent Spouse Relief -- Section 6013(e)When a husband and wife file a joint Federal income tax return, liability for the tax due is joint and several; hence each spouse may be required to pay the entire amount. Sec. 6013(d)(3). Relief is provided under the innocent spouse provisions of section 6013(e). That section states: (e) Spouse Relieved of Liability in Certain Cases. -- (1) In General. -- Under regulations prescribed by the Secretary, if -- (A) a joint return has been made under this section for a taxable year, (B) on such return there is a substantial understatement of tax attributable to grossly erroneous items of one spouse, (C) the other spouse establishes that in signing the return he or she did not know, and had no reason to know, that there was such substantial understatement, and (D) taking into account all the facts and circumstances, it is inequitable to hold the other spouse liable for the deficiency in tax for such taxable year attributable to such substantial understatement, then the other spouse shall be 581 relieved of liability for tax (including interest, penalties, and other amounts) for such taxable year to the extent such liability is attributable to such substantial understatement. All four statutory requirements must be met for the taxpayer to be afforded relief. Purcell v. Commissioner, 826 F.2d 470">826 F.2d 470, 473 (6th Cir. 1987), affg. 86 T.C. 228">86 T.C. 228 (1986); Estate of Jackson v. Commissioner, 72 T.C. 356">72 T.C. 356, 360 (1979). The burden of proof is on petitioner wife to prove that she satisfies each element of the requirements of section 6013(e)(1). Welch v. Helvering, 290 U.S. 111 (1933); Bokum v. Commissioner, 94 T.C. 126">94 T.C. 126, 138 (1990). The parties agree that the requirements of section 6013(e)(1)(A) and (B) have been met. At issue are the requirements under section 6013(e)(1)(C) and (D). As to the knowledge requirement of section 6013(e)(1)(C), petitioner wife must establish that she did not know, and had no reason to know, of the substantial understatement of tax. The test applied to determine whether a spouse had reason to know is whether a reasonably prudent person in the taxpayer's position582 had reason to know or would be expected to know that the tax liabilities were substantially understated. Stevens v. Commissioner, 872 F.2d 1499">872 F.2d 1499, 1505 (11th Cir. 1989), affg. T.C. Memo. 1988-63; Sanders v. United States, 509 F.2d 162">509 F.2d 162, 167 (5th Cir. 1975). The reason-to-know standard imposes a duty of inquiry on the spouse claiming relief. Stevens v. Commissioner, supra.Petitioner wife was not involved in her husband's business. Petitioner wife relied upon her husband to handle the family finances and, in light of the fact that he is an accountant, we find her reliance was reasonable. Petitioner wife was responsible for paying ordinary household expenses and in so doing lived within the constraints of a family budget in accord with the salary she believed her husband earned. However, a spouse cannot close her eyes to facts that might give her reason to know of the unreported income. Terzian v. Commissioner, 72 T.C. 1164">72 T.C. 1164, 1171 (1979); Mysse v. Commissioner, 57 T.C. 680">57 T.C. 680, 699 (1972). While Mr. Blumberg concealed certain of his activities from Mrs. Blumberg, 583 we do not find that a reasonably prudent person in her circumstances was without reason to know or could not be expected to know of the unreported income. The bank statements for the joint accounts at Fidelity Cash Reserves and Manufacturers Hanover Trust were mailed to the marital residence in the name of both petitioners. Petitioner wife testified that she was aware and involved in the purchase and construction of the Pound Ridge property, the total cost of which exceeded $ 350,000. The evidence presented pertaining to petitioners' real estate transactions demonstrates that beginning in April of 1984 and extending into 1985, petitioners had a net outlay of funds totaling over $ 200,000 for the purchase and construction of this property, based on total costs in excess of $ 350,000 less the proceeds realized from the sale of their West Mountain residence and the $ 100,000 mortgage loan obtained in December 1984. Petitioner wife testified that $ 70,000 from her son's inheritance was also used to finance the home; however, no evidence was offered other than her self-serving testimony. Moreover, according to the record, the receipt of the claimed inheritance was sometime later than584 the timeframe of these transactions. We conclude under these circumstances that petitioner wife was aware or should have known of petitioner husband's additional income. The final element petitioner wife must prove is that, under all the facts and circumstances, it is inequitable to hold her liable for the deficiencies attributable to the substantial understatements in tax. Sec. 6013(e)(1)(D). We will address this final element for completeness. In deciding whether it is inequitable to hold petitioner wife liable for the deficiencies, we take into account whether she significantly benefited, either directly or indirectly, from the items omitted from gross income. Belk v. Commissioner, 93 T.C. 434">93 T.C. 434, 440 (1989); sec. 1.6013-5(b), Income Tax Regs. Normal support is not a significant benefit for purposes of determining whether it is inequitable to hold petitioner liable for a deficiency. Flynn v. Commissioner, 93 T.C. 355">93 T.C. 355, 367 (1989); Terzian v. Commissioner, supra at 1172; sec. 1.6013-5(b), Income Tax Regs. However, evidence of significant benefit arises from transfers of property to the spouse even where the benefit585 from such transfer is received several years after the year of the omitted income. Terzian v. Commissioner, supra at 1172 (citing the report of the Senate Finance Committee, S. Rept. 91-1537 (1970), 1 C.B. 606">1971-1 C.B. 606, 608); sec. 1.6013-5(b), Income Tax Regs.As discussed above, petitioners' net outlay for the jointly owned Pound Ridge property was over $ 200,000. Petitioners sold the Pound Ridge property, utilizing the proceeds to purchase their current residence in South Salem, which is solely owned by petitioner wife. We cannot conclude that it would be inequitable to hold petitioner wife liable for the deficiencies in income tax because as the sole owner of the South Salem residence she derived a significant benefit from the transfer of funds attributable to the omitted items of income. In addition, when contrasted with the $ 2,239 of interest income petitioners jointly reported on their 1983 Federal income tax return, the fact that petitioner wife's New York State resident income tax return reflects her receipt of $ 8,339 in interest income in 1984 suggests that petitioner wife had a significant increase in funds on deposit in her own586 accounts during 1984 attributable to the omitted items of income. Furthermore, petitioner wife received a significant benefit from the acquisition of recording equipment with a depreciable basis of $ 11,211 which was placed in service in 1984. Accordingly, a consideration of these elements shows that petitioner wife is not entitled to innocent spouse relief under section 6013(e). To reflect the foregoing, Decision will be entered for respondent. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. Petitioners have conceded the deficiencies and additions to tax as originally determined in respondent's statutory notice of deficiency.↩3. It is this amount which formed the basis for respondent's amendment to answer in which increased deficiencies in income tax and additions to tax are sought. We note that respondent bears the burden of proof as to the additional income asserted in the amendment to answer. ↩4. Although the parties use July 15, 1988, as the date of conviction, the documentary evidence shows July 13, 1988, to be the correct date.↩5. We note that immediately prior to the close of trial, counsel for respondent stated that he "would like to move for a [sic] partial summary judgment on the additional income issue". In response to this request, the Court advised the parties that this issue was to be addressed on brief.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624145/	RITA O'SHAUGHNESSY, EXECUTRIX UNDER THE LAST WILL AND TESTAMENT OF PETER O'SHAUGHNESSY, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.O'Shaughnessy v. CommissionerDocket No. 38863.United States Board of Tax Appeals21 B.T.A. 1046; 1930 BTA LEXIS 1754; December 31, 1930, Promulgated 1754 1. Where the question is raised as to the constitutionality of a provision of the taxing act, the Board will consider it. Where, after consideration, a substantial doubt remains, the statute will be followed until the doubt is dispelled by a court decision. Where such question involves the consideration of many decisions of the Supreme Court, from which differing conclusions may reasonably be reached, the Board will follow the words of the statute. 2. Section 302(e) of the Revenue Act of 1926 requires that there be included as a part of the estate of a decedent the value of property held as joint tenants by the decedent and any other person. This section must be construed to include the full value of such property, and not merely the interest of the decedent. It does not clearly appear that the section, as so construed, is unconstitutional. Joseph P. Tumulty, Esq., Walter E. Barton, Esq., and Raymond C. Cushwa, Esq., for the petitioner. L. S. Pendleton, Esq., for the respondent. PHILLIPS1046 In this proceeding the petitioner seeks a redetermination of the estate-tax liability of the estate of Peter O'Shaughnessy, deceased, 1047 1755 against which the respondent has determined a deficiency in estate tax in the amount of $21,148.51. The questions involved arise out of the fact that respondent has included as a part of the decedent's gross estate the entire value of certain real property held by the decedent and his daughter as joint tenants. In the estate-tax return filed by petitioner, as executrix of the estate, none of such property was included as a part of the gross estate of decedent. FINDINGS OF FACT. The petitioner is the executrix of the estate of Peter O'Shaughnessy, who died on August 1, 1926. Prior to August 28, 1919, the decedent owned certain real estate situated in the State of Kentucky. On August 28, 1919, he conveyed this real estate to Eugene V. Cloud, his wife Emma joining in the conveyance, and on the same date Cloud reconveyed the real estate to the decedent and Victor O'Shaughnessy, as joint tenants with right of survivorship. On July 22, 1921, the decedent conveyed his interest in the real estate to Victor O'Shaughnessy, the decedent's wife Emma joining in the conveyance; and on the same date Victor O'Shaughnessy conveyed the real estate to the decedent and Rita O'Shaughnessy, 1756 as joint tenants with right of survivorship, the granting clause and habendum clause of the deed reading as follows: Granting Clause: That Victor O'Shaughnessy, unmarried for and in consideration of one dollar, and other good and valuable considerations, to him paid by Peter O'Shaughnessy and Rita O'Shaughnessy, the receipt whereof is hereby acknowledged, does hereby bargain, sell and convey to the said Peter O'Shaughnessy and Rita O'Shaughnessy for and during their joint lives, with right of survivorship, his or her heirs and assigns forever - Habendum Clause: To have and to hold the same to the said Peter O'Shaughnessy and Rita O'Shaughnessy for and during their joint lives, with right of survivorship, his or her heirs and assigns forever. At the time of the decedent's death, the fair market value of the real estate owned by the decedent and Rita O'Shaughnessy as joint tenants with right of survivorship was $305,700: The Commissioner included the entire value thereof in the gross estate of the decedent. OPINION. PHILLIPS: The petitioner contested the deficiency determined by the respondent on the following grounds: (1) That no part of the value of real1757 estate, situated in the State of Kentucky and owned by the decedent and Rita O'Shaughnessy as joint tenants with right of survivorship, should be included in the gross estate within the purview of Sections 301, 302 and 302(e) of the Revenue Act of 1926; (2) that if it was the intent of said sections to include all of such jointly owned real 1048 estate in the gross estate, they were repugnant to the Fifth Amendment to the Constitution in that they were so arbitrary and capricious as to deprive the estate of its property without due process of law. In the alternative it was contended (3) that only one-half of the value of such jointly owned property was taxable under said sections; and (4) that if it was the intent to tax more than one-half of such value, said sections were repugnant to the Fifth Amendment. Section 301(a), 302, 302(e) and 302(h) of the Revenue Act of 1926 were in force at the time of the death of the decedent and they read as follows: SEC. 301. (a) In lieu of the tax imposed by Title III of the Revenue Act of 1924, a tax equal to the sum of the following percentages of the value of the net estate (determined as provided in section 303) is hereby imposed1758 upon the transfer of the net estate of every decedent dying after the enactment of this act, whether a resident or nonresident of the United States; * * * 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 - * * * (e) To the extent of the interest therein held as joint tenants by the decedent and any other person, or as tenants by the entirety by the decedent and spouse, or deposited, with any person carrying on the banking business, in their joint names and payable to either or the survivor, except such part thereof as may be shown to have originally belonged to such other person and never to have been received of acquired by the latter from the decedent for less than an adequate and full consideration in money or money's worth: Provided, That where such property or any part thereof, or part of the consideration with which such property was acquired, is shown to have been at any time acquired by such other person from the decedent for less than an adequate and full consideration in money or money's worth, there shall be excepted1759 only such part of the value of such property as is proportionate to the consideration furnished by such other person: Provided further, that where any property has been acquired by gift, bequest, devise, or inheritance, as a tenancy by the entirety by the decedent and spouse, then to the extent of one-half of the value thereof, or, where so acquired by the decedent and any other person as joint tenants and their interests are not otherwise specified or fixed by law, then to the extent of the value of a fractional part to be determined by dividing the value of the property by the number of joint tenants; * * (h) Except as otherwise specifically provided therein subdivisions (b), (c), (d), (e), (f), and (g) of this section shall apply to the transfers, trusts, estates, interests, rights, powers and relinquishment of powers, as severally enumerated and described therein, whether made, created, arising, existing, exercised, or relinquished before of after the enactment of this Act. Section 2348 and 2349, Kentucky Statutes, read as follows: Section 2348. Joint tenants may be compelled to make partition; and when a joint tenant dies, his part of the joint estate, real or1760 personal shall descend to his heirs, or pass by devise, or to his personal representative, subject to debts, courtesy, dower or distribution. 1049 Section 2349. The preceding section shall not apply to any estate which joint tenants have as executors or trustees, nor to an estate conveyed or devised to persons in their own right, when it manifestly appears, from the tenor of the instrument, that it was intended that the part of the one dying should belong to the others, neither shall it affect the mode or proceeding on any joint contract or judgment. While the formal record fails to show the relationship of the decedent and Rita O'Shaughnessy, it does establish that they were not husband and wife. Briefs filed by both parties state the relationship to have been that of father and daughter. The estate with which we are called upon to deal is one of joint tenancy and not tenancy by the entireties. The petitioner, in her brief, abandons her first contention that none of the property held in joint tenancy should be included in the gross estate and concedes that one-half thereof may be so included. The third ground urged by petitioner, that only one-half of the value1761 of the jointly owned property was taxable under the provisions of the Act, can not be sustained. The Act taxes the interest of the joint tenants. The thought that the Act intends to tax only the interest of the decedent in such property, which has in the past been accepted by the Board, must be rejected in view of the statement of the Supreme Court in Tyler v. United States,281 U.S. 497">281 U.S. 497, that "the intent of Congress to impose the challenged tax is not open to doubt." Nor does it appear that there is any basis for the contention that the word "and" should be read "or" in that clause of section 302(e) which reads "except such part thereof as may be shown to have originally belonged to such other person and never to have been received or acquired by the latter from the decedent for less than an adequate and full consideration in money or money's worth." The words appear to have been used advisedly to assure the interpretation given prior acts by the Commissioner's regulations. See Senate Finance Committee Report accompanying the 1921 Act (H.R. 8245). There remains only the question whether the statute, so far as it includes more than one-half of the value of1762 the joint property in the gross value of the estate, is constitutional. While the Board will consider such an issue, Independent Life Insurance Co. of America,17 B.T.A. 757">17 B.T.A. 757, the unconstitutionality of any provision of the tax law must clearly appear before the Board, as part of the executive branch of the Government, would be justified in holding that it should not be enforced. If after consideration there remains a substantial doubt, the law should be followed until the doubt is dispelled by a court decision. There exists a substantial basis for the argument that one-half of the joint estate had passed from the ownership and control of the 1050 decedent in his lifetime, Knox v. McElligott,258 U.S. 546">258 U.S. 546, and that such one-half was not taxable as a part of his gross estate. Nichols v. Coolidge,274 U.S. 531">274 U.S. 531; May v. Heiner,281 U.S. 238">281 U.S. 238; Reinecke v. Northern Trust Co.,278 U.S. 339">278 U.S. 339 (as to the five trusts). See also Mary Allen Emery, Executrix,21 B.T.A. 1038">21 B.T.A. 1038, decided this day. On the other hand, there is weight in the argument that the reasoning used1763 by the Supreme Court in Tyler v. United States,281 U.S. 497">281 U.S. 497 in respect of tenancies by the entireties may be applied in the case of joint tenancies to subject the whole to the tax where the survivor paid nothing. The question of constitutionality involves the consideration of many decisions of the Supreme Court, from which differing conclusions may reasonably be reached. See prevailing and dissenting opinions in Pennsylvania Co., etc., Executors,21 B.T.A. 176">21 B.T.A. 176. While we have not hesitated to construe those decisions and to apply what we considered to be the better of conflicting views, where the constitutionality of the statute was not involved, Pennsylvania Co., supra;Ada M. Slocum,21 B.T.A. 169">21 B.T.A. 169; Georgianna M. Romberger et al., Executors,21 B.T.A. 193">21 B.T.A. 193; Mary A. Emery, Executrix, supra, we recognize that there exists much ground for difference of opinion as to the extent to which those decisions apply beyond the facts presented in each. See 1764 Edgar M. Morsman, Jr., Administrator,14 B.T.A. 108">14 B.T.A. 108, and Commissioner v. Morsman, 44 Fed.(2d) 902. It does not clearly appear that the taxing Act is unconstitutional. Since this case falls squarely within the terms of the Act, the action of the Commissioner is approved. Reviewed by the Board. Decision will be entered for the respondent.VAN FOSSAN concurs in the result only. BLACK BLACK, concurring: I concur in the result reached by the majority opinion, but I do not share the doubts expressed therein as to the constitutional validity of that part of section 302 of the Revenue Act of 1926 which requires the inclusion as a part of the decedent's gross estate of the value at the time of his death of the interest held as joint tenants by the decedent and any other person "whether made, created, arising, existing, exercised or relinquished before or after the enactment of this Act." I think that Tyler v. United States,278 U.S. 339">278 U.S. 339, although involving tenancies by the entirety rather than joint tenancies, is decisive of the question of the constitutional validity of the statute in question. 1765 In the instant case the decedent died August 1, 1926, and the joint tenancy was created July 22, 1921, while the Revenue Act of 1918 *1051 was in full force and effect. In this sort of a situation I do not think the decision in Knox v. McElligott,258 U.S. 546">258 U.S. 546, is applicable. My reasons for holding this view are more fully stated in a dissenting opinion which I have filed in Mary Allen Emery, Executrix,21 B.T.A. 1038">21 B.T.A. 1038, and which it is unnecessary to repeat at this time.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624147/	WARNER COLLIERIES COMPANY OF DELAWARE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Warner Collieries Co. v. CommissionerDocket No. 34679.United States Board of Tax Appeals36 B.T.A. 54; 1937 BTA LEXIS 780; June 8, 1937, Promulgated 780 Petitioner held to be liable as a transferee. H. A. Mihills, C. P. A., for the petitioner. J. R. Johnston, Esq., for the respondent. VAN FOSSAN 54 OPINION. VAN FOSSAN: This case is now before us on a mandate of the United States Circuit Court of Appeals for the Sixth Circuit. The Board's original report was promulgated on September 29, 1932, and the decision was entered the following day (). An appeal was taken by the respondent on the transferee issue. The Circuit Court of Appeals, without opinion, remanded the cause for further proceedings to be had in conformity with the judgment of the court. That judgment was as follows: The court being of opinion that the Board of Tax Appeals abused its discretion in refusing, after the recess at the hearing, to permit counsel for the Commissioner to submit further proofs on the question of the net value of the assets of the Crawford Hill Coal Company transferred to the respondent as of June 30, 1919, and also erred in refusing to consider evidence thereafter offered by the Commissioner touching the value and amount of such assets. It is ordered that the order781 of the Board be reversed and the cause remanded for a redetermination of the question after permitting the Commissioner to introduce such proofs and considering the evidence pertaining thereto offered by the Commissioner and rejected by the Board. Pursuant to the mandate a further hearing was held on March 31, 1936, at which additional evidence was adduced relating to the net value of the assets of the Crawford Hill Coal Co., transferred to the petitioner as of June 30, 1919. In addition to the facts as found by us in our original report of September 29, 1932, we find the following facts: The agreement of October 30, 1919, was executed and fully carried out in accordance with its terms. As provided in paragraph 5 of that contract, the Crawford Hill Coal Co., on January 29, 1920, directed in writing that the 4,500 shares of the petitioner's stock be issued to the former company's stockholders in proportion to their stockholdings. The balance sheet of the Crawford Hill Coal Co., as of June 30, 1919, shows assets aggregating $240,558.18, consisting chiefly of accounts receivable, $58,442.11; plant, less reserves, $157,695.33; and Liberty Bonds, $82,500; with current liabilities782 and taxes of $10,518.27; capital stock, $90,000; surplus, $168,319.01; and profit and 55 loss, $32,404.77. The net value of the assets of the Crawford Hill Coal Co. as of June 30, 1919, was at least $100,000 in excess of its liabilities. The assets of the Crawford Hill Coal Co. as of June 30, 1919, were transferred to the petitioner pursuant to the agreement of October 30, 1919. The business of Crawford Hill Coal Co. was conducted by it from June 30, 1919, to October 30, 1919, the date the transfer of its assets to the petitioner. The original entries reflecting the transactions of the Crawford Hill Coal Co. during that period were made on the Crawford Hill Coal Co.'s books and were transferred to the petitioner's books. They were there set up with similar entries relating to other properties acquired by the petitioner. All profit or loss resulting from the operation of the Crawford Hill Coal Co. after June 30, 1919, accrued to the petitioner. The petitioner derived a profit from such operations from June 30, 1919, to April 1, 1920. No loss appeared during that period and all liabilities incurred and paid by the Crawford Hill Coal Co. during such period related to783 operations and were reflected in the profit and loss account from which the petitioner received the benefit. All ledger accounts were closed as of June 30, 1919, and so transferred to the petitioner's books. Ultimately there was a complete transfer. Liberty bonds of the face value of $82,500 and worth from 80 to 90 percent thereof were transferred by the Crawford Hill Coal Co. to the petitioner on October 30, 1919. The accounts receivable of $58,442.11, due from W. H. Warner & Co. to the Crawford Hill Coal Co., was ultimately paid in full. The liabilities shown on the balance sheet of June 30, 1919, were assumed and paid by the petitioner. The differences between the receipts and expenditures and the credit and debit balances arising from the operation of the Crawford Hill Coal Co. during the period from June 30 to October 30, 1919, were reflected in the profit and loss account of the petitioner. Upon the transfer of its properties to the petitioner the Crawford Hill Coal Co. owned the right to receive personally or through its nominees 4,500 shares of the petitioner's capital stock. Pursuant to the written enstruction of the Crawford Hill Coal Co. dated January 29, 1920, the784 petitioner issued such 4,500 shares to the stockholders of the former corporation in proportion to their holdings. The shares of the partnership of W. H. Warner & Co. were issued to its individual members. The stock was issued on January 30, 1920. After that date the Crawford Hill Coal Co. had no assets and was dissolved in 1921. The value of the 4,500 shares of the petitioner's stock was the net value of the assets of the Crawford Hill Coal Co. at the time they were taken over by the petitioner and it was so set up on the books of the petitioner. 56 The petitioner originally presented four questions in this case, briefly described as, the statute of limitations, the transferee liability, the affiliation, and the special assessment issues. In our former opinion we held that the statute of limitations did not bar the assessment of the tax against the Crawford Hill Coal Co.; that the respondent had not sustained the burden of proving the liability of the petitioner as transferee; that, although the affiliation issue did not need to be considered, yet under the decision of the Supreme Court in 785 , the petitioner and the Crawford Hill Coal Co. were not entitled to affiliation; and that the special assessment issue had become moot. In his petition for review to the United States Circuit Court of Appeals the respondent's assignment of errors related only to the transferee liability issue. The petitioner filed no cross appeal nor did it call the attention of the appellate court to any suggested errors in our opinion. The petitioner now asserts that our decision on the statute of limitations issue was erroneous and that it should be permitted to reopen that issue because it relates to and affects the transferee liability issue. Complaint is also made that we ignored the petitioner's contention that as a part of the statute of limitations issue the waives filed were invalid. The validity of the waivers had no bearing under our decision that the statute did not bar assessment and, hence, it was unnecessary to discuss that point. The respondent's position is that this case was remanded to us for action only to the extent required to carry into effect the mandate of the court and that such mandate limited the scope786 of our authority and decision to the receipt of evidence relating to the net value of assets of the Crawford Hill Coal Co. transferred to the petitioner as of June 30, 1919, and the effect such evidence might have on the transferee liability issue. The rule of law applicable to the situation before us is stated in as follows: When a case has been once decided by this court on appeal, and remanded to the Circuit Court, whatever was before this court, and disposed of by its decree, is considered as finally settled. The Circuit Court is bound by the decree as the law of the case; and must carry it into execution, according to the mandate. The court can not vary it, or examine it for any other purpose than execution; or give any other or further relief; or review it, even for apparent error, upon any matter decided on appeal; or intermeddle with it, further than to settle so much as has been remanded. In ; affd., 787 ; certiorari denied, , we discussed this question at length. In that case the mandate directed that the petitioner's tax liability should be redetermined in accordance with a specific finding of "$665,000 as the fair value of the stock, the cost of the timber, as of July 28, 1913, when the exchange was made" and we held that 57 we were without authority thereafter to permit the petitioner to amend its pleadings so as to raise new issues or to give any other or further relief. Cf. ; . In the case at bar we find that only one question was presented to the court, that is, the refusal of the Board to receive certain evidence relating to the net value and amount of the assets of the Crawford Hill Coal Co. transferred to the petitioner as of June 30, 1919, and the bearing that such evidence would have on the transferee issue. The mandate orders the cause "remanded for a redetermination of the question after permitting the Commissioner to introduce such proofs." The petitioner predicated its appeal to the Board on four788 distinct allegations of error. The adjudication of the statute of limitation issue was necessarily a determination precedent to the consideration of the other issues. Our action thereon was final in the absence of an order from the court specifically relating to that issue or a general order to rehear and redetermine the case not inconsistently with the court's opinion and mandate. We construe the word "question" in the mandate to refer to the transferee liability issue alone. The present condition of the record does not warrant the reopening of the statute of limitations issue. The primary and controlling issue is the liability of the petitioner as transferee of the assets of the Crawford Hill Coal Co. We have no doubt that the transaction by which the transfer was accomplished was a sale. The facts show clearly that the petitioner purchased the properties and assets of the Crawford Hill Coal Co., together with those of several other companies engaged in a like business, and paid for such assets with its own stock, which had a substantial value. However, the method employed to make payment rendered the seller insolvent and unable to pay the tax, the correctness of which789 is not challenged. See . It is well established that the insolvency of the transferor is a condition precedent to proceeding against the transferee to collect the tax. The petitioner and the Crawford Hill Coal Co. as corporations and the individual officers and directors thereof were parties to and had full knowledge of the agreement and conditions of sale. The petitioner asserts that the real transferees from whom the respondent should collect the tax are the transferor's stockholders to whom the petitioner's stock was distributed. It cites several cases in support of its theory, including ; affd., . However, in the opinion of the Circuit Court of Appeals in that case we find the following: * * * The petitioners contend that, since all of the physical assets and property of the Union Company were turned over to the Metropolitan, the 58 latter is the transferee against which the deficiency should have been declared. We see no merit to this contention. We find nothing in the statute which limits collection of defaulted taxes owing by790 a dissolved or abandoned corporation to the transferees of its physical assets. Certainly the transferees of a mere holding company which has no property other than shares of stock are not immune from the operation of the section. When the Union Company sold its physical property to the Metropolitan, it became owner of Metropolitan stock, against which the tax liability could have been asserted. Distraint against the Union Company was rendered futile by its distribution of the stock to its stockholders. This is clearly a situation which section 280 was intended to meet, and we have no doubt that the tax can be assessed against and collected from the Union's stockholders to the extent of the assets they received. The facts in the Fairless case present the converse of the situation before us, but we see no difference in the principle involved. The respondent it not precluded from proceeding against the transferee of assets whose disposition by the taxpayer rendered it insolvent even if other assets, constructively owned but never received by it, are subject to a like process, 791 ; ; Wayne Body corporation,; . In our former decision we said: The assets of The Crawford Hill Coal Company were transferred to petitioner under the terms of the agreement of October 30, 1919, as of June 30, 1919. The record contains no enumeration or proof of the value of either the assets conveyed to petitioner nor of the liabilities assumed by it at June 30, 1919, the time of transfer. There is evidence that on March 31, 1919, the transferor possessed Liberty bonds in amount of $80,000 and had liabilities in the amount of $11,503.02, but there is no evidence that at June 30, 1919, it still owned such bonds and transferred them to petitioner; nor is there any evidence whether the amount of its liabilities increased or dimminished between March 31 and June 30. We know only that petitioner received assets of an unproved value and assumed liabilities of an unproved amount. On this state of the record we must hold that respondent has not sustained the burden of proof placed on him792 by the statute. The record now shows that assets of the transferor as of June 30, 1919, were worth over $100,000 in excess of its liabilities. This amount was ample to pay the tax liability of the transferor. ;; ; ; . Moreover, the contract itself also expressly provides that the Crawford Hill Coal Co. was deemed to have acted for and on account of the petitioner in conducting the business of the former from June 30, 1919, to the date of the transfer of its property and assets. 59 The petitioner thus agreed that the properties acquired and that the value thereof were to be determined and fixed on the basic date of June 30, 1919. The contract refers to an "informal agreement." We can justifiably conclude that such an agreement contemplated the acquisition of the Crawford Hill Coal Co. assets by the petitioner on that date at their value appearing on the contemporaneous balance sheets. All subsequent793 transactions were charged and credited to the petitioner and were reflected ultimately in the petitioner's profit and loss account. The date of the written agreement, therefore, is not exclusively decisive of the time of the transfer. There is a further reason for holding the petitioner liable for the proposed tax. The petitioner agreed expressly: * * * to pay and satisfy any and all obligations and liabilities of whatsoever kind, nature or description, owned or incurred by said Seller on or before June 30, 1919, and to indemnify and save harmless said Seller from any and all claims, demands and actions in any manner arising out of any obligations and liabilities asserted against said Seller, and from all loss, cost, damage and expense in connection therewith. By reason of this agreement the petitioner became specifically liable for the tax in question. ; ; affd., ; *794 ; affd., ; ; see , and cases there cited; . In our former opinion we said: "Under our decision above, the question of special assessment becomes moot." In view of the mandate it now becomes pertinent to consider the issue of special assessment. H. H. Champlin, supra. Upon a careful examination of the record we find nothing therein which warrants our granting the petitioner's request for special assessment. We said in our former opinion that the decision of the United States Supreme Court in , was determinative of the affiliation issue. We see no reason to alter our view that the petitioner and the Crawford Hill Coal Co. are not entitled to affiliation. Decision will be entered for the respondent in the sum of $21,721.33 for the fiscal year ending March 31, 1919.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624149/	BELL FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBell Fed. Sav. & Loan Ass'n v. CommissionerDocket No. 11822-89United States Tax CourtT.C. Memo 1991-368; 1991 Tax Ct. Memo LEXIS 417; 62 T.C.M. (CCH) 376; T.C.M. (RIA) 91368; August 7, 1991, Filed 417 Decision will be entered under Rule 155. P, an accrual method taxpayer, is a savings and loan association who made original home mortgage loans to borrowers. P recognized the prepaid interest it received from the loans (points) over an 8-year period using a half-year convention even though the borrowers brought to closing separate funds sufficient to cover both closing costs and points. Further, P incurred net operating losses (NOLs) during its 1983 and 1984 taxable years. P carried the NOLs back to its 1978 taxable year without recalculating the addition to its bad debt reserve for 1978 to reflect the carried back NOLs. HELD, absent an agreement between the parties to finance the points, when a borrower brings separate funds to closing sufficient to satisfy closing costs and points, the loan is a nondiscounted loan and P must recognize points it receives in the year the transaction closes. HELD, further, following our analysis in Pacific First Federal Savings Bank v. Commissioner, 94 T.C. 101">94 T.C. 101 (1990), P is not required to recalculate the addition to its bad debt reserve for the taxable year to which NOLs are carried back. Joseph D. Ament and Anthony C. Valiulis418 , for the petitioner. Erin Collins, for the respondent. HAMBLEN, Judge. HAMBLENMEMORANDUM OPINION Respondent determined deficiencies in petitioner Bell Federal Savings and Loan Association and Subsidiary's (hereinafter petitioner) 1978, 1985, 1986, and 1987 Federal income taxes in the amounts of $ 433,512, $ 177,424, $ 87,542, and $ 987,092, respectively. Respondent also determined additions to tax for petitioner's taxable year 1987 under section 6653(a)(1)(A) and (B)1 and section 6661. 2The issues to be decided are: (1) Whether petitioner may defer the recognition of loan fees (hereinafter points) charged to a borrower419 in connection with the borrower's financing of residential real estate when the points are paid by the borrower with funds separate from the financing transaction; and (2) whether taxable income, for purposes of computing the addition to bad debt reserve under the taxable income method of section 593(b)(2), must reflect net operating loss (NOL) carrybacks from subsequent years. BackgroundThis case was submitted with all facts fully stipulated. The facts as stipulated are found accordingly. The stipulation of facts and attached exhibits are incorporated herein by this reference. Numerous concessions have been made by both parties. Petitioner is a domestic, Federally chartered savings and loan association having its principal place of business at 79 West Monroe Street in Chicago, Illinois, when the petition was filed in this case. For all relevant times herein, petitioner employed the accrual method of accounting and filed consolidated Federal income tax returns with the Internal Revenue Service Center in Kansas City, Missouri. A. Recognition of PointsOne of petitioner's primary functions is the origination of mortgage loans. These mortgage loans include both newly420 originated loans and refinanced first and second mortgage home loans. In connection with its mortgage loans, petitioner typically charged borrowers loan fees or points paid at the time of the loan closing. Points are an established business practice in the savings and loan industry in petitioner's community. Points are charges for the use of money and are considered prepaid interest in the lending industry. Petitioner does not, in whole or in part, rebate or refund the amount of points to a borrower if a loan is repaid prior to maturity. In an October 11, 1968, letter to Mr. Lloyd A. Byerhof, an accountant for petitioner, respondent approved petitioner's deferral method for recognizing points over an 8-year life with a half-year convention. As reflected in that letter, petitioner had requested permission from respondent to recognize points as income for Federal income tax purposes as earned by use of a composite basis. Respondent granted such permission based on the fact that petitioner "does not receive cash or a check for the points, and that the loan proceeds are disbursed net to the borrower." Under these circumstances, respondent granted petitioner permission "to change421 its accounting treatment of points on discounted loans, for Federal income tax purposes, from the practice of including such points in income in the year the loan is made to the practice of including such points computed on a composite basis as referred to in Revenue Ruling 54-367, C.B. 1954-2, 109, in income in the year in which earned." During the taxable years at issue, petitioner deferred the recognition of points on both refinanced and newly originated real estate mortgage loans. Petitioner adopted a half-year convention and determined an 8-year life for the refinanced and newly originated real estate mortgage loans. Petitioner then recognized the points as income for Federal income tax purposes ratably over the 8-year life of the loans. Insofar as the points issue is concerned, respondent determined deficiencies in petitioner's returns for the taxable years 1985, 1986, and 1987. In computing the determined deficiencies, respondent included only the points paid by the borrowers where the borrower paid the points with separate funds at closing and where the loan was a newly originated real estate mortgage for, and secured by, the borrower's principal residence. 422 Respondent did not include in his deficiency determination points associated with second mortgages and refinanced loans originating during the taxable years at issue. During the years at issue, a typical mortgage loan transaction involved the completion of various documents and numerous steps. Initially, a borrower would enter into a contract to purchase real estate from a third party seller. At the time of the execution of the real estate contract, the borrower would pay the seller earnest money, leaving a balance to be supplied from the borrower's own and borrowed funds. With the intent of obtaining financing for a portion of the purchase price, the borrower would then complete petitioner's loan application and request a mortgage loan. Next, the borrower would sign the loan application, submit it to petitioner for its consideration, and pay petitioner $ 250 as a nonrefundable application fee. Shortly after the approval of the loan application, petitioner sends the borrower a commitment to make a mortgage loan at a stated interest rate. The loan commitment is signed by petitioner and then sent to the borrower. If the borrower accepts petitioner's offer, the borrower signs423 the commitment and returns it to petitioner. The loan commitment is not binding until signed by the borrower. Petitioner's 1987 loan commitment letters stated, "The loan is subject to the following * * Payment of [points] either as a discount out of the proceeds of the loan or as a fee paid at the time of settlement/closing of the loan." In April 1987, petitioner modified its requirements with respect to loan applications. Although petitioner still required the borrower to pay an application fee of $ 250 at the time of submitting the application, it also required the borrower to pay an amount equal to 1 percent to 1-1/2 percent of the face amount of the loan within 7 days of receiving the loan commitment from petitioner as an additional fee. The 1 percent to 1-1/2 percent was nonrefundable and enabled the borrower to lock in a specific interest rate for a specific period of time. After the executed commitment is received by petitioner, but prior to the loan closing, petitioner debits its real estate loan account in the full face amount of the loan and credits that amount to the borrower on a loan-in-process account (the LIP Account) established for that borrower's transactions. 424 The LIP Account is part of petitioner's in-house books and records (i.e. the general ledger). The LIP Account ledgers and the computer printout are never supplied to the borrower. During this debit and credit process, petitioner also credits to the LIP Account the amount of the application fee and the 1 percent or 1-1/2 percent payment received from the borrower. Petitioner then immediately debits the LIP Account in the amounts of these two payments. These in/out entries reflect that the borrower has paid these two amounts with his/her own separate funds and not with proceeds from the loan. As stated above, after the executed commitment is received by petitioner, but prior to the loan closing date, petitioner credits the borrower's LIP Account in the face amount of the loan. Petitioner also immediately deducts from that account the amount of the closing points charged to the borrower. At the time of the loan closing the borrower is required to pay, and did pay, separate fresh funds to petitioner in an amount equal to his downpayment, points, and other miscellaneous fees. In addition to providing these fresh funds, the borrower executes a mortgage note in the full amount of425 the approved loan. The borrower's fresh funds are credited to the LIP Account. The borrower's fresh funds include the amount of the points charged. Also in this account are the net loan proceeds. At closing petitioner issues from the account checks to the seller, to certain creditors of the seller (e.g., to seller's broker), to the borrower's reserve account, and to other entities for closing costs owed by the borrower or seller. At closing, the borrower is also furnished a "Statement of Account," a "Settlement Statement," and a "Disclosure Statement." Petitioner has a fixed right to receive the points charged as of the loan closing date. B. Bad Debt DeductionFor all relevant years, petitioner was a mutual savings and loan association entitled to utilize the provisions of section 593 to calculate the addition to its bad debt reserve. For the years 1978, 1985, 1986, and 1987, petitioner calculated its annual addition to reserve for bad debts under the percentage of taxable income method provided for in section 593(b)(2) and deducted such addition in each taxable year on its Federal income tax return. Petitioner and respondent agree that the allowable percentage of taxable426 income for purposes of the deductions for the taxable years 1985, 1986, and 1987 is a function of taxable income as finally determined for those years. Petitioner and respondent also agree that the bad debt deductions, as calculated on petitioner's originally filed tax returns for the taxable years 1978, 1985, 1986, and 1987, are prior to any of respondent's adjustments and prior to any adjustment for carrybacks of NOLs. The parties further agree that petitioner properly calculated additions to reserves for bad debts for each of the years at issue, subject to respondent's deficiency determinations herein. Petitioner's 1983 consolidated income tax return, Form 1120, reflected a NOL in the amount of $ 8,865,941. This 1983 consolidated loss was comprised of a loss by Bell Federal Savings in the amount of $ 8,978,719 offset in consolidation by a profit from Bell Savings Service Corporation (Bell Service) in the amount of $ 112,778 (before adjustments for charitable contributions in the amount of $ 11,475). Petitioner's consolidated income tax return, Form 1120, for the taxable year 1984 reflected a NOL in the amount of $ 5,336,627. This 1984 consolidated loss was comprised of a 427 loss by Bell Federal Savings in the amount of $ 5,487,586 offset in consolidation by a profit from Bell Service in the amount of $ 150,959 (before adjustments for charitable contributions in the amount of $ 12,925). The 1983 and 1984 NOLs were attributable to the financial entity Bell Federal Savings. None of the 1983 and 1984 NOLs were attributable to the nonfinancial entity Bell Service. For the taxable year 1983, $ 1,751,676 of the $ 8,865,941 NOL was carried back and absorbed in the taxable year 1977. The remaining 1983 NOL in the amount of $ 7,114,265 was carried back and absorbed in the taxable year 1978. A tentative carryback, Form 1139, was filed to carry back the 1984 NOL to the taxable year 1978, where it was fully absorbed. Respondent made the following adjustments: First, the 1984 NOL available for carryback was reduced because of adjustments to loan fee income reportable in that year. This reduction in the available NOL created an adjustment for the taxable year 1978. The second adjustment related to the restoration of the prior percentage-of-taxable-income bad debt deduction as a result of both the 1983 and the 1984 loss carrybacks. In applying the 1983 loss 428 carryback to the 1978 year, petitioner allocated the available loss against both financial income and nonfinancial (subsidiary) income. This allocation was computed based upon the ratios of 1978 financial income before the bad debt deduction to total 1978 consolidated income before the bad debt deduction and the ratio of 1978 nonfinancial income to total 1978 consolidated income before the bad debt deduction. Using these computed percentages, petitioner allocated a portion of the available loss carryback against financial income and a portion of the loss carryback was allocated against nonfinancial income. The same treatment was utilized for applying the 1984 loss to 1978. The available loss carryback for 1984 was applied in part against the remaining 1978 financial income and in part against the remaining 1978 nonfinancial income. Respondent determined that petitioner's treatment and allocation of the losses for 1983 and 1984 was improper. Respondent determined that petitioner should have applied the total amount of the losses first against income from the financial institution and only then apply any remainder to the nonfinancial institution. DiscussionA. Recognition429 of PointsRespondent determined that petitioner must recognize in the taxable year of receipt income it receives in the form of points or loan fees from a borrower where petitioner has a contractual right to receive payment of the fee from the borrower's separate funds at closing and where the borrower brings sufficient outside funds to closing to cover the fee. Respondent asserts that the loans at issue were not discounted. Petitioner contends that it is appropriate for it to recognize the points over the 8-year life of the loans, as previously allowed by respondent. In support of petitioner's contention, petitioner asserts that the loans are discounted and that points are withheld from the loan proceeds before the proceeds are available to the borrower. Respondent's deficiency determination is presumptively correct, and the burden of proof is on petitioner to show that it is incorrect. 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). Section 451(a) provides that the amount of any item of gross income shall be included in the gross income of the taxpayer for the tax year in which received by the taxpayer unless, under the method of accounting used430 in computing taxable income, such amount is to be properly accounted for in a different period. Section 1.451-1(a), Income Tax Regs., provides that, for taxpayers under the accrual method of accounting, income is includable in gross income when all the events have occurred that fix the right to receive such income and the amount thereof can be determined with reasonable accuracy. Under this "all events test," the right to receive income becomes fixed when the required performance occurs, when payment is due, or when payment is made, whichever happens first. Sec. 1.451-1(a), Income Tax Regs. Although they are not controlling precedent in this Court, we also note that long-standing administrative announcements adopt this interpretation. Rev. Rul. 74-607, 2 C.B. 149">1974-2 C.B. 149; Rev. Rul. 70-540, 2 C.B. 101">1970-2 C.B. 101. In the case before us, the question becomes: For purposes of the all events test, when was payment made? Petitioner argues that the loans were discounted loans where petitioner reduced the loan proceeds by the amount of the points before remitting the balance of the loan to the borrowers. In so doing, petitioner asserts431 that the points were financed by the borrower and should be includable in petitioner's gross income over the life of the loan as the points are paid by the borrower. Respondent determined that the loans were not discounted. Respondent points to the fact that the borrowers brought sufficient separate funds to closing to satisfy the points paid to petitioner. Further, respondent refers to the fact that petitioner never relinquishes the points it charges, even if the loan is paid off in full before maturity. Notwithstanding petitioner's internal accounting processes, respondent determined that the borrowers paid petitioner the points at closing. Consequently, respondent determined that petitioner must recognize the points paid in the taxable year the loan transaction closed rather than over the life of the loan. Petitioner makes much of the fact that points constitute interest instead of fees for services. We agree. However, the fact that points are interest is not dispositive of the issue before us. The critical issue is not what points constitute, but rather when all the events have occurred that fix petitioner's right to receive the points. This issue boils down to whether432 the loans were discounted or not discounted. If the loans were discounted, petitioner is correct in recognizing the points over the life of the loan. If the loans were not discounted, respondent is correct that petitioner must include the points in gross income in the taxable year the loan transaction closed. In determining whether the loans were discounted or not, we must examine the transactions themselves. Initially, we recognize that there is no agreement in the record before us between the borrower and petitioner supporting petitioner's assertion that the loans were to be discounted. Further, the LIP Accounts are petitioner's internal method of bookkeeping. These accounts were never explained or shown to the borrower. The borrower knows that he/she is required either to have the points paid from the proceeds of petitioner's loan or to pay them with his/her fresh funds at closing. When the borrower brings fresh funds sufficient to cover various closing costs and points to closing, the borrower has fulfilled his/her obligation to bring fresh funds to closing in an amount sufficient to cover the points. Petitioner's internal method of bookkeeping is insufficient433 support for petitioner's claim that the loans were discounted. We conclude that the loans at issue before us were not discounted. Respondent correctly points out that the case before us is analogous to Franklin Life Insurance Co. v. United States, 399 F.2d 757 (7th Cir. 1968), cert. denied 393 U.S. 1118">393 U.S. 1118, 22 L. Ed. 2d 123">22 L. Ed. 2d 123, 89 S. Ct. 989">89 S. Ct. 989 (1969). In Franklin, an insurance company loaned money to policyholders under an agreement that required the policyholders to pay currently the interest owed for the period from the inception of the loan to the end of the current policy year. Thereafter, the policyholders were to make interest payments annually on the anniversary date of the policy. When a loan was repaid during a policy year, the insurance company refunded the ratable portion of interest applicable to the remaining policy year. The court found that, although the insurance company was an accrual method taxpayer, the company must recognize the entire amount of interest paid at the time it was paid, not ratably over the policy year. In so holding, the court relied on the fact that the insurance company had unrestricted use of the money from the time of payment notwithstanding434 the fact that the insurance company might have to refund a portion of the interest sometime within the policy year. The facts in the case before us places petitioner in an even weaker position than the insurance company in Franklin. Petitioner maintains unrestricted use and enjoyment of the points and does not under any circumstances refund the points to the borrower if the loan is paid off before maturity. Ample judicial authority exists supporting our decision that, where nonrefundable interest is prepaid to an accrual method taxpayer and where the taxpayer has to fulfill no further obligation to earn the interest, the taxpayer must recognize the interest currently. See Union Mutual Life Insurance Co. v. United States, 570 F.2d 382 (1st Cir. 1978), cert. denied 439 U.S. 821">439 U.S. 821, 58 L. Ed. 2d 113">58 L. Ed. 2d 113, 99 S. Ct. 87">99 S. Ct. 87 (1978); Life Insurance of Co. Georgia v. United States, 227 Ct. Cl. 434">227 Ct. Cl. 434, 650 F.2d 250">650 F.2d 250 (1981). Petitioner argues that its internal bookkeeping procedures establish that the loans were indeed discounted since petitioner reduced the amount of the loan proceeds by the amount constituting the points as soon as the loan proceeds were transferred435 into the LIP Accounts. Petitioner asserts that it made a disbursement of the loan proceeds to the seller only after the loan proceeds were reduced by the points. Petitioner continues by contending that the remaining amount of the funds disbursed to the seller were paid by the borrower with new funds at closing. Petitioner's contentions do not address the facts before us. We must look to the agreement between petitioner and the borrower to determine if the borrower paid the points out of separate funds or if petitioner discounted the loan by the amount of the points and the borrower made up the discounted amount before the proceeds were disbursed to the seller. Any such express agreement as to the latter between petitioner and the borrower is lacking in the record. Our only guidance is the agreement by the borrower to pay petitioner points "either as a discount out of the proceeds of the loan or as a fee paid at the time of settlement/closing of the loan." This statement clearly does not support petitioner's contention or settle the issue. The facts before us simply do not establish petitioner's right to defer the recognition of points over the life of the loans. Further, it436 is evident that petitioner had sole control over the LIP Accounts and the order of the steps taken in the transaction. By exercising its control over the disposition of the loan proceeds together with the separate funds brought to closing by the borrower, petitioner received enjoyment of the points and must realize them in income. Helvering v. Horst, 311 U.S. 112">311 U.S. 112, 85 L. Ed. 75">85 L. Ed. 75, 61 S. Ct. 144">61 S. Ct. 144 (1940). "The power to dispose of income is the equivalent to ownership of it. The exercise of that power to procure the payment of income to another is the enjoyment, and hence the realization, of the income by him who exercises it." Helvering v. Horst, 311 U.S. at 118. In the case before us, petitioner agreed to pay the loan amount to the seller at closing. Petitioner can distribute the entire amount of the loan amount from the loan proceeds and collect the points it charged the borrower from the borrower's separate funds. Alternatively, petitioner can deduct the points from the loan proceeds and distribute the entire loan amount to the seller utilizing a portion of the borrower's separate funds to make up the now-existing deficiency in the loan proceeds due to the points discount. 437 Whichever way the transaction is structured, it is clear that petitioner is doing the structuring. Therefore, either the loans are not discounted (resulting in petitioner's recognition of the points in the taxable year of the transaction's closing) or the loans are discounted with petitioner exercising power over the points equivalent to ownership (resulting in recognition of the points in the taxable year of the transaction's closing under Helvering v. Horst, supra). Finally, respondent limited the deficiency determination to only those newly originated loans where the borrower borrowed money from petitioner in order to purchase his/her primary residence where the borrower brought sufficient funds to closing to satisfy the points paid to petitioner and where the financed residence secured the loan. In doing so, respondent has successfully demonstrated that, under these limited circumstances, petitioner's position would create a matching problem with section 461(g)(2). Section 461(g)(2) allows taxpayers to deduct points paid in respect of any indebtedness incurred in connection with the purchase or improvement of, and secured by, the principal residence438 of the taxpayer as long as the amount of the loan and the points charged are within the established business practice of the area. Since borrowers can currently deduct points paid under the limitations of section 461(g)(2), matching principles dictate that, when those same points are paid to the lender, they should be included in the gross income of the lender. See Schubel v. Commissioner, 77 T.C. 701">77 T.C. 701 (1981). In a true discount loan situation, the borrower cannot deduct points because no points have been paid. Schubel v. Commissioner, 77 T.C. at 704-705. However, if the borrower actually pays points from fresh funds, section 461(g)(2) allows for a current deduction, although the substance of the two transactions may be similar. Under the form of the loans at issue, petitioner had the right to receive points paid by the borrower with fresh funds at closing. Petitioner must accept the tax consequences of its choice of transaction form. Commissioner v. National Alfalfa Dehydrating & Milling Co., 417 U.S. 134">417 U.S. 134, 40 L. Ed. 2d 717">40 L. Ed. 2d 717, 94 S. Ct. 2129">94 S. Ct. 2129 (1974). Petitioner attempts to make much of the fact that it received permission from respondent in 1968 to recognize439 points over an 8-year life with a half-year convention. It is clear respondent then allowed petitioner, as it does today, to defer recognition of points where petitioner enters into lending transactions where points are paid by the proceeds of the loan, i.e., discounted, and the borrower does not bring outside funds sufficient to cover closing costs and points. However, these are not the facts before this Court in the case at hand. In the case at hand, petitioner received the points from the separate funds of the borrower at closing. Nothing in the record, except petitioner's internal bookkeeping methods, supports petitioner's contention that the loans were discounted and, as above noted, that is not controlling. Therefore, we hold that the loans at issue were not discounted, and we hold that points petitioner received at closing must be recognized in the taxable year of the lending transaction's closing. B. Bad Debt DeductionsIn addition to respondent's determined adjustments relating to the recognition of points, respondent also determined a deficiency for 1978 relating to petitioner's method of carrying back its NOLs. Respondent determined that petitioner's carryback440 of NOLs requires petitioner to recompute the addition to its bad debt reserve, thereby reducing its bad debt deduction for the taxable year to which the NOLs were carried back. Further, respondent determined that petitioner did not properly apportion its consolidated NOLs from the taxable years 1983 and 1984 against its consolidated income in 1978, the carryback year. For the taxable year 1983, petitioner had a NOL of $ 8,865,941, comprised of an $ 8,978,719 loss by Bell Federal Savings offset by a $ 112,778 profit from Bell Service. 3 After a portion of the NOL was carried back to the taxable year 1977, $ 7,114,256 was carried back to the taxable year 1978. For the taxable year 1984, petitioner had a NOL of $ 5,336,627, comprised of a $ 5,487,586 loss by Bell Federal Savings offset by a $ 150,959 profit from Bell Service. 1. Effect of441 NOL Carryback on Addition to Bad Debt ReserveRespondent determined that petitioner must recompute its bad debt reserve for the year to which it carried back NOLs from later years. Petitioner argues that respondent's position is contrary to the intent of Congress and flies in the face of recent opinions of this Court. Petitioner bears the burden of proof to show that it is entitled to deductions greater than those allowed by respondent. Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 78 L. Ed. 212">78 L. Ed. 212, 54 S. Ct. 8">54 S. Ct. 8 (1933); Rule 142(a). This burden of proof includes establishing both the right to and the amount of the deduction. Commissioner v. National Alfalfa Dehydrating & Milling Co., supra; New Colonial Ice Co. v. Helvering, 292 U.S. 435">292 U.S. 435, 78 L. Ed. 1348">78 L. Ed. 1348, 54 S. Ct. 788">54 S. Ct. 788 (1934). Section 593 allows a mutual savings and loan association to compute an addition to its bad debt reserve as a statutory percentage of taxable income. Section 1.593-6A(b)(5)(vi) and (vii), Income Tax Regs., require that institutions that use this method must recalculate the addition to bad debt reserve if taxable income is reduced by subsequently generated NOL carrybacks. This Court has recently addressed the specific442 issue of whether a savings bank's addition to bad debt reserve must be recalculated due to NOLs it carries back to the year at issue. See Pacific First Federal Savings Bank v. Commissioner, 94 T.C. 101">94 T.C. 101 (1990). In Pacific First, we found that section 1.593-6A(b)(5)(vi) and (vii), Income Tax Regs., is invalid and contrary to Congress' intent to the extent that it requires taxable income to reflect NOL carrybacks before the deduction for additions to bad debt reserve is computed under the percentage of taxable income method. Pacific First Federal Savings Bank v. Commissioner, 94 T.C. at 107. 4Pacific First brought before us a similarly situated taxpayer under essentially the same set of circumstances. We see no reason and are not 443 persuaded to hold contrary to our recent opinion in Pacific First where there has been no demonstration of material differences in the applicable facts to justify such an endeavor. Therefore, we adhere to our Court-reviewed holding in Pacific First that section 1.593-6A(b)(5)(vi) and (vii), Income Tax Regs., is invalid. We further hold that petitioner is not required to adjust taxable income for NOLs carried back to the year at issue before computing the addition to its bad debt reserve under the percentage of taxable income method. 2. NOL AllocationIn applying the consolidated NOL from the taxable year 1983 to the taxable year 1978, petitioner allocated the loss against both the financial income of Bell Federal Savings and the nonfinancial income of Bell Service. This allocation was computed based upon the ratios of the 1978 financial income and the 1978 nonfinancial income before the bad debt deduction to the total 1978 consolidated income before the bad debt deduction. The taxable year 1984 NOL was carried back to the taxable year 1978 and was applied in part against petitioner's remaining 1978 financial income and in part against petitioner's remaining 1978 444 nonfinancial income. Respondent determined that petitioner improperly allocated its 1983 and 1984 NOLs between its 1978 financial and nonfinancial income. Respondent contends that since the losses in 1983 and 1984 were from petitioner's financial entity only, losses must first be applied against the financial income of its entity in 1978. Respondent further contends that only the loss carrybacks which exceed the 1978 financial income are available to be applied against the nonfinancial income in 1978. By so doing, respondent asserts that the recomputation of the deduction for the addition to bad debt reserve for the year at issue must be done after the losses from each year are applied against the separate income of petitioner's financial entity. Respondent sets forth an intricate method of reporting pursuant to the regulations under section 1502. However, respondent's assertions are inapplicable in the case before us. As we have already found, supra, petitioner is not required to recompute the addition to its bad debt reserve when petitioner carries NOLs back to the year at issue. Since petitioner is not required to recompute the addition to its bad debt reserve based 445 on the carried back NOLs, we need not address how any such recomputation would be carried out. In the case before us, this question is moot. Petitioner asserts that since this Court has invalidated section 1.593-6A(b)(5)(vi) and (vii), Income Tax Regs., petitioner is entitled to a reordering of NOLs "for all years affected" where it applied NOLs under the now invalid regulations. To the extent that "all years affected" include years not before this Court in this proceeding, we will not comment on petitioner's assertions. To the extent that "all years affected" include the taxable year at issue, a reordering of NOLs is required due to the invalidity of the regulations as well as petitioner's failure to recognize points in the year the transaction closed, as held herein, supra. ConclusionAfter reviewing the entire record, we hold that petitioner failed to properly report points it received on nondiscounted loans where the borrower brought to closing fresh funds sufficient to cover closing costs and points. We further hold that sections 1.593-6A(b)(5)(vi) and (vii), Income Tax Regs., are invalid and petitioner is not required to recompute the addition to its bad debt reserve*446 for a taxable year due to NOLs carried back to that taxable year. We have considered both petitioner's and respondent's other arguments and find them without merit. Due to concessions by both respondent and petitioner and due to our holdings in this opinion, Decision will be entered under Rule 155.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended and in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. ↩2. After concessions by both parties, respondent's determined additions to tax for petitioner's taxable year 1987 have been resolved and are not at issue before this tribunal.↩3. The loss and profit figures for petitioner for the taxable years 1983 and 1984 are shown prior to adjustments for charitable contributions made within the 2 taxable years.↩4. Our decision in Pacific First Federal Savings Bank v. Commissioner, 94 T.C. 101">94 T.C. 101 (1990), was followed in Peoples Federal Savings & Loan Association of Sideny v. Commissioner, T.C. Memo 1990-129">T.C. Memo 1990-129↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624150/	Theodore A. Granger and Elizabeth T. Granger v. Commissioner.Granger v. CommissionerDocket No. 1327-67.United States Tax CourtT.C. Memo 1970-155; 1970 Tax Ct. Memo LEXIS 206; 29 T.C.M. (CCH) 667; T.C.M. (RIA) 70155; June 15, 1970, Filed Theodore A. Granger and Elizabeth T. Granger, pro se, 2910 Dogwood Dr., Henderson, N. C. Ernest J. Wright, for the respondent. KERNMemorandum Findings of Fact and Opinion Respondent determined deficiencies in petitioners' income taxes as follows: Petitioner(s)YearAmountTheodore A. Granger1958$ 123.04Theodore A. Granger and Elizabeth T. Granger19591,732.00Theodore A. Granger196117.00Theodore A. Granger1962774.00Theodore A. Granger1963972.50 Hereafter Theodore A. Granger will sometime be referred to as "petitioner." To a considerable extent these deficiencies resulted from the decrease in the amount of net operating loss reported by petitioner in his 1960 Federal income tax return from $167,863.00 to $5,440.45 and the consequent disallowance of net operating loss carryback208 deductions claimed for 1958 and 1959 and net operating loss carryover to 1961, 1962 and 1963. 668 In paragraph 4 of their petition, petitioners allege that the proposed deficiencies for 1958 and 1959 had been "paid and settled in full by Court Order." Since petitioners did not introduce any evidence on this point at the trial of this case and did not discuss this point on brief, it appears that petitioners have abandoned this claim. The other issues raised by the pleadings are the following: (1) Whether a reasonable expectation of recovery existed during 1960, 1961, 1962 and 1963, with respect to an insurance claim arising from the destruction by windstorm in February 1960, of a factory which petitioner was constructing. 1(2) Whether petitioner's cost basis in a house he had under construction exceeded the amount of the proceeds realized in its 1960 foreclosure sale. (3) Whether petitioner is entitled to interest expense deductions in 1960, 1961, 1962 and 1963 in excess of209 the amounts allowed in the statutory notice of deficiency. (4) Whether petitioner incurred certain travel and legal expenses in 1960, and, if so, in what amount. (5) Whether the entire $3,000 paid to the petitioner during 1963 by Foundation Accounts, Inc. was taxable to petitioner in 1963 even though $600 thereof was attributable to services performed during 1964. (6) Whether all or any part of the amounts mentioned in (5) above, was self-employment income. Findings of Fact Some of the facts and exhibits were stipulated and are found to be as stipulated. Petitioner and Elizabeth T. Granger resided in Henderson, North Carolina at the time the petition was filed in this case. Petitioner filed individual Federal income tax returns for the taxable years 1958, 1960, 1961, 1962 and 1963 with the district director of internal revenue, Greensboro, North Carolina. Petitioner and Elizabeth T. Granger filed joint income tax returns for the taxable years 1957 and 1959 with the district director of internal revenue in that city. On March 21, 1961, petitioners filed a From 1045, Application for Tentative Carry-back Adjustment, with the district director in Greensboro, claiming an overassessment210 and overpayment of income tax for the taxable years 1957 and 1959 in the amounts of $233.00 and $1,732.00 respectively, resulting from the carryback of an alleged net operating loss incurred in the taxable year 1960. Petitioners did not claim a decrease in tax for 1958 when filing the Form 1045. 2 The district director allowed the tentative overassessments as claimed by petitioners for 1957 and 1959 and, in addition, he allowed an overassessment for 1958 in the amount of $123.04. Petitioner reported no taxable income for the taxable years 1961, 1962 and 1963 by virtue of the carryover of his alleged 1960 net operating loss. Petitioner was awarded an A.B. degree by Harvard University in 1940. While at Harvard, his major courses of study were economics and engineering. He also took some courses in accounting and business administration. In 1957, petitioner was employed as an accountant by Tungsten Mines, a concern operating near Henderson, North Carolina. 211 His responsibilities included looking after construction costs of a large construction program undertaken by the mining concern and reporting thereon to its management. During 1958, 1959 and 1960, petitioner was self-employed as a designer and builder of homes for sale. During 1960, petitioner had at least three houses under construction, all of which became the subject matter of foreclosure proceedings instituted by the Citizens Bank & Trust Company, Henderson, North Carolina (hereinafter sometimes referred to as the "bank"). With respect to one of these houses, described as "Lot 24, Westover (Whiteoak) Drive, Granger Job #24" in a schedule set out below in these findings, petitioner borrowed from the bank three amounts at various times totaling $13,500.00 and paid interest with respect to these amounts until July 15, 1960. On October 24, 1960, the house was foreclosed upon by the bank and petitioner's total debt to the bank with respect to the house of $13,500.00 plus unpaid interest since July 15, 1960, 669 was cancelled. 3 The house was designed by petitioner, and its construction plans indicate that the completed building would comprise 1,941 square feet. In his individual212 Federal income tax return for 1960, petitioner claimed a $5,900.00 foreclosure loss deduction attributable to this house, which he explained as follows: "Lost $20,000.00 house by foreclosure, less $14,100.00 - $5,900.00." This deduction was disallowed by respondent. In addition to constructing houses, petitioner began the construction of a factory in Henderson, North Carolina. The factory was severely damaged by a snow and windstorm in February 1960, forcing the abandonment of the construction work. The damage to the building was covered by builders risk insurance policies. For reasons not shown by the record, the insurance companies declined to acknowledge their liability to make payment213 to petitioner under such policies. Thereupon petitioner filed an action in the United States District Court, Raleigh, North Carolina, against the insurance companies carrying the business risk insurance on his damaged factory to collect under these policies on account of the substantial damages sustained. In his Federal income tax return for 1960, petitioner claimed a business casualty loss deduction in the amount of $160,863.00 for the damage to his factory. Petitioner labeled the amount of the loss as the "Total Cost of Replacement" of the factory. On some date not disclosed by the record but after November 25, 1963, and before June 7, 1965, petitioner was awarded a judgment against the insurance companies in the amount of $128,443.34, and the insurance companies paid into the office of the Clerk of the United States District Court the amount of such judgment. Disputes arose between petitioners, the bank, a materialman having a lien and the United States Government which had tax claims and liens against petitioners and their properties. Finally, on or before July 27, 1965, these disputes were settled either by agreement or decision of the court and the funds held by the Clerk of214 the Court were distributed. The liens of the materialman and of the United States were paid and the balance was paid to the bank. Pursuant to a contract between the bank and petitioners, the bank agreed to release its claims against them with the exception of a note for $10,000.00 secured by a second mortgage on their home. This agreement is referred to in greater detail infra. Respondent disallowed the claimed casualty loss deduction in the explanation of adjustments to petitioner's 1960 income contained in the statutory notices of deficiency issued to petitioners. This adjustment along with others made to petitioner's 1960 Federal income tax return, caused a substantial reduction in the net operating loss reflected for that year. As a result, respondent disallowed petitioner's net operating loss carryback deductions claimed for 1958 and 1959, and his net operating loss carryover deduction claimed for 1961, 1962 and 1963. During 1960 and in connection with his suit against the insurance companies, petitioner and his attorneys traveled to Kansas City, Missouri, for the purpose of consulting with engineers employed at the Butler Steel Company who had designed the prefabricated215 steel used in the damaged factory. To pay the travel expenses petitioner borrowed $750.00 in that year. In filing his individual income tax return for 1960, petitioner claimed a $1,100.00 deduction for travel and legal expenses attributable to that trip which was disallowed by respondent. Petitioner reported his income from his construction business using a method of accounting which he referred to as the "job completion" basis. Under this method of accounting, petitioner generally charged his various construction jobs with the cost of expenses at the time he wrote the checks for payment of the expenses. When he sold a house he deducted the aggregate expenses attributable to the house from its selling price for the purpose of reporting income from its sale. Petitioner did not charge his construction jobs with the interest expense that he incurred. He always reported interest expense on an annual basis, deducting it in the year that it was paid. Petitioner introduced evidence which showed that he paid the bank a total of $2,008.58 in interest related to his construction business in 1960; however, in the statutory notice of deficiency respondent determined that petitioner was entitled216 to deduct $2,066.08 as 670 business interest expense. 4 On his federal income tax returns for 1961, 1962 and 1963, petitioner did not claim a deduction for interest expense, nor did petitioner offer evidence that he paid business interest in those years except to the extent shown in the schedule set out below in these findings. Petitioners have from time to time borrowed certain sums of money from the Citizens Bank & Trust Company, Henderson, North Carolina. On occasion, petitioners used the funds advanced by the bank for purposes other than those set forth in the schedule below. Set forth in the following schedule of loans is an analysis of the outstanding loans owed by the petitioner as of June 7, 1965: to Citizens Bank & Trust Company (hereinafter sometimes referred to as the "loan schedule"): No. 1 - Lot 24 Westover (Whiteoak) Drive, Granger Job #2413,500.00Renewed numerous times and interest7,900.00Borrowed 4/7/594,000.00Borrowed 3/6/591,600.00Borrowed 2/28/5910,000.00Borrowed 3/18/59 Granger Job #23No. 2 - Vacant Lot #23, Westover (Whiteoak) Drive,TOTAL DUE ON LOAN 6/7/650-13,782.97Foredlosed 10/24/6013,782.97282.97Interest 7/15/60 to 10/24/60 paid to 7/15/60- 500.00Repaid 7/6/5912,500.00Borrowed 5/20/59No. 3 - Factory, Oxford Road, Granger Job #300TOTAL DUE ON LOAN 6/7/6515,296.6950,000.00Renewed numerous times and interest12,500.00Borrowed 6/4/5912,500.00Borrowed 8/4/5912,500.00Borrowed 6/19/592,616.32Interest 12/30/61 to 6/7/6512,680.37Balance due after foreclosure- 1,409.96Proceeds of Foreclosure 12/30/6114,089.83Total due 12/30/611,089.83Interest 8/10/60 to 12/30/61 8/10/6013,000.00Renewed and interest paid to3,000.00Borrowed 4/28/59 Granger ResidenceNo. 8 - Installment Loan, Air-Conditioning T.A.TOTAL DUE ON LOAN 6/7/65324.3774.37Interest 6/22/60 to 6/7/65250.00Borrowed 6/22/60No. 7 - Farmall Tractor Loan, Chattel Mortgage of 6/22/60TOTAL DUE ON LOAN 6/7/655,178.001,178.00Interest 7/15/60 to 6/7/65 paid to 7/15/604,000.00Renewed numerous times and interest4,500.00Borrowed 5/15/59No. 6 - Unsecured Loan on Financial StatementTOTAL DUE ON LOAN 6/7/6512,900.002,900.00Interest 7/12/60 to 6/7/65 interest paid to 7/12/6010,000.00Borrowed 12/14/59, Renewed numerous times andNo. 5 - Second Mortgage on T. A. Granger HomeTOTAL DUE ON LOAN 6/7/6528,149.774,814.49Interest 12/30/61 to 6/7/65- 4,377.22Proceeds of Foreclosure 12/30/6123,335.28Balance due after foreclosure27,712.50Total due 12/30/612,712.50Interest 3/10/60 to 12/30/61 paid to 3/10/6025,000.00Renewed numerous times and interest6,500.00Borrowed 10/6/593,500.00Borrowed 9/14/5915,000.00Borrowed 9/2/59No. 4 - Lot, West End Drive, Granger Job #315TOTAL DUE ON LOAN 6/7/6565,741.6715,741.67Interest 3/10/60 to 6/7/65 paid to 3/10/60 as of 1/15/60273.00TOTAL DUE ON LOAN 6/7/65361.41Interest 1/15/60 to 6/7/6588.41No. 9 - Unpaid Premiums due Insurance DepartmentTOTAL DUE ON LOAN 6/7/651,311.18333.18Interest 10/6/59 to 6/7/65978.00Unpaid balance since Oct. 6, 1959TOTAL, NOTES, INTEREST ON NOTES, EXPENSESTOTAL EXPENSES (NOT INCLUDING INTEREST) 17,737.5815,787.58Court Costs (Engineers - Censert - So. Testing Co.)1,450.00Note T. A. Granger 3/7/61500.00Note T. A. Granger 9/22/60 (Kansas City Trip) T. A. Granger HomeNo. 10 - Expenses - Secured by Third Mortgage on (NO INTEREST FIGURED ON EXPENSES)147,000.67217 672 On June 7, 1965, petitioner entered into an agreement with the Citizens Bank & Trust Company which provided, in general, that the bank would cancel all debts owed by the petitioners to it, as set forth in the paragraph above, except, (1) the second mortgage on petitioner's house and (2) the right to the first $7,000.00 of the proceeds realized on the foreclosure sale of factory property, provided any amounts recovered over $7,000.00 were credited to the second mortgage on petitioner's house. In consideration for the bank's cancellation of the debts owed by them, petitioners agreed to make certain payments on their mortgaged property, and release to the Bank the $128,443.34 insurance recovery, held by the Clerk of the United States District Court, Raleigh, North Carolina, plus additional interests and costs agreed upon by the District Court, less any liens allowed or recognized by the Court. On July 27, 1965, the United States District Court, Raleigh, North Carolina held that Greystone Concrete Products, Inc., had perfected a materialman's lien and had a right to a net recovery of $3,462.90 out of the insurance award recovered by petitioners from the insurance companies. 218 In addition, the Court stated that the United States perfected tax liens and had a right to recover $2,017.30 out of said insurance award. 5Foundation Accounts, Inc., is a corporation located in Durham, North Carolina. During the course of its existence, it never had any paid employees. During 1963, petitioner was associated with Foundation Accounts, Inc., as its chief independent consultant. In addition, he was a stockholder in the corporation. In acting as chief consultant for Foundation Accounts, Inc., petitioner performed services of a technical nature which had to do with studies of polymers and expansion agents. After performing various studies, they were submitted by petitioner to the corporation for evaluation. Foundation Accounts, Inc.'s only supervision over petitioner's consulting services consisted of defining the objectives that he was to achieve. The corporation did not establish219 working hours for petitioner. However, it did on occasion direct him to go to different areas of the country to perform services. During 1963, petitioner received from Foundation Accounts, Inc., five payments by check of $600 each for his consulting services. The first four payments were for consulting services performed by him in 1963. The final payment was received by petitioner on December 30, 1963, without restrictions on its use, for services to be performed by him during 1964. Foundation Accounts, Inc., did not withhold any payroll taxes from the fees it paid to petitioner for his consulting services; because it considered petitioner to be an independent consultant. At the time the corporation set up its books, it informed petitioner that it was not going to withhold payroll taxes from the fees paid to him. Opinion KERN, Judge: The major event which gave rise to this proceeding, and which gave rise to most of the other difficulties 673 which have beset the petitioner and his wife in recent years, was the severe damage to a factory being constructed by petitioner resulting from a snow and wind-storm in February 1960. The damage to the building was covered by insurance220 but, for some reason not explained by the record, the insurance companies declined to acknowledge liability to petitioner and he was forced to bring a court action which resulted in a judgment in petitioner's favor at some date after November 23, 1963 and before June 7, 1965. In his income tax return for 1960, petitioner claimed a casualty loss deduction in the amount of $160,863.00 for the damage to his factory. Respondent's disallowance of this deduction together with other minor adjustments resulted in the decrease of the net operating loss for that year from the figure of $167,863.00 reported by petitioners to the figure of $5,440.45 and the consequent disallowance of net operating loss carrybacks and carryforwards claimed for the taxable years. Respondent takes the position that because the damage to petitioner's factory was covered by business risk insurance and because petitioner filed an action against the insurance companies and ultimately recovered a judgment for the damage to his factory, there was a "reasonable prospect of recovery" of a "claim to reimbursement" for the loss caused by the damage and therefore petitioner is not entitled to a casualty loss deduction in221 1960. Respondent relies on Income Tax Regulation section 1.165-1(d)(2)(i), interpreting section 165, I.R.C. 19546 and effective for losses sustained after January 16, 1960, which states as follows: If a casualty or other event occurs which may result in a loss and, in the year of such casualty or event, there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery, no portion of the loss with respect to which reimbursement may be received is sustained, for purposes of section 165, until it can be ascertained with reasonable certainty whether or not such reimbursement will be received. Whether a reasonable prospect of recovery exists with respect to a claim for reimbursement of a loss is a question of fact to be determined upon an examination of all facts and circumstances. * * * This Court has previously upheld the validity of this regulation in Louis Gale, 41 T.C. 269">41 T.C. 269 (1963).222 The burden of showing that there was no reasonable prospect of recovery at the end of a given year rests upon petitioner. Id. at 276. In this case petitioner has failed to prove that there was no reasonable prospect of recovery against the insurance companies during 1960. The only evidence offered by petitioner with respect to his prospect of recovery for the 1960 windstorm damage to the factory building then being constructed was to the effect that the insurance companies denied liability, following which denial of liability petitioner brought a court action against them resulting in the substantial recovery of the amount claimed. On similar facts we stated in Louis Gale, supra, at page 276 as follows: But petitioners claim that when the insurance companies denied liability in 1959, that fact alone deprived them of any reasonable prospect of recovery, so the loss became deductible in 1959 even though they brought suits against the insurance companies for such recovery in that year. Denial of liability by an insurer is certainly a factor to be considered in223 deciding the reasonableness of the prospects of recovery, Coastal Terminals, Inc., supra, but it is only one factor. Such denial may be a formality; it may be specious; it may be merely the first step in a negotiated settlement; it may be only because of a disagreement as to amount; or it may be a delay to offer time for investigation. But we cannot say that denial of liability alone, without more, is the decisive factor. Of equal or more persuasive force on this point, it seems to us, is the fact that petitioners, in good faith, brought suit against the insurers in 1959, see Scofield's Estate v. Commissioner, supra, and the fact, which we may consider, that they recovered. We decide this issue in favor of respondent. Petitioner cites as error the disallowance by respondent of a $5,900.00 loss claimed by petitioner in his 1960 income tax return with respect to the foreclosure sale of a home constructed by petitioner. Petitioner testified that the cost of the home, including land and building, was $18,900.00 and that he had arranged for the sale of the property at a price of $19,700.00, but was prevented from consummating the sale because of the foreclosure proceeding, as a result224 of which petitioner's debt to Citizen's Bank & Trust Company in the amount of 674 $13,782.97 was extinguished. Petitioner also offered into evidence certain construction plans for the home. Petitioner offered no documentary evidence as to any item of cost relating to this house and no evidence (other than the plans) which in any way substantiated the total amount which he claimed had been spent on the home. Petitioner's conclusory statements and unsubstantiated estimates of the cost of a home he built nine years prior to the trial of this case cannot satisfy his burden of proof to establish his cost basis in the foreclosed property. See Louis Halle, 7 T.C. 245">7 T.C. 245, at 247-248, aff'd 175 F. 2d 500 (C.A. 2). Petitioner offered no evidence on how the construction plans for the home could be used as a basis for the determination of the cost of the completed house. Further, the record does not show whether the construction of the house was completed at the time of the foreclosure sale. We decide this issue in favor of respondent. In his petition, petitioner states that "[the] Commissioner has failed to give the [petitioner] credit for capital losses225 and interest losses for years 1958-1965 as shown * * * by 'Exhibit B'." The "Exhibit B" to which petitioner refers in his petition includes the schedule of outstanding loans owed by petitioner to the Citizens Bank & Trust Company as of June 7, 1965, which is the "loan schedule" set out in our Findings of Fact. A copy of this exhibit is attached to the stipulation of facts submitted by the parties. In his statutory notice of deficiency, respondent determined that petitioner was entitled to deduct $2,066.08 as business interest expenses for the year 1960, but as to 1961, 1962 and 1963 respondent allowed no such deduction. At the trial petitioner failed to prove that he paid in 1960 deductible business interest expenses in an amount greater than that determined by respondent. As to petitioner's 1960 interest expenses, respondent's determination is sustained. However, the second and fourth items appearing on the loan schedule reveal that the projects described therein as "Job No. 23" and "Job No. 315" were foreclosed upon in 1961. Respondent appears to recognize that if property belonging to petitioner is sold in foreclosure proceedings, petitioner is entitled to interest deductions226 as interest paid in the amount of interest liability satisfied from the proceeds of the foreclosure. Harold M. Blossom, 38 B.T.A. 1136">38 B.T.A. 1136. Respondent urges however that there is no evidence on how the proceeds from either of these foreclosures were applied as between principal and interest and would have us conclude that petitioner has failed to prove that any part of such proceeds constituted the payment of interest. We disagree. The prevailing rule in the United States is that in the absence of an agreement providing otherwise, a payment upon a debt consisting of principal and interest is to be treated by the debtor and creditor as first applicable to the interest due and then to the principal. Story v. Livingston, 13 Pet. 359, 38 U.S. 310">38 U.S. 310 (1837); Estate of Daniel Buckley, 37 T.C. 664">37 T.C. 664. The prevailing rule is followed in North Carolina. Overby v. The Fayetteville Building and Loan Association, 81 N.C. 56">81 N.C. 56 (1879); Bunn v. Moore's Executors, 2 N.C. 279">2 N.C. 279 (1796). There is nothing in the record which would suggest that as to the227 second and fourth items on the loan schedule petitioner and the Citizens Bank & Trust Company had entered into an agreement which would contradict the North Carolina rule requiring that a part payment on a debt consisting of principal and interest be applied first to interest. We therefore find that petitioner is entitled to deduct in 1961 as business interest $1,089.83 as to item two on the loan schedule and $2,712.50 as to item four on that schedule or a total of $3,802.33. In his 1960 income tax return, petitioner claimed a $1,100 deduction for travel and legal expenses which was disallowed by respondent. As the trial petitioner produced no documentary evidence relating to the payment of these claimed expenses, but he did testify that he and his attorneys traveled to Kansas City, Missouri, in connection with his suit against the insurance companies, for the purpose of consulting with engineers who designed the prefabricated steel used in the damaged factory. Petitioner also testified that the loan referred to as item seven on the loan schedule, in the amount of $250.00, and the first note referred to in item 10 of the loan schedule, in the amount of $500.00, represents funds which228 he spent on the Kansas City trip. 675 As we have already pointed out, respondent decreased the amount of net taxable loss reported by petitioner in his 1960 return from $167,863.00 to $5,440.45 and petitioner has failed to show error in respondent's determination. Under section 172 the deduction allowed petitioner for personal exemptions in 1960, totaling $2,400.00 is not treated as a net operating loss for purposes of the net operating loss carryback or carryover. Hence, petitioner's net operating loss carryback to be applied to his 1957 taxable year is $3,040.45 ($5,440.45 less $2,400.00). In petitioner's 1957 income tax return he reported adjusted gross income of $4,602.57 and five dependency exemptions, and he elected to use the respondent's tax tables to calculate his tax rather than itemize his deductions. Since no deductions for personal exemptions and no other nonbusiness deductions are allowed in computing taxable income in taxable years other than the loss year for purposes of calculating the net operating loss carried over to such years, petitioner's net operating loss carryback of $3,040.45 is to be applied against 1957 taxable income which, for purposes of the net229 operating loss provisions, is deemed to be $4,602.57. Because of the five exemptions claimed by petitioner in 1957, respondent in his adjustments attached to the statutory notice of deficiency determined that petitioner had no tax liability for 1957. However, in order to make use of the net operating loss provisions to reduce his tax in years following 1957, petitioner would have to prove that he was entitled to business deductions in 1960 in an amount at least $1,562.12 7 in excess of the amount allowed by respondent. Thus even if we were to decide that petitioner is entitled to the maximum travel and legal deduction in 1960 for which petitioner contends, an amount of $1,100.00, our decision would not affect petitioner's tax liability in any manner related to these proceedings in any taxable year before this Court. We therefore do not decide this question. The final matter placed at issue by the parties in their pleadings relates230 to petitioner's association with Foundation Accounts, Inc., during the latter part of 1963. During that year petitioner received four payments of $600.00 each attributable to work performed by him during the last four months of 1963. Petitioner also received a fifth payment, by check, on December 30, 1963, intended to be compensation for work which petitioner was to perform for Foundation Accounts, Inc., during January, 1964. Petitioner did not attempt to show that there were any restrictions on his use of the fifth payment after he received it on December 30, 1963, nor did he attempt to show that Foundation Accounts, Inc., was not solvent when he received his fifth payment. Except as to his construction activities petitioner was a cash basis taxpayer. Respondent contends that under these circumstances the advance payment by check made to petitioner on December 30, 1963 constituted income to petitioner in 1963. Respondent is correct. Lavery v. Commissioner, 158 F. 2d 859 (C.A. 7) affirming 5 T.C. 1283">5 T.C. 1283; Hedrick v. Commissioner, 154 F. 2d 90 (C.A. 2); Obland v. United States, 278 F. Supp. 989">278 F. Supp. 989 (E.D. Mo. 1967); L. L. Moorman, 26 T.C. 666">26 T.C. 666;231 and S.P. Freeling, 7 B.T.A. 1238">7 B.T.A. 1238. Respondent also contends that the $3,000 paid to petitioner by Foundation Accounts, Inc., in 1963 constituted "self-employment income" under section 1401 8 because petitioner was not an "employee" within the meaning of section 1402 9 and, by reference made in the latter section, within the 676 meaning of section 3121(d)10 and the regulations promulgated thereunder. 11232 At the trial, the President and Treasurer of Foundation Accounts, Inc., testified that the corporation never had any paid employees, that the only supervision over petitioner's activities consisted of outlining the objectives that he was to achieve, that petitioner was told that the corporation considered him to be an independent consultant, and that the corporation was not goint to withhold payroll taxes. Petitioner did not present any evidence on this issue at the trial. Lacking evidence that petitioner was under the direction, supervision or control of Foundation Accounts, Inc., as to the means or methods of accomplishing his work, see Terry C. Rosano, 46 T.C. 681">46 T.C. 681, we decide this issue in favor of respondent. On the apparent assumption that this Court could redetermine any matter with respect to petitioner's tax liability for his taxable years 1957 through 1963, whether or not raised in the pleadings, petitioner gave testimony and offered certain exhibits into evidence concerning an alleged business expense in 1961 and a debt which he claimed became worthless in 1962 or 1963. These matters were not raised in the original pleadings by the parties, nor did petitioner233 seek to amend his petition to include allegation as to these matters either at the trial or at any time thereafter. On nuerous occasions we have held that we will not, and cannot, consider issues which are not raised in the pleadings. J. William Frentz, 44 T.C. 485">44 T.C. 485, aff'd, 375 F. 2d 662 (C.A. 6); Lynne Gregg, 18 T.C. 291">18 T.C. 291; Samuel E. Hirsch, 16 T.C. 1275">16 T.C. 1275. In order to reflect the conclusions reached herein, Decision will be entered under Rule 50. Footnotes1. Petitioner appears to have abandoned his claim that his business casualty loss, if found to be deductible, exceeds his cost basis as determined by respondent in the notice of deficiency.↩2. In the Form 1045 which he filed, petitioner made this statement: "Taxpayer Cannot find his copy of 1958 tax return. Income tax rebate for 1958 taxable year is therefore waived in order to expedite carry-back adjustment."↩3. In the absence of proof to the contrary we assume that in connection with this foreclosure sale the mortgagee bank bid in the amount of the mortgage debt plus the interest due thereon and received in return the complete legal and equitable title to the property thus extinguishing the debt. Compare item 1 of the schedule set out infra which purports to reflect this transaction with other items therein. In this transaction there is no "balance due after foreclosure" shown in the schedule.↩4. Respondent does not contend herein that petitioner is entitled to a business interest deduction in an amount less than the amount determined in his notice of deficiency.↩5. The signature of the Assistant United States Attorney representing the United States in connection with the tax liens does not appear on the copy of the consent judgment admitted into evidence or the copy of the same consent judgment which petitioners attached to their petition.↩6. Hereafter all statutory references are to the Internal Revenue Code of 1954, unless otherwise indicated.↩7. The amount noted is calculated by subtracting $3,040.45, petitioner's net operating loss carryback from the year 1960 as determined by respondent, from $4,602.57, petitioner's taxable income in 1957 for purposes of the net operating loss provisions.↩8. SEC. 1401. RATE OF TAX. In addition to other taxes, there shall be imposed for each taxable year, on the self-employment income of every individual, a tax * * . ↩9. SEC. 1402. DEFINITIONS. (a) Net Earnings From Self-Employment. - The term "net earnings from self-employment" means the gross income derived by an individual from any trade or business carried on by such individual, less the deductions * * (b) Self-Employment Income. - The term "self-employment income" means the net earnings from self-employment derived by an individual * * * during any taxable year * * * (c) Trade or Business. - The term "trade or business", when used with reference to self-employment income or net earnings from self-employment, shall have the same meaning as when used in section 162 * * , except that such term shall not include - * * (3) the performance of service by an individual as an employee * * * (d) Employee and Wages. - The term "employee" * * * shall have the same meaning as when used in chapter 21 (sec. 3101 and following, relating to Federal Insurance Contributions Act). ↩10. Section 3121(d)↩ defines as an "employee," for purposes here relevant, "any individual who under the usual common law rules applicable in determining the employer-employee relationship has the status of an employee. 11. Sec. 31.3121(d)-1 [Employment Tax Regs.] Who are employees. (c) Common law employees. * * * (2) Generally such relationship exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so. The right to discharge is also an important factor indicating that the person possessing that right is an employer. Other factors characteristic of an employer, but not necessarily present in every case, are the furnishing of tools and the furnishing of a place to work, to the individual who performs the services. In general, if an individual is subject to the control or direction of another merely as to the result to be accomplished by the work and not as to the means and methods for accomplishing the result, he is an independent contractor. An individual performing services as an independent contractor is not as to such services an employee under the usual common law rules. Individuals such as physicians, lawyers, dentists, veterinarians, construction contractors, public stenographers, and auctioneers, engaged in the pursult of an independent trade, business, or profession, in which they offer their services to the public, are independent contractors and not employees.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624151/	LEONA LUECHTEFELD, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentLuechtefeld v. CommissionerDocket No. 21828-82.United States Tax CourtT.C. Memo 1985-227; 1985 Tax Ct. Memo LEXIS 400; 49 T.C.M. (CCH) 1471; T.C.M. (RIA) 85227; May 13, 1985. Mary Gassmann Reichert and William J. Falk, for the petitioner. Frank Agostino and David R. Reed, for the respondent. KORNERMEMORANDUM FINDINGS OF FACT AND OPINION KORNER, Judge: Respondent determined a deficiency of $206 in petitioner's 1979 Federal income tax. The sole issue for decision is whether petitioner, a member of a religious order and under vows of poverty and obedience, earned income during the year in issue in her individual capacity or conversely, in her capacity as agent for her religious order. The parties agree that if it is determined that the income at issue was earned by petitioner in her individual capacity, then she must report such income as gross income under section 61, 1 but if it is determined that petitioner earned the income at issue only as agent of her order, then such income401 is not reportable by her. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference. Sister Leona Luechtefeld (hereinafter "petitioner") resided at Red Bud, Illinois, at the time she filed her petition in this case. During all times relevant herein, petitioner was a member, also known as a Sister, in a religious order of the Roman Catholic Church, called the Adorers of the Blood of Christ (hereinafter referred to as "the Order"). The Order was incorporated under the laws of the State of Illinois on July 24, 1886, as the Convent of the Sisters of the Precious Blood, and is a religious organization exempt from Federal income tax. As stated in its Articles of Incorporation, the purposes of the Order are as follows: . . . to conduct schools and places of learning and to promote education, to advance the cause of Religious and Social Work, 402 to conduct hospitals and institutions for the care and treatment of suffering humanity and to do all and everything necessary or convenient for the accomplishment of any of the purposes or objects and powers above mentioned or incidental thereto. Each member of the Order is required to make vows of chastity, obedience and poverty as a precondition to membership, and petitioner undertook these vows prior to becoming a member in the Order. Petitioner executed a Declaration Concerning Remuneration in which she agreed "never [to] claim or demand, directly or indirectly, any wages, compensation, remuneration, or reward * * * for the time or for the services or work that I devote for * * * [the Order] during the time I may remain there or elsewhere in the name of or under commission from said [Order] * * ." A member who wishes to withdraw from the Order may receive official dispensation from her vows by application through her provincial superior to the general superior of the Order. In addition, some members have withdrawn from the Order without obtaining dispensation from the Church. Members who withdraw from the Order are entitled to receive the personal property they owned403 before joining the Order, as well as property received by gift or inheritance. In addition, withdrawing members are entitled to the return of their dowries, if they had them. The procedures set forth in the Order's Constitution for the return of property to withdrawing members do not vary for members who fail to obtain official dispensation from their vows. Pursuant to the procedures of the Order outlined below, members of the Order are allowed to secure employment in furtherance of the purposes of the Order. During all years relevant herein, the Order was divided into twelve geographical provinces, each of which was administered by a Provincial Superior. The Provincial Superior, inter alia, sits on the relevant province's placement board and, as a member of the board, considers proposals of Sisters within the province regarding missions [i.e., employment] desired by the Sisters. The Provincial Superior is vested with authority to approve or disapprove a proposed mission. The granting of such approval or disapproval depends upon whether the proposed mission is in accordance with the Order's Articles of Incorporation, and the Gospel of Jesus Christ, which, as interpreted404 by the Order, require that the mission work of a Sister in the Order relate to religious and charitable works that promote education, relieve suffering, and otherwise provide assistance to those in need. When the Provincial Superior approves of a proposed mission, such approval is effective for one year, following which the Sister must acquire reapproval for the following year. In accordance with these procedures, each Sister whose proposed mission is approved is issued a separate missioning order each year and these missioning orders (also known as obediences) are distributed to the Sisters of the Order on "Missioning Day." When a Sister takes a vow of obedience as a precondition to her membership in the Order, she expressly undertakes to subjugate her will to that of the Order and, pursuant to such vow, no Sister may accept a mission (i.e., a position of employment) without the express approval of and direction by the Order. Moreover, each Sister who receives a missioning order is under a duty to obey that order and cannot voluntarily terminate the mission without prior approval of the Order. Additionally, each Sister is under a duty to abide by any direction of the Provincial405 Superior, even if such direction relates to the performance of the mission itself, or requires the Sister's withdrawal from the mission. 2 In fact, the Order has at times required Sisters to terminate their employment in their assigned missions. Any payments made to a Sister in respect of her mission are required to be paid over in full to the Mother House of the Order, or deposited directly to the bank account of the Mother House. Once these funds are transferred by the Sister to the Mother House, the Sister maintains no control over the Order's disposition of the funds. Moreover, if a Sister of the Order who has engaged in mission work on behalf of the Order subsequently leaves the Order and receives dispensation from her vows, she is entitled to receive no part of the money generated by her mission work while she was a member of the Order. When a Sister of the Order is missioned in a location which is not impracticably far away from the Mother House of the406 Order, the Sister generally lives in the convent. When, however, a Sister is missioned by the Order to a location which is distant from a convent, a residence is rented for the Sister to live in, in the name of the Order. The Order generally, through its placement board, makes arrangements for a Sister's living accommodations, and any house rented by the Order for these purposes is considered within the Order to constitute a convent. Each Sister living away from the Mother House of the Order is required to submit to the Order a monthly budget statement, setting forth her living expenses, which is reviewed by the Order in accordance with established guidelines. The Order then either approves or revises the proposed budget, and pays the Sister's monthly living expenses, as approved. In addition, the Order provides its Sisters with a maximum allowance for personal expenses which, during the year at issue, was $35 per month. There is no relationship between the amount of a Sister's monthly allowance and the amount of funds, if any, generated by her mission work. If a Sister is missioned away from the Mother House of the Order and she requires a telephone, the telephone is maintained407 in the name of the Order, unless otherwise required by the telephone company. If such a Sister requires the use of an automobile, the Order may provide her with the use of an automobile which is owned, maintained and insured in the name of the Order. Petitioner made her permanent vows of poverty, chastity and obedience in 1947 and became a permanent member of the Order at that time. Petitioner has not requested dispensation from her vows, and at all times relevant herein was an active member of the Order. During the year in issue, petitioner was employed by Land of Lincoln Legal Assistance Foundation, Inc. (hereinafter "Land of Lincoln") as a part-time paralegal. Land of Lincoln provides legal assistance to indigents in central and southern Illinois. Although the job description for paralegals at Land of Lincoln is very broad, petitioner's actual duties included primarily providing assistance to older indigent persons with their tax returns, Medicare forms, insurance forms, and food stamp applications. When petitioner first contemplated an affiliation with Land of Lincoln, she had already made her perpetual vows. Accordingly, prior to interviewing for, and accepting the position408 of Land of Lincoln, petitioner sought authority from the Order to do so. In seeking authority from the Order, petitioner was questioned concerning the nature of the work involved at Land of Lincoln and how that work related to the purposes of the Order. After reviewing the nature of the work to be performed by petitioner at Land of Lincoln and determining that such work would further the purposes of the Order, the Order, by missioning order, granted petitioner's request and directed her to assume the position. When petitioner applied for the position at Land of Lincoln, she fully disclosed her status vis-a-vis the Order to her prospective employer, and such status was not objected to by Land of Lincoln. During the year at issue, petitioner acted strictly in accordance with her vows of poverty and obedience. Petitioner lived in a convent maintained by the Order, did not maintain a personal bank account and, when her employment required that she have access to an automobile, petitioner used a car which was owned and maintained by the Order. Petitioner received salary checks, made payable to "Sister Leona Luechtefeld" from Land of Lincoln during the year at issue. Although Land409 of Lincoln did not impose any restriction upon petitioner's use of these checks, upon receipt, petitioner, pursuant to her vows, immediately endorsed each check over to the Order and sent it to the lockbox maintained by the Order in St. Louis. After endorsing these checks, petitioner exercised no control over the funds. In her income tax return for 1979, petitioner disclosed, but excluded from adjusted gross income, the salary of $4,860 paid to her by Land of Lincoln, on the grounds that she received it only as agent for her Order. Respondent determined that all salary received by petitioner during 1979 was received by her in her individual capacity, and therefore had to be reported as income on her Federal income tax return. OPINION At issue is whether amounts paid by Land of Lincoln with respect to petitioner's services as a paralegal are taxable income to petitioner. Petitioner contends that the income was received by her in her capacity as agent for the Order and argues that such amounts are therefore not taxable to her. Respondent maintains that petitioner received such compensation in her individual capacity, and she is therefore taxable thereon. Respondent relies*410 primarily upon the rule that income must be taxed to its earner. Lucas v. Earl,281 U.S. 111">281 U.S. 111 (1930). The facts in this case are not materially different from those presented in Schuster v. Commissioner, 84 T.C. (filed April 29, 1985), and that case controls the result here. While I still adhere to the views expressed in my dissenting opinion in Schuster, I of course accept the majority opinion in that case as the law in this Court. Accordingly, respondent's position must be sustained. Decision will be entered for the respondent.Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as in effect in the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, except as otherwise noted.↩2. It is the policy of the Provincial Superior or other member of the placement board to visit each Sister at her mission site in order to assure that the mission is in conformity with the objectives of the Order.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4512578/	[Cite as State v. Devenny, 2020-Ohio-775.] STATE OF OHIO ) IN THE COURT OF APPEALS )ss: NINTH JUDICIAL DISTRICT COUNTY OF SUMMIT ) STATE OF OHIO C.A. No. 29450 Appellee v. APPEAL FROM JUDGMENT ENTERED IN THE SHAWN W. DEVENNY COURT OF COMMON PLEAS COUNTY OF SUMMIT, OHIO Appellant CASE No. CR-2018-11-3735 DECISION AND JOURNAL ENTRY Dated: March 4, 2020 HENSAL, Judge. {¶1} Shawn Devenny appeals from the judgment of the Summit County Court of Common Pleas, denying his motion to dismiss. This Court affirms. I. {¶2} The facts underlying this appeal are not in dispute. According to Officer Corzine with the Tallmadge police department, he observed a silver Toyota Avalon speeding at approximately 4:11 p.m. on August 7, 2018. He activated his siren and overhead lights and tried to pursue the vehicle, which was being driven by Mr. Devenny. Mr. Devenny did not stop. Instead, he sped up in an effort to elude Officer Corzine. After a few minutes, Officer Corzine ended the pursuit given Mr. Devenny’s high rate of speed and the presence of other traffic. Shortly thereafter, a detective with the Tallmadge police department saw the silver Toyota while driving home from work. He radioed the Stow police department and informed them that the 2 vehicle was headed into their jurisdiction. The Stow police saw the vehicle and attempted to pursue it, but were also unsuccessful. {¶3} Later that day, Officer Corzine learned that the vehicle had been stolen. Officer Corzine contacted the owner, who informed him that the Brecksville police had stopped the vehicle and had Mr. Devenny in custody. Officer Corzine contacted the Brecksville police, who confirmed this information. {¶4} Officer Golem with the Brecksville police department had observed the silver Toyota speeding at approximately 5:14 p.m. At the time, he was unaware that the vehicle was stolen, or that the Tallmadge and Stow police had tried to stop the vehicle earlier that day. When he attempted to stop the vehicle, Mr. Devenny sped up. After about a five-minute high-speed chase, the vehicle crashed into a median in Broadview Heights, and Mr. Devenny attempted to flee on foot. Officers apprehended him and took him into custody. {¶5} On August 14, 2018, a Cuyahoga County grand jury indicted Mr. Devenny on two counts of failure to comply in violation of Revised Code Section 2921.331(B) (one a third- degree felony, and one a fourth-degree felony), one count of receiving stolen property in violation of Section 2913.51(A), and one count of obstructing official business in violation of Section 2921.31(A). Mr. Devenny pleaded guilty to receiving stolen property and the third- degree-felony count of failure to comply. The court dismissed the remaining two counts. The trial court then found Mr. Devenny guilty, and sentenced him to community control. {¶6} Three weeks later, a Summit County grand jury indicted Mr. Devenny on two counts of failure to comply, both felonies of the third degree. Mr. Devenny moved to dismiss the indictment on the basis of double jeopardy. The trial court held a hearing on the motion, and 3 ultimately denied it. Mr. Devenny now appeals, raising one assignment of error for this Court’s review. II. ASSIGNMENT OF ERROR TRIAL COURT ERRED BY DENYING APPELLANT’S MOTION TO DISMISS ON DOUBLE JEOPARDY GROUNDS[.] {¶7} In his assignment of error, Mr. Devenny argues that the trial court erred by denying his motion to dismiss the indictment based upon a violation of his constitutional rights against double jeopardy. This Court disagrees. {¶8} “Appellate courts review de novo the denial of a motion to dismiss an indictment on the grounds of double jeopardy, because it is a pure question of law.” State v. Mutter, 150 Ohio St. 3d 429, 2017-Ohio-2928, ¶ 13. “The Double Jeopardy Clause of the Fifth Amendment to the United States Constitution provides that no person shall ‘be subject for the same offence to be twice put in jeopardy of life or limb.’” Id. at ¶ 15, quoting the Fifth Amendment to the U.S. Constitution. “Through the Fourteenth Amendment to the United States Constitution, this protection applies to individuals prosecuted by the state of Ohio.” Id. Article I, Section 10, of the Ohio Constitution also contains a Double Jeopardy Clause, which states that “[n]o person shall be twice put in jeopardy for the same offense.” “The protections afforded by the Ohio and United States Constitutions’ Double Jeopardy Clauses are coextensive * * * [and] protect against three abuses: (1) ‘a second prosecution for the same offense after acquittal,’ (2) ‘a second prosecution for the same offense after conviction,’ and (3) ‘multiple punishments for the same offense.’” Mutter at ¶ 15, quoting North Carolina v. Pearce, 395 U.S. 711, 717 (1969). Here, we are concerned with the protection against a second prosecution for the same offense after conviction. 4 {¶9} Mr. Devenny argues that he is being prosecuted in Summit County for the same failure-to-comply offense that he pleaded guilty to – and was convicted of – in Cuyahoga County. He asserts that the “same elements” test set forth in the United States Supreme Court’s decision in Blockburger v. United States, 284 U.S. 299 (1933), applies. “The Blockburger test applies ‘where the same act or transaction constitutes a violation of two distinct statutory provisions’ and requires the reviewing court to evaluate the elements of each statutory provision to determine ‘whether each provision requires proof of a fact which the other does not.’” Mutter at ¶ 17, quoting Blockburger at 304. {¶10} In response, the State argues that the conduct at issue was not part of the same act or transaction and, therefore, was not the same offense for purposes of double jeopardy. More specifically, the State points to the fact that Mr. Devenny failed to comply with an order or signal of a police officer in Summit County when he fled from Officer Corzine. Then, an hour later, in a separate act or transaction, he failed to comply with an order or signal of a police officer in Cuyahoga County when he fled from Officer Golem, who was unaware of the prior chase in Summit County. {¶11} This Court’s review of the hearing transcript from the motion to dismiss supports the State’s position. When Officer Golem with the Brecksville police attempted to stop Mr. Devenny for speeding, he was unaware that the vehicle was stolen, or that it had been involved in another police chase about an hour earlier. He simply attempted to stop Mr. Devenny for speeding, and when Mr. Devenny failed to comply, he initiated a chase. This Court, therefore, agrees with the State’s position that the second police chase in Cuyahoga County was not part of the same act or transaction that occurred in Summit County earlier that day. See State v. Craig, 5th Dist. Licking No. 17-CA-61, 2018-Ohio-1987, ¶ 24-25 (holding that a second police chase 5 that occurred in Licking County over an hour after a police chase occurred in Franklin County was not part of the same transaction because the Licking County officer attempted to stop the vehicle based solely on a traffic violation he observed, and was unaware that the vehicle had been involved in a police chase in Franklin County earlier that day); compare State v. Graham, 8th Dist. Cuyahoga No. 108053, 2019-Ohio-4353, ¶ 18-21 (addressing facts wherein the Cuyahoga County police initiated but ultimately terminated a chase of a vehicle, alerted the Medina County police of their failed pursuit, and the Medina County police initiated a chase and apprehended the driver based upon that information without observing a separate traffic violation). We, therefore, reject Mr. Devenny’s argument in this regard. {¶12} Mr. Devenny also argues that “Cuyahoga County understood and was aware that this incident began in [S]ummit [C]ounty and assumed jurisdiction over any and all related offenses.” He further argues that “it is reasonable that [he] understood that the plea to two counts and dismissal of two others was resolving the entire incident[.]” While the parties entered copies of the indictments from both counties as stipulated exhibits at the hearing on Mr. Devenny’s motion to dismiss, Mr. Devenny did not provide the trial court with a transcript of the proceedings or other evidence from the Cuyahoga County case that would support these assertions. See State v. Armstrong, 9th Dist. Medina No. 03CA0064-M, 2004-Ohio-726, ¶ 16 (providing that a defendant has the burden of providing the trial court with the transcript of proceedings or other evidence from the defendant’s previous case to substantiate a double- jeopardy claim); see also State v. Billingsley, 133 Ohio St. 3d 277, 2012-Ohio-4307, ¶ 51 (noting that, absent a grant of authority to do so, “a county prosecuting attorney does not have authority to enter into a plea agreement on behalf of the state for crimes committed wholly outside the county in which the prosecuting attorney has been elected.”). This Court, therefore, cannot say 6 that the trial court erred when it rejected those arguments. Armstrong at ¶ 16. (“As the trial court was not provided with an adequate record to determine [the defendant’s] double jeopardy claim, we are unable to conclude that the court erred when overruling his motion to dismiss.”). Based upon the foregoing, Mr. Devenny’s assignment of error is overruled. III. {¶13} Mr. Devenny’s assignment of error is overruled. The judgment of the Summit County Court of Common Pleas is affirmed. Judgment affirmed. There were reasonable grounds for this appeal. We order that a special mandate issue out of this Court, directing the Court of Common Pleas, County of Summit, State of Ohio, to carry this judgment into execution. A certified copy of this journal entry shall constitute the mandate, pursuant to App.R. 27. Immediately upon the filing hereof, this document shall constitute the journal entry of judgment, and it shall be file stamped by the Clerk of the Court of Appeals at which time the period for review shall begin to run. App.R. 22(C). The Clerk of the Court of Appeals is instructed to mail a notice of entry of this judgment to the parties and to make a notation of the mailing in the docket, pursuant to App.R. 30. Costs taxed to Appellant. JENNIFER HENSAL FOR THE COURT 7 CALLAHAN, P. J. TEODOSIO, J. CONCUR. APPEARANCES: ANGELA M. KILLE, Attorney at Law, for Appellant. SHERRI BEVAN WALSH, Prosecuting Attorney, and HEAVEN DIMARTINO GUEST, Assistant Prosecuting Attorney, for Appellee.	01-04-2023	03-04-2020
https://www.courtlistener.com/api/rest/v3/opinions/4476479/	OPINION. Turner, Judge: The issue common to the four petitioners is whether the gain from the sale of the fruit on the trees at the time they sold their respective citrus groves was ordinary income, the fruit at the time of the sale not being mature and not, therefore, ready to be harvested. This question has been recently decided by the Supreme Court, in Watson v. Commissioner, 345 U. S. 544, affirming 197 F. 2d 56 and 15 T. C. 800. It was held that on the sale of an orange grove with immature fruit on the trees, such part of the gain realized as was attributable to the crop was ordinary income because realized on the sale of property held primarily for sale to customers in the ordinary course of business. That decision controls this issue, and the respondent is sustained. The other issue relates only to the trust petitioners, who contend that they may return such ordinary income on the installment basis under section 44 of the Internal Revenue Code.2 On this issue, we think that the petitioners have met the requirements of the statute. If the fruit be regarded as personal property, the facts show that the sales in question were casual sales and not sales in the ordinary course of the petitioners’ trade or business, even though the fruit on the trees at the time of the sale was held primarily for sale to customers in the ordinary course of such trade or business. Furthermore, there can be no question, we think, that a growing crop of citrus fruit would not be “property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year.” If, on the other hand, the growing crop was realty, the statute carries no conditions or limitations on the right of a taxpayer to report its gain under section 44 (b), other than the limitations as to the amounts and times of the payments, and as to those conditions there is no argument that they have not been met. On this issue we accordingly hold for the petitioners. Decisions will be entered wider Rule 50. SEC. 44. INSTALLMENT BASIS. (a) Dealers in Personal Property. — Under regulations prescribed by the Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the Installment payments actually received in that year which the gross profit realized or to be realized when payment is completed, bears to the total contract price. (b) Sales op Realty and Casual Sales op Personalty. — In the case (1) of a casual sale or other casual disposition of personal property (other than property of a hind which would properly be included in the inventory of the taxpayer if on hand at the close of the, taxable year), for a price exceeding $1,000, or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed 30 per centum of the selling price (or, in case the sale or other disposition was in a taxable year beginning prior to January 1, 1934, the percentage of the selling price prescribed in the law applicable to such year), the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner above prescribed in this section. As used in this section the term “initial payments” means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624161/	LEE B. FOSTER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Foster v. CommissionerDocket No. 37841.United States Board of Tax Appeals22 B.T.A. 717; 1931 BTA LEXIS 2079; March 12, 1931, Promulgated 2079 Following Edward Mallinckrodt, Sr.,4 B.T.A. 1112">4 B.T.A. 1112; Edward Mallinckrodt, Jr.,14 B.T.A. 194">14 B.T.A. 194; Ida C. Calloway et al., Executors,18 B.T.A. 1059">18 B.T.A. 1059, the petitioner settlor is entitled to deduct losses based upon sales of securities to a trust. S. Leo Ruslander, Esq., for the petitioner. P. M. Clark, Esq., and C. C. Holmes, Esq., for the respondent. MURDOCK 717 The Commissioner determined a deficiency of $968.94 in the petitioner's income tax for the calendar year 1923. The petitioner alleges that the Commissioner erred in disallowing as a deduction from his gross income the sum of $21,259.70 as a loss sustained upon the sale of certain securities in that year. 718 FINDINGS OF FACT. The petitioner is an individual residing in Pittsburgh, Pa.By an instrument dated May 15, 1918, the petitioner, as party of the first part, entered into an agreement with the Fidelity Title & Trust Company of Pittsburgh, hereinafter referred to as the trustee, as party of the second part, the pertinent provisions of which were as follows: AND WHEREAS, the party of the first part is desirous of2080 transferring said stocks and bonds to the Trustee, to be held by it in trust for the purpose of providing an income for the living expenses of the party of the first part, his wife and children, as hereinafter set forth, the said income to be free and clear of all of the debts, contracts, engagements, alienations and anticipations of all of the beneficiaries of, and free and clear of all levies, attachments, executions and sequestrations against any or all of the beneficiaries named herein. AND WHEREAS, the Trustee is willing to accept said trust and carry out the terms of this agreement; NOW, THEREFORE, it is mutually understood and agreed as follows: FIRST: The party of the first part does hereby sell, assign, transfer and set over unto the Trustee all of the securities listed on said "Exhibit A" herein attached. In Trust Nevertheless, to invest and keep the same invested, and to pay over, in quarterly installments, during the life-time of the party of the first part the net income therefrom to Pauline Livingston Foster, the wife of the party of the first part, * * * provided, that said Pauline Livingston Foster continue during said period to live with the party of the first2081 part as his wife. SECOND: In the event that said Pauline Livingston Foster shall cease for any cause whatsoever to live with the party of the first part as his wife, or shall fail to survive the party of the first part, then and in either of said events, the Trustee shall during his lifetime pay over, in quarterly installments, the net income of said trust estate to the party of the first part as Guardian for, and to be used in such manner as he shall deem right and proper for the maintenance and support of, such lawful child or children of the first party as may then be living; * * THIRD: Upon the death of the party of the first part, the net income of said trust estate shall be paid, in quarterly installments, to his said wife, Pauline Livingston Foster, (provided that at the time of the death of the party of the first part she shall have been living with him as his wife) for and during the term of said Pauline Livingston Foster's natural life; said payments, however, to be made to the said Pauline Livingston Foster for the purpose of being expended for her own living expenses and for the maintenance, education and support of the lawful child or children of the party of the2082 first part living at the time of his death. * * FOURTH: Upon the death of both the party of the first part and the said Pauline Livingston Foster, his wife, or upon the death of the party of the first part at a time when the party of the first part and said Pauline Livingston Foster, his wife, shall not be living together as man and wife, the Trustee shall pay, in quarterly installments, the net income of said trust estate to such of the children of the party of the first part as may then be living and over the age of twenty-one years, and to the Guardian or Guardians of such children of the party of the first part as may be then living and under the age of twenty-one years, said payments to be for the support and education of said children and in such amount to each child as said Trustee may in its discretion 719 deem wise and best for the interests of such child or children; said income shall not be accumulated but be paid out each year as received; * * FIFTH: Upon the youngest child of the party of the first part becoming the age of forty years, provided the party of the first part and his wife the said Pauline Livingston Foster are both dead, or if the party of2083 the first part is dead and the said Pauline Livingston Foster, though living, shall prior to the time of his death have ceased to live with him as his wife, said trust shall cease and determine, and the principal thereof shall be divided equally among the lawful children of said party of the first part, share and share alike. If the party of the first part is living at the time said youngest child becomes forty years of age, then upon his death but only if the said wife of the said party of the first part shall have failed to survive him or live with him as his wife, said trust shall cease and determine as provided for in this paragraph. If said wife survive and shall have lived with said party of the first part as his wife up to the time of his death and she, the said wife, is still living when said youngest child attains the age of forty years, then upon her death only shall said trust cease and determine as provided for in this paragraph. If one or more of said children of the party of the first part shall have died prior to the termination of said trust, leaving lawful issue surviving him or her, then such lawful issue shall take the share of said deceased parent per stirpes2084 and not per capita. SIXTH: If at any time hereafter it shall be impossible for any cause whatsoever, to further carry out the terms of this agreement as to the distribution of said income, or trust estate, then and in that event said trust shall cease and determine, and the said estate be distributed to the then legal heirs of the party of the first part. SEVENTH: During the lifetime of the party of the first part the Trustee shall not sell or reinvest any of the assets or funds of said trust estate without the written consent of the party of the first part being first had and obtained. The party of the first part shall have the right during his lifetime to direct the Trustee to sell or dispose of the assets of the trust estate, and the reinvestment of the money or funds so realized shall be made only as consented to by the party of the first part, as herein provided. The recommendation of said party of the first part shall be, if acted upon, sufficient warrant to said Trustee to invest in the manner recommended. In the event of the failure of the Trustee and the party of the first part to agree upon such investment or reinvestment, the matter shall be submitted to the then2085 Judges of the Orphans' Court of Allegheny County, whose decision shall be final and binding upon the parties. The following table shows various facts in regard to the securities which the petitioner sold to the trustee in the year 1923: Date of purchaseDate of saleAmount and kind of securityCostSale priceFair market value at date of saleLoss claimed on return2/27/237/19/231,000 shares Mother Lode Coal Mines Co$13,150.00$8,000$9,0005,150.00191612/31/23195 Independent Brewing Co3,112.209759752,137.207/24/2211/22/23400 Sinclair Oil common11,910.006,8007,7005,110.00192211/2/23400 Texas Co20,010.0014,00014,0006,010.00192211/2/23100 Sinclair Oil common2,977.501,7001,9251,277.50192210/25/23100 Texas Co5,002.504,0004,0501,002.502/20/224/25/23$15,000 Par Third Ave. 5's8,572.508,0008,000572.50Total21,259.70The Commissioner disallowed the losses claimed. 720 OPINION. MURDOCK: Counsel for the petitioner agreed that in some instances the securities had been sold for less than their fair market value on the day of sale. Thereafter, 2086 he limited his claim to the amount of the difference between the total cost and the total fair market value. The Commissioner stated in his deficiency letter that the trust was valid and he eliminated the income of the trust from the petitioner's income. But he said the petitioner could not deduct these losses under section 214(a)(5) because by the trust instrument the petitioner was the equitable owner of the corpus of the trust fund and the alleged sales were merely changes in form without any change in substance. The respondent's position is that the remainders attempted to be created in the trust instrument are to a class and may not vest until a child of the petitioner, not living at the date of the instrument, becomes forty years of age; thus the remainders are void under the rule against perpetuities; the preceding estates are valid; but by reason of the failure of all of the estates in remainder a resulting trust arises in favor of the grantor and his heirs and next of kin with respect to the principal; therefore, there can be no loss through such alleged sales. He cites a number of Pennsylvania cases in support of his rationale but he cites no authority for his conclusion. 2087 We will assume that he has correctly applied the law of Pennsylvania. The life estates and the estates for years are valid and sufficient to support the trust. ; . They are not "mere agencies to accomplish a transgression" of the rule against perpetuities. A transgression of the rule was not the dominant intent of the settlor. Such cases as ; , and ; , have no application. The petitioner retained no right to revoke the trust and consequently has no such right. The trust is a taxable entity separate from the petitioner and has been so treated by the Commissioner. None of the income of the trust is payable to the petitioner for his own use during the continuation of the trust. The trust may continue long after the death of the petitioner. If he gives property to the trust he suffers no loss for tax purposes. But here he did not give, unless, as in the opinion of some, the excess of fair market value over sales price2088 would be a gift. He sold. The bona fides of these sales has not been questioned. We have heretofore held that sales under similar circumstances establish losses. ; ; Ida C. Calloway et al.,721 . There is no reason why a different rule should be applied in this case. The claim for losses amounting to $19,084.70 is sustained. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624163/	AMERICAN 3 WAY LUXFER PRISM CO., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.American 3 Way Luxfer Prism Co. v. CommissionerDocket No. 5935.United States Board of Tax Appeals9 B.T.A. 571; 1927 BTA LEXIS 2558; December 12, 1927, Promulgated 2558 1. DEDUCTION . - Petitioner sustained a loss during 1919 through a reduction of its inventory caused by breakage and/or loss of physical assets. Held, that such loss is deductible in computing petitioner's net income. 2. DEPRECIATION. - No evidence adduced as to depreciation sustained and the amount allowed by respondent has not been disturbed. Frank Carlton, Esq., for the petitioner. W. H. Lawder, Esq., for the respondent. TRUSSELL 572 This proceeding results from the respondent's determination of a deficiency in the income and profits taxes of this petitioner in the amount of $2,733.80 for the calendar year 1919. The petition sets forth the following allegations of error by respondent. That net taxable income has been increased by - (1) Depreciation disallowed$4,686.06(2) Inventory adjustment 12-31-18250.00(3) Inventory adjustment 12-31-18791.76(4) So-called additions of a permanent nature150.00(5) Reserve for taxes400.00(6) Items previously charged to expense94.50(7) Depreciation disallowed207.376,579.69The first and seventh items above represent two different matters and2559 are the issues here involved, the other alleged errors having been waived at the hearing on this proceeding. FINDINGS OF FACT. The petitioner is an Illinois corporation with its principal place of business at Cicero, and was during 1919, and prior and subsequent thereto, engaged in the business of manufacturing, selling, jobbing, and contracting for the installation of sidewalk light prisms, steel sidewalk doors, prism glass for transoms and general daylighting purposes, and ventilators and skylights of glass and concrete or steel. In the manufacture of its products the petitioner employs a great many items of equipment and small tools. Petitioner supplies the molds to glass manufacturers for the production of its glass prisms and such molds have a very short useful life due to breakage in the process of casting, and also due to the fact that different types and styles of prisms have to be made to order for particular jobs. Such special styles of prisms require molds which are usually of no further use after casting those special prisms. In the production of concrete work, petitioner uses slate-top tables and iron molds to form the concrete. A great many of these iron2560 molds are broken or damaged in being removed after the concrete has been cast. In performing its contracts for the installation of glass prisms, sidewalk doors, skylights, etc., it was necessary for petitioner to send out to and leave on the jobs, supplies and equipment such as iron molds, canvas covers and jigs, and various small tools. In such instances there was always a loss of supplies, equipment or tools, either through breakage or theft, and also some jobs required special equipment which became practically worthless after serving its special 573 purpose. About 25 per cent of the small tools purchased which were known to be actual replacements were charged to expense and carried under a classification of "General Tools." In the spring of 1918 petitioner moved to Cicero, Ill., and found it necessary to store a quantity of its furniture and office fixtures in its plant. Due to a badly leaking skylight, the furniture was damaged to such an extent that, when the floor space was needed for production purposes, most of the furniture was destroyed in the latter part of 1919 so as to get rid of it. Petitioner's machinery for its general line of production consisted2561 of punch presses, brakes, shears, bending machines, etc. In the spring of 1918, when the business was moved from La Porte, Ind., to Cicero, new machinery, such as turret lathes, large planers, etc., were purchased for the production of parts for trucks for war purposes. During 1919, after petitioner ceased producing truck parts, it sold at a loss the machinery used in that production. Due to the fact that petitioner did business in all parts of the country, that its supplies and equipment were scattered, and that it sustained a considerable loss of equipment and tools each year, the petitioner, since about 1904, has consistently followed the practice of keeping no itemized account of all its various fixed assets as to date of acquisition and depreciation as applied to separate items and not setting up on its books the assets when purchased; of taking a physical inventory at cost or value on prior inventory of all its supplies, equipment, tools, furniture, fixtures, and machinery at the end of each year; and of charging or crediting to profit and loss any decrease or increase of the inventory from the value of the assets as shown on the books. The physical inventory taken for2562 the year 1919 was destroyed by a fire which occurred in petitioner's office early in 1920, or else it was otherwise lost or destroyed for it has not been found since that time. The petitioner's general ledger shows, inter alia, the following accounts for the year 1919 as a result of its inventory: MachineryMoldsSmall toolsFurniture and fixturesEquipment and factory suppliesTotalsOpening inventory Jan. 1$11,675.40$1,011.67$3,139.83$3,583.03$10,099.63$29,509.56Purchases during year240.2538.07523.452,710.413,512.18Totals11,915.651,011.673,177.904,106.4812,810.0433,021.74Closing inventory Dec. 317,071.311,000.001,914.652,164.959,834.9321,985.84Charged to profit and loss, Dec. 311,069.3411.671,263.251,941.532,975.117,260.90Sales during year3,775.003,775.00Totals11,915.651,011.673,177.904,106.4812,810.0433,021.74574 The amount of $7,260.90 charged to profit and loss at the close of the year 1919, represents an actual reduction in petitioner's inventory of supplies, equipment, tools, furniture, fixtures and machinery during that year2563 due to breakage and/or otherwise lost. On or as of December 31, 1919, petitioner charged $807.51 to profit and loss account and credited that amount to depreciation reserve. The respondent, in auditing petitioner's return, disallowed $4,686.06 of the deduction for decrease in inventory which seems to have been termed depreciation and also, a deduction of $207.37 for depreciation. Petitioner's taxes have been computed under the provisions of sections 327 and 328 of the Revenue Act of 1918. OPINION. TRUSSELL: We are presented with two questions of fact, one as to the deduction for the loss of assets during the year as shown by petitioner's closing inventory and termed in the petition as depreciation, and the other as to the amount of depreciation. The facts established that petitioner sustained a loss during 1919 through reduction of its inventory, caused by breakage and/or loss of physical assets, and that loss amounted to $7,260.90, of which amount the respondent has disallowed a deduction of $4,686.06. The amount of $4,686.06 should be allowed as a deduction in computing petitioner's net income for the year 1919 as provided for in section 234(a) of the Revenue Act2564 of 1918. As to the question of whether the respondent erred in disallowing $207.37 of the $807.51 claimed by petitioner for depreciation, we have before us no facts upon which to base any conclusion. With reference to the recomputation of petitioner's tax liability on the reduced net income, in accordance with this decision and the provisions of sections 327 and 328 of the Revenue Act of 1918, the respondent should use the same comparatives and rates as were used when the deficiency here involved was computed. Counsel for the petitioner stated in his closing statement at the hearing on this proceeding, that such comparatives and rates would be perfectly satisfactory. Judgment will be entered upon 15 days' notice, pursuant to Rule 50.Considered by LITTLETON, SMITH, and LOVE.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624164/	HARRY SOLOMON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Solomon v. CommissionerDocket No. 20112.United States Board of Tax Appeals15 B.T.A. 419; 1929 BTA LEXIS 2862; February 14, 1929, Promulgated 2862 1. There being no assignment of error with regard to the correctness of the deficiency determined by the respondent for the year 1920, the determination of the respondent is approved. 2. Held that the record does not sustain the respondent's assertion of the fraud penalty for the years 1920 to 1923, inclusive. L. E. Renard, Esq., for the petitioner. C. H. Curl, Esq., and J. W. Carpenter, Esq., for the respondent. SIEFKIN419 This is a proceeding for the redetermination of deficiencies in income taxes for the calendar years 1920 to 1923, inclusive. The amounts of deficiencies as computed by respondent and the penalties asserted for each of these years are as follows: YearDeficiencyPenaltyTotal1920$1,277.84$638.92$1,916.7619212,412.381,206.193,618.5719221,245.95622.981,868.931923882.90441.451,324.35The petitioner alleges that the respondent erred in finding that the petitioner filed false and fraudulent returns for the years 1920, 1921, 1922, and 1923. 420 In addition the petition contains the following assignments of error: (1) The respondent erred in2863 finding that the petitioner's net income for the year 1922 was $18,267.55 and in asserting a deficiency in tax of $1,245.95. (2) The respondent erred in finding that the petitioner's net income for the year 1923 was $17,965.23 and in asserting a deficiency in tax of $882.90. FINDINGS OF FACT. The petitioner is an individual with residence at Scranton, Pa.Upon the occasion of an investigation by a revenue agent of the income of the petitioner for the years 1919 to 1923, inclusive, the agent failed to find any personal books of account of the petitioner. He did find a set of accounting records of the partnership of Solomon, Horowitz & Solomon, of which petitioner was a member. This partnership was engaged in the wholesale grocery business. The income of the partnership as found by the agent was very little different from the income reported on the partnership returns for the years 1921 and 1922. The agent found that at the end of 1923 there was no balance sheet so he prepared a balance sheet. Since the revenue agent did not find any personal records of the petitioner, he computed the income upon a net worth basis. This method consisted in subtracting the petitioner's2864 bank balance at the beginning of the year from the bank balance at the end of the year and adding living expenses to the difference. The living expense of the petitioner was increased because the petitioner admitted to the agent that he gave his wife $100 per week for living expenses. The revenue agent prepared a report dated November 10, 1924, covering the years 1919 to 1923. He made a supplemental report dated May 28, 1925. The agent also submitted a report on November 10, 1924, covering an investigation of the partnership of Solomon, Horowitz & Solomon. The petitioner was also a member of the partnership named the Anthracite Chemical Co. The agent attempted to make an investigation of this company, but found that they had no records. Conferences were had between the petitioner and representatives of the respondent. At one of these conferences, held on August 26, 1924, the petitioner was questioned by representatives of the respondent. Under date of March 16, 1925, the respondent received an affidavit executed by petitioner on March 11, 1925. 421 The returns filed by petitioner showed the following income: 1920192119221923Gross income:Salaries$2,700.00$2,417.10$3,481.10$3,672.00Partnership profits2,664.633,129.221,085.031,848.03RentsNone.732.001,575.001,200.00InterestNone.None.2,004.001,904.00Total5,364.636,278.728,145.138,624.03Deductions:Taxes108.00200.00300.00300.00Losses500.0060.00233.75None.Contributions250.00624.00824.00Others197.50408.00608.00510.001,355.251,532.00Net income4,756.635,768.726,789.887,092.032865 In the deficiency letter, dated July 24, 1926, the respondent determined the net income of petitioner for each of the years in controversy to be as follows: 1920$16,227.38192123,515.66192218,267.55192317,965.23Under date of September 22, 1926, the respondent wrote a letter to petitioner's counsel advising him that the petitioner's deficiency in tax and penalty for the year 1920 were $610.88 and $305.44, respectively. In this letter the net income was stated at $11,226.30. OPINION. SIEFKIN: At the hearing counsel for petitioner abandoned the claims as to the impropriety of the proposed additional tax for the years 1921, 1922, and 1923. The only evidence introduced with regard to the deficiency for the year 1920 was a letter from the respondent dated September 22, 1926, in which the respondent stated that the deficiency in tax for the year 1920 was $610.88. The deficiency letter had shown the deficiency to be $1,277.84. However, there is no assignment of error in the petition regarding the deficiency for the year 1920 and the question of the correctness of the deficiency is not before us. The respondent's determination of deficiencies for2866 the years in question will not be disturbed. The respondent has asserted the 50 per cent fraud penalty against the petitioner for each of the years 1920 to 1923, inclusive. This proceeding was heard subsequent to the enactment of the Revenue Act of 1928. 422 Section 907(a) of the Revenue Act of 1924, as amended by section 601 of the Revenue Act of 1928, provides in part as follows: * * In any proceeding involving the issue whether the petitioner has been guilty of fraud with intent to evade tax, where no hearing has been held before the enactment of the Revenue Act of 1928, the burden of proof in respect of such issue shall be upon the Commissioner. * * * The record does not prove that the petitioner, in any of the years, was guilty of filing false and fraudulent returns with intent to evade the tax. The petitioner is, therefore, not liable for the penalties asserted by the respondent. The deficiencies are $1,277.84 for the year 1920, $2,412.38 for the year 1921, $1,245.95 for the year 1922, and $882.90 for the year 1923.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624165/	Estate of Paul Hansen, Deceased, Alison Scott Hansen, Executrix 1 v. Commissioner. Estate of Paul Hansen v. CommissionerDocket Nos. 2187, 2188, 2215, 2216, 2217, 2218.United States Tax Court1945 Tax Ct. Memo LEXIS 286; 4 T.C.M. (CCH) 264; T.C.M. (RIA) 45080; February 27, 1945S. Ashley Guthrie, Esq., for the petitioners. Charles J. Munz, Esq., for the respondent. STERNHAGEN The Commissioner determined deficiencies in income tax as follows: 19401941Estate of Paul Hansen$4,757.40$3,107.66Paul E. Langdon704.841,574.32Kenneth V. Hill694.561,529.20Samuel A. Greeley5,146.483,089.02Samuel M. Clarke769.071,587.54Thomas M. Niles666.801,522.59287 He determined that "the accounting records of the firm reflect the accrual method of accounting", upon that method computed its income for the periods August 16-December 31, 1940, and the year 1941, as $60,595.68 and $88,796.80, and consequently increased the share of each partner. Two other issues are presented. Findings of Fact On August 15, 1940, Paul Hansen, now deceased, Paul E. Langdon, Kenneth V. Hill, Samuel A. Greeley, Samuel M. Clarke and Thomas M. Niles formed the partnership of Greeley and Hansen to do business at Chicago, Illinois, as consulting hydraulic and sanitary engineers for municipalities throughout the United States. The business had been started in 1914 under the name of Pierce and Greeley. In about 1922, Paul Hansen became a member. In about 1935, Pierce withdrew and the business was conducted as Greeley and Hansen. On August 15, 1940, four new men became partners. In this report the firm before August 16, 1940, is called the old partnership and the firm thereafter is called the new partnership. The work of the partnership consists of (a) the preparation of a general plan to permit municipalities to obtain financing of the project; (b) then the preparation288 of detailed plans and specifications for contractors' and manufacturers' bids, and (c) supervision and inspection of construction. The fees are sometimes percentages of the cost of construction and sometimes on a per diem or fixed sum basis. The fees were received in installments as the work progressed, the fixed fees on a monthly basis and the percentage fees as the work progressed, computed on an estimate of work done or of construction completed. Usually the fees were not definitely determined until the end of the job when the last payment was made. All the income consisted of fees for personal services. The new partnership filed income tax returns in the First District of Illinois for the period August 16-December 31, 1940, and for the year 1941, on the cash basis. The old partnership also filed income tax returns for 1940 and 1941 on the cash basis. Its predecessors had consistently filed income tax returns on the cash basis. From 1914 until about 1923, there was a method of accounting regularly employed in keeping the books of account of the successive partnerships. Such method was a simple cash method. In about 1923, the method became more formal and two new accounts were289 set up designated as "Services Billed" and "Work in Proress". No contracts were entered on the books of account and no entry was made of daily services rendered on any job. As the work on any job progressed bills for services were sent to clients either at monthly intervals, as called for by the contracts, or as funds were needed. The amount was either an estimate of the value of the services rendered or a percentage of the estimated cost of construction, and it was credited to "Services Billed" account and debited to accounts receivable. Before closing the books at the end of each year the bookkeeper submitted a list of uncompleted jobs as of December 31 to Greeley, and Greeley, in a few minutes, estimated the probable compensation for services rendered on each job for which no bill had yet been rendered. This figure was an impression rather than a close estimate. Each item or total of Greeley's estimate was entered in the "Work in Progress" account as showing the figure for the work in progress as of the end of the year, and the figure was brought forward in the subsequent year as the figure for the work in progress at the beginning of the subsequent year. The figure for work in290 progress as of December 31, 1940, was $74,000, and as of December 1, 1941, $54,000. The amount in the account as of the beginning of the 1940 period was $24,200. Except for the above-mentioned amounts, all accounts in the partnership books were kept on a cash basis. The books had no bills payable accounts. At times, when the partnership borrowed money, the books carried a notes payable account. In the partnership income tax returns the "Work in Progress" and "Services Billed" accounts were omitted and income was reported on the cash basis. The income per books and the income per return were as follows: Aug. 16 to Dec. 31, 1940Calendar Year 1941Services billed$127,999.22$393,897.35Work in Progress: Beginning$ 24,200.00$ 74,000.00End74,000.0049,300.0054,000.0020,000.00Gross income177,799.22373,897.35Operating Expenses:121,593.03323,148.88Personal income tax of Greeley3,751.88125,344.91(1,092.72)322,056.16Net income or (loss) per books$ 52,454.31$ 51,841.19Income per return: Aug. 16 to Dec. 31, 1940Calendar Year 1941Cash collected on receivables$118,191.52$379,268.96Operating expenses121,593.03$323,148.88Paid to old partnership included in "Otherdeductions authorized by law"9,619.00332,767.88Net income or (loss) as reported($ 3,401.51)$ 46,501.08291 The Commissioner determined that the method of accounting regularly employed in the partnership books of account was "the accrual method of accounting", and made various adjustments, which show that the adjusted partnership income was determined by the Commissioner as follows: Aug. 16 to Dec. 31, 1940Calendar Year 1941INCOMEServices billed per books$127,999.22$393,897.35Work in Progress: Beginning$ 98,816.00End98,816.0052,594.9546,221.05226,815.22347,676.30Additional Income: Sale of equipment1,222.31Gain from liquidation of notes and accountsreceivable7,741.126,444.12* Interest received1,092.72* Correction of journal entry Dec. 31, 19414,400.00Expenses accrued Dec. 31, 1940 and in-cluded in expenses paid in 194153,589.94Total Income$235,778.65$413,203.08DEDUCTIONSExpenses as per books$125,344.91$323,148.88* Income tax of Greeley3,751.88Expenses per return$121,593.03$323,148.88Expenses accrued by agent: Wages and salary32,960.40Federal Social Security6,313.061,257.40Sundry expenses14,316.4853,589.94Total deductions$175,182.97$324,406.28Adjusted Income$ 60,595.68$ 88,796.80292 The adjustments made by the Commissioner to "the accrual basis" which he adopted show that reported income was first adjusted to book income by substituting services billed $127,999.22 and $393,897.35 for $118,191.52 and $379,268.96, and using the book figures in the work in progress account. Then for the book figures in the work in progress account were substituted the figures $98,816, work in progress as of December 31, 1940 and January 1, 1941, and $52,594.95, work in progress as of December 31, 1941. These figures were derived from figures obtained in 1942 from Clarke, one of the partners, at the request of the revenue agent who was then making an examination of the partnership books for 1940 and 1941. The Clarke figures were estimates for work in progress based in part on partnership records, in part293 on information not at hand at the end of the respective periods, and in part on information not in the books or records of the partnership. On some of the jobs the final amount due had not yet been determined. No uniform method was applied to determine the percentage of completion on each uncompleted job. Additional expenses were added to the book expenses as follows: For the period August 16-December 31, 1940, wages and salary - 32,960.40, Federal Social Security taxes - $6,313.06, and sundry expenses - $14,316.48, totalling $53,589.94, and for the year 1941, Social Security taxes - $1,257.40. The additional expenses accrued in 1940 were restored to income for 1941. The above adjustments were made to reflect income on "the accrual basis" adopted by the Commissioner. In the return of the old partnership for 1941 the entire amount of $9,619, received from the new partnership, was reported as income. Memorandum Opinion STERNHAGEN, Judge: 1. The controversy is one of accounting. The Commissioner refused to recognize the returns of the new partnership, which were made on the cash basis, and determined that the method of accounting regularly employed in keeping the books of the partnership294 was "the accrual method". The accounts on the books were adjusted to that supposed method, the resulting income was computed, and thus the deficiencies were evolved. The petitioners, members of the partnership, assail the substitution of this so-called "accrual method" for the cash method and say that the cash method is the only method in accordance with the partnership books and therefore under Section 41 is the only method available to either the partnership or the Commissioner for the determination of taxable income. The statute provides (Sec. 41, I.R.C.): The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. * * The Commissioner's rejection of the partnership returns is based upon the fact the returns omit the two accounts295 called "services billed" and "work in progress". The Commissioner treats the services billed account as a record of liabilities of clients which the partnership has a right to collect. But the evidence shows that this is incorrect. The amounts entered in such account were not accrued legal rights to receive. They were mere estimates by the partnership as the jobs progressed of the value of the services rendered. As a rule, the fee for a job was not definitely determined until the last payment was made. The amount entered in the work in progress account at the end of each period was merely. Greeley's "impression", - not even an estimate - of the value of services rendered to December 31 on unfinished jobs for which no bills had been rendered. The Commissioner did not use the figures shown in that account but used estimates made in 1942 by Clarke, one of the partners. The Clarke estimates were to some extent based on records and were the result of some computations, but they were not based on detailed and accurate data nor arrived at by a uniform method of computation. The Clarke estimates made in 1942 were used by the Commissioner, as said in the deficiency notice, "in accordance296 with the provisions of Section 22 (c) of the Internal Revenue Code". This section provides for the use of inventories where necessary in order to clearly reflect income of any taxpayer. Inventories are used to determine the cost of goods sold where "the production, purchase, or sale of merchandise is an income-producing factor". Reg. 103, Sec. 19.22 (c)-1. All the income of the partnership was derived from personal services; and the production, purchase, or sale of merchandise was not an income-producing factor. Inventories were unnecessary and their use in computing the income of the partnership in application to the work in progress account was incorrect. In the revenue agent's report on which the determination of the Commissioner is based it was stated: If records are kept in a manner to reflect accounts receivable, accounts payable, and inventories, it is considered to represent the accrual method of accounting. The general books of the partnership contain these accounts. Other than the services billed and work in progress accounts, the partnership's books were kept on a cash basis. In order to compute the partnership's income on an accrual basis the297 Commissioner set up various accrued expense accounts, such as accrued wages and salary, accrued federal social security tax, and sundry and miscellaneous expenses, although such items had not been entered on the partnership's books of account as accruals and were not entered until actually paid in a subsequent taxable period. That the books carried a notes payable account in which entries were made at times when money was borrowed and that the books also carried a receivables account is not determinative that an accrual method of accounting was used. Daily Record Co., 13 B.T.A. 458">13 B.T.A. 458. Such accounts may come into existence and be recorded on books of account without the slightest effect on income. M. D. Rowe et al., 7 B.T.A. 903">7 B.T.A. 903. Since substantially all accounts were kept on a cash basis, it was a simple matter for both the old and new partnerships to report income on that basis from the books of account disregarding the memorandum accounts called services billed and work in progress. This clearly reflected income. No uniform method of accounting can be or is prescribed for all taxpayers. Neither a strictly cash nor a conventional accrual system is required. 298 But items of gross income and deduction must be accounted for consistently. Reg. 103, Sec. 19.41-2 and 19.41-3; Mertens Law of Federal Income Taxation, Sec. 12.05. This was done. Even if a few accounts in the books were on an accrual method, "minor deviations from the cash basis are not sufficient to sustain a holding that the accrual basis was used" ( Estate of L. W. Mallory, 44 B.T.A. 249">44 B.T.A. 249, 258, particularly where a substitute method adopted by the Commissioner was erroneous. Under Section 41, Internal Revenue Code, the taxpayer has the selection of the method of accounting. Huntington Securities Corp. v. Busey, 112 Fed. (2d) 368. Since the partnership computed its net income in accordance with the method of accounting regularly employed by it and had no desire for a change, it was not necessary to secure the consent of the Commissioner. Section 41; Page Oil Co., 41 B.T.A. 952">41 B.T.A. 952, 958, affirmed, 129 Fed. (2d) 748 (C.C.A. 2d); Reynolds Cattle Co., 31 B.T.A. 206">31 B.T.A. 206. The determination of the Commissioner that the "accounting records of the firm reflect the accrual method of accounting" was in error and299 the adjustments made by him to effect a change from the cash to an accrual method were incorrect. 2. A question is presented by the petitioners in respect of the disallowance of an expense deduction of $9,619 for 1941 and the inclusion of $7,741.12 in 1940 income and $6,444.12 in 1941 income. No facts as to the background of this deduction can be found from the evidence. Apparently, the new partnership paid $9,619 to the old partnership for assets and of this the Commissioner took $5,801.35 as the basis of accounts receivable having a book value of $26,122.61. What the book value or the actual value was is not in evidence. Clearly, as the purchase price of assets, the $9,619 was not deductible as an expense. The Commissioner apparently divided the $9,619 into the amounts attributed as cost of the accounts receivable acquired and as cost of the other assets acquired and by this division he arrived at $5,801.35 as the cost basis of accounts receivable having a book value of $26,122.61. Since this $5,801.35 was 22.21 per cent of the $26,122.61 book value of all the accounts, the gain on the realization of any one account was determined by using as the basis for such account the same300 22.21 per cent of the book value of the account. By this method he included in 1940 income $7,741.12 and in 1941 $6,444.12. The taxpayers assail this, contending that they have included these amounts in the income of the respective years. Since, however, there are no facts in evidence upon which a correct determination could be made or a criticism could be founded of the determination which the Commissioner has made, there is nothing upon which this Court can base findings of fact or reach a conclusion, and the determination must therefore be affirmed. 3. Greeley and Hansen, as members of the old partnership, claim that, because the new partnership concedes that of its deduction of $9,619 the disallowance of $3,817.65 was correct, the old partnership should have this amount subtracted from the $9,619 which was included by it in its income. Apparently the $3,817.65 is the amount which the respondent attributed to the price paid by the new partnership to the old for assets other than accounts receivable. This amount was apparently received by the old partnership as the price of assets. Whether the amount included gain or resulted in loss depends upon the cost to the old partnership301 of the assets sold. But what the assets cost cannot be found from the evidence. Thus, as in the preceding point, the taxpayers have failed to sustain their claim, and it must be denied. Decisions will be entered under Rule 50. Footnotes1. Proceedings of the following petitioners are embraced in this report: Paul E. Langdon, Kenneth V. Hill, Samuel A. Greeley, Samuel M. Clarke and Thomas M. Niles.↩. The items "Sale of Equipment", "Interest Received" and "Correction of Journal Entry Dec. 31, 1941" are conceded by petitioner to be correct. The item "Income Tax of Greeley" was not included in deductions claimed in the partnership return for the period August 16 to December 31, 1940. These items are not adjustments effecting a change from the cash to an accrual basis.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624166/	WALTER DAVID AND MARIAN DAVID, ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent David v. CommissionerDocket Nos. 39754-86, 4497-90, 4498-90, 4500-90United States Tax CourtT.C. Memo 1993-621; 1993 Tax Ct. Memo LEXIS 642; 66 T.C.M. (CCH) 1774; December 27, 1993, Filed 642 Decision will be entered for respondent. For petitioners: Richard Alan Levine and Theodore D. Peyser. For respondent: Curt M. Rubin. DAWSON, GUSSISDAWSON; GUSSISMEMORANDUM OPINION DAWSON, Judge: These cases were assigned for trial or other disposition to Special Trial Judge James M. Gussis pursuant to the provisions of section 7443A(b)(4) and Rules 180, 181, and 183. All section references are to the Internal Revenue Code in effect for the years in issue unless otherwise indicated. All Rule references are to the Tax Court Rules of Practice and Procedure. The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE GUSSIS, Special Trial Judge: These cases were consolidated for trial, briefing, and opinion. Respondent determined the following deficiencies and additions to tax: Walter David and Marian David, docket Nos. 39754-86, 4498-90 Additions to TaxSec.Sec.Sec.YearDeficiency6653(a)(1)6653(a)(2)66611981$ 32,262.13$ 1,900.0150% of the--interest dueon $ 32,262.13198229,531.00------Sheldon Jay David and Marilyn David, docket Nos. 643 4497-90, 4500-90 Additions to TaxSec.Sec.Sec.YearDeficiency6653(a)(1)6653(a)(2)66611981$ 30,780.42$ 1,781.8750% of the-- interest dueon $ 30,780.42198228,317.001,415.8550% of the$ 7,079interest dueon $ 28,317Respondent also determined that petitioners Walter and Marian David are liable for increased interest under section 6621(c) for 1981 on $ 32,262.13. Respondent also determined that petitioners Sheldon and Marilyn David are liable for increased interest under section 6621(c) for 1981 on $ 30,780.42 and for 1982 on $ 28,317. Petitioners have conceded the liabilities for increased interest under section 6621(c) and the addition to tax under section 6661(a) for 1982 in docket No. 4500-90 (Sheldon and Marilyn David). The only issues remaining for decision in these consolidated cases are: (1) Whether binding settlement agreements were entered into between petitioners and respondent for the 1981 and 1982 tax years; (2) whether petitioners are liable for the negligence additions to tax pursuant to sections 6653(a)(1) and (2) in the years involved. Some of the facts have been stipulated and they are so 644 found. The stipulations of facts and the accompanying exhibits are incorporated herein by this reference. Petitioners Walter and Marian David resided in Woodmere, New York, at the time they filed their petitions. Sheldon and Marilyn David resided in Brooklyn, New York, at the time they filed their petitions. In December 1981, Walter and Marian David invested in Mid-Continent Drilling Associates (MCDA-II), a limited partnership. MCDA-II is one of nine limited partnerships which comprise the Petro-Tech National Litigation Project. In Webb v. Commissioner, T.C. Memo. 1990-556, this Court held that MCDA-II was a tax shelter, the activities of which were not engaged in with a profit objective. On their joint Federal income tax returns for the years 1981 and 1982, Walter and Marian David claimed partnership losses of $ 59,400 and $ 64,451, respectively, which were disallowed in full. In December 1981, Sheldon and Marilyn David invested in MCDA-II. On their joint Federal income tax returns for 1981 and 1982, they claimed partnership losses of $ 59,400 and $ 64,451, respectively, which were disallowed in full. Walter David graduated from City College645 in 1961 with a bachelor of business administration degree. He majored in accounting. He then became associated with W. B. David & Co., a diamond business in New York City founded by his father, Herman David. Sheldon David graduated from Yeshiva College in 1969 with a bachelor of arts degree, a bachelor of Hebrew literature degree and a Hebrew teacher's diploma. He later earned a master of business administration degree from Long Island Graduate School of Business with a specialty in marketing. After college, Sheldon David also joined W. B. David & Co. On August 11, 1988, the 1982 Federal income tax return filed by Sheldon and Marilyn David was assigned to an Internal Revenue Service appeals officer, Seymour Margolis. On October 14, 1988, the 1981 tax return filed by Walter and Marian David was also assigned to Margolis. By letter dated November 2, 1988, Margolis made a settlement offer to Walter and Marian David and, early in November 1988, Margolis made an identical settlement offer to Sheldon and Marilyn David. By telephone conversation on November 14, 1988, Stephen Burr, the certified public accountant who represented the above petitioners, stated that the petitioners 646 would accept the offer and that he would provide verification of their cash investments. On July 7, 1989, Margolis sent to Burr an audit statement with respect to Walter and Marian David for 1981 and a Form 870-AD for 1981. On July 10, 1989, Margolis sent to Burr an audit statement with respect to Sheldon and Marilyn David for 1981 and 1982 and a Form 870-AD for 1981 and 1982. The July 7 and July 10 transmittal letters accompanying the audit statements and the Forms 870-AD state that "we will notify you when the proposed settlement is approved." Margolis did not receive any executed Forms 870-AD back from any of the petitioners for the years involved. By letter dated September 28, 1989, Margolis informed Burr that the reports sent to him in July 1989 with respect to, inter alia, Walter David and Sheldon David were incorrect and that the settlement offer was no longer available. Petitioners argue that on November 14, 1988, Burr orally accepted a written settlement offer made by Margolis resulting in binding settlement agreements with respect to the 1981 and 1982 tax years. This Court has repeatedly declined to enforce a settlement agreement where the person entering into the agreement647 on behalf of the Commissioner lacked the authority to bind the Commissioner. Estate of Jones v. Commissioner, 795 F.2d 566 (6th Cir. 1986), affg. T.C. Memo. 1984-53; Gardner v. Commissioner, 75 T.C. 475">75 T.C. 475 (1980); Cole v. Commissioner, 30 T.C. 665">30 T.C. 665, 674 (1958), affd. per curiam 272 F.2d 13">272 F.2d 13 (2d Cir. 1959); Ginella v. Commissioner, T.C. Memo. 1991-625. Delegation Order No. 66, as applicable, sets forth the titles of those individuals vested with the authority to settle tax cases not docketed before the Tax Court. Settlement authority in the Appeals Office is specifically vested only in Chief and Associate Chiefs of Appeals and Appeals Team Chiefs. Margolis, as an appeals officer, was not an official with appropriate settlement authority and thus lacked the authority to enter into binding settlement agreements with petitioners in the instant cases. Petitioners' contention that Margolis, as an appeals officer, somehow derived settlement authority under Delegation Order No. 225, 52 Fed. Reg. 13008648 (April 20, 1987), is without merit. Delegation Order No. 225, supra, which was promulgated in 1987, authorized officials in the Examination Division and others to settle certain tax shelter issues based on settlement positions taken by Chief Counsel or the Appeals Office. There is nothing in Delegation Order No. 225, supra, that purports to circumvent or override the procedures established in Delegation Order No. 66 with respect to the authority therein granted to enter into binding settlement agreements. Delegation Order No. 225, supra, does not purport to extend settlement authority to appeals officers. Moreover, Delegation Order No. 225, supra, specifically provides that "the delegation of authority granted herein may not be redelegated." Petitioners further argue that they signed and mailed to respondent the Forms 870-AD purportedly settling their tax liabilities for 1981 and 1982, thereby entering into binding settlement agreements. Respondent has no record of receiving the signed Forms 870-AD. Moreover, evidence was introduced that as of July 8, 1988, all offers of settlement pertaining to the Petro-Tech National Litigation Project were withdrawn. The649 fact that, as of November 2, 1988, Margolis mistakenly believed he could still make offers of settlement in regard to Petro-Tech cases is irrelevant. In short, neither Margolis nor anyone else had the authority to enter into a settlement agreement on behalf of respondent with respect to Petro-Tech cases as of July 8, 1988. After careful review we find that the record in these cases clearly establishes that no binding settlement agreements were entered into between the parties for either 1981 or 1982. We note that petitioners' argument that we should enforce the purported settlement agreements because respondent implemented an identical agreement with a similarly situated taxpayer is unpersuasive. Our responsibility is to apply the law to the facts of the cases before us; how the Commissioner treated other taxpayers is irrelevant. 2Davis v. Commissioner, 65 T.C. 1014">65 T.C. 1014, 1022 (1976); Avers v. Commissioner, T.C. Memo. 1988-176. 650 Section 6653(a)(1) provides that if any part of any underpayment of tax is due to negligence or intentional disregard of the rules or regulations, there shall be added to the tax an amount equal to 5 percent of the underpayment. Section 6653(a)(2) provides for an addition to tax in the amount of 50 percent of the interest payable on the portion of the underpayment of tax attributable to negligence. Negligence as used in section 6653(a) is defined as the lack of due care or the failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 947 (1985). Under certain circumstances reliance by a taxpayer on the advice of a competent adviser, can be a defense to the additions to tax for negligence. See, e.g. United States v. Boyle, 469 U.S. 241">469 U.S. 241, 250 (1985); Ewing v. Commissioner, 91 T.C. 396">91 T.C. 396, 423-424 (1988) affd. without published opinion 940 F.2d 1534">940 F.2d 1534 (9th Cir. 1991). However, the reliance must be reasonable, in good faith, and based upon full disclosure. Ewing v. Commissioner, supra;651 Pritchett v. Commissioner, 63 T.C. 149">63 T.C. 149, 174-175 (1974). Relying on United States v. Boyle, 469 U.S. 241">469 U.S. 241 (1985), petitioners argue they are not liable for the negligence additions to tax because they relied upon the advice of their accountants Stephen Burr and Robert Feinman in deciding to invest in MCDA-II and thus exercised reasonable care. Reliance on professional advice, standing alone, however, is not an absolute defense to negligence, but rather a factor to be considered. Freytag v. Commissioner, 89 T.C. 849">89 T.C. 849, 888 (1987), affd. 904 F.2d 1011">904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. , 111 S. Ct. 2631 (1991). It must first be established that such reliance was reasonable. United States v. Boyle, supra at 250. Petitioners have not shown that it was reasonable for them to rely upon the advice of Feinman and Burr. Feinman and Burr both testified that they had no knowledge or expertise in the area of oil and gas drilling. Nor is there anything in the record indicating that Feinman and Burr had first652 hand knowledge of MCDA-II. In advising petitioners to invest in MCDA-II, both Feinman and Burr relied entirely on the materials contained in the offering memorandum. In addition, in preparing petitioners' 1981 and 1982 returns, Feinman and Burr relied solely on the statements of promoters reflected on Schedule K-1s prepared by the partnership's accountants, Laventhol & Horwath, as to petitioners' distributive shares of partnership losses for 1981 and 1982. We have rejected pleas of reliance when neither the taxpayer nor the expert" relied upon by the taxpayer knew anything about the business involved. Freytag v. Commissioner, supra; Beck v. Commissioner, 85 T.C. 557">85 T.C. 557 (1985); Flowers v. Commissioner, 80 T.C. 914">80 T.C. 914 (1983); Rogers v. Commissioner, T.C. Memo. 1990-619. We fail to discern any reason for not doing so in this case. Petitioners' contention that, in making their investments, they relied on the fact that a nationally known accounting firm had been retained by the promoters of the MCDA-II program to prepare the tax returns for the partnership and653 audit the partnership books is unconvincing. Petitioners' reliance was not justified. Nothing in the record indicates that the accounting firm in question purported to have first hand knowledge of the economic validity of the several programs contemplated in the MCDA-II offering memorandum. In fact, the letter from the accounting firm accompanying the Schedule K-1 form reflecting the partnership tax returns filed for the appropriate taxable year states that the information on the Schedule K-1 form was not intended to represent financial data which had been subjected to auditing procedures or which had been prepared in accordance with generally accepted accounting principles. The accounting firm also indicated in its letter that it did not express an opinion as to the information submitted. In short, we do not believe that petitioners' purported reliance on the accounting firm was reasonable and in good faith. We have considered the case of Heasley v. Commissioner, 902 F.2d 380 (5th Cir. 1990), revg. T.C. Memo 1988-408">T.C. Memo. 1988-408, where the Court of Appeals held that the taxpayers, who were unsophisticated investors with limited654 prior investment experience and with no formal education beyond high school, were not liable for the negligence-related additions to tax. The Court of Appeals reasoned that due care did not require moderate income investors to conduct an independent investigation of their investment. The Heasley case is factually distinguishable. Walter David and Sheldon David were college graduates. In 1981 Walter David and Sheldon David were owners and managers of a diamond business. Unlike the taxpayers in the Heasley case, petitioners did not establish that they intended to profit from their investments in MCDA-II, and we are not persuaded that their purported efforts to monitor their investments were in any way meaningful. We conclude that the Heasley case is inapplicable here. Petitioners presented evidence of a jury verdict against Laventhol & Horwath in a fraud case brought by investors of MCDA-II in the United States District Court, Southern District of Texas, Houston Division. Petitioners argue that a finding of fraud in the District Court case negates a finding of negligence in the instant case. In essence, petitioners request that we take judicial notice of the findings655 of fact made by the jury in the District Court case and upon which they based their verdict. We take judicial notice of the jury award pursuant to Fed. R. Evid. 201, but we do not take judicial notice of the specific findings of fact on which the verdict is based. Rule 201(b) requires that before a fact can be judicially noticed it must be either (1) generally known within the community or (2) capable of accurate and ready determination by sources whose accuracy cannot reasonable be questioned. Estate of Reis v. Commissioner, 87 T.C. 1016">87 T.C. 1016, 1026 (1986); see also Petzoldt v. Commissioner, 92 T.C. 661">92 T.C. 661, 674-676 (1989). The findings of fact on which the jury's verdict is based do not satisfy the two tests of Rule 201(b). They are not generally known to the public, nor are they so indisputable that their accuracy cannot reasonably be questioned. The mere fact that a jury in one case makes findings of fact is not a basis for another court to take judicial notice of those findings and deem them indisputably established for purposes of the pending litigation. Estate of Reis v. Commissioner, supra at 1028.*656 Furthermore, we note that petitioners' reliance on Reile v. Commissioner, T.C. Memo 1992-488 is misplaced. In Reile, the Court found that the taxpayers' reliance upon the advice of their accountant was reasonable and in good faith, thereby negating a finding of negligence. The Court did not rely upon another Court's finding of fraud for its holding as petitioners suggest on brief. Respondent's determinations with respect to the negligence-related additions to tax are sustained. To reflect the foregoing, Decisions will be entered for respondent. Footnotes1. Cases of the following petitioners are consolidated herewith: Sheldon Jay David and Marilyn David, docket Nos. 4497-90 and 4500-90; Walter David and Marian David, docket No. 4498-90.↩2. Because the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, 96 Stat. 648, applies to partnership taxable years beginning after Sept. 3, 1982, the years before the Court are pre-TEFRA. For years to which TEFRA is applicable, partners have the right to enter into settlement agreements the terms of which are consistent with those of agreements entered into by the Commissioner with other partners. Sec. 6224(c)(2).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624167/	DANIEL A. MARKMAN and ESTATE OF IRIS M. MARKMAN, DANIEL A. MARKMAN, ADMINISTRATOR, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentMarkman v. CommissionerDocket Nos. 9506-79, 20381-80.United States Tax CourtT.C. Memo 1987-407; 1987 Tax Ct. Memo LEXIS 404; 54 T.C.M. (CCH) 154; T.C.M. (RIA) 87407; August 20, 1987. 404 Petitioner-husband operated a dental practice and engaged in the trade or business of horse racing during 1975 and 1976. Held: (1) Petitioner-husband's dental practice income for 1975 and 1976 was underreported. Amounts determined. (2) Petitioner-husband's loss from horse racing in 1975 did not exceed the amount stipulated to by the parties. (3) Petitioners are liable for an addition to tax under sec. 6653(a), I.R.C. 1954, for 1976. Marvin Klamen and Henry S. Shaw, for the petitioners. Henry Thomas Schafer, for the respondent. CHABOTMEMORANDUM FINDINGS OF FACT AND OPINION CHABOT, Judge: Respondent determined deficiencies in Federal individual income taxes and an addition to tax under section 6653(a)1 (negligence, etc.) against petitioners as follows: Addition to TaxDocket No.YearDeficiencySec. 6653(a)9506-791975$ 94,136.43 2None20381-80197637,510.00$ 1,876.00These two cases 405 were consolidated for trial, briefs,and opinion. After concessions by both sides, the issues for decision 3 are as follows: (1) Whether petitioner-husband and unreported income from the practice of dentistry in 1975 and 1976; (2) Whether petitioners are entitled to additional 1975 deductions for horse racing expenses; and (3) Whether petitioners are liable for an addition to tax under section 6653(a) for 1976. FINDINGS OF FACT 4406 Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference. When the petitions were filed in the instant cases, petitioners 5 resided in Illinois. During 1975 and 1976, Daniel and Iris were parents of the following children: Wayne S. Markman (hereinafter sometimes referred to as "Wayne"), Linda B. Klien (hereinafter sometimes referred to as "Linda"), Ellis B. Markman (hereinafter sometimes referred to as "Ellis"), and Elyse A. Markman. Daniel, a dentist, 407 was awarded a D.D.S. degree from St. Louis University in 1948. After graduation, Daniel worked with the United States Public Health Service until 1949. After leaving the Public Health Service, Daniel bought a dental practice in St. Louis. Daniel has been involved with his practice for at least 32 years. Before graduation, Daniel had worked as a social worker. When Daniel bought the practice in 1949, St. Louis was changing. People were leaving the inner city. When Daniel bought the practice, the building in which his office was located held more than one hundred doctors, but they were moving out as fast as they could. Daniel's patients came from a low socioeconomic area. Daniel worked many hours each day. During late 1975 the building in which he worked had gone into decay. There were only three or four doctors in the whole building and Daniel's office was the only one open on its floor. Before September 1975, Daniel's dental practice had no employees. In September 1975, Daniel employed Wayne to work in the practice. Wayne was graduated from the University of Missouri, Kansas City Dental School and was a practicing licensed dentist in Missouri. Wayne first received his 408 license to practice dentistry in September 1975, about the time he began to work as Daniel's employee. Wayne's salary for 1975 was $ 7,200, and for 1976 was $ 38,342. Daniel hired dental assistants after Wayne started working for him. Daniel hired an additional dentist, Barry Liebman (hereinafter sometimes referred to as "Liebman"), about October or November 1975. Liebman left Daniel's employ in early 1976, having received $ 5,112.75 for 1976. Dental Practice RecordsFor some time until November 11, 1976, Daniel used the following procedure to record the receipts and maintain the accounts receivable of the dental practice: When a patient came to Daniel for dental work, Daniel performed the work and then wrote on the back of one of his business cards the total charge for the service. When the patient made a payment, the amount of the payment was deducted from the amount shown on the back of the card. The patient kept the card in his or her possession. Daniel did not keep any record of what any of his patients owed him; the only such record was on the business card that was kept by the patient. Many of Daniel's patients paid by cash; others paid by check. When money in the form 409 of cash or check was received in Daniel's dental practice office, at a minimum, the date, the payor's name, and the amount of the remittance were recorded on a sheet of paper (hereinafter sometimes referred to as a "patient receipt record") kept in the office for that purpose. Daniel kept the patient receipt records in the ordinary course of his dental business. Sometimes, Daniel lent money to patients. Repayments of these loans were recorded on the patient receipt records. At times, a patient paid on completion of the dental service, the amount was recorded in the patient receipt record, when the insurance carrier paid Daniel he issued a refund to the patient, but the insurance company's check also was recorded in the patient receipt record. Daniel experienced bad checks. Each bad check, even duplicates, was recorded on the patient receipt records. Daniel also cashed checks for patients or allowed them to write checks for more than the amount of his fee, the excess being remitted in cash. These checks were also recorded on the patient receipt records. As cash and checks were received, a pool of funds was created out of which various disbursements were made. Some of the checks 410 that Daniel received were endorsed over to third parties, such as dental suppliers and dental laboratories, in payment of amounts due them. Cash was used to buy lunches, used to pay Daniel's employees, used to pay suppliers, or kept by Daniel. The balance of cash and checks remaining after these transactions would usually be deposited that night or at noon. These deposits were made to one of two bank accounts maintained at the Mercantile Commerce Trust Company (hereinafter sometimes collectively referred to as "the practice receipts account"). 6 In 1976, the total deposits to the practice receipts account from the dental practice were $ 105,935.28. In 1976, Daniel regularly checked or reviewed the patient receipt records. If there appeared to be an error, then Daniel brought the error to the attention of the employee whose error it appeared to be. In 1976, Daniel made a nightly reconciliation between the cash and checks on hand at the end of the day and the total of the day's entries as reflected on the patient receipts records. Any difference between the two totals would usually be resolved 411 through discussions between Daniel and the employees. Certified public accountants hired by Daniel in November 1976 (hereinafter sometimes referred to as "the CPAs" were unable to reconcile the receipts shown on the patient receipt records with the deposits made to the practice receipts account. Daniel determined how much he drew as "salary" based on how much cash was left after the dental practice's bills were paid. For 1975, the patient receipt records were kept in a wirebound notebook. For 1976, receipts for January and part of February were recorded in the same wire-bound notebook, and the remainder of the 1976 receipts through November 11, were recorded on looseleaf paper. In November of 1976, on the recommendation of the CPAs, Daniel installed a "one-write" bookkeeping system to record receipts and disbursements. Under the "one-write" bookkeeping system, all of Daniel's dental practice receipts were deposited into the practice receipts account. The "one-write" records reflect accurately the dental practice receipts by Daniel in the amounts shown in table 1. Table 1PeriodAmount11-12-76 to 11-30-76$ 11,888.6012-01-76 to 12-31-76$ 19,483.35In preparing their joint 1975 412 Federal individual income tax return, Daniel and Iris totaled the patient receipt records for 1975. Daniel and Iris elected cash basis reporting and reported the total from the patient receipt records for 1975 of $ 114,823.07 as gross receipts from the dental practice. Daniel's patient receipt records for 1975 show receipts in the amounts set forth in table 2. Table 2MonthAmountMonthAmountJanuary$ 6,096.60 July$ 7,899.67February10,080.25 August8,942.30March8,306.32 September9,155.30April9,576.75 October15,066.72May8,080.85 November12,386.21June8,078.51 December11,153.59Total$ 114,823.07Daniel and Iris claimed Ellis as a dependent on their 1975 tax return. In 1975, Ellis was 21 years old. Daniel and Iris paid their children's school tuition and much of their children's living expenses while the children were in school. Beginning in the 1950's, respondent audited Daniel's and Iris' tax returns every few years. For 1972, 1973, and 1974, Daniel and Iris reported on their tax returns the amounts shown in table 3. Table 3Adjusted GrossNet DentalYearIncomePractice Income1972$ 9,381 ($ 3,394)197317,001496 197426,20210,138 The patient receipt records for 1972, 1973, and 1974 were 413 maintained in a format similar to those for 1975. Table 4 shows the total receipts per the patient receipt records for each of these years. Table 4YearTotal Receipts1972$ 39,525.63197352,039.87197474,201.201975114,823.07In early 1975, respondent began to audit Daniel's and Iris' 1972 and 1973 tax returns. By March 24, 1976, the audit had been expanded to include their 1974 tax return, respondent had begun to use a special agent in the audit, and Daniel had become aware that the audit was concerned with deposits to accounts in the names of Daniel, Iris, and their four children, maintained at the Chesterfield Bank in Chesterfield, Missouri (hereinafter sometimes collectively referred to as "the Chesterfield Bank accounts"). Iris died on May 2, 1977. In January 1978, respondent proposed that Daniel and Iris had underreported their income, resulting in proposed adjustments, deficiencies, and additions to tax in the amounts shown in table 5. Table 5ProposedProposedAdjustmentsProposedAdditions to TaxYearTo IncomeDeficienciesSec. 6653(a)1972$ 24,581.43 7414 $ 6,316.64$ 315.83197320,162.35 84,723.42236.17197416,800.00 97,974.74398.74The above-proposed adjustments were based on unexplained deposits made during the respective years into the Chesterfield Bank accounts. 10 On January 18, 1978, petitioners executed respondent's Form 4549, "Income Tax Examination Changes", thereby agreeing to the assessments of the proposed deficiencies in income taxes and additions to tax under section 6653(a), as shown in table 5. In May 1978, Daniel was informed of respondent's intent to audit Daniel's and Iris' 1975 and 1976 tax returns. The actual audit began in the fall of 1978. The revenue agent made a standard request for all records relating to Daniel's and Iris' activity for 1975, to include 415 bank statements, canceled checks, any type of schedules or books that were used in preparing the tax return, and any other documents that would be of assistance. In response to this request the revenue agent was provided with some of the 1975 Mercantile Commerce Bank statements and canceled checks, part of the 1975 checkbook and a few scattered horse racing receipts that made no sense to the revenue agent. In December 1978 the revenue agent asked for additional information as follows: 1. A Schedule of Income and Expenses on the horse racing activity, which will show how the ($ 11,000.45) loss was arrived at. 2. A schedule, explanation, etc., which will show how the dental practice gross receipts were arrived at. 3. Bank statements, cancelled checks, and passbooks for all of Dr. Markman's Chesterfield bank accounts, and those of his dependent children, and any other bank accounts at any other bank. Also January, February, and March statements of the dental practice account. As of early January 1979, the additional documents requested had not been furnished to the revenue agent. On January 15, 1979, the revenue agent served summonses on the Mercantile Commerce Trust Co. and the 416 Chesterfield Bank in order to obtain all bank records showing 1975 and 1976 transactions in accounts over which Daniel or Iris had any power. On January 26, 1979, petitioners' then counsel stayed compliance of the summonses pursuant to section 7609 by sending notice to both Mercantile Commerce Trust Co. and Chesterfield Bank directing them not to comply with the summonses. Respondent chose not to seek judicial enforcement of the summonses for 1975. A notice of deficiency for 1975 was issued to petitioners on April 5, 1979, because of the imminent expiration of the statute of limitations. During the period from December 18, 1978, through April 15, 1979, petitioners declined to consent to extend the statute of limitations for assessment and collection of income taxes with respect to 1975. In the fall of 1979, petitioners agreed to furnish and did furnish the information requested for both 1975 and 1976. The 1975 deposits to the Chesterfield Bank accounts plus the dental practice deposits to the practice receipts account totalled $ 188,859.64. After elimination of deposits representing salary, transfers, or interest, deposits in 1975 in the Chesterfield Bank accounts in amounts 417 shown in table 6 remained unexplained. Table 6Name onUnexplainedAccount No.Signature CardDeposits1-10-6011-7Iris 11 $ 3,896.29 7422-9Ellis11,179.5310-5929-2Linda751.5010-6737-7Ellis12418 $ 5,188.7201-006944-0Ellis, Iris, Daniel 1314 20,000.0010-2629-2Wayne15 3,547.6110-7159-0Ellis, Daniel1,753.79$ 46,317.44The signature cards for all the accounts listed in table 6 showed Daniel's and Iris' residential address. Bank statements for all these accounts were mailed to Daniel's and Iris' residential address for all of 1975 with two exceptions. 16 (All of these accounts, except the Iris account, were used by respondent to compute the adjustments 419 to Daniel's and Iris' income for one or more years in the 1972-1974 period, adjustments to which petitioners agreed.) The revenue agent analyzed the 1975 deposits to the practice receipts account and concluded that of the total deposits to that account for 1975, $ 38,448.43 were deposits from the dental practice and $ 4,634.60 were unidentified deposits. The remaining deposits to this account for 1975 were from a loan or Daniel's trade or business of horse racing. The revenue agent further concluded that Daniel paid $ 70,531.46 of expenses in 1975 from patient receipts that were never deposited in the bank. Deposits to the practice receipts account that the revenue agent concluded were from Daniel's dental practice totalled $ 1,829 for January 1975. There are $ 800 in unexplained deposits in other Chesterfield Bank accounts in January 1975. In the notice of deficiency for 1975, respondent determined an adjustment 420 to income which included an understatement of receipts in the amount of $ 18,264.30. In making this determination, respondent first computed the mean of the percentages of expenses to gross receipts for petitioner for 1972, 1973, 1974, and 1976 as shown in table 7. Table 71972197319741976ReceiptsGross receiptsper return$ 39,525.63$ 52,039.87$ 74,201.20 $ 210,824.00 Additional receiptsper audit adjustments24,581.4320,162.3516,800.00 --Decrease by wageexpense -- -- -- (47,172.00)Total receipts asadjusted$ 64,107.06$ 72,202.22$ 91,001.20 $ 163,652.00 ExpensesTotal expensesper return17 $ 42,919.58$ 51,543.64$ 64,063.64 $ 174,255.00 Correction toexpanses per auditadjustments (see166.691,326.75(2,694.32)-- notes 7, 8, and 9, supra)Decrease for wageexpense -- -- --O (47,172.00)Expenses as adjusted$ 43,086.27$ 52,870.39$ 61,369.32 $ 127,083.00 Expenses as a per-centage of receipts67.21%73.23%67.44%77.65%Average percentage of expenses to gross receipts: 71.38%Respondent assumed 421 that the expenses in 1975 would be the same percentage of gross receipts as the average computed as above. Accordingly, respondent divided the dental practice expenses reported by Daniel and Iris for 1975 by the above-computed average, to derive his determination of gross receipts, as follows: $ 94,997.77 / 71.38% = $ 133,087.37 18Daniel and Iris reported gross dental practice receipts of $ 114,823.07 for 1975. Respondent determined the $ 18,264.30 difference (between $ 133,087.37 and $ 114,823.07) was the amount by which Daniel and Iris underreported gross dental practice receipts for 1975. Daniel's and Iris' 1976 tax return was prepared by the CPAs. In preparing the 1976 tax return, the CPAs rejected the patient receipt records as meaningless and unsupportable. Instead, they began by attempting to identify the source of the funds deposited to the practice receipts account. All deposits that could not be identified were treated as income from Daniel's dental practice, and subject to tax. The 422 CPAs then contracted Daniel's suppliers and received from them information as to how much they had received from Daniel in 1976. From these totals, the CPAs deducted the amounts of the payments made to the suppliers that appear in Daniel's and Iris' checkbook. Daniel had a habit of endorsing checks from patients over to his creditors in payment. Consequently, the resulting balance was assumed to be amounts paid to suppliers out of funds received but never deposited. The balance of the amounts paid to suppliers was included in the reported dental practice income. This amounted to $ 63,323,65. The same amount was treated as an expense item and was included with the checkbook payments in the computation of total expenses. Similarly, wages paid in cash were recorded as expenses and an offsetting increase in patient receipts was made. The total of these payments to employees was $ 41,565.25. Disbursements from the practice receipts account in the form of checks to Daniel or to "cash" total $ 5,160 for 1976. Of the $ 5,160 amount, $ 4,850 of checks are dated after November 11, 1976. The CPAs did not include in their calculations any amount for Daniel's "salary" that was taken in 423 cash. Daniel paid for his personal living expenses in 1976 out of his "salary" draws. In determining the deficiency for 1976, respondent first totalled the patient receipt records for January 1, 1976, through October 31, 1976 ($ 251,141.57). To this total respondent added deposits to the practice receipts account for November 1976 of $ 15,294.20 and December 1976 of $ 19,614.30. These amounts totalled $ 286,050.07. From this total respondent subtracted total patient receipts as reported on Daniel's and Iris' tax return for 1976 of $ 210,824. The result of $ 75,226 19 was determined by respondent to be unreported income. In 1976, deposits were made to Chesterfield Bank accounts maintained by members of the Markman family, as shown in table 8. Table 8Account No.TotalTransfers, Salary,Unexplainedand NameDepositsand InterestDeposits1-109-6011-720424 $ 28,461.69$ 16,842.94$ 11,618.75Iris7422-96,922.301,239.585,682.72Ellis10-5929-21,081.00-0- 1,081.00Linda10-6737-721 20,780.7112,276.148,504.57 Totals$ 57,245.70$ 30,358.66$ 26,887.041975 Horse RacingDaniel and Iris reported on their 1975 tax return a loss of $ 11,000.45 incurred in the trade or business of horse racing. 22425 In the notice of deficiency, respondent determined that the horse racing activities resulted in a $ 43,308 profit for 1975. 23 Accordingly, respondent made an adjustment of $ 54,308.45 to Daniel's and Iris' taxable income. 24 In their petition, petitioners claim that Daniel's correct horse racing expenses are $ 98,781. Daniel's 1975 horse racing receipts were $ 86,031; his deductible horse racing expenses for 1975 were $ 98,792.52. * * * Daniel had unreported income from the practice of dentistry in 1975 of $ 18,264.30. Deposits of $ 26,887.04 to the Chesterfield Bank accounts were taxable gross receipts of Daniel and 426 Iris in 1976. Daniel took cash draws totalling $ 40,000 from dental practice receipts during the period January 1, 1976, through November 11, 1976. Daniel's total receipts from the practice of dentistry were $ 277,711.22 in 11976, which is $ 66,887.22 more than Daniel and Iris reported on their 1976 tax return. Daniel sustained a net loss from his trade or business of horse racing in 1975 of $ 12,761.52, which is $ 1,761.07 more than the loss that Daniel and Iris deducted on their 1975 tax return. Some part of petitioners' 1976 underpayment of tax is due to negligence. OPINION I. 1975 and 1976 -- Dental PracticePetitioners contend that for 1975, the "focal point" is in the methodology and formula used by respondent in determining Daniel's dental practice income; that respondent's method was arbitrary, capricious, and unreasonable. Petitioners assert that, for 1976, respondent knew of, and had access to, books, records, and summaries prepared by petitioners' accountants; they contend that respondent's decision to rely solely on the patient receipts records was "clearly" arbitrary, capricious, and unreasonable. Respondent contends that petitioners' refusal to provide information 427 necessary to audit the 1975 tax return justifies respondent's resort to an indirect method of proof, and that the projection formulation used was reasonable. Respondent maintains that, with the exception of alleged undocumented loan repayments (of insignificant amounts), the gross 1976 dental practice receipts are accurately reflected n Daniel's patient receipts records. We agree in general with respondent's conclusions. 25 We are generally concerned herein with the amount of gross income from Daniel's dental practice. Gross income 428 includes gains derived from business, including the practice of dentistry. Section 61(a)(2). 26Because Daniel utilized the cash method of accounting for his income from the dental practice, dental practice receipts are recognized as income in the year received. Section 451(a); section 1.451-1(a), Income Tax Regs. Accordingly, we are concerned with determining the correct amount of dental practice receipts for 1975 and 1976. A. 1975 Dental Practice ReceiptsRespondent's factual determinations in a notice of deficiency are presumed to be correct; except where otherwise provided in the statute or the Tax Court Rules of Practice & Procedure, the burden of proof is on petitioners. Welch v. Helvering,290 U.S. 111">290 U.S. 111, 115 (1933); Rule 142. Petitioners' primary contention for 1975, that we should strike down respondent's determination based on the methodology used in determining 429 the deficiency, is without merit. Except for declaratory judgments, a trial before this Court is a proceeding de novo. Our determination of petitioners' tax liability is based on the evidence produced at trial and, ordinarily, not on the record developed at the administrative level. Greenberg's Express, Inc. v. Commissioner,62 T.C. 324">62 T.C. 324, 328 (1974). Accordingly, we generally will not examine the basis for a notice of deficiency. Kenyatta Corp. v. Commissioner,86 T.C. 171">86 T.C. 171, 180 (1976), affd. without published opinion (CA9-1987). We see no reason to depart from this rule in the instant cases. Furthermore, since petitioners failed to provide respondent with requested books and records before the notice of deficiency was issued, respondent's determination in the absence of an opportunity to review the books and records will not be deemed "arbitrary and excessive as contended by the petitioners. Thus, its presumptive correctness has not been destroyed, and the burden of disproving it still rests with the petitioners." Schellenbarg v. Commissioner,31 T.C. 1269">31 T.C. 1269, 1277 (1959), affd. in part and revd. in part on another issue 283 F.2d 871">283 F.2d 871 (CA6 1960). Accordingly, we proceed to the evidence 430 as it appears in the record. Initially, we note that the 1975 patient receipt records support the amount of gross dental practice receipts reported on Daniel's and Iris' 1975 tax return. In that the patient receipt records were regularly kept in the ordinary course of Daniel's business, they will not be disregarded absent a showing that they are inadequate or erroneous. Lark Sales Company v. Commissioner,437 F.2d 1067">437 F.2d 1067, 1078 (CA7 1970), affg. in part and revg. in part a Memorandum Opinion of this Court; 27Estate of Hill v. Commissioner,59 T.C. 846">59 T.C. 846, 857 (1973). Respondent contends that Daniel's 1975 patient receipt records are in error in that they understate Daniel's dental practice receipts. At the same time, however, respondent urges us to rely on the 1976 patient receipt records as being accurate. Petitioners urge us to rely on the 1975 patient receipt records, 431 but contend that the 1976 records overstate Daniel's receipts and so should be disregarded. We agree with both sides' contentions, while rejecting both sides' urgings. 28 On the one hand, the patient receipt records overstated actual receipts by including loan repayments, by including checks that were cashed as accommodations to patients, 432 and by doublecounting insurance payments and bad checks. On the other hand, there is no way to gain assurance that all receipts were recorded. Daniel did not maintain accounts receivable records that could be used to check the accuracy of the patient receipt records. Daniel's habit of using patient receipts (both cash and checks) directly to pay for supplies and other business expenses, without running the receipts through the practice receipts account, contributed to the difficulties encountered by both respondent and the CPAs. Finally, there is the troubling problem of substantial unexplained deposits to the Chesterfield Bank accounts. The record reveals several differences between the trustworthiness of the1975 patient receipt records and that of the 1976 patient receipt records. For most of 1975, unlike 1976, Daniel was the only person in his very busy office and thus had the clear opportunity to omit recording amounts whether because of the pressure of work or because of a desire to falsify records. Because of the presence of employees who dealt with the receipts in 1976, and Daniel's nightly reconciliations to be sure that there was no theft, it is less likely that significant 433 amounts of receipts from patients were not recorded in the patient receipt records. Also, for about the last 7 weeks of 1976, a new accounting system was introduced that appears to have largely eliminated errors. From the foregoing, we conclude that the 1976 patient receipt records are likely to have overstated Daniel's dentistry receipts and the 1975 patient receipt records are likely to have understated Daniel's dentistry receipts. It is well established that bank deposits are prima facie evidence of income where the deposits were made by the party charged with income or to an account controlled by the party charged with income. Tokarski v. Commissioner,87 T.C. 74">87 T.C. 74, 77 (1986); see Estate of Mason v. Commissioner,64 T.C. 651">64 T.C. 651, 656-657 (1975), affd. 566 F.2d 2">566 F.2d 2 (CA6-1977); Mauch v. Commissioner,35 B.T.A. 617">35 B.T.A. 617, 627 (1937), affd. 113 F.2d 555">113 F.2d 555 (CA3 1940). On brief, petitioners ignore the unexplained bank deposits, notwithstanding (1) this state of the law as to the effect of unexplained bank deposits, (2) the many stipulations and exhibits relating to bank accounts of Daniel, Iris, and their children, as well as analyses by respondent's agents, and (3) respondent's reliance, on opening 434 brief, on the unexplained bank deposits. Instead, petitioners attack the formula that respondent used to determine unreported income for 1975 (see table 7 and the accompanying text, supra), contend that this formula is "arbitrary, capricious and unreasonable", and conclude that "[t]he evidence before the Court is clearly sufficient to warrant the Court's determination that there was no deficiency for the tax year 1975." We regret petitioners' failure to assist the Court in analyzing the unexplained bank deposits. We have nevertheless viewed the unexplained bank deposits with a critical eye. Giving petitioners the benefit of doubts that we have raised, we conclude that the unexplained bank deposits provide sufficient support for respondent's determination that Daniel and Iris failed to report $ 18,264.30 of dental practice income for 1975. Respondent contends that petitioners should be charged for 1975 with $ 46,417.54 of unexplained deposits to the Chesterfield Bank accounts. 29 Petitioners have not suggested that any of the deposits are explained as coming from sources that are not taxable to petitioners. Petitioner have not suggested any reason why any of the Chesterfield Bank 435 accounts should not be taken into account for purposes of determining unreported income. We note that Daniel and Iris did not claim Linda as a dependent for 1975. They also did not claim Wayne as a dependent, but the evidence is clear that Daniel and Iris were supporting Wayne (and were having deposits made into his Chesterfield Bank account) until Wayne began to work for Daniel in September 1975. In 1975, Ellis was 21 year old. The evidence is unclear as to whether he was attending college at that time. Daniel and Iris claimed Ellis as a dependent on their 1975 tax return. If Ellis was not a full-time student in 1975, then the claimed dependence deduction required that Ellis have less than $ 750 gross income for that year (sec. 151(e)(1)(A)). 30 If Ellis was a full-time student in 1975, then the $ 750 limit was not applicable (sec. 151(e)(1)(B)), but Daniel and Iris would have paid Ellis' tuition and living expenses. In the one case, Ellis was not likely to have contributed to the unexplained deposits; in the other, Daniel and Iris would 436 have incurred more personal expenses; in either case, Daniel and Iris would have contributed more than half of Ellis' support (sec. 152(a)(1)). Under the circumstances, it is not unreasonable to expect Daniel to be knowledgeable about, and be able to explain to the Court, significant deposits to Ellis' accounts. We note that $ 20,000 consists of a single deposit made on January 30, 1975. See n. 14, supra. Although petitioners have not raised the matter, we believe it is unlikely that this deposit could have resulted from omitted receipts from Daniel's dental practice for the first 30 days of 1975. Even if we were to resolve in petitioners' favor any doubts about the unexplained deposits into the Chesterfield Bank accounts, we still would be left with unexplained deposits that exceed the amount that respondent determined as unreported income for 1975. We conclude that Daniel and Iris omitted from their 1975 income at least the amount that respondent determined. Petitioners' analysis of the law, 437 as applied to the facts of the instant cases, is as follows: The burden is on Petitioners to show the Respondent's formula was wrong, but not to prove the correct amount. Helvering v. Taylor, 293 U.S. 507">293 U.S. 507 (1935), affirming 70 F.2d 619">70 F.2d 619 (2nd Cir. 1934), reversing and remanding 27 B.T.A. 1426">27 B.T.A. 1426 (1933). In providing overwhelming evidence that the formula used by Respondent was arbitrary, unreasonable and capricious, Petitioner has overcome the presumption of correctness of the findings contained in the deficiency notice. * * * Petitioners have missed the point of Helvering v. Taylor, supra. In that case, the taxpayer did not merely show that respondent's notice of deficiency was incorrect. The taxpayer in Helvering v. Taylor also convinced the courts that respondent's error resulted in a determination of a greater tax liability than the taxpayer's true tax liability, i.e., that respondent's determination was "excessive." The Supreme Court stated its conclusion as follows (293 U.S. at 515): Unquestionably the burden of proof is on the taxpayer to show that the commissioner's determination is invalid. Lucas v. Structural Steel Co.,281 U.S. 264">281 U.S. 264, 271. Wickwire v. Reinecke,275 U.S. 101">275 U.S. 101, 105. 438 Welch v. Helvering,290 U.S. 111">290 U.S. 111, 115. Frequently, if not quite generally, evidence adequate to overthrow the commissioner's finding is also sufficient to show the correct amount, if any, that is due. See, e.g., Darcy v. Commissioner,66 F.(2d) 581, 585. But, where as in this case the taxpayer's evidence shows the commissioner's determination to be arbitrary and excessive, it may not reasonably be held that he is bound to pay a tax sufficient also to establish the correct amount that lawfully might be charged against him. * This was foreshadowed by Cohn v. Commissioner,39 F.2d 540">39 F.2d 540, 544 (CA2 1930), in which the Circuit Court of Appeals held that it was reversible error to rule for respondent and disallow all deductions, where we were convinced that the taxpayer had made some deductible expenditures but could not tell how much. In Cohan, too, the question was not simply whether respondent's determination had been shown to be wrong, but rather whether it had been shown to be excessive. This matter was more clearly explained in Giddio v. Commissioner,54 T.C. 1530">54 T.C. 1530, 1534 (1970), as follows: In Estate of Peter Finder,37 T.C. 411">37 T.C. 411, 423 (1961), the Commissioner assigned erroneous reasons 439 for the disallowance of a deduction for depreciation, yet the burden of proof remained with the taxpayer. See also Angellino v. Commissioner,302 F.2d 797">302 F.2d 797 (C.A. 3, 1962), affirming on this point a Memorandum Opinion of this Court. In all of these cases the accuracy of the determination rather than the method of computation was the controlling factor in determining the validity and effect of the notice of deficiency. Indeed, in Rouss v. Bowers, supra, [30 F.2d 628">30 F.2d 628] at 630, the court said that even "assuming * * * the Commissioner's method was arbitrary, this cannot avail * * * [petitioner] in the absence of any showing that it resulted in an erroneous assessment." See also Bishoff v. Commissioner, supra [27 F.2d 91] at 93. * * * In the instant cases, both sides deal with the method that respondent used to determine Daniel's dental practice receipts for 1975. We acknowledge doubts about the appropriateness of certain aspects of that method. However, the question is not whether petitioners have shown that respondent's method of determining Daniel's dental practice receipts was arbitrary -- or even that it was wrong -- but rater the question is whether petitioners have shown that 440 respondent's determination was excessive. Petitioners have failed to show that it was excessive. Indeed, the evidence (chiefly as to unexplained bank deposits and inadequate records) tends to show that respondent's determination was not excessive. We hold for respondent on this issue. 31B. 1976 Dental Practice ReceiptsDaniel kept records of his 9176 gross dental practice receipts by recording in the patient receipt records the date, the payor's name, and the amount, as a minimum for each receipt. The total receipts as reflected in the patient receipt records for January through October plus the bank deposits to the practice receipts account for November and December exceeded the total gross receipts reported on Daniel's and Iris' 1976 Federal individual income tax return; respondent determined an adjustment to income to the extent of this excess. See n. 19, surpa.Petitioners contend that they have overcome the presumption of correctness of 441 respondent's determination in the notice f deficiency, and have shown the correct amount of dental practice income for 1976. Respondent asserts that the patient receipt records correctly reflect Daniel's dental practice gross receipts. We agree with petitioners that respondent's determination in the notice of deficiency was excessive, but only to the extent of $ 8,338.78. Respondent's determination as to Daniel's dental practice income is presumed to be correct; petitioners have the burden of proving respondent's determination is in error; Rule 142. It is clear to us that the patient receipt records include some items that were not income. It was Daniel's practice to record all items received, whether they constituted income or were receipts of another nature. Petitioners have shown, and we are convinced, that Daniel occasionally loaned money to his patients. The repayments of these loans, while not constituting income, were nonetheless recorded on the patient receipt records. Daniel also billed insurance companies. Some of the patients paid on completion of the dental services. When the insurance company paid, the receipt was recorded and a refund given to the patient. In 442 this manner, the patient receipt records tend to reflect duplicate amounts. Daniel also occasionally cashed checks for his patients. If cash was available, Daniel allowed the patient to write a check for more than the amount of the dental fee, and the excess was returned to the patient in cash. The check was recorded on the patient receipt records in the full amount. The result is an exaggeration of the amount of income. In addition, not all of the checks received were honored. Some were returned, the patients' bank accounts containing insufficient funds. In this manner, as well, the patient receipt records overstate the amount of income that Daniel actually realized. Although we are convinced that the patient receipt records overstate Daniel's 1976 dental practice receipts, petitioners have failed to show the extent of the excess. I the language of Helvering v. Taylor,293 U.S. at 515, "it may not reasonably be held that [petitioners are] bound to pay a tax that confessedly [they do] not owe, unless [their] evidence was sufficient also to establish the correct amount that lawfully might be charged against [them]." The uncertainties arise from Daniel's inadequate record-keeping 443 practices. Under these circumstances, it is the Court's duty to "make as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making." Cohan v. Commissioner,39 F.2d at 544. The CPAs determined Daniel's 1976 gross dental practice receipts by an indirect method. Initially they totalled the deposits to the practice receipts account, excluding from the computation those deposits which could be identified as from a source other than patient receipts. To this sum was added an amount determined to be payments to suppliers and employees that had not been made from the practice checking account. This total ($ 210,824.18, rounded to $ 210,824 on Daniel's and Iris' 1986 tax return) was then considered total patient receipts. Although the CPAs recognized that Daniel often used cash to pay Wayne's and Liebman's salaries, they did not consider that Daniel may have used cash for his own, nonbusiness, purposes. Daniel testified that he paid for his personal living expenses in 1976 out of his "salary". When asked how his salary was determined, Daniel responded as follows: "Whatever was available. When my bills were paid and there 444 was something left, I took it. That's the way I lived." Daniel further testified that he couldn't recall if he took cash or paid himself by checks and that his salary was slightly in excess of Wayne's salary. Wayne's salary for 1976 was $ 38,342. A review of the disbursements records prepared by the CPAs reveals that checks to Daniel or to "cash" total $ 5,160 for 1976. Based on our knowledge that Daniel's patients often paid him in cash, Daniel's haphazard recordkeeping, and our impressions from his testimony, we conclude that the balance of Daniel's "salary" for 1976 was taken in cash. Assuming Daniel's testimony to be accurate, e.g., that his "salary" was slightly in excess of Wayne's, we conclude and we have found that Daniel took cash draws totalling $ 40,000 from dental practice receipts during the period January 1, 1976, through November 11, 1976. These amounts are dental practice receipts that did not make it to the practice receipts account. As a result, we conclude that $ 40,000 is to be added to the receipts that the CPAs took into account. Daniel testified that his "salary" was used to pay his living expenses. In addition, in 1976, deposits were made to the Chesterfield 445 Bank accounts in the amount of $ 57,245.70. Of this total, $ 30,358.66 represents deposits which are either salaries or transfers from other accounts. The remaining $ 26,887.04 consists of unexplained deposits. By early 1976, Daniel knew that respondent had begun to focus on unexplained deposits to the Chesterfield Bank accounts in the course of the audit of Daniel's and Iris' earlier years' tax liabilities. It would not have taken much wisdom to recognize that, as a matter of elementary prudence, Daniel and Iris should keep records to identify deposits to the bank accounts of family members, and especially deposits to the Chesterfield Bank accounts. In January 1978, petitioners and respondent settled Daniel's and Iris' 1972, 1973, and 1974 income tax liabilities on the basis of unexplained deposits to the Chesterfield Bank accounts. It should have been painfully obvious to petitioners that they were vulnerable on this score and that they must gather and preserve evidence so that all the deposits could be explained. Nevertheless, almost half of the 1976 deposits to the Chesterfield Bank accounts remain unexplained. Petitioners made no effort at trial or on brief to provide an 446 explanation or argument. Taking into account the admonition in Cohan v. Commissioner, supra, we conclude that the unexplained 1976 deposits into the Chesterfield Bank accounts are to be treated as unreported receipts from Daniel's dental practice. Accordingly, we conclude that Daniel's total receipts from his dental practice was $ 277,711.22, instead of (1) the $ 210,824.18 reported on the 1976 tax return, and (2) the $ 286,050 determined in the notice of deficiency. We hold in part for respondent and in part for petitioners on this issue. II. 1975 -- Horse Racing ExpensesOn their 1975 tax return, Daniel and Iris reported a loss of $ 11,000.45 incurred in the trade or business of horse racing. 32 In reporting this loss, Daniel and Iris reported gross receipts of zero and expenses of $ 11,000.45. In the notice of deficiency, respondent determined that Daniel has gross income from the trade or business of horse racing of $ 43,308. Respondent further determined 447 that Daniel had no expenses associated with the trade or business of horse racing. Consequently, respondent determined that Daniel had net business income from horse racing of $ 43,308 in 1975. Since this amount differs by $ 54,308.45, from the $ 11,000.45 reported loss, respondent determined that Daniel and Iris has underreported their income by $ 54,308.45. In an examination of Daniel's and Iris' books and records after the notice of deficiency was issued, respondent's agent concluded that Daniel had gross income of $ 86,031 in 1975 from the trade or business of horse racing. Respondent's agent also concluded that Daniel had deductions of $ 98,792.52 for 1975 attributable to the trade or business of horse racing. As a result of these conclusions, respondent's agent concluded that Daniel suffered a loss of $ 12,761.52 from the trade or business of horse racing for 1975. Furthermore, since Daniel and Iris had reported a loss of only $ 11,000.45, respondent's agent concluded petitioners were entitled to an additional loss deduction of $ 1,761.07 (the difference between $ 12,761.52 and $ 11,000.45). As a result of these conclusions by respondent's agent, the parties filed the following 448 stipulation: 3. (a) In the statutory notice of deficiency issued with respect to the 1975 tax year, respondent determined, per adjustment (b), that petitioners had unreported business income from horse racing in the amount of $ 54,308.45. Respondent now concedes this adjustment in full and stipulates that with respect to this adjustment petitioners did not under report horse racing income in the amount of $ 54,308.45 as claimed and that petitioners are entitled to deduct an unclaimed racing loss in the amount of ($ 1,761.07) for the 1975 tax year. At trial, petitioners' counsel made the following statement with regard to the above stipulation: The other issue relating to 1975 as set forth in 3A of the stipulation before the Court are [sic] conceded now by the petitioner orally in addition to the written concession by the respondent as contained in the stipulation.Later, petitioners' counsel made the following statement to the Court: Before proceeding further, your honor, I have just been chided by my lawyer, Mr. Shaw, and may I ask leave of Court to withdraw my earlier concession as to the items contained in 3A defer a response to that concession until later on in the trial and 449 counsel on its own I can assure the Court will initiate a response to the Court. I'm not too sure why, I just got a short, terse note. Can I ask leave to do that your Honor?On the last day of the trial, the Court made the following statement: Now, Mr. Klamen, there -- I'm not at all sure that the record reflects with specificity what petitioner's position is as to that claim with regard to 1975. You had initially conceded the -- all the amounts claimed in the petition in excess of what respondent had allowed, and then you indicted that perhaps you were not conceding it. In any event, you've not put in any evidence other than what's in the -- in the stipulations that might bear on it. What is petitioner's position?Petitioners counsel responded as follows: There is no concession by the consid -- petitioner to that amount, your Honor. And, I think the record will show there is evidence dealing with that subject, and it will be brought to the brief, your Honor. We will see to that. In their petition, petitioners asserted that they were entitled to additional deductions for horse racing expenses of $ 87,780.55. This amount is about the difference between the $ 98,792.52 total horse 450 racing deductions and the $ 11,000.45 loss reported by Daniel and Iris on their tax return. On brief, petitioners contend tht "[t]he stipulations agreed upon by the parties, and evidence presented at trial was sufficient to overcome the presumption of the correctness of the deficiency notice. Respondent offered no evidence showing the petitioner was not entitled to the deduction calculated in the amount of $ 98,792.52". Petitioners also point to the testimony of respondent's agent wherein the agent testified that petitioners were entitled to $ 98,792.52 in horse racing expense deductions for 1975. After reviewing the testimony and exhibits, it is clear to us (and we have found) that the $ 98,792.52 in horse racing expense deductions properly offsets $ 86,031 in horse racing receipts, resulting in a net loss from horse racing activities of $ 12,761.52 in 1975. Since this loss exceeds by $ 1,761.07 the loss that Daniel and Iris reported, petitioners are entitled to this additional deduction, as the parties have stipulated. Petitioners' continued contention that they are entitled to further deductions, based on the ambiguity of the stipulation and their assertion in their petition 451 that they are entitled to these expenses, borders on the frivolous. We hold for respondent on this issue. III. 1976 -- Section 6653(a) -- Negligence, Etc.Respondent contends that petitioners are liable for the negligence, etc., addition to tax for 1976 because (1) a large amount of gross income was not reported on Daniel's and Iris' 1976 tax return, (2) Daniel and Iris did not provide their return preparer with all the information necessary to accurately report their income, and (3) Daniel and Iris were being audited in 1976 with respect to Daniel's prior years' dental practice receipts and so Daniel and Iris understood their record-keeping obligations. Petitioners maintain that they are not liable for this addition because (1) there is no underpayment of tax and (2) they provided the CPAs "with all information available and engaged their services in verifying that information and compiling any additional information necessary." We agree with respondent. An addition to tax under section 6653(a)33 is imposed if any part of any underpayment of tax is due to negligence or intentional disregard of rules or regulations. Petitioners have the burden of proving error in respondent's 452 determinations that this addition to tax should be imposed against them. Bixby v. Commissioner,58 T.C. 757">58 T.C. 757, 791-792 (1972). Under section 600134 and section 1.6001-1(a) and (e), Income Tax Regs., a taxpayer must keep such permanent books of account or records as are sufficient to establish 453 the amount of gross income, deductions, credits, or other matters required to be shown on the tax return. The records that Daniel maintained 454 for 1975 and 1976 (through November 11, 1976) were woefully inadequate to establish the amount of gross income required to be reported on Daniel's and Iris' income tax returns. For 1976, Daniel and Iris did not use the records Daniel kept, such as they were, in the preparation of their tax return. Instead, because of Daniel's failure to maintain adequate records of his gross income from the dental practice for most of 1976, Daniel and Iris were forced to rely on the CPAs' reconstruction of Daniel's gross income in the preparation of their tax return. Because of the inadequacy of this reconstruction, Daniel and Iris underreported Daniel's 1976 dental practice receipts by almost $ 67,000. Daniel's failure to keep adequate records under these circumstances constitutes negligence. See Stovall v. Commissioner,762 F.2d 891">762 F.2d 891, 895 (CA11 1985), affg. a Memorandum Opinion of this Court; 35Zivnuska v. Commissioner,33 T.C. 226">33 T.C. 226, 239-241 (1959). This negligence resulted in a substantial omission from income (even though the omission was less that that determined by respondent). There are no offsetting deductions or credits, and so this omission from income resulted in a deficiency for 1976 455 which, in the instant case, is the same as an underpayment for 1976. Accordingly, we conclude that petitioners have an underpayment for 1976, and that this underpayment is due to negligence. Petitioners urge that Daniel's actions were reasonable in that Daniel hired the CPAs to reconstruct income and prepare the tax returns, Daniel was inexperienced in bookkeeping and accounting, and in instituting the one-write system Daniel followed carefully the suggestions and recommendations of the CPAs. In support of this argument petitioners cite Golden Nugget, Inc. v. Commissioner,T.C. Memo. 1969-149. Golden Nugget, Inc. is unlike the instant case in that the accounting system used by the taxpayers in Golden Nugget, Inc. was relied on to divide profits among three partners and to prepare the tax returns. Furthermore, the accounting system used in Golden Nugget, Inc. was sanctioned by a qualified public accountant. In the instant case, Daniel did not rely on the 1976 patient receipt records to either divide profits or to prepare his and Iris' tax return. The CPAs regarded them as useless in preparing the 1976 tax return. Furthermore, it was not until November 1976 456 that Daniel hired the CPAs and began using the accounting system recommended by them. Daniel's responsibility to keep accurate records and file accurate returns was not met by his tardy hiring of the CPAs. See Metra Chem Corp. v. Commissioner,88 T.C. 654">88 T.C. 654, 662-663 (1987); Pritchett v. Commissioner,63 T.C. 149">63 T.C. 149, 174-175 (1974); Soares v. Commissioner,50 T.C. 909">50 T.C. 909, 914 (1968). We hold for respondent on this issue. 36In order to take account of the foregoing and of concessions by both sides, Decisions will be entered under Rule 155.Footnotes1. Unless indicated otherwise, all section, chapter, and subtitle references are to sections, chapters, and subtitles of the Internal Revenue Code of 1954 as in effect for the years in issue. ↩2. Of this amount, self-employment taxes under chapter 2 are $ 1,113.90; the remaining amount is chapter 1 income tax.↩3. The amount of petitioners' liability for self-employment taxes for 1975 is derivative and depends both on the resolution of the issues for decision and on the settled issues. The parties have agreed by stipulation to provide similar derivative treatment to "an unclaimed deduction for sales tax". ↩4. Rule 151(e)(3) provides, in part, as follows: In an answering or reply brief, the party shall set forth his objections, together with his reasons therefor, to any proposed findings of any other party, showing the numbers of the statements to which his objections are directed; in addition, he may set forth alternative proposed findings of fact. In the instant cases, although petitioners filed an answering brief, they failed to object to respondent's proposed findings of fact in accordance with Rule 151(e)(3). Consequently, we have assumed herein that petitioners have no objections to respondent's proposed findings of fact. Our findings of fact are, of course, based on the record in the instant cases. Unless indicated otherwise, all Rule references are to the Tax Court Rules of Practice & Procedure. ↩5. During 1975 and 1976, petitioner Daniel A. Markman (hereinafter sometimes referred to as "Daniel") was married to Iris M. Markman (hereinafter sometimes referred to as "Iris"). Daniel and Iris filed joint Federal income tax returns for both years. Iris died before the petitions were filed; her estate is a petitioner in both cases. ↩6. Daniel's horse racing income also was deposited into the practice receipts account. ↩7. Offsetting this adjustment was a proposed $ 166.69 reduction in "Income - Schedule 'C'". 8. Offsetting this adjustment was a proposed $ 1,326.75 reduction in "Income - Schedule 'C'" and a proposed $ 1,744.99 increase in Schedule A deductions. ↩9. In addition to this adjustment, there was a proposed $ 2,694.32 increase in "Income - Schedule 'C'" and an offset of a proposed $ 477.61 in Schedule A deductions. ↩10. The unexplained deposits were made to accounts in the following names: Account NameAmount↩Ellis$ 22,876.35Ellis, Daniel, Iris22,270.00Ellis, Daniel12,405.00Wayne2,911.30Linda1,081.13$ 61,543.7811. Respondent concludes that $ 15,601.40 was deposited into the account, $ 419.80 was explained as transfers, $ 11,285.31 was explained as Iris' salary checks, and $ 3,896.29 was unexplained. Our addition of the deposits shown on respondent's bank deposit analysis for this account shows the deposits totalling $ 15,781.40. Since our totals of transfers and Iris' salary checks agree with respondent's totals, this appears to result in unexplained deposits of $ 4,076.29. Neither side notes the $ 180 discrepancy. ↩12. Respondent concludes that $ 9,138.13 was deposited into this account, $ 3,949.41 was explained as transfers, and $ 5,188.72 was unexplained. Our addition of the deposits shown as explained or unexplained on respondent's bank deposit analysis for this account shows the explained items totalling $ 4,179.51 and the unexplained items totalling $ 4,958.62. Neither side notes the $ 230.10 discrepancy. In addition, an unexplained deposit shown on the analysis as $ 450 on September 15, is shown on the bank statement for this account as $ 650. Neither side notes the $ 200 discrepancy. 13. The account's name was "Markman Educational Fund". ↩14. This amount is a single deposit made on January 30, 1975. ↩15. This amount is the total of the unexplained deposits into this account through August 1975. (As we have found, supra,↩ Wayne began to work in Daniel's dental practice in September 1975.) Respondent states on brief that the unexplained deposits for this period totalled $ 3,647.71. Respondent's total includes two $ 100 deposits on August 29, 1975. However, our examination of the bank statement shows that one of these deposits was made on September 2. The remaining $ 0.10 discrepancy between respondent's total and our finding is unexplained.16. The statements for Ellis' account no 10-6737-7 were mailed to a Kansas City, Missouri, address from September 1975 through August 1976. The statements for Ellis' and Daniel's joint account were mailed to an Overland Park, Kansas, address from January 1975 through July 1975. ↩17. Daniel's and Iris' 1972 tax return showed expenses of $ 42,919.93; the $ 0.35 difference is unexplained, but would not affect the results under respondent's analysis. ↩18. The notice of deficiency states the quotient as $ 133,083.37. However, the adjustment to income made in the notice of deficiency is consistent with the correct quotient, shown supra.↩19. On opening statement at trial, respondent conceded that the proper adjustment should be $ 73,576.29. On answering brief, respondent made a further concession, that the proper adjustment should be $ 73,288.84. ↩20. The stipulated bank statements for this account show deposits totalling $ 28,461.23 in 1976. Our finding is in accord with respondent's unobjected to requested finding of fact (see n. 4, supra↩). Respondent has not explained the difference of $ 0.46.21. The stipulated band statements for this account show deposits totalling $ 20,780.74 in 1976; they do not include the statement for the period March 23 through April 26. Our finding is in accord with respondent's unobjected-to requested findings of fact (see n. 4, supra↩). Respondent has not explained the March 23 through April 26 deposits and the difference of $ 0.03. 22. Daniel engaged in the practice of racing "culls" or horses deemed unsuitable for sale as race horses by the breeder. Daniel paid one-half of the horse's winnings, if any, to the breeders. Daniel paid all expenses of the racing activity. Daniel did not gamble on the outcome of horse races. The parties do not dispute that Daniel was in the trade or business of horse racing. 23. On their 1976 tax return, petitioners reported that Daniel's horse racing activities produced $ 129,248 income and $ 136,974 expenses, for a net loss of $ 7,726. In his notice of deficiency, respondent did not adjust any of the 1976 horse racing activity amounts. ↩24. On the notice of deficiency, Form 886-A, Explanation of Items, respondent concluded with "Therefore, your taxable income is increased $ 43,308.00." However, the notice of deficiency Form 5278, Statement -- Income Tax Changes, shows "b. Business Income -- Horse racing $ 54,308.45." It is clear that the latter amount is the amount of the intended adjustment. ↩25. Taking as our text the substance of Helvering v. Taylor,293 U.S. 507">293 U.S. 507 (1935), we conclude as follows: 1975: It may be that respondent's formula approach underlying the notice of deficiency was "arbitrary", but petitioners have failed to show that the result produced by respondent's approach was "excessive"; also there is evidence supporting respondent's conclusion, and so we agree with respondent's conclusion. 1974:↩ Respondent's decision to base the notice of deficiency on Daniel's records clearly was ot "arbitrary", but we are convinced that respondent's determination was "excessive", and so we provide some relief to petitioners under the "Cohan" rule. 26. SEC. 61. GROSS INCOME DEFINED. (a) General Definition. -- Except as otherwise provided in this subtitle [i.e., subtitle A, relating to income taxes], gross income means all income from whatever source derived, including (but not limited to) the following items: * * (2) Gross income derived from business;↩27. Medd v. Commissioner,T.C. Memo. 1968-244. As we made clear in Estate of Hill v. Commissioner,59 T.C. 846">59 T.C. 846, 857 (1973), this Court's understanding of the standards to be applied is essentially the same as that enunciated by the Court of Appeals in Lark Sales Company v. Commissioner,437 F.2d 1067">437 F.2d 1067, 1078↩ (CA7 1970). 28. The parties' briefs lead us to empathize with Tevye in Fiddler on the Roof (Joseph Stein, copyright (1964)) wherein the following exchange takes place (Best American Plays, Sixth Series 1963-1976, (Crown Publishers, Inc., 1971) at 407-408): MORDCHA. Aha! The university. Is that where you learned to criticize your elders? PERCHIK. That's where I learned that there is more to life than talk. You should know what's going on in the outside world. MORDCHA. Why should I break my head about the outside world? Let them break their own heads. TEVYE. He's right. As the Good Book says, "If you spit in the air, it lands in your face." PERCHIK. That's nonsense. You can't close your eyes to what's happening in the world. TEVYE. He's right. AVRAM. He's right and he's right? How can they both be right? TEVYE. You know, you're also right. ↩29. See table 6, supra, and the accompanying text. Note 15, supra,↩ explains why our findings are $ 100.10 less than respondent's contentions. 30. As a result f numerous amendments, the $ 750 amount has been increased to $ 1,900 for 1987. See subsections (c)(1)(A) and (d)(1)(A) of section 151 of the Internal Revenue Code of 1986↩. 31. Respondent also disallowed $ 87,168.52 of Daniel's claimed 1975 dental practice expenses. Respondent concedes this in full, and also concedes that petitioners are entitled to deduct $ 2,487.29 that had not been claimed on the tax return.↩32. Markman was not involved in betting on the horses. See n. 21, supra. Groetzinger v. Commissioner, U.S. , 107 S.Ct. 980↩ (1987), and section 165(d) (both dealing with deductions for gambling losses) are not implicated. 33. 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 * * * 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.[The subsequent amendments of this provision (by sec. 101(f)(8) of the Crude Oil Windfall Profit Tax Act of 1980 (Pub. L. 96-223, 94 Stat. 229, 253), sec. 722(b)(1) of the Economic Recovery Tax Act of 1981 (Pub. L. 97-34, 95 Stat. 172, 342), sec. 107(a)(3) of the Technical Corrections Act of 1982 (Pub. L. 97-448, 96 Stat. 2365, 2391), and secs. 1503(a) and 1503(d)(1) of the Tax Reform Act of 1986 (Pub. L. 99-514, 100 Stat. 2085, 2742-2743)) do not apply to the instant case.] ↩34. SEC. 6001. NOTICE OR REGULATIONS REQUIRING RECORDS, STATEMENTS, AND SPECIAL RETURNS. Every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary or his delegate may from time to time prescribe. Whenever in the judgment of the Secretary or his delegate it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary or his delegate deems sufficient to show whether or not such person is liable for tax under this title.[The subsequent amendments of this provision (by sec. 1906(b)(13)(A) [sic] of the Tax Reform Act of 1976 (Pub. L. 94-455, 90 Stat. 1520, 1834), by sec. 501(a) of the Revenue Act of 1978 (Pub. L. 95-600, 92 Stat. 2763, 2878) and by sec. 314(d) of the Tax Equity and Fiscal Responsibility Act of 1982 (Pub. L. 94-248, 96 Stat. 324, 605)) do not apply to the instant case.] ↩35. T.C. Memo. 1983-450↩. 36. Respondent has chosen not to determine an addition to tax under section 6653(a) for 1975, nor make a claim for such an addition to tax in his answer or otherwise at or before the hearing in these cases. The record would support such an addition to tax for 1975 even if the burden of proof fell upon respondent. See Rule 142(a). Since respondent has not claimed the addition for 1975, we do not grant it. Sec. 6214(a); Koufman v. Commissioner69 T.C. 473">69 T.C. 473↩ (1977).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624168/	ROYCE JONES and JUDETH H. (SAVAGE) JONES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentJones v. CommissionerDocket No. 8415-76.United States Tax CourtT.C. Memo 1978-212; 1978 Tax Ct. Memo LEXIS 298; 37 T.C.M. (CCH) 917; T.C.M. (RIA) 780212; June 8, 1978, Filed 298 Held, petitioners' expenses incurred while on a trip through Mexico, Central and South America are not deductible business expenses. Judeth H. (Savage) Jones, pro se. Thomas F. Donahue and Jeannette A. Cyphers, for the respondent. WILESMEMORANDUM FINDINGS OF FACT AND OPINION WILES, Judge: Respondent determined a $389.02 deficiency in petitioners' 1974 Federal income taxes. The only issue we must decide is whether petitioner Judeth H. (Savage) Jones' estimated expenses incurred on a trip through Mexico, Central and South America are deductible under section 162. 1FINDINGS OF FACT Some facts have been stipulated and are found accordingly. Petitioners Royce Jones and Judeth H. (Savage) Jones299 timely filed their 1974 joint Federal income tax return with the Internal Revenue Service Center, Fresno, California. When they filed their petition herein petitioners were legal residents of Palo Alto, California. From 1970 until June 1974, Judeth H. (Savage) Jones (hereinafter petitioner) taught elementary school in the San Bernardino Unified School District where she was a certified, tenured teacher. During 1974 she taught at Roosevelt School which had an ethnic makeup that was approximately two-thirds Chicano. She had a minimal, but not adequate, understanding of Spanish. Although Roosevelt School had a large percentage of Chicano students, many of whom were Spanish speaking, petitioner was not required to speak Spanish as a condition of her employment. During the spring of 1974 petitioner and her husband planned an extensive trip through Mexico, Central America, and South America. They planned this trip so they could visit places of geological interest, and spend most of their time in small cities. In order to take this trip petitioner obtained a leave of absence from her employer. On August 6, 1974, petitioners commenced their tour. They started their trip in Mexicali300 where they boarded a train for Guatemala. Along the way they purchased Spanish language magazines and comic books. In the various cities they visited, petitioners went to movie theatres where they saw such movies as Live and Let Die; Let the Good Times Roll; Angelo Also Eats Beans; Lost Horizon; Breezy and Interlude of Love; and Serpico. All but one of these movies were in English with Spanish subtitles. From Guatemala petitioners took buses, trains and airplanes through Columbia, Peru, Ecuador, and Bolivia. While in these countries petitioners backpacked into many remote areas, and frequently stayed for extended periods at pensions run by Spanish-speaking families. Petitioners eventually returned to the United States after approximately 119 days of travel. Upon her return to the United States, petitioner applied for and obtained a part-time job as a bilingual aid with the Regional Occupation Program in Colton, California. In this capacity petitioner assisted with reading, English and math for students grades 9 through 12. In September she was hired by the San Bernardino Unified School District as a bilingual, bicultural, and biliterate teacher for grades 1 through 3. As301 a bilingual teacher petitioner taught in both English and Spanish students who spoke either one or both of the languages. She also had a Spanish language tutor in the classroom who spoke exclusively in Spanish, since many of the Chicano students spoke no English. Petitioner's own evaluation of her language skills is that she would never have been able to teach in a bilingual classroom had it not been for her extensive exposure to Spanish during her travels. During her travels petitioner kept no diary. Her husband, however, kept a brief log consisting of 10-1/2 pages indicating the places visited and the activities engaged in while in the various locations. Some of the activities included visiting zoos, parks and museums, bicycling, looking for shells, mailing packages of emeralds, watching fireworks, visiting travel agencies, swimming and diving, visiting churches, watching parades and fiestas, and visiting local markets. On their 1974 Federal income tax return petitioners deducted as travel expenses $2,161.74, the entire cost of their trip through Mexico, Central and South America. Petitioners have conceded, however, that those expenses attributable to Royce Jones' travels302 are not deductible. Respondent, in his notice of deficiency, disallowed petitioners' entire travel expense deduction and determined a $389.02 deficiency. OPINION The only issue we must decide is whether petitioner, Judeth H. (Savage) Jones' traveling expenses incurred on her trip through Mexico, Central and South America are deductible business expenses. Petitioner contends that expenses incurred during her trip are deductible educational expenses because they maintained and improved skills required in her employment as a teacher. In support of her argument, petitioner notes that when she returned to the United States she was hired as a bilingual aid and later as a bilingual teacher. Petitioner also relies upon three Memorandum Opinions of this Court to support her position: Haynie v. Commissioner,T.C. Memo. 1977-330; Oehlke v. Commissioner,T.C. Memo. 1967-144; and Smith v. Commissioner, T.C. Memo. 167-246. Respondent contends that none of petitioner's travel expenses is deductible because the major portion of petitioner's activities while traveling did not directly maintain or improve skills required in her trade or business. 303 After considering all facts before us, as well as the parties' arguments, we agree with respondent that petitioner's travel expenses were not deductible educational expenses. Generally, expenses of travel as a form of education are only deductible to the extent they are attributed to a period of travel that is "directly related" to an individual's duties in his trade or business. A period of travel is directly related to an individual's trade or business only if the "major portion" of the activities during the travel is of such a nature that it directly maintains or improves skills required in an individual's employment or trade or business. Sec. 1.162-5(d), Income Tax Regs. Therefore, the question before us is a narrow one: did a major portion of petitioner's activities during her travel maintain or improve her skills as a teacher. On this issue petitioner has the burden of proof. Rule 142e8a), Tax Court Rules of Practice and Procedure; Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933). After considering the entire record before us we conclude petitioner has failed to meet her burden of proof. Without question petitioner's trip helped improve her Spanish, a skill304 she subsequently used in her profession. Nevertheless, we are not convinced that a major portion of her activities helped maintain or improve her teaching skills. The record before us indicates petitioner spent most of her time pursuing the usual tourist activities: she visited zoos, parks, and museums, went to the beach, went bicycling, visited churches and local markets, went to movies, went backpacking, etc. Although petitioner alleges she kept a dictionary of newly-learned terms, she failed to submit it to the Court, so we are unable to consider how extensively she studied Spanish. In general, the record is too incomplete for us to determine that petitioner spent a major portion of her time maintaining or improving her skills as a teacher rather than merely sight-seeing and traveling. Consequently we agree with respondent that petitioner's travel expenses were not deductible educational expenses. Although petitioner relies on three Memorandum Opinions of this Court, we find them unpersuasive and distinguishable on their facts. In Haynie v. Commissioner,supra, taxpayer was an assistant school principal who traveled to foreign countries where she visited305 secondary schools, discussed educational problems with other teachers, administrators and governmental officials, gave lectures, and held seminars. All of taxpayer's activities were recorded in a detailed journal. In contrast, petitioner can point to no close Communication she had with other teachers, administrators and governmental officials; she participated in no seminars, and she gave no lectures. Finally, she failed to record her thoughts for future use in her capacity as a teacher. At best, petitioner is able only to show a very indirect educational effect her travels had on her profession as a teacher. We find Oehlke v. Commissioner,supra, similarly unpersuasive. In Oehlke taxpayer was a high school art and art history instructor who went to Europe. On her trip she took extensive notes on art and architecture and took slides subsequently used in classes. Each day she spent many hours in museums, and she purposely avoided tourist-oriented activities such as shopping. The record in that case indicates that the taxpayer's time, money, and energy were spent in activities directly related to her profession. Again, in contrast, petitioner can only point*306 to a general exposure to Mexican, Central and South American cultures that may have improved her skills as a teacher. Finally, Smith v. Commissioner,supra, is also distinguishable on its facts. In that case we specifically found that the taxpayer, a schoolteacher who taught Latin and French, "devoted most of each day of the trip to speaking French, attending French lectures, or taking short excursions to places that had an important part in the history, art or architecture of either France or the Ancient Roman Empire." [Emphasis added.] We are unable to make similar findings on the record before us. While petitioner improved her Spanish we are unable to say she spent most of each day speaking the language. Similarly, we are unaware of any lectures she attended, and we know of no notes, records or materials she was later able to use in her classes. Accordingly, we are unable to conclude that the major portion of petitioner's activities during her travels directly maintained or improved the skills required in her profession as a teacher.To reflect the foregoing, Decision will be entered under Rule 155. 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/4624170/	Milwaukee Valve Company v. Commissioner.Milwaukee Valve Co. v. CommissionerDocket No. 71144.United States Tax CourtT.C. Memo 1958-164; 1958 Tax Ct. Memo LEXIS 62; 17 T.C.M. (CCH) 811; T.C.M. (RIA) 58164; August 29, 1958Walter J. Rockler, Esq., 120 South LaSalle, Chicago, Ill., for the petitioner. John M. Byers, Esq., for the respondent. MURDOCKMemorandum Opinion MURDOCK, Judge: The Commissioner has moved for judgment in favor of the petitioner on the pleadings. The Commissioner determined deficiencies in income tax of $66,241.58 for 1953 and $460.75 for 1954. No error is alleged as to 1954. Paragraphs 4 and 563 of the petition are as follows: "4. The determination of tax liability set forth in said notice of deficiency is based upon the following errors: "(a) The Commissioner erred in determining that the correct value of the petitioner's closing inventory as of December 31, 1953, was $318,946.05. The provisions of the Internal Revenue Code of 1939 relied on by the Commissioner, namely, 'Sections 22(c) and 41 or any other Section', are not applicable, and the value shown on the petitioner's tax return in the amount of $196,886.87 is the correct value of the inventory as of December 31, 1953. "(b) If it is determined that the correct value of the closing inventory was $318,946.05, then the Commissioner erred in failing to increase correspondingly the value of the petitioner's opening inventory as of January 1, 1953. "(c) The Commissioner erred in increasing the petitioner's income for calendar year 1953 by the amount of $122,059.18. "(d) The Commissioner erred in determining an excess profits tax liability of $2,778.23 for the calendar year 1953 which is based on adding to excess profits net income an item of abnormal income in the sense of Section 456 of the Internal Revenue Code64 of 1939. "(e) The Commissioner erred in determining that there is a deficiency in income and excess profits taxes for the calendar year 1953 in the amount of $66,241.58. "5. The facts upon which the petitioner relies as the basis for this proceeding are as follows: "(a) For at least fifteen years prior to 1953, the petitioner has followed a single consistent method of inventory valuation. Inventory has been valued at 'cost or market whichever is lower.' In determining the cost of work in process and finished goods inventories, the petitioner has followed a standard cost system under which each item has been valued at a predetermined cost based on the cost of raw materials, labor and allocated overhead that existed at the time the petitioner adopted this system. The predetermined cost at which items have been priced has remained constant over the years. "(b) The petitioner, in determining the value of the opening and closing inventories for 1953, followed the method of valuation described above. This method of inventory valuation, consistently applied, clearly reflects the actual income of the petitioner for that year. "(c) In income tax audits of prior years, the method of*65 inventory valuation followed by the petitioner was reviewed and discussed; nevertheless, this method was not previously challenged by the Commissioner or his representatives. The Commissioner by seeking to compel an involuntary change in method as of December 31, 1953, without allowing a corresponding adjustment as of January 1, 1953, has sought arbitrarily to compel the petitioner to recognize as income in a single year an increase in inventory values that occurred over a period of at least fifteen years which elapsed since the petitioner's introduction of the standard cost method." The answer admits all of those allegations except that as to 4(d) he answers: "(d) In view of the respondent's admission of error with respect to subparagraph (a) of paragraph 4. of the petition, the allegation of error contained in subparagraph (d) of paragraph 4. of the petition is moot." The material facts alleged and admitted are adopted as findings of fact and an ultimate fact is found as follows: The correct value of the inventory of the petitioner at December 31, 1953, was $196,886.87 as shown in the 1953 income tax return of the petitioner. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624171/	JAMES J. O'TOOLE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.O'Toole v. CommissionerDocket No. 19402.United States Board of Tax Appeals12 B.T.A. 769; 1928 BTA LEXIS 3459; June 22, 1928, Promulgated 3459 The amount of gain from the sale of mineral rights determined. C. B. Prothro, Esq., for the petitioner. L. L. Hight, Esq., for the respondent. TRAMMELL769 This is a proceeding for the redetermination of a deficiency in income tax for 1921 in the amount of $920.32 and a delinquency penalty of 25 per cent, amounting to $230.08, making a total deficiency of $1,150.40. The issue results, first, from the action of the respondent in including all of the gain derived from the sale of royalty interests involved, to the petitioner and not dividing the same between petitioner and his coowner; second, a mathematical error in addition made by the respondent which was conceded at the hearing; and, 770 third, in treating as taxable transactions the transfers of royalty interests to the petitioner's wife and four other individuals. FINDINGS OF FACT. The petitioner is an individual residing in Shreveport, La. On April 12, 1921, the petitioner and one Thaddeus I. Woods acquired for a consideration of $15,000 from Anna B. Williamson and her husband, J. F. Williamson, an undivided one-half interest in all oil, gas and other minerals in, on or3460 under the following described lands, to wit: The east 1/2 of the SE. 1/4 of section 21, and the NE. 1/4 of the NE. 1/4 of section 28, all in township 23 N., Range 8 W., Claiborne Parish, Louisiana. The cost to the petitioner was one-half of the total consideration, Woods paying the other half. The petitioner and his coowner, Woods, transferred to various persons undivided interests or units in said mineral rights. The total amount of $16,150 was received by Woods and the petitioner. After the conveyance by Woods and the petitioner by 17 separate conveyances, receiving a total consideration of $16,150, the petitioner and Woods divided between themselves the balance of the undivided interests, the petitioner receiving 11/96 of a one-half interest, which interest he conveyed to his wife for a recited consideration of $2,500. Woods conveyed to the wife of petitioner one undivided 1/96 interest for a recited consideration of $350. Prior to the division the petitioner and Woods had conveyed four other interests in the mineral rights: One interest to one Wallace, who was president of the Exchange National Bank, the consideration recited in the conveyance being $500. An interest3461 was conveyed to one Neilon, cashier of the same bank, the consideration recited being $500. Another interest was conveyed to one Ward, the consideration recited being $1,000. Another conveyance was made of an interest to one Pickett, the consideration recited being $500. These conveyances to the last-named individuals were made for services rendered. A draft had been sent to the Exchange National Bank for $15,000, representing the purchase price of the mineral interests acquired by the petitioner and Woods and the petitioner arranged with Wallace and Neilon to hold this draft for an extra day in order to enable them to raise the money. In consideration for this service the petitioner and Woods conveyed to Wallace and Neilon the interests above set out. Ward was a wealthy and influential man in the community and the $1,000 interest was conveyed to him for his assistance in financing and finding purchasers for the interests which the petitioner and Woods were undertaking to sell in the mineral rights. Pickett gave the petitioner and Woods information about the mineral rights and 771 from whom it might be acquired. For this service Ward and Pickett received from the petitioner3462 and Woods their respective interests. No cash or other thing of value other than the services rendered by them was given in payment for the interests of the above individuals. Of the 11/96 of a one-half interest conveyed to his wife by the petitioner, she sold 6/96 for $2,100 and 2/96 for $750, making a total of $2,850. The petitioner's wife paid no consideration for the interest conveyed to her by the petitioner. It was conveyed to her merely as a convenience to the petitioner. The petitioner and Woods together incurred the following expenses in connection with the transaction: Cost of abstract $128Attorneys' fees250Three trips to Haynesville, La25403The petitioner's portion of these expenses was $201.50. OPINION. TRAMMELL: At the hearing the respondent conceded that the gain derived from the sale of the mineral rights should be divided equally between the petitioner and Woods. No further discussion of that question is necessary. The respondent also conceded that he had made a mathematical error in his deficiency notice in determining that the selling price of O'Toole's interest was a total of $28,850. The addition being erroneous, 3463 the correct amount upon the respondent's theory should have been $25,450. The petitioner contends that the consideration recited in the deed to his wife was not in fact received and that no consideration was received. Yet he does not contend that the transfer to his wife was a gift but merely that the transfer was for his own convenience. He was threatened with claims by certain creditors and he desired to protect himself by this means. In view of the testimony, it is our opinion that the recited consideration of $2,500 in the conveyance from the petitioner to his wife should not be added to the petitioner's income. Since, however, the conveyance from the petitioner to his wife was not an actual bona fide transfer of a beneficial interest, the consideration received by the petitioner's wife should be treated as having been received by the petitioner. The petitioner's wife sold a portion of the interest she received in one transaction for $2,100 and also another interest for $750, making a total of $2,850 to be added to the 772 gross amount received by the petitioner in lieu of the $2,500 consideration named in the transfer to the petitioner's wife. With respect3464 to the four conveyances made by the petitioner and Woods to Wallace, Neilon, Ward, and Pickett, it appears that these transfers were made without any money consideration but that they were made for services rendered by these individuals to the petitioner and Woods in enabling them to secure and sell the mineral interests. If the value of the services is to be considered in determining the gain, it should be offset by the corresponding increase in the cost of the property or expense in connection therewith. Omitting the amounts received by the petitioner's wife from the conveyances made by her for the petitioner, and also omitting the amounts of the considerations recited in the conveyances to Wallace, Neilon, Ward and Pickett, the petitioner and Woods together received as the purchase price $16,150. One-half of this amount, or $8,075, was received by the petitioner. To that amount should be added the amount of $2,850 received as consideration from the conveyances by petitioner's wife. The mineral rights cost the petitioner $7,500 and his proportion of the expenses, aside from the conveyances to Wallace, Neilon, Ward and Pickett, was $201.50. Reviewed by the Board. Judgment*3465 will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624172/	SPALDING TRUST (ENTITY) BY THE SPALDING COMPANY, TRUSTEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Spalding Trust v. CommissionerDocket No. 57127.United States Board of Tax Appeals34 B.T.A. 762; 1936 BTA LEXIS 649; July 8, 1936, Promulgated 649 1. Deduction by trustee for depreciation under a trust instrument providing for distribution of "entire annual rents and profits" from property after deducting all expenses incident to management and maintenance, taxes, assessments, or other charges imposed upon the property and expense of administering the trust, not allowable under section 23(k), Revenue Act of 1928, and art. 201, Regulations 74. 2. No statutory net loss, which may be carried forward and deducted from the gross income of a subsequent year, is sustained where all allowable deductions under section 214 of the statute do not exceed the gross income. Arthur McGregor, Esq., for the petitioner. Arthur L. Murray, Esq., for the respondent. ARNOLD 762 OPINION. ARNOLD: In this proceeding petitioner appeals from the determination by respondent of a deficiency in income tax for the calendar year 1928 in the amount of $3,502.17, and assigns as error the action of the respondent (1) in failing to allow as a deduction from income for 1928 depreciation sustained in the amount of $17,056.50, and (2) in refusing to allow as a deduction from income for 1928 a net loss alleged to have650 been sustained by petitioner during the calendar year 1927. The facts were stipulated by the parties substantially as follows: Petitioner is a trust estate created and existing under and by virtue of a Declaration of Trust dated October 5, 1909, * * The Spalding Company has acted as trustee ever since the date of Declaration of Trust and is now the duly appointed, qualified and acting Trustee of said trust estate. During the calendar year 1929 The Spalding Company acting as trustee for the Spalding Trust made two returns of income for the calendar year 1928, one a fiduciary return on form 1041, * * * wherein it disclosed a net income of $75,259.79 distributable under the provisions of said Declaration of Trust, and the other return on form 1040, * * * wherein there was reported profit from the sale of stocks, bonds, etc. in the sum of $75,808.02. On this return there was deducted an item purporting to be an operating loss carried forward from the calendar year 1927 in the sum of $15,253.63. Respondent in his notice of determination has disallowed this item of $15,253.63 as a deduction from 1928 income. During the year 1928 Petitioner owned the following depreciable assets651 which it held in said trust during the entire calendar year. A reasonable allowance for exhaustion, wear and tear on these assets is shown in the following tabulation: DescriptionCostRateDepreciation sustainedSpalling Building$601,253.941 1/2%$9,018.81Perkins Hotel147,976.163%4,439.282nd & Adler Sts. Bldg26,526.614%1,061.142nd & Front Sts. Bldg23,300.764%932.036th & 8th & Front St. Bldg15,131.104%605.24Furniture and Fixtures10,000.0010%1,000.00Total depreciation sustained17,056.50763 In determining the taxable income to this trust estate taxable to this Petitioner as trustee, Respondent has not allowed any of this depreciation. During the year 1928 Petitioner made two returns of income for the calendar endar year 1927, one a fiduciary return on form 1041, * * * wherein it disclosed an income of $156,679.74 as distributable under the provisions of the Declaration of Trust, * * * and the other return on form 1040, * * * wherein it reported the income from the sale of a portion of the trust assets in the sum of $1,802.87 and took as a deduction depreciation on the above referred to trust652 assets in the sum of $17,056.50, which showed a loss for the calendar year 1927 to the trust estate of $15,253.63. As indicated above this loss was carried forward and taken as a deduction on Petitioner's 1928 return form 1040, on line 16 thereof, all of which the Respondent has disallowed as a deduction from income for said year. The trust instrument provided in part as follows: First: Said trustee shall receive the rents and profits of said property, both real and personal, and pay them to the persona hereinafter named as hereinafter provided; and in order that good rents and profits may be derived from said property at all times during the continuance of this trust, and in order to facilitate the handling of this trust by said trustee, it shall have full and absolute power; to contract in respect thereto, to sell, convert, lease, let, improve, exchange, invest or re-invest in any kind of property; * * in other words, said trustee shall have full power subject only to the obligations to pay the rents and profits as hereinafter provided, to manage and control said property, both real and personal to all intents and purposes as it could do if said property belonged to it in653 fee simple absolute. * * Said trustee shall always keep and maintain said property hereby conveyed to it, both real and personal, together with the rents and profits therefrom as a separate and distinct fund, and upon any sale or exchange the new property so acquired of whatever kind it may be, shall become and constitute a part of such fund. Second: During the lifetime of said trustor, said trustee shall pay to said trustor and upon his demand, not exceeding fifty per cent (50%) of the entire annual rents and profits of said property, both real and personal, after deducting all expenses incident to the management and maintenance of said property, and all sums paid or required for taxes, assessments or other charges imposed upon such property and the expense of administering the trust created hereby as hereinafter provided. During the lifetime of said trustor, said trustee shall pay to each of the five children of said trustor, to-wit: Rufus P. Spalding, James M. Spalding, Julia M. Senni, Catherine L. Bodrero and Alice M. Bonzi, or their lawful issue by representation, if issue there be, five per cent (5%) of the said entire annual rents and profits of all of said property, 654 both real and personal; but should 764 the directors of said trustee deem it necessary, or to the best interests of any of one or more of said five children that he or she, or his or her issue, should receive a sum greater than five per cent (5%) of said rents and profits, then the directors of said trustee may authorize the payment by said trustee to such child, or children, or issue, of any additional sums of money out of said rents and profits which said directors may deem advisable. But the total payments to said children, or their issue as hereinabove provided, shall in no event, during the lifetime of said trustor exceed the sum of fifty per cent (50%) of said entire rents and profits. Should the said trustor not demand, during any year, from January first to December 31st, from said trustee the said entire fifty per cent (50%) of said rents and profits or should any of the remaining fifty per cent of the rents and profits not be paid to the children of said trustor, or their issue, as hereinabove provided, either on account of the death of any one of said children without issue, or because the directors of said trustee shall not have deemed it advisable to pay all655 of said remaining fifty per cent to said children, or their issue during any such year, then any such rents and profits so remaining unpaid shall accumulate and become a part of the principal of the trust estate hereby conveyed. Third: After the death of said trustor, said trustee shall pay to the said five children of said trustor, or their issue, as hereinafter provided, in equal shares, and in lieu of the sums hereinbefore provided to be paid, the entire rents and profits of all the said property, both real and personal. * * The trust instrument further provides that upon the death of the last of the children of the trustor, the trust estate shall go to and be vested in their issue and upon failure of such issue to the legal heirs of the trustor. It also provides that the trustor shall have no right to revoke the trust. Issue 1 - 1928 Deduction for Depreciation.The returns filed by the petitioner, attached to the stipulation of facts and referred to above, disclose that for the year 1927 petitioner distributed the ordinary net income to the beneficiaries computed without deducting depreciation, as shown by form 1041, but deducted the agreed depreciation in the656 amount of $17,056.50 on form 1040, which directly gave rise to the item of $15,253.63 carried forward and claimed as a net loss deduction on the 1040 return for the year 1928. Thus, for the year 1927 petitioner did not reserve out of the ordinary income distributed to the beneficiaries an amount sufficient to make good the loss suffered by way of depreciation of the trust assets. This method was not followed in the subsequent year. In the return on form 1041 for 1928 petitioner deducted the depreciation from ordinary income and distributed the balance to the beneficiaries, thus maintaining the trust capital intact out of ordinary income, and claiming as a deduction from capital gain reported on form 1040 only the alleged 1927 net loss, which represented the depreciation sustained in 1927 in excess of the capital net gain for that year. 765 The Revenue Act of 1928, in section 23(k), provides that in computing net income there shall be allowed as deductions, among other things, a reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence, and in the case of property held in trust, 657 the allowable deduction shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or in the absence of such provisions, on the basis of the trust income allocable to each. In article 201 of Regulations 74, respondent construes these provisions of the statute as follows: * * For example if the trust instrument provides that the income of the trust computed without regard to depreciation shall be distributed to a named beneficiary, such beneficiary will be entitled to the depreciation allowance to the exclusion of the trustee, while if the distributable income shall first make due allowance for keeping the trust corpus intact by retaining a reasonable amount of the current income for that purpose, the allowable deduction will be granted in full to the trustee. That the quoted regulation embodies a correct construction of the statute is not questioned by either party to this proceeding. The controversy concerns the proper interpretation of the trust instrument, that is to say, whether the trust instrument requires the trustee to distribute the ordinary income computed without regard658 to depreciation, or whether it contemplates that the trustee shall first make due allowance for keeping the trust corpus intact by retaining a reasonable amount of the current income for that purpose. The contemporaneous construction placed upon the trust instrument by the interested parties, so far as disclosed, does not afford aid in answering this question, since, as above pointed out, the ordinary income for 1927 computed without regard to depreciation was distributed to the beneficiaries, while the distributable income for 1928 was computed by first deducting an amount sufficient to make good the depreciation sustained. We must, then, examine the terms of the trust instrument itself to determine the intention of the trustor on this point. The trust instrument, the pertinent provisions of which are set out above, makes no provision as to depreciation of trust assets and does not authorize the trustee to set aside a sum as a charge for depreciation on the property. It contains complete provisions for the management of the trust estate and the distribution of the "entire annual rents and profits" from the property to the beneficiaries "after deducting all expenses incident659 to the management and maintenance of said property, and all sums paid or required for taxes, assessments or other charges 766 imposed upon such property and the expense of administering the trust." It further provides that all income not paid to the beneficiaries under the terms of the trust, be added to the corpus. The setting aside of a sum as a charge for depreciation would amount to the creation of a sinking fund for replacement. The trust instrument makes no provision for such a fund nor does it direct that the corpus should be preserved intact. Undoubtedly the trustor might have provided that depreciation should be deducted from the net income accruing to the beneficiaries had he so desired, but no such provision was made. Moreover it is specifically provided that it is the purpose of the trust to provide income for the beneficiaries, and that the life beneficiaries shall have no interest in the corpus of the trust. In our opinion the trust goes no further than to require (or authorize) the trustees to maintain the property in such good condition as results from the making of ordinary and necessary repairs. 660 In the absence of a provision in the trust instrument authorizing the trustee, in determining the distributable income, to first keep the trust corpus intact we think the entire net income is distributable to the beneficiaries. Cf. ; affd., ; In re Chapman, 66 N.Y.S. [] ; ; Whitcomb v. Blair, 58 D.C.App. 104; , and that the loss, if any, from depreciation must be borne by the remaindermen. Cf. ; ; ; . It follows that under section 23(k) of the Revenue Act of 1928 and article 201 of Regulations 74, the petitioner is not entitled to deduct the depreciation claimed. Issue 2 - 1927 - Alleged Loss.Petitioner contends that it suffered a statutory net loss of $15,253.63 from the operation of its business in 1927, which it is entitled661 to carry forward and deduct from gross income in computing its taxable net income for 1928. For 1927, petitioner filed two returns, one on form 1041 (fiduciary return) showing the net ordinary income distributable to the beneficiaries, computed without deducting depreciation, in the amount of $156,679.74. The other return on form 1040 reported capital gain of $1,802.87, less deduction for depreciation of $17,056.50, resulting in the purported net loss of $15,253.63. Respondent asserts that petitioner in fact suffered no loss in 1927, and hence there is no net loss to carry forward and deduct from 1928 income. Respondent's position on this point, we think, is well taken. 767 Section 206(a) of the Revenue Act of 1926 defines the term "net loss" as meaning the excess of the deductions allowed by section 214 or 234 over the gross income, with certain exceptions and limitations not presently material. Section 234 deals with deductions allowed corporations, while section 214 specifies the deductions allowed individuals. Section 219 provides that the net income of a trust shall be computed in the same manner and on the same basis as provided in section 214, which relates662 to the computation of net income of individuals, and further provides that there shall be allowed as an additional deduction in computing the net income of a trust the amount of the income for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries. It is plain that under the above provisions of the statute the net loss of a trust estate must be computed in the same manner as in the case of an individual taxpayer. A net loss in the case of an estate, therefore, is the excess of the deductions allowed by section 214 over the gross income, without taking into consideration the additional deduction of the amount of income currently distributable to the beneflciaries allowed by section 219. The alleged net loss claimed by petitioner here results from the deduction allowed under section 219, when both of the 1927 returns are considered, or as it might otherwise be stated in referring only to the 1040 return, the amount claimed represents the excess of a portion of the deductions allowed under section 214 over a portion of the gross income. Viewed from either perspective, it is not a statutory net loss. , petitioner's gross income for*663 1927, as shown by the returns, consisted of $192,909.12 of ordinary income and $1,802.87 of capital gain, or a total gross income of $194,711.99. It claimed deductions from ordinary income of $36,229.38 on form 1041, allowable under section 214, and from capital gain on form 1040 a deduction for depreciation of $17,056.50, or total deductions allowable under section 214 of $53,285.88, leaving an aggregate net income, comprising both ordinary distributable income and nondistributable capital gain, in the amount of $141,426.11. The deductions allowed by section 214, as claimed in both returns, not only do not exceed the gross income, but the gross income exceeds such deductions by the amount above stated. Petitioner, therefore, sustained no statutory net loss, nor in fact a loss of any kind, for the year 1927. Respondent's action on the second issue is approved. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624174/	The Estate of Mary G. Gordon, Deceased, The First National Bank of Middletown, Ohio, Executor, Petitioner, v. Commissioner of Internal Revenue, RespondentGordon v. CommissionerDocket No. 27792United States Tax Court17 T.C. 427; 1951 U.S. Tax Ct. LEXIS 85; September 26, 1951, Promulgated 85 Decision will be entered under Rule 50. 1. Petitioner's decedent owned certain real property which she had inherited from her husband. During 1946 she began negotiations with one William S. Bein relative to his acquisition of the property. These negotiations culminated in the execution of two instruments, a "Contract to Lease With Privilege of Purchase" and a subsequently executed instrument purporting to be a lease with privilege to purchase. Held: On the basis of the facts, the negotiations between decedent and Bein resulted in Bein's becoming a lessee with the privilege to purchase, and not in a sale of the property involved.2. In accordance with the contract of July 5, 1946, Bein paid decedent the amount of $ 25,000. Held: The $ 25,000 was received by decedent under a claim of right with no provision for its repayment and no restriction as to its disposition and is, therefore, includible in her taxable income for the year in which it was received. Timothy S. Hogan, Esq., and Fred J. Schatzmann, Esq., for the petitioner.Lyman G. Friedman, Esq., for the respondent. Van Fossan, Judge. VAN FOSSAN 428 This case involves income tax for the calendar year 1946. Respondent determined a deficiency in the amount of $ 8,785.30. The petitioner claims that the decedent erroneously reported an amount of $ 25,000 as income and that there was an overpayment of $ 3,322.86. Respondent, with leave of the Court, amended his original answer to conform to the proof adduced at the trial and asserted a deficiency in the amount of $ 27,014.26. At the hearing petitioner conceded the correctness of respondent's action with respect to certain items set forth in the petition. There remains only the issues arising out of the disposition by petitioner's decedent of certain real property.FINDINGS87 OF FACT.The petitioner is the executor of the Estate of Mary G. Gordon, Deceased. Its principal office is in Middletown, Ohio. The income tax return for the period here involved was filed with the collector of internal revenue for the first district of Ohio. The notice of deficiency was mailed to petitioner on January 23, 1950.Mary G. Gordon (hereinafter sometimes called "decedent") was the owner, by inheritance from her husband, of certain real property in the city of Middletown, Ohio, known as the Gordon Theater property. At the time this property was inherited by decedent, the probate court appraised it and fixed its value at $ 70,000. This value was used for state inheritance tax purposes.Prior to the taxable year, the building on the property had been virtually destroyed by fire. All that remained were some stores and apartments which had been saved because of a fire wall located between the theater and the front of the building. During the year 1946 negotiations were begun with one William S. Bein, operator of several motion picture theaters in Cincinnati, Ohio, relative to his acquisition of this property on some basis. Bein was not interested in acquiring 429 88 it by lease in the then condition. The negotiations continued over a period of time during which several methods of procedure were discussed, both verbally and by correspondence. The methods proposed and discussed included an outright sale of the property, a lease arrangement involving a remodeling of the property by the decedent, and a transaction calling for an option and privilege of purchase arrangement.While the transaction was being thus discussed, and prior to its consummation, one Virgil T. Clark, a certified public accountant, was consulted regarding the tax consequences which would result from the various transactions under consideration. Particular attention was given to that involving the outright sale of the property and the transfer of title. Because of the capital gain involved in such transaction, together with decedent's advanced age, Clark advised that, from a tax standpoint, an outright sale would be most disadvantageous.Negotiations continued until July 5, 1946, when an instrument designated "CONTRACT TO LEASE WITH PRIVILEGE OF PURCHASE" was executed by Bein and decedent. By letters addressed to "Mr. William S. Bein, Purchaser," the closing date recited 89 in this instrument was later extended to November 8, 1946, because of a delay in having a survey made and acquiring title insurance. This contract provided, in part, as follows:The lease with privilege to purchase the above captioned real estate shall be for a term of 25 years beginning October 1, 1946.The purchase price to be $ 125,000.00 payable as follows: $ 25,000.00 on or before October 1, 1946, and interest computed at the rate of 4 1/2% per annum, payable quarterly in the arrears on the balance due of the purchase price, namely $ 100,000.00 during the term of the lease.It is understood and agreed that the lessee may exercise the privilege of purchase at any time at the expiration of six months after the death of Mary G. Gordon without premium or penalty.The lessee shall keep the premises and chattels insured with fire and extended insurance for not less than $ 100,000.00 with loss payable clause to the lessor, the lessee, as their respective interests appear, upon total or partial destruction of property; the proceeds of the insurance shall be promptly used by lessee for the restoration of the damage caused by the casualty.Lessee shall insure said premises with public 90 liability insurance covering the interest of lessor, lessee, in the amount of $ 25,000 to $ 500,000 limits.The lessee further agrees to pay all real estate taxes and assessments, if any, beginning with the installment ordinarily due and payable in June 1947 and thereafter. * * Lessee shall have the right to remove the present building and improvements located upon the premises herein agreed to be leased at any time during the term of this lease, and to remodel and/or rebuild a new structure at a cost not less than the value of the building and improvements located upon said premises at the time of such demolition. * ** * * *430 The amount of $ 125,000 was the consideration used in all of the negotiations either written or oral. This amount was also used in the calculation of commissions to be paid the real estate brokers.The instrument executed as of November 7, 1946, and designated as "THIS INDENTURE OF LEASE" recites a consideration of $ 100,000, although immediately prior thereto Bein paid the amount of $ 25,000 to decedent. The terms of the instrument provided for a payment of $ 1,125 each 3 months while the same was in force. The amount represented a yield91 per annum of 4 1/2 per cent on $ 100,000.In the contract of July 5, 1946, this quarterly payment was designated as "* * * interest computed at the rate of 4 1/2% per annum, payable quarterly in the arrears on the balance due of the purchase price, namely, $ 100,000.00 during the term of the lease." In all other respects this agreement contained provisions similar to those in the subsequent agreement of November 7, 1946.Ray O. Deardorff, an accountant, had assisted decedent in the preparation of her income tax returns since 1941, and he prepared her return for the year 1946. In the return for that year the amount of $ 25,000 which had been received from Bein was reported as income. At the time the return was prepared Deardorff had no knowledge of the transaction other than the instrument dated November 7, 1946. Decedent informed him that she had received $ 25,000. Without further information Deardorff assumed that this amount was income and so reported it in the return. Deardorff also prepared decedent's returns for the years 1947 and 1948, and depreciation was taken on the Gordon Theater property at the rate of $ 680 per year.Bein took possession of the property and made the92 quarterly payments in accordance with the terms of both instruments previously entered into. On December 23, 1949, he transferred his interest in the property to one Joseph C. Bullock, in consideration of the payment by him of $ 30,000 and his assumption of the covenants contained in the "lease" agreement of November 7, 1946.In her transactions with Bein prior to the actual execution of the agreement of November 7, 1946, petitioner's decedent referred to him, Bein, as "purchaser" of the property. In his tax returns for the years between 1946 and 1949, the year of the aforementioned transfer, Bein claimed depreciation on the property. He considered that the quarterly payments were interest payments and accordingly deductible as such on his tax returns. The option to purchase was never exercised and no deed was ever executed.We make the following additional findings:The transaction between Bein and decedent in 1946 did not constitute a sale of the property involved. Bein became the lessee of such property with the privilege to purchase.431 The $ 25,000 paid to decedent by Bein, pursuant to the contract of July 5, 1946, was received under a claim of right with no provisions93 for its repayment and no restriction as to the disposition thereof.OPINION.We are here asked to determine the proper character to be ascribed to the $ 25,000 received by petitioner's decedent in accordance with her contract agreement of July 5, 1946, with William S. Bein.Respondent, with leave of the Court, amended his pleadings to conform to the proof and affirmatively alleges that the negotiations between the parties, when considered as an over-all transaction, culminated in the outright sale of the property in question and that decedent is taxable on the profit derived therefrom as a capital gain in accordance with section 111 of the Internal Revenue Code. 1 Should we find, however, that there was no sale in substance, respondent argues in the alternative that the $ 25,000 is includible in decedent's taxable income for 1946, as originally returned by her.94 Petitioner, on the other hand, takes the position that during the year under review, Bein became a lessee with an option to purchase; that the amount received by its decedent constituted an advance payment for the option; that as such it is not taxable until the option is exercised and the tax liability definitely ascertained; that this amount was erroneously reported by the decedent as income; and that it is due a refund of the tax paid thereon.In support of his allegation that there was a sale, respondent cites Robert A. Taft, 27 B. T. A. 808, and contends the factual situation there was in all material respects identical with the one before us here. We do not agree. In that case there were present facts which were much more strongly indicative of an outright sale than in the instant case. We are inclined to agree with the position taken by petitioner in so far as the nature of the transaction itself is concerned. We do not feel that an outright sale was actually consummated. No deed to pass title was ever executed. No mortgage or note was given, and no security was pledged. Moreover, in the absence of an exercise of the 432 option to95 buy (and the option was never exercised), Bein was in no way bound to complete the purchase or pay the $ 100,000, or any amount on account of the purchase in excess of that which he had already paid.Respondent argues, however, that the intention of the parties was to accomplish a sale and that the lease arrangement with privilege to purchase was utilized merely to minimize the tax consequences. Therefore, he says, we must determine the resulting tax liabilities by giving effect to this intention irrespective of the form employed to effectuate it.When all of the relevant facts are considered in the light of the attending circumstances, they lead us to the conclusion that no sale actually took place.It does not follow, however, that the amount received by decedent is not to be included in her taxable income for 1946, the year in which it was received. Decedent included it in her taxable income for the year in which the deficiency was originally determined and respondent so considered it in making his original determination. Petitioner, in accord with its position set forth above, contends that the amount was erroneously so reported; that such amount was, in fact, the advance payment96 for the option to purchase; and that it is, therefore, not taxable until such option is exercised. It bases its argument upon Aiken v. Commissioner, 35 F.2d 620">35 F. 2d 620, affd. 282 U.S. 277">282 U.S. 277; Doyle v. Commissioner, 157">110 F. 2d 157; affirming 39 B. T. A. 940, certiorari denied 311 U.S. 658">311 U.S. 658; and Virginia Iron, Coal & Coke Co. v. Commissioner, 99 F. 2d 919, affirming 37 B. T. A. 195, certiorari denied 307 U.S. 630">307 U.S. 630. On examination these cases are found to be inapplicable and clearly distinguishable on their facts from the situation here under review.Respondent, on the other hand, takes the position that the money was received by decedent under a claim of right; that there were no provisions for its repayment or restrictions as to its disposition; and that, accordingly, it is taxable in the year received.We feel that respondent's position is well taken. Whatever name or technical designation may be given to the $ 25,000 payment, the fact remains that it was97 received under a claim of right, that decedent was under no obligation to return it and could dispose of it as she saw fit. We are of the opinion, therefore, that the payment was income taxable to her in the year received. Cf. North American Oil Consolidated v. Burnet, 286 U.S. 417">286 U.S. 417; United States v. Lewis, 340 U.S. 590">340 U.S. 590.Accordingly, the $ 25,000 received by decedent in 1946 and reported by her was properly includible in her taxable income for that year.Decision will be entered under Rule 50. Footnotes1. SEC. 111. DETERMINATION OF AMOUNT OF, AND RECOGNITION OF, GAIN OR LOSS.(a) Computation of Gain or Loss. -- The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 113 (b) for determining gain, and the loss shall be the excess of the adjusted basis provided in such section for determining loss over the amount realized.(b) Amount Realized. -- The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received.(c) Recognition of Gain or Loss. -- In the case of a sale or exchange, the extent to which the gain or loss determined under this section shall be recognized for the purposes of this chapter, shall be determined under the provisions of section 112↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624175/	Headline Publications, Inc. (Formerly American Boys' Comics, Inc.), Petitioner, v. Commissioner of Internal Revenue, RespondentHeadline Publications, Inc. v. CommissionerDocket No. 38126United States Tax Court28 T.C. 1263; 1957 U.S. Tax Ct. LEXIS 71; September 30, 1957, Filed 71 Decision will be entered under Rule 50. Petitioner filed a timely refund claim under section 722, I. R. C. 1939, for the fiscal year 1945. The abbreviated claim made no mention of carryover or carryback credits. Petitioner filed an amended claim after the statute of limitations had run asking for an unused excess profits credit carryover from the fiscal year 1944 and carryback from the fiscal year 1946 based on requested section 722 determinations for those years. The amended claim, held, barred by the statute of limitations. Sidney Gelfand, for the petitioner.Arthur N. Mindling, Esq., for the respondent. Kern, Judge. KERN 1263 For the fiscal year ended November 30, 1945, respondent determined a deficiency in income tax in the amount of $ 2,124.27 and an overassessment in excess profits tax in the amount 72 of $ 6,726.89. In making such determination, the respondent refused to allow an unused excess profits credit carryover and carryback based on a constructive average base period net income for the years ended November 30, 1944, and November 30, 1946. The parties have stipulated that the sole issue for determination is whether or not the applicable statute of limitations 1264 bars the allowance of petitioner's claim to an unused excess profits credit carryover and carryback from the fiscal years 1944 and 1946 to the fiscal year 1945.FINDINGS OF FACT.Some of the facts are stipulated. The stipulation, supplemental stipulation, and the exhibits attached thereto are incorporated herein by this reference.Headline Publications, Inc. (formerly American Boys' Comics, Inc.), hereinafter referred to as petitioner, was incorporated on December 1, 1942, under the laws of the State of New York and adopted a fiscal year ending November 30. The petitioner has its principal office in New York City and at all times relevant herein was engaged in the publication of a comic magazine.Petitioner timely filed its corporation income, declared value excess-profits, and corporation excess profits73 tax returns for each of the fiscal years 1944, 1945, and 1946 (taking into consideration extensions of time previously granted) with the then collector of internal revenue for the third district of New York.The excess profits net income, excess profits credit (on the invested capital credit method), specific exemption, and adjusted excess profits net income shown on petitioner's excess profits tax return for each of the fiscal years ended November 30, 1943, 1944, 1945, and 1946, were as follows:ExcessprofitsExcesscreditAdjustedYear ended November 30profits net(on theSpecificexcessincomeinvestedexemptionprofits netcapitalincomecreditmethod)1943$ 10,110.13$ 600.00$ 5,000$ 4,510.131944 18,198.621,003.595,0002,195.031944 28,198.621,003.5910,0000 194540,812.311,632.3010,00029,180.0119461,596.182,662.8710,0000 The excess profits net income, excess profits credit (on the invested capital credit method), specific exemption, and adjusted excess profits net income74 as determined without the benefit of any relief under section 722 of the Internal Revenue Code of 1939 which were finally accepted or agreed upon after respondent's examination or audit of petitioner's excess profits tax returns for each of the fiscal years ended November 30, 1943, 1944, 1945, and 1946, were as follows: 1265 ExcessprofitsExcesscreditAdjustedYear ended November 30profits net(on theSpecificexcessincomeinvestedexemptionprofits netcapitalincomecreditmethod)1943$ 10,110.13$ 600.00$ 5,000$ 4,510.131944 18,198.621,003.595,0002 1,128.341944 38,198.621,003.5910,0000 194541,386.391,632.3010,00029,754.0919461,596.182,662.8710,0000 On October 7, 1947, petitioner filed a timely application on Form 991 for excess profits tax relief75 under section 722 of the 1939 Code for the fiscal year ended November 30, 1945 (sometimes hereinafter referred to as the original application). This original application was in abbreviated form. By way of answer to the questions set forth on the first page of the printed form, the amount of refund for which the application constituted a claim was asserted to be $ 24,948.91 which corresponded to the total excess profits tax paid (on an excess profits net income of $ 40,812.31) prior to the filing of the application. 1 By way of answer to question 6 on the second page of such form, claim was made for a constructive average base period net income of $ 22,540. The only statement purporting to deal with the factual basis for the claim being asserted was a reference to petitioner's prior application for the fiscal year 1943 which read as follows: "History, basis of claim and details of reconstruction of base period earnings included in data filed with claim for relief from excess profits tax for the fiscal year ended November 30, 1943."76 The original application was referred to the Section 722Field Committee and was disallowed by that Committee in a report dated January 31, 1949. This determination was then certified, under established procedure, to the chairman of the Excess Profits Tax Council in Washington, D. C. On February 23, 1950, the Council held a conference in connection with its consideration of the claim, at which the petitioner was represented. This was the only conference attended by a representative of petitioner.In a report covering the Council's determination, dated March 30, 1950, a constructive average base period net income with respect to the fiscal year 1945 was allowed in the amount of $ 10,000. This determination was approved by the Executive Committee of the Council on April 17, 1950, and the case was returned to the New York field office on April 19, 1950. On the same date, a member of the 1266 Council notified petitioner's representative by mail that the Executive Committee of the Council had approved the allowance of a constructive average base period net income in the amount of $ 10,000 for each of the fiscal years 1943 and 1945. Thereafter, petitioner was notified by a so-called77 30-day letter dated November 17, 1950, that its income and excess profits tax liability for the fiscal year 1945 had been adjusted to the same amounts which were subsequently reflected in the statutory notice of deficiency dated October 5, 1951.On March 11, 1950, petitioner filed another Form 991 with respect to the fiscal year 1945 on which form the printed heading was altered to read: "Amendment To Application For Relief Under Section 722 of The Internal Revenue Code." This document (hereinafter referred to as the amended claim) was made up of the first two pages of the printed form and a single typewritten sheet which was executed by the petitioner's officers. By way of answers to the questions set forth on the first page of the form, claim was made for the refund of $ 25,474.44 which corresponded to the total amount of excess profits tax which had been paid with respect to the fiscal year 1945. The complete text of the statement (exclusive of verification matter) was as follows:Further to the application of American Boys' Comics, Inc. for relief from excessive excess profits tax pursuant to the provisions of Section 722 of the Internal Revenue Code, for the fiscal year ended78 November 30, 1945, claim is hereby made, in the event the excess profits credit determined pursuant to the provisions of Section 722 is an amount not sufficient to eliminate all the excess profits tax for the fiscal year ended November 30, 1945, for an unused excess profits credit carry-over from the fiscal year ended November 30, 1944 and an unused excess profits credit carry-back from the fiscal year ended November 30, 1946.The taxpayer originally claimed a reconstructed excess profits credit in an amount sufficient to eliminate the entire excess profits tax for the fiscal year ended November 30, 1945 without the benefit of unused excess profits credit carry-over and carry-back. To date no final determination of the reconstructed excess profits credit which the taxpayer is entitled to has been made.On March 13, 1950, petitioner's representative sent a copy of the amended claim to the respondent for the attention of a representative of the Excess Profits Tax Council. His letter of transmittal contained the following paragraph:[It] is noted that the form EPC-1 submitted to me at the conclusion of our conference in Washington on February 23rd only provides for a constructive79 average base period net income for the taxable years ended November 30, 1943 and November 30, 1945. In order to obtain the benefits of unused excess profits credit carry-overs and carry-backs, it is requested that a constructive average base period net income for 1944 and 1946 be set out on form EPC-1. No applications for relief on form 991 were filed for 1944 and 1946 in view of the fact that the excess profits net income in each of those years was less than $ 10,000.00 -- the specific exemption. Therefore, no application was necessary, and in fact would have been out of order.1267 The letter then continued to ask that there be sent to petitioner's representative "a revised EPC-1 showing constructive average base period net income for the taxable years ended November 30, 1943, November 30, 1944, November 30, 1945, and November 30, 1946."On March 24, 1950, a member of the Excess Profits Tax Council wrote petitioner's representative informing him that the amended claims had been forwarded to the Section 722Field Committee in New York for action because they were "not properly before the Excess Profits Tax Council as they do not involve any issues under the provisions 80 of section 722 of the Internal Revenue Code but relate only to standard issues." The letter further stated:The only applications for relief for the two years [1943 and 1945] which are properly before the Council relate to the question of the determination as to whether the taxpayer's excess profits credit for these years, as computed under the invested capital method, is an inadequate standard for determining excess profits by reason of the contention that the taxpayer qualifies for relief under the provisions of section 722 (b) (4), I. R. C. The amended claims relate to the question of a credit carry-back and a credit carry-forward and any action with respect to this question must be initiated by the Section 722Field Committee, Upper New York Division, before the Excess Profits Tax Council can take jurisdiction.Upon consideration by the Field Committee, it was determined that the amended claims were untimely. Accordingly, they were transmitted along with the section 722 file to the standard issue examining officer for rejection.Petitioner filed a protest dated December 8, 1950, which was duly considered by the Appellate Division (then the Technical Staff, New York Division) 81 which sustained the examining officer.On June 21, 1951, in a letter to a representative of respondent, petitioner's representative correctly, but for the first time, stated to respondent that the computations by which he arrived at the sum requested as refund in the original application, which was equal to the total amount of tax paid, included and must have included unused excess profits credit carryovers and/or carrybacks. He went on to say:It is the taxpayer's contention that the Bureau of Internal Revenue in acting upon the taxpayer's original claim and the computation of the amount of refund had to be on notice of the claim for unused excess profits credit carry-overs and carry-backs even though such claim was not expressed in specific words.In this letter he enclosed the computations referred to therein which made use of an excess profits credit carryover from 1944 of $ 13,214.38 and a carryback from 1946 of $ 19,816.92.The statutory notice of deficiency dated October 5, 1951, discloses respondent's refusal to allow any unused excess profits credit adjustment in the computation of petitioner's excess profits tax liability for 1268 the fiscal year 1945. The refusal82 to make this allowance was explained as follows:It is held that the amended Form 991 filed with the Excess Profits Tax Council on March 15, 1950, in which you claim the benefits of unused excess profits credit carry-forward and carry-back from the fiscal years ended November 30, 1944 and 1946 to November 30, 1945, an issue not contained in the original form 991 covering the fiscal year ended November 30, 1945, is not a timely amendment in respect of such new issue.Shortly before the trial of this case, and solely for the purpose of stipulating all the necessary factors for its determination, respondent's representatives conferred with petitioner's representatives for the purpose of determining the constructive average base period net income of petitioner for the fiscal years ended November 30, 1944 and 1946.Upon determining that conditions prevalent during the fiscal years 1943 and 1945 were not different from those in the fiscal years 1944 and 1946, respondent's representatives prepared a Council determination of a constructive average base period net income in the amount of $ 10,000 for each of the fiscal years 1944 and 1946. This Council determination, dated October 17, 1956, 83 was reviewed and approved by the Excess Profits Tax Council Coordinator on October 22, 1956.The report of the Council determination contained the following paragraphs:Subsequent to the issuance of the statutory notice, taxpayer filed a timely petition with the Tax Court on December 24, 1951. A hearing before the Tax Court has been set for the Calendar beginning October 22, 1956 in New York, N. Y. It is being contemplated that the case will be submitted to the Tax Court under Rule 30 of its Rules of Practice. The sole issue to be decided by the Court is whether or not the applicable statute of limitations bars the allowance of the taxpayer's claims to unused excess profits credit adjustments in the fiscal year ended November 30, 1945 by reason of an unused excess profits credit carry-over from the fiscal year ended November 30, 1944 and an unused excess profits credit carry-back from the fiscal year ended November 30, 1946.It is further to be stipulated that should the Court find in favor of the taxpayer with respect to the above issue the CABPNI to be used for the fiscal years ended November 30, 1944 and November 30, 1946 for carry-over and carry-back purposes shall be in the84 amount of $ 10,000. As a result, a Council determination of a CABPNI for such years is required.It is therefore determined that a CABPNI of $ 10,000 be allowed for carry-over and carry-back purposes only for the fiscal years ended November 30, 1944 and November 30, 1946. An investigation discloses no changes with respect to the existence of the qualifying factor for such years. The petitioner was operating in the same manner during these two years as it was in the years for which relief had previously been allowed.OPINION.The sole issue for our decision is whether or not, under the circumstances here present, the statute of limitations bars 1269 the allowance of petitioner's claim to an unused excess profits credit carryover and carryback from the fiscal years 1944 and 1946, respectively, to the fiscal year 1945.There is no doubt that the amended claim was filed after the statute of limitations had run and thus cannot possibly be considered independently as a timely claim for the benefit of a constructive unused excess profits credit carryover and carryback from the fiscal years 1944 and 1946. Petitioner alleges, however, that its original application inferentially but85 effectively included a claim for its benefit of an excess profits credit carryover and carryback, since the figure used in the original application as to the amount of refund claimed could not have been arrived at without the inclusion in its computation of claims for a carryover and carryback. Thus, petitioner argues that the amended claim merely sets forth in specific words what was inherent in the original application. Packer Publishing Co., 17 T. C. 882, remanded on other issues 211 F.2d 612">211 F. 2d 612.In the alternative, petitioner argues that the amended claim may be properly considered since it involved no new research on the part of the respondent, and the facts necessary to dispose of the amended claim must, of necessity, have been considered in conjunction with the original application for a refund. In support of its position, petitioner cites Bemis Bros. Bag Co. v. United States, 289 U.S. 28">289 U.S. 28; United States v. Memphis Cotton Oil Co., 288 U.S. 62">288 U.S. 62; Pink v. United States, 105 F. 2d 183, and the cases decided thereunder. 86 We are unable to agree with petitioner on either theory.The statutory law, as found in sections 322 (b) (1) and (6), and 722 (d), may be summarized as follows: Section 322 (b) (1) provides that a claim for a credit or refund must be filed within 3 years from the time the return was filed or within 2 years from the time the tax was paid, whichever is the longer period; section 322 (b) (6) provides, in the case of an unused excess profits credit carryback, a special period or limitation which "ends with the expiration of the fifteenth day of the thirty-ninth month following the end of the taxable year of * * the unused excess profits credit which results in such carryback * * "; section 722 (d) denies a taxpayer the benefits of section 722, unless within the period of time described by section 322 it makes application for such benefits. The pertinent provisions of Regulations 112, as amended, are set forth in the margin. 287 1270 Petitioner's original application, filed on Form 991, contained very little information. The only figures given were the requested refund of $ 24,948.91, and a requested constructive average base period net income (CABPNI) for the fiscal year 1945 of $ 22,540. The only explanation of the claim given referred to the "details of reconstruction of base period earnings included in data filed with claim for relief from excess profits tax for the fiscal year ended November 30, 1943." Petitioner does not argue that the claim for the fiscal year 1943 included as a ground for relief an unused excess profits credit carryback from the fiscal year 1944. Rather, it argues that the amount of relief claimed for 1945 in the original application could only have been arrived at by including in its computation a consideration of an excess profits credit carryover from 1944 and of a carryback from 1946, each in a considerable amount, and that such a computation was made by petitioner's counsel.We assume, arguendo, the correctness of the factual basis for this argument, but we point out that such a computation was not included in the claim for relief and that the fact of such a computation88 was never in any way communicated to respondent until 1951. Indeed, as late as 1950 it appears to have been forgotten or considered inconsequential by petitioner's counsel himself since, as late as March 1271 11, 1950, he was stating in a formal amendment of petitioner's claim that "taxpayer originally claimed a reconstructed excess profits credit in an amount sufficient to eliminate the entire excess profits tax for the fiscal year ended November 30, 1945 without the benefit of unused excess profits credit carry-over and carry-back." Even assuming the correctness of the facts urged by petitioner, the original application still does not meet the requirements of respondent's regulations. Regulations 112 clearly require that a refund claim for excess profits taxes paid, based on an unused excess profits credit determined on the basis of a CABPNI, must be specifically claimed by the taxpayer. The validity and propriety of these regulations have been repeatedly recognized by this Court. May Seed & Nursery Co., 24 T. C. 1131, affd. 242 F. 2d 151; St. Louis Amusement Co., 22 T. C. 522; Barry-Wehmiller Machinery Co., 20 T.C. 705">20 T. C. 705;89 Nielsen Lithographing Co., 19 T. C. 605; Lockhart Creamery, 17 T.C. 1123">17 T. C. 1123. It is obvious that merely asking for a larger refund than petitioner would have been entitled to if its CABPNI was determined to be in the amount prayed for is not "a complete statement of the facts upon which [the carryover or carryback claim] is based and which existed with respect to the taxable year for which the unused excess profits credit so computed is claimed to have arisen * * ." No claim for relief under section 722 was ever filed for the fiscal years 1944 and 1946. After a careful scrutiny of the record we can only conclude that petitioner's original application for relief failed to satisfy the requirements set forth in Regulations 112. Barry-Wehmiller Machinery Co., supra.Petitioner relies heavily on Packer Publishing Co., supra, and Wilmington Gasoline Corporation, 27 T.C. 500">27 T. C. 500. In the Packer Publishing case, however, we found as a fact that (p. 892) --[Petitioner's] application for relief for 1944 contained, among other matters, 90 a computation of tax which took account of an unused excess profits credit carryover from 1942 in an amount equal to the unused excess profits credit carryover from 1942 shown in its application for relief for 1943. The application for relief for 1944 stated that it incorporated by reference all matters contained in relief applications for other years, and stated that it relied for support of the claim upon the statement of facts attached to the application for relief for 1943. * * In the instant case, there was no incorporation by reference of any prior claim of, or specific reference to, a carryover or carryback, nor was the computation of tax referred to by petitioner contained in the application for relief for 1945.Petitioner's reliance on Wilmington Gasoline Corporation, supra, is misplaced. There is no doubt that respondent can waive the specificity required in his regulations, and that a consideration of the merits of the claim may act as such waiver. United States v. Andrews, 1272 302 U.S. 517">302 U.S. 517; United States v. Garbutt Oil Co., 302 U.S. 528">302 U.S. 528. See also United States v. Memphis Cotton Oil Co., supra;91 Eisenstadt Manufacturing Co., 221">28 T. C. 221; Wilmington Gasoline Corporation, supra;Martin Weiner Corp., 26 T.C. 128">26 T. C. 128. In this case, however, the record clearly indicates no waiver by the respondent, either expressed or implied. The Field Committee originally rejected the amended claim as untimely. The statutory notice of deficiency, dated October 5, 1951, does not go into the merits but rather disallows the carryover and carryback solely on the ground that the amended claim was not timely filed. In 1956 (shortly before the trial of this case), and solely for the purpose of stipulating all the factors necessary to a decision by this Court, respondent's agents determined the CABPNI for the fiscal years 1944 and 1946 after a conference with petitioner's representative. This determination was affirmed by the Excess Profits Tax Council. Its report indicates that this determination would become necessary if we found in favor of the taxpayer on the statute of limitations issue. Under these circumstances we cannot hold that the respondent waived the requirements contained in his regulations by92 a consideration on the merits of the amended claim.We are not unmindful of the recent decision of the Seventh Circuit in H. Fendrich, Inc. v. Commissioner, 242 F.2d 803">242 F. 2d 803, reversing 25 T. C. 262, called to our attention by petitioner in a supplemental reply brief. In that case, petitioner amended its section 722 refund claim after the statute of limitations had expired but before a Tax Court decision had been rendered so as to include a new "standard issue" claim. The Seventh Circuit held that petitioner's timely application for relief under section 722 suspended the statute of limitations as to all pertinent issues for the same year, provided such issues were raised before a final determination was made on the 722 issue. The factual differences between that case and the instant case are readily apparent. In the instant case the amended claim did not involve "standard issues" relating to the same taxable year but another 722 issue involving different years and relating to claims for carryover and carryback of unused excess profits credits from those years for which no refund claims were timely filed. In the presence93 of such factual differences we cannot regard the decision in the Fendrich case as controlling herein.In the alternative, petitioner contends that the amended claim, though filed in 1950, was not barred by section 322 since action on the amended claim did not entail any new research and, therefore, was a permissible amendment to the original application and not a new claim. Petitioner contends that so long as all the facts were "knowable 1273 to the respondent so that no new research was required of him," the amended claim is timely since it was filed before rejection of the original application.The general rule involved was succinctly set forth by the Second Circuit in Pink v. United States, supra.Where the facts upon which the amendment is based would necessarily have been ascertained by the commissioner in determining the merits of the original claim, the amendment is proper. Bemis Bros. Bag Co. v. United States, 289 U.S. 28">289 U.S. 28 * * ; United States v. Memphis Cotton Oil Co., 288 U.S. 62">288 U.S. 62 * ; United States v. Factors & Finance Co., 288 U.S. 89">288 U.S. 89 * . 94 The rule is otherwise when the amendment requires the examination of new matters which would not have been disclosed by an investigation of the original claim. United States v. Andrews, 302 U.S. 517">302 U.S. 517 * * ; United States v. Garbutt Oil Co., 302 U.S. 528">302 U.S. 528 * ; Marks v. United States, 2 Cir., 98 F. 2d 564 * In our opinion, the original application did not adequately apprise the respondent of the requested carryover and carryback. The original application called on the respondent to investigate only the fiscal year 1945. Respondent had no need to and, in fact, did not ascertain the relevant facts necessary for determination of the amended claim. Investigation of the requested carryover and carryback of necessity requires investigation of the question as to the correct CABPNI for the fiscal years 1944 and 1946. Thus, when the parties desired to stipulate the CABPNI for the fiscal years 1944 and 1946 for the purposes of this trial, a further investigation had to be held and more information was elicited. The fact that some of this information was negative in character and to the effect that there95 was no material change in petitioner's business for 1944 and 1946 is irrelevant; it was still information elicited by further investigation. For these reasons we think the amended claim called for an investigation of facts and circumstances not called for by the original application and was thus barred by section 322. Pink v. United States, supra;Utility Appliance Corporation, 26 T.C. 366">26 T. C. 366.On brief, the respondent has conceded that petitioner is entitled to carry back to the year 1945 an unused excess profits credit as determined on the invested capital credit basis for the fiscal year 1946. Because of this concession, a Rule 50 recomputation is necessary, in which effect will also be given to the agreements reached by the parties relating to other issues originally raised by the pleadings.Reviewed by the Special Division.Decision will be entered under Rule 50. Footnotes1. For purpose of computation under 1943 rates.↩2. For purpose of computation under 1944 rates.↩1. For purpose of computation under 1943 rates.↩2. After allowance of unused excess profits credit of $ 1,066.69 arising in the fiscal year ended November 30, 1946, as an unused excess profits credit carryback adjustment in the fiscal year ended November 30, 1944.↩3. For purpose of computation under 1944 rates.↩1. In 1948 an additional $ 525.53 was paid, making a total of $ 25,474.44.↩2. Sec. 35.722-5. Application for Relief Under Section 722. -- (a)Requirements for filing. -- Except as provided in section 710 (a) (5) and section 35.710-5 (relating to deferment of payment of excess profits tax in certain cases under section 722) and except as provided in (d) of this section, the taxpayer is not permitted to claim the benefits of section 722 in computing its excess profits tax on its return, but must compute its excess profits tax, file its excess profits tax return, and pay the tax thus shown on such return without regard to the provisions of section 722. To obtain the benefits of section 722 for any taxable year, the taxpayer must, within the period of time for filing a claim for credit or refund and subject to the limitation as to amount of credit or refund prescribed by section 322 as applicable to the taxable year for which relief is claimed, file under oath an application on Form 991 (revised January, 1943) for the benefits of section 722, unless the taxpayer has deferred on its return a portion of its excess profits tax under section 710 (a) (5), or unless the provisions of (d) and (e) of this section are applicable to the taxpayer. * * ** * * Except as otherwise provided in this section, the application on Form 991 (revised January, 1943) must set forth in detail and under oath each ground under section 722 upon which the claim for relief is based, and facts sufficient to apprise the Commissioner of the exact basis thereof. It is incumbent upon the taxpayer to prepare a true and complete claim and to substantiate it by clear and convincing evidence of all the facts necessary to establish the claim for relief; failure to do so will result in the disallowance of the claim. * * No new grounds presented by the taxpayer after the period of time for filing a claim for credit or refund prescribed by section 322, and no new grounds or additional facts presented after the disallowance, in whole or in part, of the application for relief and the claim for refund based thereon, will be considered in determining whether the taxpayer is entitled to relief or the amount of the constructive average base period net income to be used in computing such relief for the taxable year.* * * In order to obtain the benefits of an unused excess profits credit for any taxable year for which an application for relief on Form 991 (revised January, 1943) was not filed, using the excess profits credit based on a constructive average base period net income as an unused excess profits credit carry-over or carry-back, the taxpayer, except as otherwise provided in (d) of this section, must file an application on Form 991 (revised January, 1943) for the taxable year to which such unused excess profits credit carry-over or carry-back is to be applied within the period of time prescribed by section 322 for the filing of a claim for credit or refund for such latter taxable year. In addition to all other information required, such application shall contain a complete statement of the facts upon which it is based and which existed with respect to the taxable year for which the unused excess profits credit so computed is claimed to have arisen, and shall claim the benefit of the unused excess profits credit carry-over or carry-back. * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624176/	Harry Leland Barnsley, Petitioner, v. Commissioner of Internal Revenue, RespondentBarnsley v. CommissionerDocket No. 64178United States Tax Court31 T.C. 1260; 1959 U.S. Tax Ct. LEXIS 207; 10 Oil & Gas Rep. 381; March 31, 1959, Filed 207 Decision will be entered under Rule 50. Taxpayer received cash and negotiable notes payable over a term of years having a fair market value as advance royalties or bonuses on execution in 1953 as lessor of an oil and gas lease for a primary term of 10 years. Held, the fair market value of the notes constituted taxable income in 1953. Held, further, the transaction did not qualify as a sale or other disposition of personalty or real estate entitling taxpayer to report on the installment basis provided in section 44(b), I.R.C. 1939. Jack Bryant, Esq., for the petitioner.Douglas M. Moore, Esq., for the respondent. Tietjens, Judge. TIETJENS1260 OPINION.The Commissioner determined deficiencies in income tax of $ 70,152.85 and $ 47,449.05 for the years 1953 and 1954, respectively.The only issue for decision is whether petitioner properly may report amounts received as advance royalties or bonuses in the form of cash and negotiable notes on an oil and gas lease for a primary period of 10 years executed July 17, 1953, on the installment basis or must report the total bonus in 1953.All of the facts have been stipulated and the stipulated facts are incorporated209 herein and found as facts.Petitioner is an individual with his principal office at Abilene, Texas. His income tax returns for 1953 and 1954 were prepared on a cash basis and filed with the district director of internal revenue at Dallas, Texas.On July 17, 1953, petitioner, together with his mother and sister, executed a lease of certain mineral interests in 480 acres of land in Texas to the Atlantic Refining Company for a primary term of 10 years.The lease contained provisions whereby royalties of one-eighth of the oil produced and saved and one-eighth of the gas produced, sold, or used were to be paid to lessors. Provisions were also made for the commencement of drilling by the lessee, certain delay rentals, termination on certain conditions, reservations of certain overriding royalties, and other provisions not herein important.As consideration for his part in the lease, petitioner received in 1953: (a) Cash in the amount of $ 37,777.78; and (b) nine negotiable notes, the first 8 in the face amount of $ 16,790.12 each and the ninth in the face amount of $ 16,790.15. The first note was due and payable on January 15, 1954, and one of the remaining notes was due and payable 210 on the 15th day of January of each respective year thereafter 1261 through 1962. Each of the 9 notes bore interest from maturity at the rate of 6 per cent per annum, but did not bear interest prior to maturity.It is stipulated that at the date of their receipt by the petitioner in 1953, the 9 notes had fair market values as follows:FaceFair marketDue date Jan. 15amountvalue whenof notereceived in19531954$ 16,790.12$ 16,144.35195516,790.1215,523.41195616,790.1214,926.35195716,790.1214,352.26195816,790.1213,800.25195916,790.1213,269.48196016,790.1212,759.11196116,790.1212,268.38196216,790.1511,796.52151,111.11124,840.11The cash payment of $ 37,777.78 the petitioner received from the Atlantic Refining Company in 1953 was included in the $ 51,278.58 in oil royalties and lease rentals that were reported on petitioner's 1953 return. None of the 9 notes and no part of the value thereof was reported as income in the 1953 return.In 1954 petitioner received $ 16,790.12 from the Atlantic Refining Company in complete satisfaction of the note due on January 15, 1954, and reported this payment as ordinary211 income subject to depletion in his 1954 return.On brief, the Commissioner --contends that the sum of $ 124,840.11, the fair market value of the nine, negotiable, promissory notes the petitioner received from the Atlantic Refining Company in 1953 as advance royalty for his leasing of certain oil, gas, and other mineral interests to that company, was taxable to the petitioner in 1953 as ordinary income under the provisions of section 22(a), Internal Revenue Code of 1939, subject to a deduction for percentage depletion in the amount of $ 34,331.03 under the provisions of sections 23(m) and 114(b)(3) of that Code. The Commissioner contends that said notes were the equivalent of cash in that amount and that the petitioner, a cash basis taxpayer, was required to report said cash equivalent as royalty income in 1953, the year he received the said notes. * * The petitioner, on the other hand, contends that the transaction constituted an installment sale or other disposition of personal property or real estate and was properly reported on the installment basis under section 44(b), I.R.C. of 1939. 1 On this phase of the argument 1262 the Commissioner's position is that the transaction212 is not an installment sale or other disposition within the statutory meaning.So far as we can see, the transaction213 under consideration is an example of the classical form of oil and gas lease and for purposes of the Federal income tax law is not a sale or conveyance of a property interest giving rise to capital gain or loss, and this, irrespective of the laws of the various States. Burnet v. Harmel, 287 U.S. 103">287 U.S. 103. And see Arthur H. Kent, "When Is a Transaction a Sale or a Lease?", P.-H. Oil and Gas Taxes par. 1002.4. Under such a lease the cash and other consideration paid the lessor upon execution of the lease and before actual production is treated as an advance royalty or bonus and is ordinary income subject to percentage depletion in the year received. Herring v. Commissioner, 293 U.S. 322">293 U.S. 322.Though there may be many technical differences between such advance bonuses under oil and gas leases and ordinary rentals, we think for our purposes they should receive essentially the same tax treatment. The Supreme Court in Burnet v. Harmel, supra, said of a transaction such as we have here:The payment of an initial bonus alters the character of the transaction no more than an unusually large214 rental for the first year alters the character of any other lease, * Moreover, the statute speaks of a "sale," and these leases would not generally be described as a "sale" of the mineral content of the soil, using the term either in its technical sense or as it is commonly understood. Nor would the payments made by lessee to lessor generally be denominated the purchase price of the oil and gas. By virtue of the lease, the lessee acquires the privilege of exploiting the land for the production of oil and gas for a prescribed period; he may explore, drill, and produce oil and gas, if found. Such operations with respect to a mine have been said to resemble a manufacturing business carried on by the use of the soil, to which the passing of title of the minerals is but an incident, rather than a sale of the land or of any interest in it or in its mineral content. * Though the Court was there dealing with the question of capital gain from the sale or exchange of a capital asset, we see no reason why the above characterization of an initial bonus under an oil and gas lease should not be apropos here.So analyzed, the cash payment together with the 9 notes received by the petitioner215 in 1953 would appear to be in essence the same as if petitioner had received in that year a substantial advance payment of rent. It is stipulated that the notes had a fair market value and we are not constrained to disturb the Commissioner's determination that the amount so stipulated less depletion should be treated as income of the petitioner in 1953. Section 22(a), I.R.C. 1939, specifically taxes income of whatever kind and whatever form paid, and a cash basis taxpayer must report the cash equivalent, i.e., the fair market value, of property received in lieu of cash. Regs. 118, secs. 39.41-1 and 39.42-1. It has been held many times that notes having a fair market value are 1263 properly reported as income at that value in the year of receipt. Birdneck Realty Corporation, 25 B.T.A. 1084">25 B.T.A. 1084; Cherokee Motor C. Co. v. Commissioner, 135 F. 2d 840 (C.A. 6, 1943), affirming a Memorandum Opinion of this Court; Estate of Eugene Merrick Webb, 30 T.C. 1202">30 T.C. 1202; Albert J. Fihe v. Commissioner, 265 F. 2d 511 (C.A. 9, 1958), affirming a Memorandum Opinion of216 this Court.By virtue of the analogy to a large advance payment of rent made in Burnet v. Harmel, supra, we think the advance royalty or bonus should be so treated here. Rent is generally taxable in the year received by a cash basis taxpayer, and prepaid or advance rent is also taxable in the year of receipt. See 2 Mertens, Law of Federal Income Taxation secs. 12.30, 12.49. Here petitioner received $ 37,777.78 in cash and 9 negotiable notes having a stipulated fair market value of $ 124,840.11 in 1953. No strings of any kind were attached to the notes. We think the notes were the equivalent of cash and constituted taxable income in the year 1953 rather than in the years in which they are to mature or be paid.It is, of course, possible under an oil and gas lease containing proper provisions to have a bonus payable and taxable in installments, Alice G. K. Kleberg, 43 B.T.A. 277">43 B.T.A. 277. The case before us does not constitute such an arrangement. In the Kleberg case the contractual agreement was to pay a named amount in two payments as bonus. It was not a case like the one here where cash and negotiable notes, the 217 latter being the equivalent of cash, representing the bonus were received in the same year by the taxpayer.Petitioner, however, argues that this was an installment "sale or other disposition" of personalty or real estate under section 44(b), and that he is thus permitted to report his receipts on the installment basis. As pointed out above, we think that Burnet v. Harmel effectively disposes of his argument insofar as a "sale" is concerned. Under that case the transaction was not a sale. Neither do we think it was any "other disposition" of personalty or real estate. To us the term "other disposition" is qualified by its antecedent "sale," and thus has reference to that type of transaction which, when finally completed, will result in a disposition of title to property, though it may, at the time of its consideration for tax purposes, be something less than a completed sale. See Charles J. Derbes, 24 B.T.A. 276">24 B.T.A. 276, affd. (C.A. 5) 69 F.2d 788">69 F. 2d 788. We do not think this transaction was such a disposition. Under Burnet v. Harmel, it was a lease and not a sale and the amounts received, though not technically rent, 218 were more akin to rent than to payments on the purchase price of personalty or real estate. We hold the transaction is not covered by section 44(b).Decision will be entered under Rule 50. Footnotes1. SEC. 44. INSTALLMENT BASIS.(b) Sales of Realty and Casual Sales of Personality [Personalty]. -- In the case (1) of a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year), for a price exceeding $ 1,000.00, or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed 30 per centum of the selling price * * * the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner above prescribed in this section. As used in this section the term "initial payments" means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624177/	WILLIAM F. GIBSON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentGibson v. CommissionerDocket No. 34598-84.United States Tax CourtT.C. Memo 1985-618; 1985 Tax Ct. Memo LEXIS 14; 51 T.C.M. (CCH) 143; T.C.M. (RIA) 85618; December 18, 1985. Charlotte D. Sennot, for the respondent. SCOTT 15 MEMORANDUM OPINION SCOTT, Judge: This case was called from the calendar for trial at Tampa, Florida, on October 21, 1985, and recalled on October 22, 1985. There was no appearance by or on behalf of petitioner. On October 22, 1985, respondent filed a Motion to Dismiss for Lack of Prosecution and requested that damages be awarded to the United States pursuant to section 6673 of the Internal Revenue Code. 1At the trial, the Court stated that respondent's Motion to Dismiss for Lack of Prosecution would be granted and that the deficiencies and additions to tax as determined in the notice of deficiency would be sustained, and took respondent's motion for the awarding of damages to the United States under advisement. The record shows that respondent determined deficiencies in petitioner's income tax and additions to tax for the calendar years 1980 and 1981 in the amounts as follows: DeficiencyAdditions to Tax, I.R.C. 1954inSec.Sec.Sec.Sec.Sec.YearIncome Tax6651(a)(1)6653(a)6653(a)(1)6653(a)(2)66541980$4,395.00$1,098.75$219.75$280.6119815,464.001,366.00273.20419.7516 Respondent in his notice of deficiency to petitioner informed petitioner that wages are income under section 61(a)(1) and section 1.61-2, Income Tax Regs. He referred petitioner to the cases of Lonsdale v. Commissioner,661 F.2d 71">661 F.2d 71 (5th Cir. 1981), affg. a Memorandum Opinion of this Court; Hebrank v. Commissioner,T.C. Memo 1982-496">T.C. Memo. 1982-496; and Herzog v. Commissioner,T.C. Memo 1982-133">T.C. Memo. 1982-133. The deficiency notice informed petitioner that if he continued to advocate and assert the contention that wages are not taxable income or any other frivolous or groundless positions in a Tax Court proceeding, respondent would seek an award of damages under section 6673. In his petition filed from the determination of deficiencies and additions to tax contained in respondent's notice of deficiency, petitioner alleged that the determination was based on respondent's erroneous determination that compensation he received in 1980 and 1981 was gross income, that petitioner was not entitled to a refund of all withholding credits for the calendar years 1980 and 1981, and that petitioner received wages as defined17 in the Internal Revenue Code, sections 3121(a) and 3401(a) for the calendar years 1980 and 1981. Petitioner further alleged that the Commissioner erred in his determination that any part of any alleged underpayment of tax required to be shown on the returns for the calendar years 1980 and 1981 was due to fraud. In his factual allegations, petitioner stated that he is an individual and that he exchanged his labor for money, and this exchange constitutes a conversion of a capital asset of equal value resulting in no profit to petitioner. Although petitioner alleged error in respondent's determining that petitioner was liable for an addition to tax for fraud, the deficiency notice is clear that respondent did not determine an addition to tax for fraud. Respondent did determine additions to tax for failure to timely file a return and for negligence, and for underpayment of estimated tax. However, these determinations are not comparable to a determination of fraud. Petitioner clearly was knowledgeable that his position with respect to wages not constituting income was frivolous at the time he filed his petition, since he had been referred to several cases18 by respondent that stated this fact. We therefore conclude that petitioner's position in this proceeding is frivolous and groundless. We further conclude that petitioner instituted this proceeding primarily for delay and maintained it primarily for delay. Although petitioner did not appear at the trial, the filing of a petition on a frivolous basis for the purpose of delay is not excused by petitioner's failing to appear at trial and having the petition dismissed and the deficiencies determined by respondent sustained because of this failure. We have examined the deficiency notice with care to determine whether petitioner reasonably could have concluded from this notice that respondent had determined that a part of his underpayment of tax in either of the years here involved was due to fraud with intent to evade tax. We conclude that although respondent in the notice of deficiency referred to each addition to tax as a "penalty," it was clear that these additions were for delinquency and negligence and failure to pay estimated tax and not for fraud. In fact, the notice used the word "delinquency" in connection with the section 6651(a)(1) addition, "negligence" in connection with19 sections 6653(a), 6653(a)(1) and 6653(a)(2) additions, and "estimated tax" in connection with section 6654 additions. In the petition the additions to tax for failure to timely file the returns, for negligence and for underpayment of estimated tax were not placed in issue. Therefore we need not consider whether such an allegation would cause us to question whether the proceeding was instituted and maintained solely for delay. There was no addition to tax for fraud determined or alleged by respondent and therefore the allegation with respect to fraud in the petition is itself frivolous. Fraud must be determined or alleged by respondent and is an issue on which respondent bears the burden of proof. Based on this record, we award damages to the United States for the calendar year 1980 in the amount of $2,000 and for the calendar year 1981 in the amount of $3,000. An appropriate order and decision will be entered.Footnotes1. Unless otherwise stated, all statutory references are to the Internal Revenue Code of 1954, as amended and in effect during the years here in issue.↩*. 50% of the interest due on $5,464.00↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624179/	Bonnie Gladys (Mrs. F. R.) Gray, et al., 1 v. Commissioner. Gray v. CommissionerDocket No. 15626.1United States Tax Court1952 Tax Ct. Memo LEXIS 7; 11 T.C.M. (CCH) 1213; T.C.M. (RIA) 53000; December 22, 19527 1. Held: The respondent is sustained in his determination of deficiencies in income taxes for the year 1943 and his determination that all or part of the deficiency of Fred R. Gray for this year was due to fraud with intent to evade tax. 2. Held: The respondent erred in his determination that all or part of the deficiences determined against petitioner Fred R. Gray for the years 1942 and 1944 were due to fraud with intent to evade tax. 3. Held: The statute of limitations is not available as a bar to the deficiency determined in the absence of a plea of this defense. 4. Held: Where the statute of limitations is pleaded as a defense to the deficiency determined, the burden is placed upon the respondent to plead and prove any exceptions he relies upon. M. C. Chiles, Esq., for the petitioners. D. Louis Bergeron, Esq., and M. C. Maxwell, Esq., for the respondent. VAN FOSSAN Memorandum Findings of Fact and Opinion The respondent determined deficiencies in income and Victory taxes of the petitioners and penalties against petitioner Fred R. Gray, as follows: Docket50%PetitionerNumberYearDeficiencyPenaltyBonnie Gladys Gray156261943$3,184.14Fred R. Gray1562719432,896.77$1,448.38Fred R. Gray312251942984.12492.06Fred R. Gray3122519448,652.414,326.20Bonnie Gladys Gray3122619448,652.41The 8 issues to be determined in these consolidated proceedings are whether petitioners reported all their income during the years in question and whether any part of the deficiencies determined were due to fraud with intent to evade tax. There is also presented the question whether the deficiencies determined are barred by the statute of limitations. Findings of Fact Fred R. and Bonnie Gladys Gray, the petitioners, are husband and wife, residing in Houston, Texas. Their separate income tax returns for the years in issue, computed on the cash basis, were filed with the collector of internal revenue for the first collection district of Texas. In 1937, Fred R. Gray, hereinafter referred to as the petitioner, entered the retail liquor business in Houston, Texas. Prior to that time he had worked in a mill, operated a cafe, a grocery store, a barbecue stand and had also worked as a salesman for a wholesale liquor company. In 1937 the petitioner purchased a retail liquor store located on Crockett Street, Houston, Texas. He later moved his store to 1708 Houston Avenue in the same city. The petitioner built another store on Eleventh Street in Houston, which he sold in January 1940. In 1941 the petitioner 9 bought another liquor store situated on Washington Avenue in Houston, and during the years in question, he operated the liquor stores on Houston and Washington Avenues. The earnings from these liquor stores constituted all of the petitioner's income during the years in question. The petitioner received $3,000 from his mother in 1931. For 6 years prior to 1940, Bonnie Gladys Gray worked as a clerk with an approximate salary of $18 per week. Prior to his entrance into business, the petitioner maintained no bank accounts but kept his money on his person or in a box at home. From 1937 until mid 1940, the petitioner and his wife lived in the back part of their store on Houston Avenue. In 1940 they moved to a house in Houston, purchased by the petitioner. Final payment was made by petitioner on this property in 1943. After the petitioner went into the retail liquor business he opened a checking account at the Citizens State Bank in Houston, Texas. Thereafter he opened other accounts in other banks in Houston. In April 1942 the petitioner transferred a checking account to the Houston National Bank and at the same time rented a safety deposit box in which he put $10,000 in cash. In the operation 10 of his business the petitioner made bank deposits about once a week. He kept most of his money in his safety deposit box. The petitioner cashed checks for customers which he deposited in his bank accounts along with cash from sales. No attempt was made to separate money received from sales and that paid out on checks cashed and later put through the bank. The petitioner visited his safety deposit boxes 13 times in 1943 and 11 times in 1944. The petitioner filed financial statements with a wholesale liquor dealer for the purpose of obtaining credit on January 1, 1942, and January 1, 1945. The petitioner's net worth statement as of January 1, 1942 was $17,438.52. On January 1, 1945 the net worth of the petitioner's business was stated by him to be $77,100. The petitioner started keeping books and records when he entered the retail liquor business in 1937. The petitioner kept a separate ledger for each store, entering sales, purchases and cash payouts. Purchases of soft drinks, tobacco and other incidentals were made in cash. Whiskey was purchased by check. Clerks' salaries were paid in cash. The clerks maintained a record of the business transacted daily in each store. Cash on hand was 11 checked daily by the petitioner and daily sales were determined from cash on hand, cash payouts and cash register records. Daily purchases and sales were entered on the ledgers. At the end of each year an inventory was taken by the petitioner and the accountant who made out the income tax returns for the petitioner and his wife. The returns were prepared from the information obtained from the ledgers and the inventory. The petitioner and his wife signed the returns as prepared for them and made out a check for the amount of tax due. Whiskey was in short supply in 1942 and it remained scarce during the years in issue. The practice grew up in the trade for wholesalers to require retailers to purchase such items as rums, brandies and wines, which were not in great demand, in order to obtain whiskey. A great deal of this slow-moving merchandise had to be sold at a loss in order to be disposed of. The Office of Price Administration regulations allowed a retail whiskey dealer a mark-up of 33 1/3 per cent on his cost. A gross profit of 25 per cent could be realized by the retailers on the basis of this mark-up. The petitioner's income tax returns were investigated by respondent's agents 12 in connection with the investigation of a wholesale liquor dealer. The petitioner was indicted for criminal fraud with regard to his 1943 income tax and, over the protest of his attorney, he pleaded guilty. He was fined $8,000 and received a suspended sentence. The respondent's agents examined the petitioner's ledgers, check stubs, canceled checks and invoices. A group of petitioner's canceled checks and invoices had been destroyed in the process of moving the location of a liquor store. Duplicate invoices were obtained from wholesale concerns which sold to petitioner. The petitioner cooperated in the efforts of the agents to examine all records. The respondent's agents examined the accounts receivable records of wholesale liquor distributors in the Houston area. They also examined the records of the petitioner's bank deposits and withdrawals and his safety deposit boxes. Mathematical errors made in the petitioner's returns were corrected and they are not in issue here. The respondent determined the amount of sales for each of the years in question by eliminating what was considered nontaxable receipts from bank deposits and adding to this figure cash purchases, salaries paid, and 13 other cash expenditures. Estimated living expenses were then added to this total. The petitioner had three children by a former marriage and two children by his present wife and he supported these children during most of the period in issue. The petitioner purchased several Buick automobiles during the years in question. He belonged to a duck hunting club. The petitioner made monthly payments on his house until June 1943 when he paid the balance due of $3,412.95. In 1944 the petitioner cashed over $9,000 worth of United States bonds owned by him. The proceeds were deposited in one of his checking accounts. The petitioner's sales, as determined by the respondent, are as follows: 194219431944$81,957.07$119,679.61$165,002.06 The total sales, as reported by petitioner, were as follows: 194219431944$75,303.06$91,278.44$129,293.62The petitioner's purchases, as shown by the records of wholesale liquor dealers and the petitioner's records, are as follows: Wholesalers'Petitioner'sYearRecordsRecords1942$ 57,468.25$ 57,507.89194384,047.8281,519.881944114,819.75116,338.44The respondent's agents prepared schedules of cash on hand, ownership of War Bonds, comparative profit and loss statements and 14 balance sheets pertaining to the petitioner for the years in issue. The net profit from his business, as reported by the petitioner and as determined by the respondent, is as follows: 194219431944Per ReturnAs AdjustedPer ReturnAs AdjustedPer ReturnAs Adjusted$5,401.34$14,090.28$12,385.70$27,714.05$15,178.79$51,344.88 The net income reported by the petitioner and his wife and as determined by the respondent for the years in issue, is as follows: NameYearAs ReportedAs DeterminedFred R. Gray1942$2,500.83$ 6,820.30Fred R. Gray19436,094.4413,758.61Fred R. Gray19447,589.4025,172.44Bonnie Gladys Gray19436,094.4413,758.62Bonnie Gladys Gray19447,589.3925,172.44The petitioner and his wife filed their income tax returns for the calendar year 1942 on March 15, 1943. On March 15, 1944, the petitioner and his wife filed their returns for the calendar year 1943. On March 7, 1945, the petitioner and his wife filed their income tax returns for the calendar year 1944. In June 6, 1947, notices of deficiencies for the year 1943 were mailed to the petitioner and his wife. On August 8, 1950, a notice of deficiency for the years 1942 and 1944 was mailed to the petitioner. On the same date, August 8, 1950, 15 a notice of deficiency was mailed to Bonnie Gladys Gray for the year 1944. The petitioner and his wife pleaded the statute of limitations as a bar to the deficiencies determined for the years 1942 and 1944. The respondent did not plead a waiver of the statute of limitations but alleged that the petitioner wilfully filed false and fraudulent returns for each of the years in issue. The deficiency in the income tax of the petitioner for the year 1943 was due to fraud with intent to evade tax. No part of the deficiencies determined in 1942 and 1944 was due to fraud with intent to evade tax. Opinion VAN FOSSAN, Judge: The first issue involves the application of the statutes of limitations. 116 17 For the year 1942 only the petitioner's tax is in issue. The return for 1942 was filed on March 15, 1943, and the notice of deficiency was mailed on August 8, 1950. The statute of limitations bar this deficiency unless fraud is proven by the respondent, as alleged by him. For the year 1943 the taxes of both the petitioner and his wife are at issue. The returns were filed on March 15, 1944. On June 6, 1947, notices of deficiencies were mailed to both the petitioner and his wife. The respondent argues, on brief, that a consent agreement was signed by the petitioner extending the period of limitations to June 30, 1947. The statute of limitations is not pleaded by the petitioner nor does the respondent allege a waiver of the statute of limitations. However, the respondent has alleged fraud against the petitioner. Fraud is never presumed. It must be proved by clear and convincing evidence. The petitioner pleaded guilty to the charge of fraud in a criminal proceeding regarding this year's tax. His explanation that he was trying to protect his family is not such as to lead us to believe that he was innocent of the charge at the time he made the admission. Although the plea of guilty is not conclusive in itself, it carries great weight here due to the absence of an adequate explanation. Thomas J. McLaughlin, 29 B.T.A. 247">29 B.T.A. 247. When coupled with the other evidence before us it requires us to sustain respondent's determination 18 that the income for 1943 was fraudulently understated in the amount determined. As a result, the deficiency and penalty determined against the petitioner for the year 1943 are approved. The petitioner's wife did not plead the statute of limitations as a bar to the deficiency determined against her for the year 1943. In the absence of such a plea, the statute of limitations cannot be availed of. United Business Corporation of America, 19 B.T.A. 809">19 B.T.A. 809, affirmed 62 Fed. (2d) 754. No amendment to the petition has been made or requested upon this point. The evidence demonstrating an understatement of income requires that we sustain the deficiency determined against the petitioner's wife for 1943. Fraud was not charged as to the wife. The taxes of both the petitioner and his wife are in issue for the year 1944. The petitioner and his wife filed their returns on March 7, 1945. The respondent, on brief, argues that a consent agreement was signed by the petitioner extending the statute of limitations until June 30, 1949. However, the notice of deficiency was not mailed until August 8, 1950. The statute of limitations was pleaded by the petitioner and bars the deficiency determined unless the 19 respondent proves the fraud alleged. The petitioner's wife, it is argued, signed a consent agreement for the year 1944 extending the period of limitations until June 30, 1951, for the purposes of section 275(c) of the Internal Revenue Code. The notice of deficiency was mailed on August 8, 1950. The petitioner's wife pleaded the statute of limitations. The respondent did not plead a waiver of the statute of limitations nor did he aver facts or otherwise indicate that section 275 (c), I.R.C. was applicable or relied upon. Fraud was not alleged against the petitioner's wife. Where the statute of limitations is pleaded by the petitioner to a deficiency, it is the respondent's burden to allege affirmatively the exceptions he relies upon. Farmer's Feed Company, 10 B.T.A. 1069">10 B.T.A. 1069. As above noted, in the present instance, as to petitioner's wife, the respondent did not plead a waiver, fraud, or other exception to the statutory limitation. Nor does the evidence before us establish that a consent agreement was entered into. We conclude that the statute of limitations bars the determination as to the 1944 deficiency determined against the petitioner's wife. We turn then to the contention of fraud 20 with regard to the petitioner for the years 1942 and 1944. 222 The respondent has the burden of proving fraud. In the present case the respondent relies upon the plea of guilty to the criminal fraud indictment for 1943. Speaking generally, the admission of guilt in one year is of little weight as evidence of fraud in other years, unless a pattern of fraud involving the several years is proven. The respondent also relies upon an alleged statement of petitioner to one Robbins that he could operate without the Bureau of Internal Revenue knowing everything he did. Whether this statement referred to 1943, to the years in question, or other years, is not specified. The respondent leans heavily upon his computation of petitioner's income by means of bank deposits, living expenses and cash payments to determine sales made by the petitioner. To sustain the imposition of fraud penalties, however, the intent to defraud must be found. It is a fact to be proven, as are other facts. Admittedly, the respondent's calculations demonstrate that the petitioner erred in reporting his income. Petitioner protests that the errors were due to ignorance. There is wide room for error on respondent's part in the 21 determination of sales through bank deposits of a taxpayer who cashes checks for customers in his business and runs such checks through his bank account. These calculations by respondent, standing alone, do not prove fraud. Some of petitioner's basic records vary but little from respondent's redetermination. For example, in the record of purchases, including the checking of wholesalers' records, the determinations are very close to each other. Considering the ignorance and lack of business experience of petitioner, sales reported by him were not so widely at variance. On the record here before us, it has not been shown that the petitioner fraudulently omitted sales from his records in the years 1942 and/or 1944. Looking at the facts in the light most favorable to the respondent, we hold that he has not sustained his burden of proving fraud for the years 1942 and 1944. Without proof of fraud in these years, the respondent's determinations are barred by the statute of limitations. Decisions will be entered under Rule 50. Footnotes1. Proceedings of the following petitioners are consolidated herewith: Fred R. (F. R.) Gray, Docket Nos. 15627 and 31225, and Bonnie Gladys Gray, Docket No. 31226.↩1. Proceedings of the following petitioners are consolidated herewith: Fred R. (F. R.) Gray, Docket Nos. 15627 and 31225, and Bonnie Gladys Gray, Docket No. 31226.↩1. 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. SEC. 276. SAME - EXCEPTIONS. (a) False Return or No Return. - In the case of a false or fraudulent return with intent to evade tax or of a failure to file a return the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time. (b) Waiver. - Where before the expiration of the time prescribed in section 275 for the assessment of the tax, both the Commissioner and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed at any time prior to the expiration of the period agreed upon. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon.2. SEC. 293. ADDITIONS TO THE TAX IN CASE OF DEFICIENCY. * *(b) Fraud. - If any part of any deficiency is due to fraud with intent to evade tax, then 50 per centum of the total amount of the deficiency (in addition to such deficiency) shall be so assessed, collected, and paid, in lieu of the 50 per centum addition to the tax provided in section 3612 (d) (2).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624182/	Robert C. Smith v. Commissioner.Smith v. CommissionerDocket No. 5206-69-SC.United States Tax CourtT.C. Memo 1970-223; 1970 Tax Ct. Memo LEXIS 137; 29 T.C.M. (CCH) 972; T.C.M. (RIA) 70223; July 30, 1970. Filed 137 Soon after he was employed as a staff accountant for a firm of certified public accountants, petitioner took a review course to help prepare him for the C.P.A. examination. Held, the expenses incurred in connection with the course do not constitute deductible business expenses for education since the education was required of the taxpayer in order to meet the minimum requirements for qualification or establishment in his intended trade or business as a certified public accountant, and was not undertaken primarily to maintain or improve his skills in his employment. Robert C. Smith, pro se, 13654 Fairhill Rd., Apt. 101, Cleveland, Ohio, 138 J. Edward Friedland, for the respondent. HOYTHOYT, Judge: Respondent determined a deficiency in the income tax of petitioner for the year 1966 in the amount of $53.58. The only question which is presented for decision is whether petitioner is entitled to deduct $285.10 as a business expense for education. Findings of Fact Robert C. Smith, petitioner herein, resided in Cleveland, Ohio, at the time of the filing of the petition in this case. His individual income tax return for the calendar year 1966 was filed with the district director of internal revenue, Cleveland, Ohio. In June, 1965, Robert graduated from the University of Akron with a Bachelor of Science degree in accounting. After working for that University for a short period of time, he took a job in the accounting department of the General Tire and Rubber Company in Akron, Ohio. In July, 1966, Robert was employed by a firm of certified public accountants in Cleveland as an auditor, or staff accountant. This job entailed examining clients' financial statements prior to the firm's ultimate rendering of opinions as to the fairness of the figures presented in the statements. In August or early September139 of 1966 Robert enrolled in a C.P.A. Review Course for the primary purpose of preparing him for the Ohio C.P.A. examination. Although the course did further his educational background in accountancy, he admittedly would not have taken the course had it not been for the prospective examination. He incurred expenses of $285.10 in connection with this course, itemized as follows: Becker C.P.A. Review Course$259.05Books10.05Meals and Mileage 16.00Total$285.10During December of 1966 these amounts were expended and Robert deducted them as a business expense for education on his income tax return for 1966. In his return he stated that his occupation was "Auditor" and in the statement of employee business expenses attached, the following appears in Schedule D thereof: 1. Name and address of educational institution or activity Becker C.P.A. Review Course, 146 Engineers Bldg., Cleve., Ohio 44114. 2. Was the education undertaken in order for you to retain your employment, salary, or status? - Yes X No If "Yes" attach a statement from your employer to this effect. 3. If your answer to question 2 is "No," state the primary purpose of obtaining the additional140 education and show the relationship between the courses taken and your employment during the period. In order to not only maintain and improve my skills but also to assure myself a future in public accounting, I find it necessary to take this review course to aid me passing the C.P.A. examination. Is it customary for other members of your trade or profession to undertake similar education? X Yes - No 4. List the principal subjects you studied at the educational institution shown in question 1 above or describe your educational activity. It is a course aimed at helping one prepare for in order to pass the C.P.A. examination. In his notice of deficiency with respect to 1966, respondent disallowed this deduction in full on the ground that these expenses were personal in nature. Ultimate Findings of Fact The expenses of $285.10 incurred in connection with petitioner's review course in 1966 were incurred for the primary purpose of passing the C.P.A. examination and not to improve or maintain his skills in his employment as an auditor or staff accountant or to meet the express requirements of his employer imposed as a condition to retain his employment; the expenses were incurred141 to assist petitioner to become a C.P.A. and were nondeductible personal expenses. Opinion Petitioner contends that the expenditures which he incurred in 1966 in connection with the Becker C.P.A. Review Course are deductible ordinary and necessary business expenses for education under section 162, I.R.C. 1954, and section 1.162-5, Income Tax Regs.1142 The petitioner argues that he took the C.P.A. Review Course in question and 974 incurred the expenses in connection therewith for the primary purpose of improving his skills in his employment. He has failed to establish this to our satisfaction, however, and instead the record before us is convincing that the primary purpose of the C.P.A. Review Course was to prepare Robert for taking the examination so that instead of being an auditor or staff accountant he could become a certified public accountant. We are not at all persuaded by petitioner's arguments that the expenses could not be personal because they related to his business in the accounting field. While it is true that he was employed by an accounting firm before he took the Review Course, he was not employed as a C.P.A. and could not have been so employed prior to taking and passing the Ohio C.P.A. examination. We agree with the respondent that the following excerpt from the regulations prohibits the deduction taken by petitioner: Sec. 1.162-5 Expenses for education. * * * (b) * * * In any event, if education is required143 of the taxpayer in order to meet the minimum requirements for qualification or establishment in his intended trade or business or specialty therein, the expense of such education is personal in nature and therefore is not deductible. * * (e) The provisions of this section may be illustrated by the following examples: Example (1). A is employed by an accounting firm. In order to become a certified public accountant he takes courses in accounting. Since the education was undertaken prior to the time A became qualified in his chosen profession as a certified public accountant, A's expenditures for such courses and expenses for any transportation, meals and lodging while away from home are not deductible. Petitioner argues that the fact that he was employed as a staff accountant or auditor for an accounting firm in July, 1966, prior to his taking the review course and C.P.A. examination, proves that he had met the minimum requirements for qualification or establishment in his job. This may be true, but Robert took the course to qualify him to become something more, a licensed C.P.A., which he was not at the time. Example (1), quoted above, clearly demonstrates that the fact that144 an individual is already performing service in an employment status does not establish that he has met the minimum educational requirements for qualification in a subsequently to be acquired professional status. See also Robert M. Kamins, 25 T.C. 1238">25 T.C. 1238 (1956). Furthermore, we have found as a fact that Robert's expenses to prepare him to pass his C.P.A. examination were not incurred for education undertaken primarily for the purpose of maintaining or improving skills required in his employment or to meet requirements of his employer. The record is devoid of evidence that the review course did anything in those respects. Under the circumstances disclosed by the record before us it is apparent that the Becker C.P.A. Review Course, which petitioner took for the primary purpose of preparing himself for the C.P.A. examination, was deemed necessary by the petitioner in order to qualify and establish him in his intended trade or business as a certified public accountant. In his own words, "It is a course aimed at helping one prepare for in order to pass the CPA examination." Therefore, we conclude and hold that the expenses which he incurred in connection with this course are145 personal in nature and are not deductible business expenses. Section 262; see also O.D. 452, 2 C.B. 157 (1919-1920). Decision will be entered for the respondent. 975 Footnotes1. SEC. 162, I.R.C. 1954. 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, * * * Petitioner chose to rely on the regulations issued in 1958, rather than the new 1967 regulations. They read in part as follows: Sec. 1.162-5 Expenses for education. (a) Expenditures made by a taxpayer for his education are deductible if they are for education (including research activities) undertaken primarily for the purpose of: (1) Maintaining or improving skills required by the taxpayer in his employment or other trade or business, or (2) Meeting the express requirements of a taxpayer's employer, or the requirements of applicable law or regulations, imposed as a condition to the retention by the taxpayer of his salary, status or employment. * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624183/	Ralph Freedson and Kay L. Freedson, Petitioners v. Commissioner of Internal Revenue, Respondent; First Trust Company of Houston, Inc., Petitioner v. Commissioner of Internal Revenue, RespondentFreedson v. CommissionerDocket Nos. 6020-72, 6348-72United States Tax Court65 T.C. 333; 1975 U.S. Tax Ct. LEXIS 30; November 12, 1975, Filed 30 On July 25, 1975, respondent served on petitioners' counsel in each of these two cases and, in due course, filed with this Court a Request for Admissions in accordance with Rule 90, Tax Court Rules of Practice and Procedure. Petitioners have filed no response to these requests. Respondent has filed in each case a Motion for Entry of Order that Respondent's Request for Admissions be Deemed Admitted. Held: Under Rule 90(c) of the Rules of Practice and Procedure of this Court, if no response is made to a request for admissions which has been properly served, the statements of fact in the request are deemed admitted. Respondent's motions are superfluous and are, therefore, denied. Melvin M. Engel, for the petitioners.Daniel A. Taylor, Jr., and Thomas Bulleit, for the respondent. Featherston, Judge. FEATHERSTON333 OPINIONOn July 29, 1975, the Court received the original of respondent's Request for Admissions in each of these cases. One request contained 13 numbered paragraphs and the other 5. Each paper bears a Certificate of Service which recites that a copy thereof was served on petitioners' counsel, Melvin M. Engel, on July 25, 1975, by certified mail, 31 return receipt requested, in a postage-paid wrapper addressed to counsel at his address shown on the petitions. No response to these requests for admissions has been filed with the Court.On September 12, 1975, respondent filed in docket No. 6348-72 a Motion for Entry of Order that Respondent's Request for Admissions be Deemed Admitted, stating that petitioner failed to serve a written response or an objection to the request. On September 23, 1975, a similar motion was filed in docket No. 334 6020-72. The motions were calendared for hearing on October 29, 1975. Respondent's counsel argued the motions, but there was no appearance on behalf of petitioners.Rule 90(b), (c), and (e) of the Rules of Practice of this Court, relating to requests for admission, is in pertinent part, as follows:RULE 90. REQUESTS FOR ADMISSION(b) The Request: The request may, without leave of Court, be served by any party to a pending case. Each matter of which an admission is requested shall be separately set forth. Copies of documents shall be served with the request unless they have been or are otherwise furnished or made available for inspection and copying. The party making the request shall32 serve a copy thereof on the other party, and shall file the original with proof of service with the Court.(c) Response to Request: Each matter is deemed admitted unless, within 30 days after service of the request or within such shorter or longer time as the Court may allow, the party to whom the request is directed serves upon the requesting party (i) a written answer specifically admitting or denying the matter involved in whole or in part, or asserting that it cannot be truthfully admitted or denied and setting forth in detail the reasons why this is so, or (ii) an objection, stating in detail the reasons therefor. * ** * (e) Effect of Admission: Any matter admitted under this Rule is conclusively established unless the Court on motion permits withdrawal or modification of the admission. * The notes accompanying Rule 90(b), (c), and (e) of the Rules of this Court (60 T.C. 1115">60 T.C. 1115, 1116) explain that this rule is derived from rule 36 of the Federal Rules of Civil Procedure. Rule 36(a) of the Federal Rules contains the following:Each matter of which an admission is requested shall be separately set forth. The matter is admitted unless, within 33 30 days after service of the request, or within such shorter or longer time as the court may allow, the party to whom the request is directed serves upon the party requesting the admission a written answer or objection addressed to the matter, signed by the party or by his attorney, * * This provision has been interpreted to require affirmative action to avoid an admission. If no answer or objection is made within the time prescribed by the rule or the time fixed by the Court, the statements in the request are deemed admitted without the entry of any order by the Court. Moosman v. Joseph P. Blitz, Inc., 358 F.2d 686">358 F.2d 686, 688 (2d Cir. 1966); Mangan v. Broderick & Bascom Rope Co., 351 F.2d 24">351 F.2d 24, 28 (7th Cir. 1965); O'Campo v. Hardisty, 262 F.2d 621">262 F.2d 621, 623-624 (9th Cir. 1958); Chicago, Rock Island & Pacific Railroad Co. v. Williams, 245 F.2d 397">245 F.2d 397, 403-404 (8th Cir. 1957). Where no response is made to a request for 335 admissions, the party making the request is entitled to rely upon his adversary's failure to respond as an admission of the requested matters and34 to prepare for trial accordingly. Mangan v. Broderick & Bascom Rope Co., supra at 28; Water Hammer Arrester Corp. v. Tower, 171 F.2d 877">171 F.2d 877, 879 (7th Cir. 1949). See also Rules 121(b) and 122(a), Tax Court Rules of Practice and Procedure, relating, respectively, to summary judgments and the submission of cases without trial.Rule 90(b), (c), and (e) of this Court, having been adapted from rule 36 of the Federal Rules, was intended to prescribe a similar procedure. Accordingly, since petitioners in the instant cases have taken no affirmative action in response to respondent's requests for admissions, served on petitioners' counsel on July 25, 1975, more than 3 months ago, the statements set forth in those requests for admissions are deemed admitted for the purposes of the pending actions. Respondent will not be required to offer evidence at the trial of these proceedings (scheduled to be called from a trial calendar on December 8, 1975) to prove the statements set forth in the requests.It is true that Rule 90(f) of the Rules of this Court refers to sanctions for "unjustifiably" failing to admit the genuineness of any document35 or the truth of any matter as requested in accordance with the rule. Such sanctions include, but are not "limited to the sanctions provided in Title X." This rule, however, refers to sanctions in situations where the party receiving an admissions request responds but unjustifiably fails to make a requested admission. It is similar in purpose to rule 37(c) of the Federal Rules, which provides that a party who, without good reason, refuses to admit a matter may be required to pay the costs incurred in proving that matter. See notes accompanying Rule 90(f) of the Rules of this Court, 60 T.C. 1117">60 T.C. 1117. The "sanction" for failure to respond to a request for admissions is to deem the matters stated in the request admitted as provided in Rule 90(c).The motions filed by respondent requesting the Court to enter orders that the statements in his requests for admissions be deemed admitted are superfluous. Rule 90 of the Rules of this Court contemplates that a party's failure to respond to a request 336 will result automatically in the admission of the statements in the request without the necessity of a confirming order. Accordingly, respondent's motions will36 be denied. 1Appropriate orders will be issued. Footnotes1. This opinion is not intended to deal with the circumstances in which a party may be permitted later to withdraw or modify an admission which he has made, either expressly or by failure to respond to a request for admissions. In any such case, the Court, upon a proper showing, may relieve a party from inadvertent admissions. The exercise of that discretion will depend upon the facts and circumstances of the individual case. See Rule 90(e)↩ of the Rules of Practice and Procedure of this Court.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624184/	Philadelphia, Germantown and Norristown Railroad Company, Petitioner, v. Commissioner of Internal Revenue, RespondentPhiladelphia, G. & N. R. Co. v. CommissionerDocket No. 7107United States Tax Court6 T.C. 789; 1946 U.S. Tax Ct. LEXIS 223; April 22, 1946, Promulgated 223 Decision will be entered for the respondent. Pursuant to provisions in a lease executed in 1870, Federal income and excess profits taxes assessed against petitioner lessor were paid by its lessee. A portion of the income tax paid was included each year as additional rent in petitioner's gross income for 1936 to 1942, inclusive. Imposition and payment of 1940 and 1941 income taxes at increased rates and inclusion of larger amounts as additional rent in gross income for 1941 and 1942, held not to entitle petitioner to relief under section 722 (a) and (b) ( 5), Internal Revenue Code. John E. McClure, Esq., for the petitioner.Ralph A. Gilchrist,224 Esq., for the respondent. Hill, Judge. HILL 790 The Commissioner disallowed petitioner's applications for relief under section 722 of the Internal Revenue Code and claims for refund of the excess profits taxes of $ 18,770.30 and $ 66,566.40 for 1941 and 1942, respectively, as shown by its returns and paid, for the reason that petitioner had not established (1) that the tax computed under subchapter E of chapter 2 of the Internal Revenue Code, without the benefit of section 722, resulted in an excessive and discriminatory tax within the provisions of section 722 (a) and (b), and (2) what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purposes of an excess profits tax based upon a comparison of normal earnings and earnings during the excess profits tax years 1941 and 1942. Petitioner assails the action of the Commissioner as erroneous and asks for a determination of overpayments for the years and in the amounts above stated.FINDINGS OF FACT.The facts are stipulated and are found accordingly. We set forth only those facts necessary to an understanding of the questions to be decided.The 225 petitioner is a corporation, organized under the laws of Pennsylvania on February 17, 1831. Its authorized capital consisted of 50,000 shares of common stock of the par value of $ 50 a share, of which 44,938 shares were outstanding during the years 1936 to 1942, inclusive. Of the 44,938 shares outstanding, Reading Co., successor to Philadelphia & Reading Railroad Co., owned 1,298 shares.Prior to December 1, 1870, petitioner operated certain railroad properties. Its railroad and that of the Philadelphia & Reading Railroad Co. were connected with each other. On November 10, 1870, a lease and contract was executed by and between petitioner and Philadelphia & Reading Railroad Co. under which all of petitioner's railroad properties were leased to Philadelphia & Reading Railroad Co., its successors, and assigns for a term of 999 years from and including December 1, 1870. Since that date petitioner's railroad properties have been held and operated by Philadelphia & Reading Railroad Co., its successors, and assigns under such lease and contract.Under such lease and contract the lessee was obligated to pay during each year of the continuance thereof (1) a yearly rent of $ 269,623.34 226 in equal quarterly payments of $ 67,405.83 1/2 on the first day of March, June, September, and December, commencing with the first day of March 1871; (2) a yearly sum of $ 8,000 in equal quarterly payments of $ 2,000 on the above quarter days, the $ 8,000 to be paid for the purpose of defraying the expenses of maintaining the corporate organization 791 of petitioner and to be appropriated to that purpose only; (3) the ground rents charged on the real estate demised when and as they fell due; (4) all taxes and assessments upon the capital stock of petitioner, upon the yearly payments of $ 269,623.34 and $ 8,000, and upon the dividends declared and paid by petitioner to its stockholders on the yearly rent of $ 269,623.34, for the payment or collection of which taxes or assessments petitioner would otherwise be liable or accountable under any lawful authority whatever; and (5):* * * all taxes, charges, levies, claims, liens and assessments of any and every kind, which, during the continuance of the term hereby demised, shall, in pursuance of any lawful authority, be assessed or imposed on the demised premises, or any part thereof, or upon the business there carried on, or the receipts, 227 gross or net, therefrom; * The amounts of $ 269,623.34 (1), $ 8,000 (2) were paid by the lessee to petitioner and were included in petitioner's gross income for each of the years 1936 to 1942, inclusive, as rental income. The amount paid by the lessee as ground rent (3) during each of the years 1936 to 1942, inclusive, was $ 414, which amount was also included in petitioner's gross income as rent income.During the years 1936 to 1942, inclusive, petitioner's sole activities consisted of owning and holding property and distributing its avails. During the excess profits tax years the petitioner had available for distribution to its stockholders substantially the same amounts as it had for distribution to its stockholders in each of the base period years 1936 to 1939, inclusive.The income and excess profits taxes for each of the years 1936 to 1942, inclusive, assessed against the petitioner and paid directly to the collector by the lessee, are as follows:ExcessYearIncome taxprofitstax1936$ 46,501.00193745,407.68193853,016.89193953,157.551940$ 80,658.701941103,888.05$ 18,770.301942122,122.9466,566.40Of those amounts petitioner, 228 under decisions of the Supreme Court in United States v. Boston & Maine R. R., 279 U.S. 732">279 U.S. 732, and Commissioner v. Old Colony Trust Co., 279 U.S. 716">279 U.S. 716, was required to include for income tax purposes and did include in its gross income for each of the years 1936 to 1942, inclusive, the following amounts:ExcessYearIncome taxprofitstax1936$ 40,303.86193739,384.53193844,487.73193944,487.731940$ 64,709.60194183,333.231942107,849.33792 If for the years 1941 and 1942, petitioner had not been required to include in its gross income the sums of $ 83,333.23 and $ 107,849.33, respectively, its excess profits tax liability for each of such years would have been zero.Petitioner's excess profits tax net income for each of the years 1936 to 1942, inclusive, and the items entering into the computation thereof are as follows:Base period yearsGross income1936193719381939Rental income$ 277,623.34$ 277,623.34$ 277,623.34$ 277,623.34Ground rent414.00414.00414.00414.00Dividends425.00587.29587.30482.04U. S. bond interest526.80373.76680.03526.90Other interest1,180.001,046.79921.78832.87Additional rental 5,918.34Other incomeFed. income taxes paidby lessee40,303.8639,384.5344,487.7344,487.73Total gross income326,391.34319,429.71324,714.18324,366.88Deductions7,763.278,105.548,047.788,230.20Net income318,628.07311,324.17316,666.40316,136.68Less:Dividends receivedcredit361.25499.20499.21409.73U. S. bond interest526.80373.76680.03526.90Normal tax net income317,740.02310,451.21315,487.16315,200.05Statutory adjustments:Income taxBalance ofdividends received63.7588.0988.0972.31Excess profits netincome317,676.27310,363.12315,399.07315,127.74229 Excess profits tax yearsGross income194019411942Rental income$ 277,623.34$ 277,623.34$ 277,623.34Ground rent414.00414.00414.00Dividends470.90425.00470.62U. S. bond interest526.90526.90364.40Other interest1,276.211,181.401,700.10Additional rentalOther income32.42Fed. income taxes paidby lessee64,709.6083,333.23107,849.33Total gross income345,020.95363,536.29388,421.79Deductions8,015.898,067.648,533.10Net income337,005.06355,468.65379,888.69Less:Dividends receivedcredit400.26361.25400.03U. S. bond interest526.90526.90364.40Normal tax net income336,077.90354,580.50379,124.26Statutory adjustments:Income tax80,658.70Balance ofdividends received70.6463.7570.59Excess profits netincome255,348.56354,516.75379,053.67On its excess profits tax returns (Form 1121) for 1941 and 1942, made on the cash receipts and disbursements basis, the petitioner230 reported as income the amounts of $ 354,516.75 and $ 379,053.67, respectively. The excess profits tax of $ 18,770.30 shown on petitioner's excess profits tax return for 1941 was paid by the lessee to the collector for the first district of Pennsylvania at Philadelphia in four quarterly installments on March 15, June 15, September 15, and December 15, 1942. The excess profits tax of $ 66,566.40 shown on petitioner's excess profits tax return for 1942 was paid by the lessee to the collector of the same district in four quarterly installments on March 15, June 15, September 15 and December 15, 1943.The petitioner's average base period net income under section 713, without benefit of section 722, is computed as follows: 793 Excess profitsYearnet income1936$ 317,676.271937310,363.121938315,399.071939315,127.74Aggregate of excess profits net income for the last 2 yearsof the base period$ 630,526.81Aggregate of excess profits net income for the first halfof the base period628,039.39Excess of last half over first half2,487.42One-half thereof1,243.71Sum of 1/2 the excess and aggregate of the last half of the631,770.52base period 12/24 thereof315,885.26231 On May 19 and June 14, 1943, petitioner filed its applications for relief under section 722 of the Internal Revenue Code (Form 991 (revised Jan. 1943)) for the years 1942 and 1941, respectively, with the Commissioner of Internal Revenue. In his notice of disallowance dated November 13, 1944, the Commissioner stated in part as follows:You are advised that the determination of your excess profits tax for the taxable years ended December 31, 1941, and December 31, 1942, discloses an excess profits tax liability of $ 18,770.30 for the year 1941, and $ 66,566.40 for the year 1942, as shown in your return.After careful consideration of your applications for relief under section 722, filed May 19, 1943 and June 14, 1943, it has been determined that you have not established that the tax computed under subchapter E of Chapter 2 of the Internal Revenue Code, without the benefit of section 722 of the Code, results in an excessive and discriminatory tax within the provisions of Section (a) and (b) of the Code, and that you have not established what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purposes of an232 excess profits tax based upon a comparison of normal earnings and earnings during the excess profits tax years ended December 31, 1941 and December 31, 1942.Accordingly, the claims for refund contained in Forms 991, Applications for Relief Under Section 722 of the Internal Revenue Code, are disallowed. Notice of such disallowance is hereby given in accordance with the provisions of Section 732 of the Internal Revenue Code.OPINION.The petitioner contends that the facts in this case bring it squarely within the intent, purpose, and letter of the provisions of section 722, and in particular section 722 (a) and (b) ( 5), of the Internal Revenue Code. 1 It designates the lease entered into on 794 November 10, 1870, between it and Philadelphia & Reading Railroad Co. as the "factor affecting taxpayer's business" which makes its excess profits tax "excessive and discriminatory."233 To be entitled to relief under section 722 petitioner must establish not only that its "base period net income is not a fair measure of normal earnings," (Committee on Finance Report No. 1631, 77th Cong., 2d sess., p. 196) but it must also establish that the "average base period net income is an inadequate standard of normal earnings, because of the factor affecting the taxpayer's business." (Emphasis supplied.) See section 722 (b) (5), which is the provision relied upon by petitioner in this case.The term "an inadequate standard of normal earnings" is not defined in the statute. In Monarch Cap Screw & Manufacturing Co., 5 T. C. 1220, it is stated:The word "normal" is susceptible of different, or varying meanings. * * In relation to its context we think that the whole phrase of "an inadequate standard of normal earnings" refers to a standard or measure of earnings which falls below that established over a reasonable length of time and under normal conditions by the taxpayer or by other taxpayers engaged in the same or a similar business under comparable conditions. It is such a standard as would result in "an abnormally low excess profits 234 credit." Senate Finance Committee Report, supra. [No. 1631, 77th Cong., 2d sess., p. 197. 2 See also p. 35 of same report.] 3235 795 After 1870 and throughout the base period years and the excess profits tax years, petitioner's sole activities were the owning and holding of properties and the distribution of their avails. The petitioner's largest item of income was $ 269,623.34, designated as the "yearly rent" in the lease made in 1870 covering all of its railroad properties. In addition the lessee paid to petitioner $ 8,000 for the maintenance of its corporate existence. The lessee also paid each year $ 414, the ground rent charged on the real estate demised. These three items were the same in the excess profits tax years 1940, 1941, and 1942. Petitioner's income, exclusive of the above enumerated items and exclusive of the item of additional rental in 1936 of $ 5,918.34, a small item of other income in 1941 of $ 32.42, and its income and excess profits taxes paid by lessee, consisted of dividends and interest. During the base period years, 1936 to 1939, inclusive, such income aggregated $ 2,131.80, $ 2,007.84, $ 2,189.11, and $ 1,841.81, or an average of $ 2,042.64 per year. The average amount of such dividend and interest income for the three excess profits tax years was $ 2,314.14. An additional236 item of income which petitioner was required to include in its gross income for tax purposes was the Federal income tax paid by the lessee. The amount so included in gross income and the amount of tax actually paid by the lessee in each of the base period years and the excess profits tax years are as follows:Base period yearsExcess profits tax yearsPaid by lesseeIncluded inPaid byIncluded inYeargross incomelesseeYeargross incomeExcessIncome taxprofits tax1936$ 40,303.85$ 46,501.001940$ 64,709.60$ 80,658.70193739,384.5345,407.68194183,333.23103,888.05$ 18,770.30193844,487.7353,016.891942107,849.33122,122.9460,566.40193944,487.7353,157.55Obviously, the only change of any consequence between petitioner's gross income in its base period years and its gross income in the excess profits tax years occurred in the amount of taxes paid by the lessee and included in petitioner's gross income.Petitioner contends that "the addition to its income of the constantly increasing income and excess profits taxes gave rise to conditions affecting it, resulting in an average base period237 net income which is not an adequate measurement for the determination of excess profits." It states on brief that its excess profits tax is excessive and discriminatory because its excess profits net income resulted solely from:(a) The imposition upon petitioner in 1941 and 1942 of Federal income taxes at increased rates and their payment by the lessee under a lease and contract entered into in 1870, and796 (b) The inclusion in petitioner's 1941 and 1942 income of greater amounts of Federal income taxes paid by the lessee, than were included in its base period income. [Emphasis supplied.]From such statement it clearly appears that it is the taxes at increased rates or increased taxes of petitioner paid by the lessee and included in petitioner's gross income for 1941 and 1942 which, it is claimed by petitioner, make its average base period net income an inadequate standard of normal earnings. That this is petitioner's contention also appears from petitioner's suggested alternative method for the computation of a constructive average base period net income. It states that, since the "factor affecting the petitioner's business which may reasonably be considered 238 as resulting in the petitioner's average base period net income being an inadequate standard for measuring its excess profits is the fact that the Federal income tax rates in effect in the base period were less than the Federal income tax rates in effect in 1941 and 1942," an "appropriate adjustment for this factor would be to recompute petitioner's average base period net income on the basis of 1941 and 1942 rates having been in effect throughout the base period." For the purpose of computing its 1941 excess profits credit petitioner suggests the exclusion of the amount included in the excess profits net income for each of the base period years and the inclusion therein in lieu thereof of the amount of $ 83,333.23, the amount of taxes paid by the lessee included in 1941 gross income, and for the credit for 1942 it suggests the inclusion in excess profits net income for each of the base period years of $ 107,849.33, the amount included in 1942 gross income.Section 722 (a) expressly provides:In determining such constructive average base period net income, no regard shall be had to events or conditions affecting the taxpayer, the industry of which it is a member, or taxpayer generally239 occurring or existing after December 31, 1939.Obviously, if events or conditions occurring or existing after December 31, 1939, may not be considered in determining constructive average base period net income which is to be used in lieu of the average base period net income otherwise determined under subchapter E, it follows that such events or conditions may not be regarded as "any other factor affecting the taxpayer's business which may reasonably be considered as resulting in an inadequate standard of normal earnings during the base period," for to do so would nullify the above quoted provision.Furthermore, the requirement that the lessee pay petitioner's taxes arose in 1870, upon the execution of the lease, and it has been in existence ever since. All taxes assessed against the petitioner since that year have been paid by the lessee. To obtain relief under section 722 (b) (5) the petitioner must establish that the application of the 797 section "would not be inconsistent with the principles underlying the provisions of" subsection (b) and "with the conditions and limitations enumerated therein." One of such limitations enumerated therein is that the "event or condition240 affecting the taxpayer" must occur or exist "either during or immediately prior to the base period." See sec. 722 (b) (1), (2), (3), and (4) and Committee on Finance Report No. 1631, 77th Cong., 2d sess., pp. 198-203. 4 Neither the lease nor the requirement that the lessee pay petitioner's taxes was unusual or abnormal in the sense that either arose in the base period or immediately prior thereto or in the sense that either created or brought about unusual or abnormal or unforeseeable conditions or results. On the contrary, the payment by the lessee of petitioner's income and excess profits taxes was but the fulfillment of the intent and purpose of the provisions of the lease.241 The petitioner argues that its income is not of a type intended to be reached by the excess profits tax, since: "The excess profits tax is specifically designed to recapture a portion of profits due to the expansion and creation of activities by the war efforts" (sec. 35.722-3 (e), Regulations 112, p. 151); that the excess profits taxes involved herein are due to the inclusion in the technical or statutory income of the amount of income tax imposed by the Government; that the taxes were paid by the lessee directly to the collector or the United States Treasury and were not "actually received" by the petitioner "for its own use"; and 798 that, if it had not been required to include the amounts of $ 83,333.23 and $ 107,849.33 in its 1941 and 1942 gross income, its excess profits tax liability for such years would have been zero.Although the excess profits tax arose out of the congressional desire "that the rearmament program should furnish no opportunity for the creation of new war millionaires or further substantial enrichment of already wealthy persons," as appears from Ways and Means Committee Report No. 2894, 76th Cong., 3d sess., pp. 1-2, the committee also stated therein242 (pp. 1-2) that the tax was to be a "general excess-profits tax" and not one limited to business engaged directly in the defense program or even to munition manufacturers generally, but that the "tax provided in the bill [Second Revenue Bill of 1940] will apply to corporate profits from all sources." Hence, the fact that the taxes paid by the lessee may not be profits "due to the expansion and creation of activities by the war effort" is not controlling.Moreover, section 711 of subchapter E, entitled "Excess Profits Tax," provides that the "excess profits net income for any taxable year beginning after December 31, 1939, shall be the normal tax net income, as defined in section 13 (a) (2) for such year," subject to adjustments of certain "unusual and nonrecurring items." See Committee on Ways and Means Report No. 2894, 76th Cong., 3d sess., p. 8. 5 That payments by a lessee of taxes of the lessor constitute additional rent taxable to the lessor was definitely established in 1929 by the Supreme Court in United States v. Boston & Maine R. R., 279 U.S. 732">279 U.S. 732. Payments of taxes assessed against the lessor and paid by the lessee have been includible in243 gross income for the purpose of computing the normal tax net income for many years prior to the periods here involved. We are unable to find and petitioner points to no provision contained in subchapter E which indicates that taxes of the lessor paid by the lessee should be regarded as an unusual, nonrecurring, or abnormal income item for the purposes of the excess profits tax. Under the circumstances the fact that the amount paid by the lessee for petitioner's taxes was not "actually received" by it, but was paid direct to the collector, is not of great import.The "standard of normal earnings" for a period of 999 years from December 1, 1870, was actually established by the lease executed in 1870. As heretofore pointed out, the amount of the taxes paid by the lessee each year constituted a part of the normal earnings of petitioner for Federal income and excess244 profits taxes. Since the lessee performed all its obligations under the lease during the base period 799 years, petitioner's average base period net income conformed to the "standard of normal earnings" established by the lease.Except to state that the essential facts demonstrate inequities and hardships, the petitioner does not specify the inequities and hardships resulting to it from the imposition of the excess profits tax. It concedes that each year since 1870 it received and had available for distribution to its stockholders substantially the same amount of income, viz., $ 269,623.34, the amount designated as yearly rent. This was so because the lessee was required to pay all taxes. In this respect petitioner's position was not different from that of prior years.In our opinion, the evidence fails to show that petitioner is entitled to relief from excess profits taxes for 1941 and 1942 under section 722 of the Internal Revenue Code.Reviewed by the Special Division.Decision will be entered for the respondent. Footnotes. In 1936 Reading Co., in compliance with a court decision, reimbursed petitioner for 1933 Federal 5↩% excise tax in the amount of $ 5,918.34 in dividends paid.1. (a) General Rule. -- In any case in which the taxpayer established that the tax computed under this subchapter (without the benefit of this section) results in an excessive and discriminatory tax and establishes what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purposes of an excess profits tax based upon comparison of normal earnings and earnings during an excess profits tax period, the tax shall be determined by using such constructive average base period net income in lieu of the average base period net income otherwise determined under this subchapter. In determining such constructive average base period net income, no regard shall be had to events or conditions affecting the taxpayer, the industry of which it is a member, or taxpayer generally occurring or existing after December 31, 1939, * (b) Taxpayers Using Average Earnings Method. -- The tax computed under this subchapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer entitled to use the excess profits credit based on income pursuant to section 713, if its average base period net income is an inadequate standard of normal earnings because -- * * (5) of any other factor affecting the taxpayer's business which may reasonably be considered as resulting in an inadequate standard of normal earnings during the base period and the application of this section to the taxpayer would not be inconsistent with the principles underlying the provisions of this subsection, and with the conditions and limitations enumerated therein.↩2. In the light of the greatly increased excess profits tax rate, it is believed desirable to afford relief in meritorious cases to corporations which bear an excessive tax burden because of an abnormally low excess profits credit. Therefore section 722↩ which currently extends relief only in a limited class of cases is revised and broadened so as to remove existing inequities and to alleviate hardship in cases where relief cannot now be obtained. * 3. Your committee has adopted the provisions of the House Bill [Revenue Bill in 1942] relating to general relief for excess-profits tax purposes with certain modifications. It is recognized that specific legislation cannot take care of all of the harsh cases which may arise under a high excess-profits tax and that legislation of a general nature is necessary to provide relief for many unforeseen hardships which may arise under the excess-profits tax law.Under the House Bill, taxpayers who are entitled to use the average-earnings basis are permitted to have their base period earnings reconstructed in cases of abnormalities or hardships. In order to secure the benefit of this provision, taxpayers must meet certain specific tests to establish that their actual earnings during the base period are abnormal. * ↩4. To be eligible for relief, taxpayers which are entitled to use the average earnings credit under section 713 must establish that the average base period net income is not a fair measure of normal earnings because of one or more of the following reasons: * * *5. The business of the taxpayer during the base period was adversely affected by any other factor, resulting in an average base period net income which is an inadequate standard of normal earnings, and the taxpayer's claim for relief and the application of the relief as provided in this section would not be inconsistent with the principles underlying the eligibility requirements and the conditions and limitations set forth therein. Thus, corporations which do not meet the strict eligibility requirements set forth in this section are not debarred from relief if their case is within the spirit of the statute and if its application would not be inconsistent with its principles and conditions and limitations.An example which your committee believes illustrates this paragraph would be a taxpayer which shortly before the base period undertook a business involving the manufacture of a product requiring an extensive period for preparation or manufacture, and which had no stocks of such product on hand at the commencement of such business. Since a large portion of the base period would be devoted to preparation of the product for sale, and since sales would consequently be small or nonexistent and would not serve as a measure of the normal operations of the business, the base period would represent an abnormal standard by which to compute excess profits. Although in such a case, it might be said that the business was not depressed during the base period since it was operating at full manufacturing capacity, and thus might not be entitled to relief under paragraph 2, it would seem clear that such a taxpayer is entitled to relief by way of a constructive excess profits net income based upon normal operations. For example, assume that a taxpayer was organized in 1935 to distill and sell whisky. It had no reserve whisky stocks on hand. During 1935 and for the greater part of its base period, it was aging the whisky it had distilled. Because of a lack of a marketable product, the sales of such taxpayer, and consequently its base period net income, were abnormally low and do not reflect results of usual operations. Relief should be extended to such taxpayer, the base period net income of which would not have been distorted if it had adequate whisky stocks on hand at the beginning of the base period.↩5. The adjustment of income to take care of these unusual and nonrecurring items makes for equity and the removal of hardship which would otherwise occur.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624186/	LARRY D. DELPIT AND DOROTHY D. DELPIT, TRANSFEREES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentDelpit v. CommissionerDocket No. 6388-87United States Tax CourtT.C. Memo 1992-297; 1992 Tax Ct. Memo LEXIS 313; 63 T.C.M. (CCH) 3053; May 19, 1992, Filed 313 Decision will be entered in accordance with respondent's computation under Rule 155. Jerry W. Carlton and John F. Daum, for petitioners. John Kent and Marlene Kristovich, for respondent. PARRPARRSUPPLEMENTAL MEMORANDUM OPINION PARR, Judge: These proceedings are under Rule 155. 1 The opinion of this Court, in which we found petitioners liable as transferees under section 6901, was filed on April 2, 1991, as T.C. Memo. 1991-147. Petitioners have objected to respondent's computation under Rule 155, and have proffered their own computation. We find petitioners' arguments without merit and uphold respondent's Rule 155 computation. I. Assets Petitioners Received From Kern, Inc.In our original opinion we found that KORC, the conduit through which Kern, Inc.'s assets passed into the hands of petitioners, 314 transferred $ 30,403,511 of assets in addition to the litigation rights to three pieces of litigation: (1) United States Department of Energy, (2) Armstrong Petroleum, and (3) Tenneco Oil Company, to petitioners. Petitioners received $ 41 million from the Tenneco litigation, $ 470,341 from the Armstrong litigation, and nothing from the Department of Energy litigation, which remained outstanding at the time of trial. 2Petitioners want to exclude the three litigations from the value of the assets they received from Kern, Inc. Petitioners completely misunderstand the holding of our original opinion. The litigation payments in both the Tenneco and Armstrong litigations are assets of Kern, Inc., received by petitioners. Specifically, petitioners received $ 30,276,808 in Kern, Inc.'s assets in the form of note payments from KORC, the entity which Kern, Inc., liquidated into. The $ 30,276,808 is the sum of all KORC's315 note payments to petitioners less the $ 126,543 we found KORC earned in 1982. The record lacks any evidence that KORC earned any other moneys after 1982. Petitioners also received $ 41,470,341 of Kern, Inc.'s assets in the form of the litigation proceeds. Therefore, in total petitioners received $ 71,747,149 of Kern, Inc.'s assets in a transaction the substance of which was a liquidating distribution from Kern, Inc. and its subsidiaries through a conduit entity, KORC, to the sole shareholder petitioner Larry Delpit. II. Credits for Amounts Petitioners Transferred to KORCPetitioners cite California Civil Code sec. 3439.09(b) (West 1970); Aggregates Associated, Inc. v. Packwood, 375 P.2d 425">375 P.2d 425 (Cal. 1962); and Patterson v. Missler, 48 Cal. Rptr. 215 (Ct. App. 1965), for the proposition that under California law, it is clear that respondent's recovery is limited to the amount by which the property KORC transferred to petitioners exceeds the consideration given by petitioners, the Kern, Inc. stock, plus interest on that consideration at the statutory prejudgment rate. Petitioners' argument is without merit, and it is clear that none 316 of the three sources of California law petitioners cite applies to their transactions. California Civil Code sec. 3439.09(b) (West 1970) provides: (b) A purchaser or encumbrancer who without actual fraudulent intent has given less than a fair consideration for the conveyance or obligation, may retain the property or obligation as security for repayment. [Emphasis added.]Petitioner 3 was the sole shareholder and director of Kern, Inc. Petitioners are neither purchasers nor encumbrancers. To the contrary, petitioners are the recipients of Kern, Inc.'s assets through a liquidating distribution of Kern, Inc., and its subsidiaries achieved by means of a transaction in which (1) petitioner sold all of his stock in Kern, Inc. to KORC for inadequate consideration, (2) Kern, Inc. liquidated into KORC one day after the stock sale, and (3) KORC paid petitioner for the stock with Kern, Inc.'s assets. Next, petitioners cite Aggregates Associated, Inc. v. Packwood, 375 P.2d 425">375 P.2d 425 (Cal. 1962).317 First, we point out that this case was overruled by Liodas v. Sahadi, 562 P.2d 316">562 P.2d 316 (Cal. 1977). Second, in any event, the case is not applicable. In Aggregates Associated, the Supreme Court of California applied a general rule that entitles a grantee to a credit for sums expended in paying the debts of a grantor when a transfer is only constructively fraudulent, as opposed to being actually fraudulent. The court found the grantee in Aggregates Associated was entitled to a credit for his payments to the grantor's creditors. Petitioners are not grantees, and Aggregates Associated in no way stands for the position that petitioners are entitled to a credit for the Kern, Inc. stock they transferred to KORC. Finally, petitioners rely on Patterson v. Missler, 48 Cal. Rptr. 215">48 Cal. Rptr. 215 (Ct. App. 1965). As with petitioners' other two sources of California law, Patterson is inapplicable to the case at hand. In Patterson, the District Court of Appeals for the Fourth District of California stated and applied California Civil Code sec. 3439.09(b), which we have found to be inapplicable, as follows: Where the conveyance is fraudulent318 because made by an insolvent debtor to a purchaser who, without actual fraudulent intent, has given less than a fair consideration therefor, the latter is innocent of wrongdoing and, for this apparent reason, the law protects him against loss of his investment. (Civ. Code sec. 3439.09(b).) To accomplish such the statute, in effect, confers upon the purchaser a lien upon the property to secure repayment of his investment. [Patterson v. Missler, supra at 222; emphasis added.]Petitioners want (1) a credit for the amount of their "investment" which they argue is their Kern, Inc. stock, and (2) a credit for interest on the value of their Kern, Inc. stock. As previously discussed, petitioners are not purchasers, and accordingly, neither the Patterson case nor California Civil Code sec. 3439.09(b) is applicable to their transactions. Petitioners' argument is without merit and they are not entitled to a credit for either the value of the Kern, Inc. stock or interest on the Kern, Inc. stock. III. Credit for Taxes Petitioners Paid on the Transfers Received From KORCPetitioners argue that the Government has already received a substantial319 portion of the tax owing through petitioners' payment of tax on amounts they received from KORC. Accordingly, petitioners argue that if the Government is allowed to keep the sums already paid by petitioners on the amounts received from KORC, and also recover the entire amount of transferee liability from petitioners, then the Government will receive a windfall of extra taxes. Petitioners argue this windfall is prohibited by California law. In Maynard Hospital, Inc. v. Commissioner, 54 T.C. 1675 (1970), we were faced with the same problem of the payment of taxes on amounts later determined to be subject to transferee liability. At 54 T.C. 1676">54 T.C. 1676, we stated: As we held in Estate of Samuel Stein, 37 T.C. 945">37 T.C. 945, 956 (1962), where a taxpayer has in 1 year received an amount from a corporation under a claim of right and paid a tax upon the receipt, he is not entitled to recover the tax paid in the prior year under a doctrine of equitable recoupment when it is later determined that he is liable as transferee for tax of the corporation making the distribution to him. In the Stein case we pointed out that prior to the enactment320 of section 1341, I.R.C. 1954, a number of cases had held that a taxpayer who was required to restore payments which he had received under a claim of right was entitled to a deduction in the year in which repayment was made. We further pointed out that section 1341 now provides the appropriate remedy in a situation where a taxpayer had included an item in gross income in one taxable year and in a subsequent taxable year becomes entitled to a deduction because the item or a portion thereof was no longer subject to his unrestricted use.Accordingly, we hold for respondent on this issue. IV. The Government's Entitlement to InterestWhen transferred assets exceed the total tax liability of a transferor, interest is charged on the deficiency and is a right created by the Internal Revenue Code. However, in the case where a transferee receives assets that are insufficient to satisfy the total tax liability of a transferor, the determination of the existence, starting date, and rate of interest upon the retention of those assets prior to demand is controlled by State law. Estate of Stein v. Commissioner, 37 T.C. 945">37 T.C. 945, 961 (1962). Petitioners argue the *321 latter rule of interest is applicable because the property transferred is less than the deficiency. For the reasons set forth in this supplemental opinion, it is apparent that the former rule of interest applies because the assets transferred to petitioners, $ 71,747,149, clearly exceed the transferor's income tax liability. Decision will be entered in accordance with respondent's computation under Rule 155. Footnotes1. All Rule references are to the Tax Court Rules of Practice and Procedure, and all section references are to the Internal Revenue Code in effect for the years in issue, unless otherwise indicated.↩2. At the time of trial, the Department of Energy was seeking approximately $ 60 million from KORC.↩3. References to petitioner in the singular refer to Larry D. Delpit.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624187/	PETER F. AND DOREEN J. JUNKER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentJunker v. CommissionerDocket No. 21563-84.United States Tax CourtT.C. Memo 1987-103; 1987 Tax Ct. Memo LEXIS 99; 53 T.C.M. (CCH) 214; T.C.M. (RIA) 87103; February 23, 1987. J. Benjamin Selters, II, for the petitioners. Marilyn Devin, for the respondent. SHIELDSMEMORANDUM FINDINGS OF FACT AND OPINION SHIELDS, Judge: Respondent determined a deficiency in petitioners' 1980 income tax in the amount of $13,367. Due to concessions, the only issue for determination is whether Doreen J. Junker qualifies under section 6013(e) 1 as an "innocent spouse." 100 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 reference. Petitioner Peter F. Junker (Peter) lived in Hollywood, California and petitioner Doreen J. Junker (Doreen) lived in Newark, New Jersey at the time their joint petition was filed in this case. During 1980, they were married and living together in Van Nuys, California. 2 At that time Peter was 30 years old and was employed by an insurance underwriter during part of the year and by a broker for the balance. Doreen was 32 years old, a college graduate, and employed by Allianz Insurance Company as a supervisor of eleven individuals. She had signed and filed income tax returns since about 1970. During 1980 they each had earnings of about $30,000.00 which they deposited to a joint bank account. During the fall of 1980, Peter explored the "tax savings" offered by a video tax shelter known as Consultation and Management International ("CMI"). He received a copy of its "prospectus" which stated that its "sole objective101 is to either substantially reduce or completely eliminate your taxes * * ." On December 10, 1980, Peter agreed to invest $15,000 in the shelter and gave CMI a check drawn on petitioners' joint checking account for $7,500. On the same date he also signed and gave CMI a promissory note for $7,500 payable together with interest on or before February 1, 1981. On January 19, 1981, Peter paid CMI for the note and interest with two checks in the amounts of $7,500 and $82.19 drawn on the joint checking account. On January 31, 1981, Peter moved out of petitioners' apartment. However, on February 13, 1981, he returned with a joint income tax return for 1980 which Doreen signed. The return reflected a combined gross income for the petitioners of $57,560 and, on Schedule C, a $51,000 loss allegedly arising out of Peter's investment in CMI. The CMI investment in 1980 also resulted in a purported excess of investment tax credit which was available for carryback to Doreen's income tax return for 1977 which she had filed as an unmarried individual. An Application for Tentative Refund for 1977 was filed with respondent in March 1981. The application was signed by Peter. He also signed Doreen's102 name to the application. At about this time Peter informed Doreen that he had or was going to file for a dissolution of their marriage and each of them hired a separate divorce attorney to attempt to arrive at a property settlement. During the settlement negotiations, Doreen received at the apartment refund checks for 1977 and 1980 of $2,525 and $14,009, respectively. She gave the checks to her attorney who deposited them in his escrow account pending the dissolution of the marriage. On January 14, 1982, the Los Angeles County Superior Court entered an interlocutory judgment of dissolution of the marriage. As part of the judgment, the court divided the "commmunity and quasi-community assets" of petitioners as follows: A. To [Peter] as his sole and separate property: 1. All furniture, furnishings, appliances, books, art objects and household supplies within the possession of [Peter]. 2. The 1978 Datsun 280Z automobile, California license number Z PISTOL. 3. One-half (1/2) of the proceeds of the termination of the financial accounts in the names of the parties, in the amount of $4,000.00. 4. Petitioner's accrued retirement benefits, if any through Petitioner's103 employer, J.L. Kelley West, Inc. 5. The investment interest in the business known as Consultation and Management International. 6. All items of personal property assets, clothing, jewelry and other personal effects either worn or used by [Peter] and currently in his possession. B. To [Doreen] as her sole and separate property: 1. All furniture, furnishings, appliances, books, art objects and household supplies within the possession of [Doreen]. 2. One-half (1/2) of the proceeds of the termination of the financial accounts in the names of the parties, in the amount of $4,000.00. 3. The 1980 California State income tax refund in the amount $3,062.00. 4. The 1980 Federal income tax refund, in the amount of $17,000.00. 5. [Doreen's] accrued retirement benefits, if any, through [her] employer, Allianz Insurance Company. 5. All items of personal property assets, clothing, jewelry and other personal effects either worn or used by [Doreen] and currently in her possession. C. To further equalize the division of the community property assets, [Doreen] is ordered to pay to [Peter] forthwith the cash sum of $9,732.00. On April 5, 1984, respondent104 issued a notice of deficiency to petitioners in which the CMI loss was disallowed in full and it was determined that the resulting deficiency was due from both petitioners. OPINION Doreen claims that she is not liable for the deficiency because she is an innocent spouse under section 6013(e). 3 To qualify for such relief, she has the burden of proving that each of the conditions set forth in section 6013(e) has been met. ; Rule 142(a). As applicable to this case these conditions are that: (1) on the joint return for 1980 there was a substantial understatement 4 of tax attributable to grossly erroneous items of Peter; (2) Doreen did not know and had no reason to know of the substantial understatement; and (3) taking into account all of the facts and circumstances, it is inequitable to hold her liable for the deficiency attributed to the understatement. Respondent contends that none of the conditions were met. 105 With regard to the first condition, neither party disputes the existence of a substantial understatement and from the record as a whole we have no difficulty in finding that the payments to CMI and the claimed loss with respect thereto are solely attributable to Peter despite his unreliable testimony to the effect that the CMI investment was more in the nature of a joint venture which was freely discussed with and agreed to by Doreen. We are also satisfied that the claimed loss is a grossly erroneous item which is defined to include "any claim of a deduction, * * for which there is no basis in fact or law." Section 6013(e)(2)(B). A claimed deduction has no basis in law when it does not qualify as a deductible expenditure under well-settled legal principles or when no substantial legal argument can be made to support its deductibility. . According to CMI's prospectus its sole objective was to substantially reduce or completely eliminate the income tax liability of its investors. Consequently Peter's "investment" with CMI could not have been entered into with a bona fide objective of making a profit and consequently106 the loss attributable thereto constitutes a grossly erroneous item because it does not qualify as a deductible expenditure under well settled legal principles. See , affd. , cert. denied ; , affg. a Memorandum Opinion of this Court; . However, from an examination of the entire record we are unable to conclude that Doreen has established that in signing the return she had no reason to know of the substantial understatement and that after taking into account all of the facts and circumstances it would be inequitable to hold her liable for the deficiency. First she testified that she learned about Peter's first payment to CMI before the end of 1980 and about the second payment in early February of 1981 but nevertheless she signed the 1980 return on February 13, 1981. Her claim that she only did so because Peter pushed her into a chair and subjected her to verbal abuse 5 is not107 acceptable when considered with her obvious intelligence and the fact that she is a college graduate and during the year supervised eleven individuals at Allianz Insurance Company. Furthermore, she had filed returns since 1970 and readily admitted being aware of the importance of doing so. Finally, she subsequently received and turned over to her divorce lawyer refund checks which were generated by the loss claimed on the 1980 return. In the division of their property pursuant to the divorce, Doreen ultimately received approximately 50 percent of the $17,000 received from these checks. From all of the above, we conclude that Doreen had reason to know that a substantial understatement existed with respect to the 1980 joint return and that it would not be inequitable to hold her liable for the deficiency. Therefore, Doreen does not qualify for relief under section 6013(e). To reflect the foregoing and the concessions, Decision will be entered under Rule 155.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated. All rule references are to the Tax Court Rules of Practice and Procedure unless otherwise provided.↩2. Petitioners were divorced in 1983 and at the date of trial Doreen's name was Doreen J. Allen.↩3. Section 6013(e) provides: (e) SPOUSE RELIEVED OF LIABILITY IN CERTAIN CASES. -- (1) IN GENERAL. -- Under regulations prescribed by the Secretary, if -- (A) a joint return has been made under this section for a taxable year, (B) on such return there is a substantial understatement of tax attributable to grossly erroneous items of one spouse, (C) the other spouse establishes that in signing the return he or she did not know, and had no reason to know, that there was such substantial understatement, and (D) taking into account all the facts and circumstances, it is inequitable to hold the other spouse liable for the deficiency in tax for such taxable year attributable to such substantial understatement. Section 6013(e) was amended by the Tax Reform Act of 1984 with retroactive application to all taxable years to which the Internal Revenue Code of 1954 and 1939 applies. See Pub. L. 98-369, sec. 424, 98 Stat. 801; H. Rept. 98-432, Pt. 2, 1401, 1503, (March 5, 1984). ↩4. A "substantial understatement" means an understatement that exceeds $500. Section 6013(e)(3).↩5. We have found that Doreen's signature on the Application for Tentative Refund Form 1045, is a forgery. Consequently, the filing of this form has no bearing on her knowledge of the understatement.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624189/	APPEAL OF BAXTER D. McCLAIN.McClain v. CommissionerDocket No. 3578.United States Board of Tax Appeals2 B.T.A. 726; 1925 BTA LEXIS 2296; September 30, 1925, Decided Submitted June 29, 1925. 2296 Expenses incurred by taxpayer in moving his family and household effects from one city to another because he had accepted employment in the other city, are not deductible as ordinary and necessary business expenses or as traveling expenses incurred in pursuit of a trade or business. Ellis W. Manning, Esq., for the Commissioner. STERNHAGEN 726 Before STERNHAGEN, LANSDON, GREEN, and LOVE. This is an appeal from the determination of a deficiency in income tax of $76.53 for the year 1923. There was no appearance for the taxpayer. The appeal was submitted on the pleadings. The petition contains allegations of error by the Commissioner in refusing to allow as deductions the following items: Moving expenses$578.59Insurance107.25Contributions100.00and also error in the method of computing the tax. The Commissioner in his answer denies the allegations of error with respect to the computation, and also the allegations with respect to the items of insurance and contributions. In the absence of evidence there is nothing for us to consider upon these issues. The facts with respect to the item of $578.59 are admitted. 2297 FINDINGS OF FACT. In 1921 the taxpayer was a resident of Iola, Kans. In the latter part of that year he entered into a contract of employment with the International Cement Corporation, in which he agreed to become secretary and counsel for the corporation, with headquarters at its office in New York City. The corporation agreed to pay him a fixed annual salary, and further agreed to pay the traveling expenses of the taxpayer and his family from Iola to New York City, as well as the freight on his household goods. The taxpayer paid out for traveling expenses and freight the sum of $578.59, which sum he received from the corporation and included in his incometax return. DECISION. The determination of the Commissioner is approved. OPINION. STERNHAGEN: The petition contains an argument that since the contract of employment provides for the payment by the employer 727 of the moving expenses, they are therefore business expenses. It may be that the payment made by the employer is a business expenses so far as he is concerned, but the mere fact that the taxpayer receives this amount under the contract does not determine the character of the expenditure made by*2298 the taxpayer. What we have to consider here is whether or not the amount, when expended by the taxpayer, is in the nature of an ordinary and necessary expense paid or incurred by him "in carrying on any trade or business," or is traveling expenses "while away from home in the pursuit of a trade or business" (the quotations being the language of the Act of 1921). The taxpayer changed the place of residence of himself and his family to another city, for the purpose of entering upon new employment in that city. As compensation under the contract of employment, he received, in addition to salary, the amount of the moving expenses. The expenditure when made by him, we think, was purely a personal and family expense, and we can see no basis in reason for finding that they were incurred in carrying on a trade or business, or in pursuit of a trade or business of either the taxpayer or his employer. ARUNDELL not participating.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624190/	Eureka Fire Brick Works v. Commissioner.Eureka Fire Brick Works v. CommissionerDocket No. 7641.United States Tax Court1946 Tax Ct. Memo LEXIS 25; 5 T.C.M. (CCH) 998; T.C.M. (RIA) 46275; November 29, 1946Horace S. Robeson, Esq., for the petitioner. Stanley L. Drexler, Esq., for the respondent. LEECHMemorandum Findings of Fact and Opinion LEECH, Judge: This proceeding involves deficiencies in income tax of $1,844.58 and excess-profits tax in the amount of $719.97 for the year 1940. The only issue submitted is whether the respondent, having adjusted petitioner's inventory of finshed goods at December 31, 1940, erred in not making a corresponding adjustment to the opening inventory of finished goods at January 1, 1940. Certain facts were stipulated and are so found. Additional facts are found from the evidence. Findings of Fact Petitioner is a New Jersey corporation having its principal place of business at Mt. Braddock, Pennsylvania. It is now primarily engaged in manufacturing26 refractory brick for use in the steel industry. It produces some five or six hundred types of brick. Petitioner filed its income, declared value excess-profits, and defense tax return for the taxable year 1940 with the collector of internal revenue for the 23rd Pennsylvania District at Pittsburgh, Pennsylvania. For the years 1920 to 1941, inclusive, petitioner valued its inventory of finished goods at a varying fixed price per 1,000 nine-inch brick equivalent. It used the same inventory reported on its tax returns in its financial statements furnished to its stockholders and to the public. In determining a deficiency for the year 1940, the respondent adjusted petitioner's inventory of finished goods at December 31, 1940 from $16,735.20 to $25,410.62. He made no change in the inventory of $27,106.59, at January 1, 1940, reported by petitioner. Petitioner's closing inventory at December 31, 1939, as reported on its return for that year, was in the same amount as its January 1, 1940 inventory. The number of units of finished goods, known as nine-inch brick equivalent, included in petitioner's inventory at December 31, 1940 was 522,975. The cost or market value of the items included27 in said inventory at December 31, 1940 was $48.5886 per 1,000 units of bricks, or $25,410.62. The number of units of finshed goods, known as nine-inch brick equivalent, included in petitioner's inventory at January 1, 1940 was 544,638. The cost or market determined in the same manner as the closing inventory was $49.087 per 1,000 units of brick, or $26,734.65. Opinion The contested issue presents an accounting problem. Petitioner is a manufacturing concern and the use of an inventory is necessary to clearly determine its yearly income. 1 Petitioner over the years has valued its finished goods inventory by a varying fixed price per thousand unit. Petitioner contends its fixed price method of valuing its inventory accords with good accounting practice in the refractory brick industry and correctly reflects its income. We need not discuss the merits of this contention for petitioner has stipulated that the value of its inventory as of December 31, 1940, based on the lower of cost or market, was $25,410.62, as determined by the respondent in his deficiency notice. Hence we pass to petitioner's alternative contention, that the respondent in adjusting the closing inventory should have*28 correspondingly adjusted petitioner's opening inventory. Respondent concedes some distortion of income results from his failure to adjust petitioner's opening inventory. He argues that the adjustment of the petitioner's closing inventory for the prior year, 1939, is barred by the statute of limitations. He contends, moreover, that petitioner has failed to establish the cost or market of its opening inventory for 1940. The validity of neither contention is material here. The petitioner's opening inventory as of January 1, 1940 was shown on its return at $27,106.59. If the respondent had adjusted the opening inventory on a comparable basis to the closing inventory, petitioner's opening inventory would have been reduced by $371.94, and its income for the year correspondingly increased ($27,106.59 minus $26,734.65). Thus although petitioner's argument may be sound, no benefit results to it under the existing facts. And, since respondent has not requested any increased deficiency, Decision will be entered for the respondent. Footnotes1. I.R.C., sec. 22 (c)↩. Regs. 103, sec. 19.22 (c)-1-7.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624191/	WARWICK HOUSDEN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, RespondentHousden v. CommissionerDocket No. 33163-88United States Tax CourtT.C. Memo 1992-91; 1992 Tax Ct. Memo LEXIS 93; 63 T.C.M. (CCH) 2063; T.C.M. (RIA) 92091; February 13, 1992, Filed 93 Decision will be entered under Rule 155. Michael C. Solner, for petitioner. Michael E. Fernandez-Melone, for respondent. PARRPARRMEMORANDUM FINDINGS OF FACT AND OPINION PARR, Judge: Respondent determined deficiencies in petitioner's Federal income tax as follows: Additions to TaxYearDeficiencySec. 6651(a)Sec. 6653(a)Sec. 6653(a)(1)1980$ 9,780$ 2,445$ 489N/A198111,9122,978$ 59619829,8502,46349319838,3532,088418Additions to TaxYearSec. 6653(a)(2)Sec. 66561980N/A$ 978198111,1921982198519831835The issues for decision are: (1) Whether petitioner, a resident alien of the United States, was required to deduct and withhold U.S. tax from alimony and separate maintenance payments to his former wives, nonresident aliens; (2) whether petitioner is liable for withholding tax at the source on interest payments to the Royal Bank of Canada, a nonresident company; (3) whether94 petitioner is liable for additions to tax pursuant to sections 6653(a) 1 and 6653(a)(1) and (2) for negligence; (4) whether petitioner is liable for additions to tax pursuant to section 6651(a)(1) for failure to file tax returns; and (5) whether petitioner is liable for additions to tax pursuant to section 6656 for failure to make deposit of taxes. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulated facts, together with the attached exhibits, are incorporated herein by this reference. During the years in issue, petitioner was a Canadian citizen and a resident alien of the United States. Petitioner's legal residence during the years 1980 through 1983 was Dallas, Texas. At the time the petition was filed, petitioner resided in Pacific Palisades, California. Petitioner95 is a practicing architect licensed in England and Canada. In 1980, petitioner entered the United States to organize and operate W.Z.M.H. Group, Ltd., herein WZMH-USA, an architectural corporation. (The corporation was, in essence, a subdivision of W.Z.M.H. Group, a Canadian partnership.) WZMH-USA was operated in Dallas, Boston, Houston, and Newport Beach, each as a separate corporate entity. However, the accounting and the consolidation was conducted in Dallas, and banking for all the U.S. companies was conducted in Boston. Pauline Housden and Lynn Ann Housden, both Canadian citizens and nonresident aliens of the United States, are petitioner's former wives. In or about 1968, petitioner divorced Pauline Housden in Montreal, Canada, and was obligated to pay her alimony under its decree. In or about 1972, petitioner married Lynn Ann Housden and, 10 years after, he divorced her under Canadian law and was ordered to pay either alimony or separate maintenance. During the years in issue, petitioner paid his former wives alimony or separate maintenance in Canadian currency from a Canadian banking account. The total amount of alimony and separate maintenance payments, equivalent in96 U.S. dollars, was $ 52,441 in 1980, $ 56,784 in 1981, $ 54,548 in 1982, and $ 54,541 in 1983. Petitioner claimed deductions for alimony and separate maintenance payments on his Federal income tax returns for the years in issue. However, he did not withhold any sums from the payments pursuant to section 871 (tax on nonresident alien individuals), nor did he file Form 1042S (Foreign Person's U.S. Source Income Subject to Withholding) or Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons) for the years in issue. Concurrent with the alimony payments, petitioner made interest payments to the Royal Bank of Canada (hereinafter RBC), a foreign bank incorporated under the laws of Canada, for repayment of a personal loan. The amounts of the payments were $ 12,760 in 1980, $ 22,629 in 1981, $ 11,118 in 1982, and $ 1,144 in 1983. Petitioner did not withhold any sums from the payments to RBC, nor did he file any forms to qualify for exemption from withholding. Petitioner initially retained the accounting firm Deloitte, Haskins, and Sells (hereinafter Deloitte) to maintain both the corporate books and the personal books of some of the executives, since Deloitte97 was the firm retained by all of the Canadian offices of W.Z.M.H. In or around 1982, petitioner changed accounting firms to Laventhal and Horwath, and was under the direct supervision of James Minczewski, a tax partner. Mr. Minczewski was responsible for the books and records of W.Z.M.H., as well as petitioner's personal records. In his notice of deficiency, respondent determined that petitioner was liable for withholding taxes on both the alimony and separate maintenance payments to his former wives and interest payments to RBC. Respondent asserts that petitioner's income was taxable at the source, i.e., the United States. Petitioner counters this argument by claiming that such an act would constitute double taxation; therefore, it is unconstitutional. OPINION Alimony PaymentsThe contention between the parties revolves around the applicability and constitutionality, as applied in this case, of section 1441. In pertinent part, section 1441(a) provides that "all persons" having control over certain "items of income * * of any nonresident alien individual" shall deduct and withhold a tax 2 "to the extent that any of such items constitutes gross income from sources 98 within the United States". The items of income include "other fixed or determinable annual or periodical gains, profits, and income". Sec. 1441(b). Every person required to deduct and withhold any such tax is himself liable for such tax pursuant to section 1461. In Howkins v. Commissioner, 49 T.C. 689">49 T.C. 689 (1968), 3 we held that the resident alien taxpayer was required to withhold income tax from alimony payments made to a nonresident alien former wife from his bank account maintained outside99 of the United States. The decision was predicated upon the conclusions that: (1) Taxpayer had the requisite control over the amounts paid to the former wife, (2) the alimony payments were fixed or determinable annual or periodic income, and (3) the alimony represented income to the former wife. Thus, it is established that alimony payments qualify under sections 1441 and 871 when they are fixed and/or determinable annual or periodic income. 4 It is also established that the requisite control contemplated by the statute over the alimony payments made to former wives, nonresident aliens, is satisfied if made from an account maintained by a taxpayer, even if such account is located outside the United States. Thus, the alimony constituted income to the recipients (i.e., the former wives) "from sources within the United States" (the source being petitioner, a resident of the United States where the recipients' income was produced, rather than 100 the origin of the actual physical payment), and resulted in a deduction, as claimed, by petitioner. 101 During the years in issue, petitioner claimed a deduction on each of his U.S. Federal income tax returns for alimony paid to his former wives under section 215. Thus, by claiming such deduction, petitioner has effectively acknowledged that such income was taxable to them, since the underlying theory of section 215, which allows the deduction for the husband, is that the payments will be taxable in the hands of the wife. See Howkins v. Commissioner, supra, citing H. Rept. 2333, 77th Cong., 2d Sess. 46, 71-73 (1942); S. Rept. 1631, 77th Cong., 2d Sess. 83-86 (1942); 88 Cong. Rec. 6377 (1942). In this instance, the former wives are the taxpayers, not petitioner, since the alimony constitutes untaxed income in their hands. To the extent that the former wives may be subjected to double taxation, their remedy, if any, lies within Article XVI of the Convention and Protocol Between the United States of America and Canada Respecting Double Taxation (the Convention), March 4, 1942, United States-Canada, 56 Stat. 1399, T.S. No. 983. In pertinent part, the Convention states: "Where a taxpayer shows proof that the action of the revenue authorities of the contracting102 States has resulted in double taxation * * he shall be entitled to lodge a claim with the State of which he is a citizen or resident". (Emphasis added.) Here, both former wives are nonresident aliens; thus, their remedy is outside the United States. Consequently, this case does not present a constitutional dilemma for petitioner since he, himself, was never subjected to double taxation. Accordingly, we uphold respondent's findings in his notice of deficiency. Interest Payments to Royal Bank of CanadaSection 881(a)(1) imposes a tax on the amount received from sources within the United States by a foreign corporation as interest and other fixed or determinable annual or periodical gains, profits, or income. Section 1441(a) places a duty on all persons having the control, receipt, custody, disposal, or payment of any such income items as specified in section 871(a)(1) of any nonresident alien to withhold tax on such income items. The home base of the payor, rather than the place of payment or location of the debt instrument, is the critical factor in determining the source of interest. Hellawell & Pugh, Taxation of Transnational Transactions, par. 1308, at 81103 (1987). The question for decision is whether petitioner is responsible for withholding tax at the source on interest payments to the Royal Bank of Canada, a nonresident company. Petitioner borrowed money from the bank to make personal investments prior to and during the tax years in issue. Petitioner made the payments via a check drawn on his Canadian account. As discussed above in the alimony and separate maintenance payments section, petitioner possessed the criteria to be found responsible under section 1441 for withholding tax from RBC's interest income: (1) Petitioner had complete control over the amounts paid to RBC; (2) the payments were fixed or determinable annual or periodic gains, profits and income; and (3) the interest represented income to RBC "from sources within the United States". Notwithstanding, section 1441(c) provides that no withholding is required on any income item which is effectively connected with the conduct of a trade or business within the United States and which is included in the recipient's gross income under section 871(b)(2). 5104 In order for section 1441(c) to apply, the regulations require that "the person entitled to the income must file with the withholding agent a statement [showing certain information] * * . * * for each taxable year of the person entitled to the income, and before payment of the income in respect of which it applies." Sec. 1.1441-4(a)(2), Income Tax Regs. A properly executed Form 4224 satisfies the requirement of this regulation. Since RBC failed to file Form 4224 for any of the years at issue, thus failing to meet the requirement for exception under section 1441(c), we hold that petitioner was responsible for withholding tax as outlined in section 881(a). Consequently, we uphold respondent's findings. Additions To TaxSections 6653(a), 6653(a)(1) and (2)If any part of any underpayment is due to negligence or intentional disregard of rules or regulations (but without intent to defraud), there shall be added to the tax an amount equal to 5 percent of the underpayment. In addition for tax years after 1980, there shall be added to the tax an amount equal to 50 percent of the interest payable under section 6601. The burden of proof is upon petitioner. Courtney v. Commissioner, 28 T.C. 658">28 T.C. 658, 669 (1957).105 Petitioner was a foreign national unfamiliar with the U.S. tax system. Consequently, for all the years in issue, petitioner's income taxes were prepared by the national American accounting firms of Deloitte in 1980, and Laventhal and Horwath in 1981 through 1983. Petitioner made full disclosure to both firms of his obligations under his divorce decrees and to RBC. The accountants, who also maintained the books for petitioner's corporation, were experts in their field with knowledge of "cross border" transactions. Deloitte also maintained the books for all of the Canadian offices. Mr. Minczewski, tax partner for Laventhal and Horwath, testified that he was aware in 1981 of the fact that petitioner was a resident alien making alimony payments to two former nonresident alien wives and his interest obligations to RBC. He was also aware of the existing 1942 tax treaty between the United States and Canada. Mr. Minczewski believed and so advised petitioner during the years in issue that he was not responsible for withholding taxes to either his wives or RBC. He testified: The Court: * * The question, I think, that I'm interested in is: Did you tell Mr. Housden? I'm understanding106 that you did not tell Mr. Housden he had a requirement to withhold this money when he came to you to have his income tax -- The Witness: That's correct. I did not tell him that.It was not until after respondent raised the issue of such payments and filings on audit that Mr. Minczewski advised petitioner that he may be responsible for withholding tax from both payments. It is well documented in the record that petitioner relied upon the advice of his accountants. Under the circumstances of this case, we find petitioner's reliance on his accountants to be in good faith. See Conlorez Corp. v. Commissioner, 51 T.C. 467">51 T.C. 467, 475 (1968); Haynes v. Commissioner, T.C. Memo. 1990-135. Accordingly, we find petitioner is not liable for additions to tax under this section. Section 6651(a)(1)This section provides an addition for failure to file a tax return, unless it is shown that such failure is due to reasonable cause and not due to willful neglect. The aggregate amount of this addition is 25 percent of the amount of tax due. Advice of reputable counsel that a taxpayer was not liable for the tax has been held to constitute reasonable107 cause for failure to file on time where the taxpayer exercised ordinary business care and prudence and made full disclosure of all relevant and material facts to such person. The failure to file a return on the advice of counsel cannot be said to have been due to willful neglect. United States v. Boyle, 469 U.S. 241">469 U.S. 241 (1985); Estate of Paxton v. Commissioner, 86 T.C. 785">86 T.C. 785, 819 (1986). See also Aiken Industries, Inc. v. Commissioner, 56 T.C. 925">56 T.C. 925 (1971); C.R. Lindback Foundation, 4 T.C. 652">4 T.C. 652, 667 (1945); Burruss Land and Lumber Co. v. United States, 349 F. Supp. 188">349 F. Supp. 188 (1972). As stated in Boyle: When an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice. * * * To require the taxpayer to challenge the attorney, or seek a "second opinion," * * * would nullify the very purpose of seeking the advice of a presumed expert in the first place. * * * "Ordinary business care and prudence" does not demand such actions. [469 U.S. at 251. Citation omitted.]108 Accordingly, petitioner is not liable for additions to tax under this section. Section 6656Not unlike section 6651(a)(1), section 6656 imposes a 10-percent addition for failure to deposit the withheld taxes on the date prescribed, unless it is shown that such failure was due to reasonable cause and not willful neglect. Likewise, the advice of reputable counsel that a taxpayer was not liable for the tax has been held to constitute reasonable cause for failure to pay on time under section 6656 where the taxpayer exercised ordinary business care and prudence and made full disclosure of all relevant and material facts to such person. Burruss Land and Lumber Co. v. United States, supra. For the reasons outlined above, we find petitioner is not liable for the addition to tax under this section. In summary, we hold petitioner was required to deduct and withhold tax at the source from alimony and separate maintenance payments to his former wives, nonresident aliens. Likewise, he was required to withhold tax at the source on interest payments to the Royal Bank of Canada, a nonresident corporation. Petitioner is not liable for any additions to tax under109 sections 6653(a), 6651(a)(1), and 6656 since his reliance upon the advice of his accountants represented reasonable cause. To reflect the foregoing, Decision will be entered under Rule 155. Footnotes1. 50 percent of the interest due on the deficiency.↩1. All section references are to the Internal Revenue Code as amended and in effect for the years in issue, unless otherwise indicated. All Rule references are to the Tax Court Rules of Practice and Procedure.↩2. Sec. 871 provides: SEC. 871. TAX ON NONRESIDENT ALIEN INDIVIDUALS (a) Income Not Connected With the United States Business - 30 Percent Tax - 1) Income other than capital gains - a tax of 30 percent of the amount received from sources within the United States by a nonresident alien individual as - (A) Interest * * *, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income.↩3. See also Lamm v. Commissioner, T.C. Memo. 1975-95↩.4. A 1980 United States-Canada tax treaty provides "Alimony and other similar amounts" arising in one country and paid to a resident of the other country are taxable only in the other country. However, the 1980 treaty took effect with respect to alimony and other similar payments "on or after the first day of the second month next following the date on which the Convention enters into force". (Emphasis added.) Convention Between the United States of America and Canada with Respect to Taxes on Income and on Capital, Sept. 26, 1980, Art. XVIII, par. 6, Art. XXX, par. 2(a), T.I.A.S. No. 11,087, 2 C.B. 258">1986-2 C.B. 258, 265, 269-270 (entered into force Aug. 16, 1984), as amended by protocol, June 14, 1983, Art. IX, par. 3, 2 C.B. 270">1986-2 C.B. 270, 272, and by second protocol, Mar. 28, 1984, 2 C.B. 274">1986-2 C.B. 274. Thus, the amended parts of the 1980 Convention, which apply to alimony payments, do not apply to the tax years in issue, 1980-83, since the treaty did not enter into force↩ until tax year 1984.5. This section provides that a nonresident engaged in a trade or business in the United States shall be taxed as outlined in secs. 1, 55, or 402(e)(1) on his taxable income which is effectively connected with the conduct of a trade or business within the United States.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624193/	Homer L. Blackwell v. Commissioner. Homer L. Blackwell and Leone P. Blackwell v. Commissioner.Blackwell v. CommissionerDocket Nos. 78513, 78514.United States Tax CourtT.C. Memo 1961-124; 1961 Tax Ct. Memo LEXIS 225; 20 T.C.M. (CCH) 599; T.C.M. (RIA) 61124; May 4, 1961Russell W. Baker, Esq., and Marvin C. Hayward, Esq., for the petitioners. Sylvan Siegler, Esq., for the respondent. TIETJENSMemorandum Findings of Fact and Opinion TIETJENS, Judge: The respondent determined deficiencies in income tax and additions to the tax for the calendar years and in the amounts as follows: Additions to Tax Under I.R.C. 1939Sec. 294Sec. 294YearIncome TaxSec. 293(b)(d)(1)(A)(d)(2)1943$ 3,061.59$ 1,530.801944884.91442.4619452,276.481,437.75$289.29$ 192.86194626,307.0213,153.511,601.211947None19488,600.674,300.34782.89521.9319491,138.68569.3499.8562.3819503,287.201,643.60295.85197.2319515,045.502,522.75560.19373.45226 The year 1947 is involved in this case solely by reason of a net operating loss carry-back to the year 1945. The petitioner claims an overpayment for the year 1946. The issues remaining for decision are: Whether the taxable income of petitioner Homer L. Blackwell for the year 1943 was understated. Whether petitioners' net income for the taxable years 1944 to 1951, inclusive, was correctly redetermined by the net worth and exenditures method. Whether petitioners are liable for additions to the tax for fraud. Whether for certain years the returns filed by the petitioners were false or fraudulent with intent to evade tax. Whether, by reason of petitioner Homer L. Blackwell's prior conviction on charges of willful attempted income tax evasion for each of the taxable years 1948 to 1951, inclusive, petitioners are estopped to deny liability for additions to the tax for fraud. Whether petitioners are liable for additions to the tax for failure to file timely declarations of estimated tax. The years 1943 through 1948 involve Homer L. Blackwell. The years 1949, 1950 and 1951 involve both petitioners. Leone P. Blackwell is involved solely because she signed the returns filed227 for those years. Homer L. Blackwell will generally hereinafter be referred to as the petitioner. Returns for the calendar years involved were filed with the collector of internal revenue at Kansas City, Missouri. Findings of Fact The stipulated facts are found as stipulated. The petitioners are husband and wife and are residents of Kansas City, Missouri. Homer L. Blackwell was born in 1900 in Kansas City, attended grade and high schools there and attended the University of Missouri in the fall of 1919. In 1921 the petitioners were married. They have one son. The petitioner had various jobs while in school such as delivering newspapers, clerking in a drugstore, and operating a jitney service and a trucking business. He also worked as a salesman, selling stock in an advertising company, display advertising, used automobiles and oil. In the 1920's the petitioner and an associate published directories and other advertising matter, and the petitioner operated a motion picture theatre. In about 1925 or 1926 the petitioner operated a "poster exchange" doing business as Independent Poster Exchange. This consisted of purchasing used advertising material from first run motion picture228 theatres and making it available to subsequent run theatres. The petitioner operated this business until 1940. The petitioner rented a safety deposit box at the City National Bank, Kansas City, Missouri, from 1928 through 1951. He deposited certain cash in this box and from time to time made additions to or withdrawals of cash from this box. The box was approximately 21 1/2 inches long, 5 inches wide and 1 3/4 inches deep. The bank records show the following entries in the petitioner's safety deposit box during the years 1928 to 1951, inclusive: Number ofYearEntries192821192911193015193117193211193317193440193727193842193932194035194118194251943619444194519194632194914195028195119 For 1935, 1936, 1947 and 1948 the record is not available. During the years 1930 to 1933, inclusive, petitioner borrowed money at interest from City National Bank, Kansas City, Missouri. The balance due varied from $100 to $550. Thirty loans were made in this period for $100 or more. The last was paid in January 1934. Petitioner's initial loan in 1930 was secured by Liberty Loan bonds in the amount229 of the loan. Petitioner withdrew bonds from the bank whenever his loan balance was reduced, and furnished the bank with additional bonds as collateral whenever his loan balance was increased. The amount of bonds left with the bank as collateral was at all times equal to the balance in his loan account. In 1935 the petitioners acquired their residence subject to a deed of trust securing a note in the amount of $5,750. Between October 9, 1935 and April 29, 1936, petitioners made payments of principal and interest on this note. When petitioners were unable to obtain a reduction in the rate of interest, they borrowed $4,000 from Bankers Life Company, and paid the balance remaining due on the note. On April 29, 1936, petitioners executed a new note to Bankers Life Company. This note was in the principal amount of $4,000, was to bear interest at 4 1/2 per cent, payable quarterly, and called for quarterly payments of $50 to be made on the principal commencing at the end of each three-months period beginning August 1, 1936, with the remainder of $2,050 becoming due May 1, 1946. The note was secured by a deed of trust on petitioners' residence. During the year 1936 petitioners made interest230 payments in the total amount of $135 to Bankers Life. On March 26, 1938, Bankers Life, in consideration of the receipt of $4,000 from petitioners, executed a quitclaim deed releasing petitioner's residence from the deed of trust. During 1936 petitioner paid interest in the amount of $45 to Home Federal Savings and Loan Company, Kansas City, Missouri. As of the end of each of the years 1936 to 1939, inclusive, petitioner's accountant prepared profit and loss statements and balance sheets for the Independent Poster Exchange. The following schedule shows the assets and liabilities of the Exchange as of the end of each of the years 1936 to 1939, inclusive, as computed by petitioner's accountant: Assets12-31-3612-31-3712-31-3812-31-39Cash in bank$ 57.25$ 184.94$ 4.18($ 354.00)Cash on hand50.0050.0050.0050.00Furniture & Fixtures1,049.901,200.001,200.001,200.00Depreciation10.0410.0410.04Overdraft11.20Total assets$1,157.15$1,456.18$1,264.22$ 906.04LiabilitiesEmployer's social security$ 7.15$ 7.80$ 5.60tax for DecemberEmployee's social security7.157.805.60tax for DecemberReserve for depreciation on10.0410.0410.04Furniniture & FixturesLiabilities and net worth1,431.841,238.58884.80Accrued salary Blackwell$1,771.94Overdraft(8.08)Net worth1,000.00Loss(1,606.71)Total liabilities and net$1,157.15$1,456.18$1,264.22$ 906.04worth231 The records of the district director of internal revenue, Kansas City, Missouri, do not disclose the filing of an income tax return by petitioner for any taxable year prior to the taxable year 1936. Petitioner's income tax returns for the taxable years 1936 to 1942, inclusive, disclose net income and income tax in the following amounts: TaxableNet In-IncomeYearcomeTax1936$ 85.78None19371,685.15None19381,553.54None19391,706.49None19406,894.17$ 189.1619417,477.96698.3419427,331.101,239.10Petitioner's income tax returns for the taxable years 1936 to 1939, inclusive, disclose the following with respect to the operation of the Independent Poster Exchange: 1936193719381939Total receipts from business$27,646.06$31,805.16$27,258.03$28,478.89Material and supplies9,927.417,800.47Merchandise bought for sale7,914.4713,342.46Other costs3,351.82Net cost of goods sold7,914.4713,279.237,800.4713,342.46Other business deductions19,607.5617,440.7817,749.2113,204.62Net profit124.031,085.151,708.351,931.81No inventory was shown.232 Between October 1940 and September 1941 petitioners purchased United States savings bonds having a face value in the total amount of $1,775. All of these bonds were redeemed by petitioners during the month of December 1941. On his Federal income tax return for 1942 petitioner reported a short-term capital gain in the amount of $107.25 resulting from the sale for $647.25 of certain Denver & Rio Grande Western Railroad Company bonds purchased at a cost of $540. On April 6, 1943, petitioner sold certain corporate stocks and bonds which he had purchased during the year 1942. The following schedule shows these stocks and bonds, dates of purchase, cost, sales price and gain: Date ofDescription of ItemPurchaseCostSales PriceGainSt. Louis & San Francisco Bonds10- 8-42$ 671.25$ 939.75$268.50Mo. Pacific Railway Company Stock10- 7-4277.00165.4488.44Pan American Airways Stock10- 7-42211.31313.28101.97Remington Rand Company Stock10- 7-42101.30142.5641.26Baltimore & Ohio Railway CompanyBonds9-15-42742.851,093.47350.62Totals$1,803.71$2,654.50$850.79The taxable gain was $675.48.On his Federal233 income tax return for 1943 petitioner failed to report any portion of the taxable gain derived from the sale of such stocks and bonds. During 1944 petitioner sold certain railroad bonds for a gain of approximately $500. On his return for 1944 petitioner failed to report any portion of this gain. On March 9, 1940, petitioner sold the business known as the Independent Poster Exchange to a corporation operating under the name of Advertising Accessories, Inc. pursuant to the terms of a written agreement. This agreement provided, in part, as follows: WHEREAS, Blackwell is operating, in his own name, an advertising accessory business, * * * under the name of Independent Poster Exchange, and serving exhibitors with, and selling, distributing and renting various kinds of, advertising accessories * * * WHEREAS, Blackwell is willing to sell such business, and all the assets and good will therein involved to Accessories in consideration solely of Accessories executing a contract of employment to Blackwell for a term of five years, at an annual salary of Eight Thousand ($8,000) Dollars a year, payable in weekly installments; NOW, THEREFORE, in consideration of One ($1.00) Dollar interchanged234 between the parties, receipt of which is hereby acknowledged, it is mutually agreed as follows: 1. Blackwell hereby agrees to sell, as of February 1, 1940, the good will, all contracts with exhibitors, all stock on hand or sold to and in the hands of exhibitors under repurchase arrangements, all furniture, fixtures and other assets of whatsoever kind and nature, of and however used in conjunction with the operation of such business, and whether situated in such premises or elsewhere * * to Accessories, for a total purchase price, to consist solely of the execution by Accessories of a contract of employment of even date herewith, wherein Accessories engages Blackwell as its employee at an annual salary of Eight Thousand ($8,000) Dollars, payable in equal weekly installments, with the possible reduction thereof to Four Thousand ($4,000) Dollars per year as hereinafter specified. * * In the event that Blackwell should die, or if either Accessories or Blackwell should terminate the employment of Blackwell for any reason, as provided in such contract of employment, before the expiration of such contract of employment, Accessories will pay for the remaining part of the five235 year term of Blackwell's contract of employment the sum of Four Thousand ($4,000) Dollars per year, or pro-rated for any part of a year, for such unexpired term, provided and so long as Blackwell conforms to the provisions of Paragraph "11" hereof; and payment shall be made to Blackwell, if termination occurs while Blackwell lives; but upon his death, payment shall be made to Blackwell's widow if living, and if not, to his children, if living, and if not, to his estate. It is the agreement of the parties that although the death of Blackwell would otherwise terminate all obligations of Accessories under this contract of employment, nevertheless, Accessories agrees to pay Blackwell's widow, or the other parties above specified, the amounts specified for the term of such contract, as consideration to Blackwell for the sale of his business as herein provided. The foregoing payment of Four Thousand ($4,000) Dollars per year for the unexpired term (or pro-rated for any part of the year) as provided for in this agreement and in the contract of employment shall constitute the only payment to be made under both contracts to Blackwell upon the happening of the events and conditions specified236 in both contracts. Also on March 9, 1940, petitioner entered into a contract of employment with Advertising Accessories, Inc. This contract provided, in part: FIRST: Accessories hereby engages Blackwell as its employee for a term of five (5) years from the date hereof at a yearly salary of Eight Thousand ($8,000.00) Dollars payable weekly in the sum of $153.84, except as hereinafter provided. The duties of Blackwell shall be those of a general representative, as shall be specified from time to time by Accessories. The main place of employment of Blackwell shall be in Kansas City, Missouri. Blackwell, however, will be required, whenever determined by Accessories, to travel on the business of Accessories. SECOND: Blackwell hereby accepts such employment, and agrees faithfully to perform all of such duties, and to devote his working time exclusively to the business of Accessories except for four (4) months when he may as an incidental activity liquidate and dispose of his existing state right films. Blackwell agrees that he will not for the term hereof, engage in (directly or indirectly, in the name of, or through, or by having any interest in any corporation, partnership, or person237 or otherwise) the business of selling, leasing, or licensing of advertising accessories, or in the entertainment business, or any branch or part of the entertainment business, except that Blackwell may buy and/or sell stocks or other securities listed upon any recognized stock exchange, and except that Blackwell may retain any interests he now has as scheduled at the end of this contract. * * FIFTH: This contract is being executed simultaneously with the contract between the parties hereto providing for the sale of the business of Blackwell to Accessories. This contract can be cancelled if there shall be any material breach on the part of Blackwell under the contract of even date herewith, particularly in reference to the warranties and representations therein contained. This contract of employment is consideration moving to Blackwell for the sale and delivery of his business and property to Accessories covered in the said contract executed simultaneously herewith. During the taxable year 1942 the weekly salary paid petitioner pursuant to the terms of the agreements dated March 9, 1940 was increased by $25. Petitioner continued in the employ of Advertising Accessories, 238 Inc. or its successor corporation, National Screen Service Corporation, from March 9, 1940 until February 5, 1943. On his tax returns for the taxable years 1940 to 1943, inclusive, petitioner reported the following amounts of salary from this employer: YearSalary1940$7,292.0219418,000.0019429,100.001943690.36On February 5, 1943, petitioner entered into an agreement with National Screen Service Corporation, which agreement provided, in part: WHEREAS, NATIONAL is the successor of Advertising Accessories, Inc. and has assumed the obligations of Advertising Accessories, Inc., (hereinafter called "ACCESSORIES"), and WHEREAS, ACCESSORIES and BLACKWELL entered into an agreement dated January 1940, which became effective on February 1, 1940, by the terms of which BLACKWELL sold to ACCESSORIES the good will, all contracts with exhibitors, all stock on hand or sold to and in the hands of exhibitors under repurchase arrangements, all furniture, fixtures and other assets of whatsoever kind and nature, of and however used in conjunction with the operation of the advertising accessory business, located at 110 West 18th Street, Kansas City, Missouri, under239 the name of Independent Poster Exchange, in consideration of ACCESSORIES executing a contract of employment to BLACKWELL for a term of five (5) years at an annual salary of Eight Thousand ($8,000) Dollars payable in weekly instalments, and WHEREAS, simultaneously and in accordance with the execution of the above agreement, ACCESSORIES engaged BLACKWELL as its general representative pursuant to a separate written agreement also dated January 1940 for a term of five (5) years commencing February 1, 1940 and ending January 31, 1945 at an annual salary of Eight Thousand ($8,000) Dollars payable in weekly instalments, and WHEREAS, NATIONAL and BLACKWELL have agreed to terminate such employment effective as of the 1st day of February, 1943, and WHEREAS, NATIONAL and BLACKWELL desire to fully settle and satisfy all claims, charges and accounts which either has against the other, and for such purpose NATIONAL also includes ACCESSORIES, NOW, THEREFORE, in consideration of the mutual covenants and conditions hereinafter set forth, it is mutually agreed as follows: FIRST: That BLACKWELL's employment by NATIONAL SCREEN be and the same hereby is discontinued and terminated as of February 1, 1943. 240 SECOND: NATIONAL agrees to pay and BLACKWELL agrees to accept the sum of Twelve Thousand ($12,000) Dollars, receipt of which is hereby acknowledged by BLACKWELL, in full payment and settlement of all sums that may be due him under and pursuant to the above mentioned contracts. Pursuant to the above agreement, petitioner received from National prior to the end of the taxable year 1943 payments in the total amount of $12,000. Petitioner omitted the $12,000 payment from the information sheets furnished his accountant for the preparation of his 1943 return, and no portion of the $12,000 was ever reported by petitioner for Federal income tax purposes. From October 4, 1943 until approximately October 12, 1944, petitioner and Ross Calkins, as partners, operated a wholesale furniture business known as the Calkins-Black-well Furniture Company. As of December 31, 1943 and as of December 31, 1944, petitioner's net investment in the Calkins-Blackwell Furniture Company partnership amounted to $7,896.85 and $1,131.08, respectively. On and after October 12, 1944, petitioner operated a wholesale furniture business as sole proprietor. Initially this was carried on at the premises previously241 occupied by the Calkins-Blackwell partnership. It was carried on under the name of "Associated Furniture Distributors" until 1948 and thereafter under the name of "Blackwell's Wholesale Furniture Company." This will be referred to herein under the latter name or as the petitioner's furniture business. As of December 31 of each of the years 1944 to 1947, inclusive, the balance in the checking account carried in the name of the petitioner's furniture business at the First National Bank, Kansas City, Missouri, as shown by the records of the bank, were as follows: December 31,Balance1944$ 3,941.4319459,409.74194613,373.4519479,631.59As of December 31 of each of the years 1948 to 1951, inclusive, the reconciled balances in the checking account carried in the name of the business at the First National Bank, according to petitioner's canceled checks and other bank records, were as follows: December 31,Reconciled Balance1948($1,337.80)1949(1,059.07)1950(7,076.52)1951(1,711.67)As of December 31, 1944 and as of December 31 of each of the taxable years 1945 to 1951, inclusive, the petitioner's furniture business had accounts242 receivable, merchandise inventory, and fixed assets, as follows: Decem-AccountsCost ofCost ofber 31,ReceivableInventoryFixed Assets1944$ 2,304.36$ 2,636.81$ 324.0019453,040.354,601.57659.5019467,411.3940,226.501,291.00194711,324.2524,025.311,534.29194822,449.9540,986.791,809.63194919,825.1132,939.611,809.63195022,298.4772,495.133,020.93195118,281.1265,384.074,697.93As of December 31, 1950 and as of December 31, 1951, the business owned improvements to leased property having a cost in the amounts of $1,126.32 and $1,860.85, respectively. As of December 31 of each of the taxable years 1948 to 1951, inclusive, petitioners, according to the records of the First National Bank, were liable to the bank on notes payable in the following amounts: December 31,Notes Payable1948$10,000.0019495,000.00195023,000.00195115,000.00As of December 31 of each of the taxable years 1947 to 1951, inclusive, petitioner was liable on accounts payable in the following amounts: December 31,Accounts Payable1947$ 2,814.7019483,354.4019491,871.42195010,458.0119515,376.59243 During the taxable year 1944 petitioner made payments on 1943 income taxes in the total amount of $54.20. During the taxable years 1946 and 1947 petitioner, at the time of filing his individual income tax return, made payments of income taxes in the amounts of $338.83 and $379.86, respectively. During the taxable year 1949 petitioners, at the time of filing their joint income tax return, made a payment of income tax in the amount of $98.20. During the taxable years 1944 to 1947, inclusive, petitioner made the following payments on declarations of estimated tax: Taxable YearAmount of Payment1944$ 46.09194515.001946320.001947700.00During the taxable year 1949 petitioners made payments in the total amount of $99 on their declaration of estimated tax. As of December 31 of each of the taxable years 1944 to 1951, inclusive, the amounts allowable as reserves for depreciation on fixed assets owned by the business were as follows: December 31,Reserve for Depreciation1944$ 32.40194598.351946195.871947337.131948504.321949685.281950926.8019511,312.74As of December 31, 1950 and December 31, 1951, the244 amounts allowable as reserves for amortization on leasehold improvements were $112.63 and $372.16, respectively. During the taxable year 1949 petitioner Leone P. Blackwell received an inheritance from the estate of her uncle, Otto R. Kettler, Pittsburg, Kansas, in the net amount of $794.94. During the taxable year 1951 the petitioners purchased a membership in a country club at a cost of $1,200. In 1943 and 1944 the petitioners had a checking account in the City National Bank. The balance in this account was $1,120.86 on December 31, 1943 and was $601.21 on December 31, 1944. The account was closed in 1945. During all or part of the period involved herein petitioners maintained at the First National Bank a joint checking account, a checking account in the name of Leone P. Blackwell or Gladys Irene Blackwell (sister of Homer); and a savings account in the name of both petitioners. The year-end balance in these accounts (as shown by the records of the bank) were as follows: Checking AccountsSavings AccountFirstLeone P. or GladysFirstDecember 31,National BankIrene BlackwellNational Bank1943$ 273.191944887.04$130.001945944.21257.4819462,567.78$ 322.48411.0419471,597.281,795.70802.501948379.401,795.70903.2519492,653.27920.70908.2519501,065.651,503.20913.2519512,876.111,469.60922.37245 As of December 31 of each of the taxable years 1943 to 1951, inclusive, petitioners owned a residence located at 7430 Holmes Street, Kansas City, Missouri, which had a cost to them in the amount of $7,500. During 1948 petitioners made improvements to this residence at a cost of $5,500. As of the end of each of the taxable years involved herein the furniture located in petitioners' residence had a cost of $6,000. As of December 31 of each of the taxable years 1943 to 1951, inclusive, petitioners owned United States Government bonds having a cost in the following amounts: December 31,Cost of Bonds1943$ 4,050.0019444,050.0019454,050.0019464,050.00194710,875.00194812,825.00194915,412.50195013,612.5019519,262.50The following schedule shows the total cost of the United States Government bonds purchased and redeemed by petitioners during the taxable years (none prior to 1947): Cost of BondsCost ofYearsPurchasedBonds Redeemed1947$6,825.00None19481,950.00None19492,587.50None19502,250.00$4,050.0019511,500.005,850.00As of December 31 of each of the taxable years 1943 to 1951, 246 inclusive, petitioners owned corporate stocks having a cost in the following amounts: December 31,Cost of Stocks1943$ 1,829.9619441,929.3219451,929.3219461,929.3219472,714.3219482,714.3219493,689.3219508,211.82195114,621.82As of December 31, 1943 and December 31, 1944, petitioner's net investment in the Calkins-Blackwell Furniture Company amounted to $7,896.85 and $1,131.08, respectively. On October 19, 1948, petitioner, and certain other persons formed a corporation known as Home Furnishings, Inc. of Abilene, Kansas. The corporation continued in existence until December 31, 1951. As of December 31, 1948, 1949 and 1950 petitioner's net investments in this corporation amounted to $6,500, $6,500 and $193.30, respectively. As of December 31, 1948 and December 31, 1949, this corporation was indebted to petitioner in the amount of $2,600. As of December 31 of each of the taxable years 1943 to 1951, inclusive, petitioners owned automobiles having a cost in the following amounts: December 31,Cost of Automobiles1943$2,500.0019442,500.0019452,500.0019464,166.7119474,739.8119485,281.8019495,281.8019508,997.1019516,702.74247 The petitioner used a double-entry bookkeeping system in his furniture business until July 1945 and a single-entry system thereafter. Charge sales were generally recorded. There were some sales in which the petitioner retained the proceeds before the sales were posted. The petitioner's bookkeeper entered some sales in a looseleaf notebook as "Cash sales made & Kept by HLB." The entries in this record showed only monthly amounts and an annual total. The original invoices from which these figures were compiled were destroyed. The following tabulation summarizes petitioner's records respecting the proceeds of cash sales kept by him during the years 1945 to 1951, inclusive: Proceeds of Cash SalesYearKept by Petitioner1945$ 5,412.16194613,201.29194713,762.12194827,754.59194922,983.60195040,812.93195143,346.64The petitioner's bookkeeper kept a record purporting to show the capital contributions to and withdrawals from the business. It was a practice of petitioner to take business checks to the bank, have the checks cashed, and deposit all or a portion of the proceeds to the business bank account, such deposits being identified on the248 deposit slips as deposits of currency. In the following instances business checks were cashed at the bank and some or all of the proceeds of such checks were deposited to the business bank account as currency deposits: Amount ofAmountCurrencyDateof ChecksDepositJuly 5, 1946List of Checks$3,300.00February 23, 1950$ 706.09700.00October 21, 1950507.39500.00October 27, 1950963.51950.00December 18, 1950$1,023.36$1,055.00January 23, 1951338.00325.00April 19, 1951629.64600.00June 6, 1951763.12700.00June 13, 1951476.50400.00July 24, 1951338.34325.00December 18, 19512,114.851,714.85Each of the above deposits is shown on the record of capital contributions as a "Cash" contribution to the business on the same date as the date of the deposit. With respect to the deposit of $1,055 made on December 18, 1950, the "Capital" sheet shows a "Cash" contribution on that date of $1,000 rather than $1,055. In all other instances the amount of the deposit shown on the deposit slips is identical with the amount of the "Cash" contribution shown on the "Capital" sheets as having been made on the date of deposit. 249 The following tabulation shows the source of certain deposits, all of which appear on the sheet captioned "Capital "as "Cash" contributed to the business on the same date as the date of the deposit: AmountDate of Depositof DepositSource of DepositOctober 12, 1944$1,500.00Transfer of check from personal accountJuly 5, 19463,300.00List of checksAugust 31, 19467,000.00Transfer of check from personal accountOctober 22, 19471,000.00Transfer of check from personal accountNovember 7, 1947750.00Transfer of check from personal accountNovember 21, 19471,185.00$750 currency and $485 checkOctober 12, 19485,000.00Proceeds of loan from First National BankDecember 7, 19485,000.00Proceeds of loan from First National BankFebruary 23, 1950700.00List of checks totaling $706.09March 25, 19501,200.00Check in the amount of $1,084.00 and checkin the amount of $120.00May 23, 1950600.00Transfer of check from personal accountOctober 26, 19502,175.00 $2,000 check in name of L. P. Blackwell and$175.00 cashOctober 27, 1950950.00List of checks totaling $963.51December 18, 19501,000.00Checks totaling $1,023.36January 23, 1951325.00Checks totaling $338.00April 19, 1951600.00Check in the amount of $629.64June 6, 1951700.00Check or checks totaling $763.12June 13, 1951400.00Check or checks totaling $476.50July 24, 1951325.00Check or checks totaling $338.34December 18, 19511,714.85Check or checks totaling $2,145.00250 Petitioner's income tax returns for the taxable years 1944 to 1951, inclusive, show the following with respect to the operation of the wholesale furniture business: TaxableTotalCost ofGrossYearReceiptsPurchasesGoods SoldProfitNet Profit1944$ 13,933.77$ 13,275.95$ 10,639.14$ 3,294.63$ 1,791.06 1945108,833.4695,683.4897,140.9411,692.523,526.23 *1946380,411.79384,846.66349,221.7331,190.066,106.511947160,545.17123,024.42139,225.6121,319.56(1,210.33)1948208,241.82199,144.79182,183.3126,058.513,075.391949184,656.18148,928.22166,874.4917,781.69(9,792.23)1950264,715.89242,553.49219,092.4945,623.401,933.011951318,853.98246,723.05267,608.7751,245.218,369.28The amount of net income and income tax shown on petitioner's income tax returns251 for the taxable years 1943 to 1951, inclusive, are shown in the following schedule: Taxable YearNet IncomeIncome Tax1943$ 1,450.45 1$ 4.76 21944150.29None19453,526.23 3399.92 419466,106.51699.861947(1,210.33)None19483,075.3998.201949(9,780.01)None19501,015.32None19517,926.521,259.72During each of the years 1942, 1944, 1945, 1946, 1948, 1949, 1950 and 1951 petitioner borrowed money at interest and without the furnishing of collateral from the First National Bank. The following schedule shows the total amount of the loans made to petitioner during these years and the rate of interest charged by the bank with respect to such loans: Total AmountYearof LoansRate of Interest1942$ 1,900.006%19441,000.006%19457,500.006% (4% on or afterJuly 23, 1945)1946$ 35,000.004%194810,000.004%194911,000.004%195028,000.004%19517,000.004%Total$101,400.00252 During the period involved herein petitioner issued a number of financial statements to the First National Bank. On each of these statements there appeared the following language: "For the purpose of obtaining loans and discounting paper with you, and otherwise procuring credit from time to time, I furnish you with the following statement and information which is shown by my books to be a true and correct statement of my financial condition on" the date of the statement. Each of the statements was signed by petitioner, and on the statement dated May 15, 1945 the following language was typed above his signature: "Above figures are approximate only but are definitely within 10% of absolute." The following schedule shows data appearing on the financial statements submitted by petitioner to the First National Bank: CashDate ofTotalStatementBankCashTotal AssetsLiabilitiesNet WorthMay 15, 1945$18,000.00$ 46,000.00$ 7,100.00$ 38,900.00July 3, 1946$16,754.5815,937.43103,125.4227,116.2176,009.21Nov. 1, 19486,830.3914,700.00110,893.6813,672.4397,221.25Aug. 11, 19505,764.4322,000.00136,154.799,762.21126,392.58Jan. 13, 19511,317.26151,682.7433,621.32118,061.42253 During the years 1943 to 1945, inclusive, petitioner owned a 1939 Cadillac automobile having a cost of $1,250; and during the years 1946 to 1951, inclusive, petitioner owned a 1946 Cadillac automobile having a cost of $2,987.44. Each of these had a useful life of 6 years and was devoted 50 per cent to business use. They had salvage values of $250 and $500, respectively. The following tabulation shows the annual amount allowable for depreciation and the amount of the allowable reserve for depreciation on automobiles during each of the years involved herein: Annual AllowanceReserve forYearfor DepreciationDepreciation1943$ 83.33 1/4th$ 20.83194483.33104.16194583.33187.491946207.28207.281947207.28414.561948207.28621.841949207.28829.121950207.281,036.401951207.281,243.68The petitioner's books recorded cash sales in amounts less than actual cash sales by at least $9,000 in 1949 and by at least $4,000 in 1950. A statement of profit and loss for 1949 written in pencil showed cash sales of $32,119.56. The statement showed total sales, gross profit and net loss computed on the basis of cash sales of this254 amount. A typed statement of profit and loss and the record of "Cash sales kept by HLB" showed cash sales of $22,983.60, arrived at by subtracting cash refunds of $135.96 from $32,119.56 and reducing the total by $9,000. Total sales, gross profit and net loss were computed on the basis of cash sales of the reduced amount. A similar reduction of $4,000 in the record of cash sales was made with respect to the profit and loss statement for 1950. The reduced figures on the typed statements were furnished to the petitioners' accountants for preparing the tax returns and were so used. The penciled statements showing the larger amounts were kept in the safe deposit box and found there by respondent's agents in 1951. During the years 1944 to 1951, inclusive, petitioners' personal living expenses were not less than the following amounts: Amount of PersonalYearLiving Expenses1944$4,00019455,00019465,00019476,50019486,50019497,00019508,00019519,000On October 30, 1951, the petitioner's safety deposit box contained twelve $100 bills, United States Series E Bonds in the names of one or both of the petitioners in the face amount of $12,750, 255 four envelopes containing cash in the amounts of $79, $28, $20.12 and $13, several insurance policies, several stock certificates, various items of correspondence, some jewelry, a paid note, a contract on the petitioners' residence, and penciled profit and loss statements for the years 1949 and 1950. The following schedule shows the declarations of estimated tax filed by petitioners for the taxable years 1945, 1946, 1948, 1949, 1950 and 1951, the dates of filing, and the amounts of estimated tax shown thereon: Declarationfor Tax-Amount ofable YearDate of FilingEstimated Tax1945April 14, 1945$ 61.091946March 15, 1946320.001948Not shownNone1949April 15, 194999.001950April 15, 195099.001951March 15, 1951NoneThe petitioner's accountant's office record indicates that a declaration of estimated tax for 1948 prepared for Blackwell was delivered March 12, 1948 and filed March 15, 1948. On March 10, 1955, Homer L. Blackwell was indicted on four counts for willfully and knowingly attempting to defeat and evade a large part of the income tax due and owing by him for the taxable years 1948 to 1951, inclusive. In a trial256 in the District Court of the United States for the Western District of Missouri in November 1955, petitioner was found guilty on all four counts. In March 1956 petitioner was sentenced for a period of one year and was assessed a fine in the amount of $500 on each count. The judgment of the District Court was appealed to the Court of Appeals for the Eighth Circuit, and was affirmed in May 1957. The decision of the District Court became final upon the denial of a petition for certiorari by the Supreme Court of the United States in October 1957. On their return for 1950 petitioners reported a long-term capital loss resulting from the operation of Home Furnishings, Inc., in the total amount of $6,315.60. Of this amount, $1,000 was deducted in 1950, one-half, or $3,157.80 constituted a nondeductible capital loss, and the remainder, or $2,157.80, constituted a capital loss carry-over to 1951. In computing petitioners' adjusted gross income for the years 1950 and 1951, respondent added to the total of the increase in net worth plus nondeductible expenditures for the year 1950 the capital loss carry-over in the amount of $2,157.80 and the nondeductible capital loss of $3,157.80; and subtracted257 from the total of the increase in net worth plus nondeductible expenditures for the year 1951 a capital loss carry-over in the maximum allowable amount of $1,000. Respondent determined that petitioner sustained a net operating loss in the amount of $2,293 for the taxable year 1947, and that this amount should be carried back to the taxable year 1945. The following schedules show the petitioners' net income, as determined by the respondent under the net worth and expenditures method, for each of the taxable years 1944 to 1951, inclusive: COMPUTATION OF NET INCOME BY NET WORTH AND EXPENDITURES METHOD December 31 ASSETS194319441945Cash on Hand$ 0$ 0$ 0Personal Bank Accounts1,394.051,618.251,201.69Residence - 7430 Holmes, Kansas City, Mo.7,500.007,500.007,500.00Furniture in Residence6,000.006,000.006,000.00U.S. Government Bonds - Cost4,050.004,050.004,050.00Stocks - Cost1,829.961,929.321,929.32Interest in Calkins-Blackwell Partnership7,896.851,131.08Automobiles2,500.002,500.002,500.00Business Assets - Blackwell's WholesaleFurniture Co.: Cash in Bank3,941.439,409.74Accounts Receivable2,304.363,040.35Merchandise Inventory2,636.814,601.57Petty Cash50.0050.00Fixed Assets324.00659.50Total Assets$ 31,170.86$ 33,985.25$ 40,942.17LIABILITIES AND RESERVESReserve for Depreciation - Fixed Assets$ 32.40$ 98.35Reserve for Depreciation - Automobiles$ 20.83104.16187.49Total Liabilities and Reserves$ 20.83$ 136.56$ 285.84Net Worth$ 31,150.03$ 33,848.69$ 40,656.33Less: Net Worth at End of Previous Year31,150.0333,848.69Annual Increase in Net Worth$ 2,698.66$ 6,807.64Add: Personal Living Expenses4,000.005,000.00Federal Income Tax Payments: Payments Made on Prior Year's Tax54.20Payments Made on Declaration of Estimated46.0915.00TaxAdjustment of Excess Medical Exp.74.54DeductionAdjustment of Contributions Deduction(377.46)Total Increase in Net Worth Plus$6,496.03$ 11,822.64Non-Deductible ExpendituresAdjusted Gross Income$ 6,496.03$ 11,822.64Allowable Deductions - Per Original421.21852.66Return or Standard DeductionCorrected Net Income Before Operating$ 6,074.82$ 10,969.98Loss Carry-BackOperating Loss Carry-Back(2,293.00)Corrected Net Income$ 6,074.82$ 8,676.98Reported Net Income(270.92)2,673.59Unreported Net Income$ 6,345.74$ 6,003.39258 ASSETS194619471948Cash on Hand$ 0$ 0$ 0Personal Bank Accounts3,301.304,195.483,078.35Residence - 7430 Holmes, Kansas City,7,500.007,500.007,500.00Mo.Improvements to Residence - 7430 Holmes5,500.00Furniture in Residence - 7430 Holmes6,000.006,000.006,000.00U.S. Government Bonds - Cost4,050.0010,875.0012,825.00Stocks - Cost1,929.322,714.322,714.32Investment in Home Furnishings, Inc.,6,500.00Abilene, Kan.Loan - Home Furnishings, Inc.2,600.00Automobiles4,166.714,739.815,281.80Business Assets - Blackwell's WholesaleFurniture Co.: Cash in Bank13,373.459,631.59(1,337.80)Accounts Receivable7,411.3911,324.2522,449.95Merchandise Inventory40,226.5024,025.3140,986.79Petty Cash50.0050.0050.00Fixed Assets1,291.001,534.291,809.63Total Assets$ 89,299.67$ 82,590.05$115,958.04LIABILITIES AND RESERVESNotes Payable$ 10,000.00Accounts Payable$ 2,814.703,354.40Reserve for Depreciation - Fixed Assets$ 195.87337.13504.32Reserve for Depreciation - Automobiles207.28414.56621.84Total Liabilities and Reserves$ 403.15$ 3,566.39$ 14,480.56Net Worth$ 88,896.52$ 79,023.66$101,477.48Less: Net Worth at End of Previous Year40,656.3388,896.5279,023.66Less: Net Worth at End of Previous Year40,656.3388,896.5279,023.66Annual Increase in Net Worth$ 48,240.19$ (9,872.86)$ 22,453.82Add: Personal Living Expenses$ 5,000.00$ 6,500.00$ 6,500.00Federal Income Tax Payments: Payments Made When Filing Returns338.83379.86Payments Made on Declaration of Est.320.00700.00TaxAdjustment of Excess Medical Exp.49.77DeductionRefund of Federal Income Taxes(700.00)Total Increase in Net Worth Plus$ 53,948.79$ (2,293.00)$ 28,253.82Non-Deductible ExpendituresLess: Non-Taxable Portion of Long-Term220.00Capital GainAdjusted Gross Income$ 53,948.79$ (2,293.00)$ 28,033.82Allowable Deductions - Per Original1,076.041,000.00Return or Standard DeductionCorrected Net Income Before Operating$ 52,872.75$ (2,293.00)$ 27,033.82Loss Carry-BackOperating Loss Carry-Back2,293.00Corrected Net Income$ 52,872.75$ 27,033.82Reported Net Income5,030.47$ (1,210.33)2,391.54Unreported Net Income$ 47,842.28$ 24,642.28259 ASSETS194919501951Cash on Hand$ 0$ 0$ 0Personal Bank Accounts4,482.223,482.105,268.08Residence - 7430 Holmes, Kansas City, Mo.7,500.007,500.007,500.00Improvements to Residence - 7430 Holmes5,500.005,500.005,500.00Furniture in Residence - 7430 Holmes6,000.006,000.006,000.00U.S. Government Bonds - Cost15,412.5013,612.509,262.50Stocks - Cost3,689.328,211.8214,621.82Investment in Home Furnishings, Inc.,6,500.00193.30Abilene, KanLoan - Home Furnishings, Inc.2,600.00Automobiles5,281.808,997.106,702.74Membership - Country Club1,200.00Business Assets - Blackwell's WholesaleFurniture Co.: Cash in Bank(1,059.07)(7,076.52)(1,711.67)Accounts Receivable19,825.1122,298.4718,281.12Merchandise Inventory32,939.6172,495.1365,384.07Petty Cash50.0050.0050.00Fixed Assets1,809.633,020.934,697.93Improvements to Leased Property1,126.321,860.85Total Assets$110,531.12$145,411.15$144,617.44LIABILITIES AND RESERVESNotes Payable$ 5,000.00$ 23,000.00$ 15,000.00Accounts Payable1,871.4210,458.015,376.59Reserve for Depreciation - Fixed Assets685.28926.801,312.74Reserve for Amortization - Leasehold112.63372.16ImprovementsReserve for Depreciation - Automobiles829.121,036.401,243.68Total Liabilities and Reserves$ 8,385.82$ 35,533.84$ 23,305.17Net Worth$102,145.30$109,877.31$121,312.27Less: Net Worth at End of Previous Year$101,477.48$102,145.30$109,877.31Annual Increase in Net Worth$ 667.82$ 7,732.01$ 11,434.96Add: Personal Living Expenses$ 7,000.00$ 8,000.00$ 9,000.00Federal Income Tax Payments: Payments Made When Filing Returns98.20Payments Made on Declaration of Est. Tax99.00Refund of Federal Income Taxes(250.61)Total Increase in Net Worth PlusNon-Deductible Ex-penditures$ 7,614.41$ 15,732.01$ 20,434.96Less: Non-Taxable Portion of Long-Term430.51Capital GainCapital Loss Carry-Over - Per Orig.(2,157.80)1,000.00ReturnNon-Deductible Capital Loss - Per Orig.(3,157.80)ReturnNon-Taxable U.S. Government Bond Interest1,375.00Inheritance794.94Adjusted Gross Income$ 6,819.47$ 19,672.61$ 19,004.45Allowable Deductions - Per OriginalReturn or StandardDeduction823.401,000.001,107.21Corrected Net Income Before Operating$ 5,996.07$ 18,672.61$ 17,897.24Loss Carry-BackOperating Loss Carry-BackCorrected Net Income$ 5,996.07$ 18,672.61$ 17,897.24Reported Net Income(10,603.41)313.606,819.31Unreported Net Income$ 16,599.48$ 18,359.01$ 11,077.93260 During 1943 petitioner received $12,000 from National Screen Service Corporation upon the termination of his employment contract. During 1943 the taxable portion of capital gains realized by petitioner amounted to $675.48. Petitioner failed to report either of these amounts on his 1943 Federal income tax return. Blackwell had cash on hand in the amount of $5,000 on January 1, 1944, in addition to amounts on deposit in bank accounts. He had $2,000 in cash on hand at the end of 1944, 1945, 1946, 1947, 1948, 1949 and 1950 and none at the end of 1951. The deficiencies in income tax for each of the taxable years 1943 to 1946, inclusive, and 1948 to 1951, inclusive, are due in whole or in part to fraud with intent to evade tax. The petitioners' failure to file timely declarations of estimated tax for each of the taxable years 1945, 1949 and 1950 was not shown to be due to reasonable cause. The petitioners' returns for each of the taxable years were false or fraudulent with intent to evade tax. Opinion The petitioner omitted to show on his 1943 return the item of $12,000 received upon termination of his contract of employment with National Screen Service Corporation and an amount261 of capital gain derived from the sale of certain stocks and bonds. He contends that the contract under which the $12,000 was paid him provided for sale of all the assets of the Independent Poster Exchange and it was his understanding that this payment was for assets rather than services, that he realized no gain upon this sale of assets, that a difficult legal question was involved in determining the taxability of the payment under such a contract and that he in good faith believed that it was not taxable. The omission of the capital gains is explained as involving only an insignificant amount which he overlooked. The respondent says that the petitioner must have known that at least a part of the $12,000 item was compensation for services and should have been reported as income. The 1940 contract of employment had some two years to run when in 1943 it was terminated by an agreement for a lump sum payment in settlement of all sums due him under it. Clearly, at least some part of this was compensation. A similar settlement was held to provide for payment of ordinary income in George K. Gann, 41 B.T.A. 388">41 B.T.A. 388 (1940). In Elliott B. Smoak, 43 B.T.A. 907">43 B.T.A. 907 (1941) it262 was held that a sale of an agency business under different circumstances was the sale of a capital asset and the Gann case was distinguished. If the petitioner was in any doubt as to the taxable status of the $12,000 received in 1943 it is not shown that he sought competent advice as to whether the item should be reported. To the contrary, the testimony is that he omitted to inform his accountant of the receipt of this money when giving information for the preparation of his return. The petitioner's return for 1943 showed a net income of $1,450.45. The amount of capital gains of $675 omitted was not insignificant in comparison. Also, he had reported capital gains in 1942 and therefore was not ignorant of liability for tax thereon. It is plain that the omission of these two items was deliberate and that the returns were false and fraudulent with intent to evade tax. The determination as to 1943 is therefore not barred by the statute of limitations and the deficiency and addition to the tax for that year must be sustained. Section 276(a), Internal Revenue Code of 1939. 1263 The respondent determined the net income for the years 1944 through 1948 of Blackwell and for the years 1949 through 1951 of both petitioners by the net worth and expenditures method. This computation assumes a starting net worth at the beginning of 1944 of $31,150.03, including no cash other than that recorded in bank accounts, and reaches a net worth at the end of 1951 in the amount of $121,312.27, also without cash on hand except for bank balances. According to this computation the petitioner sustained a loss in 1947 larger than that reported on his return. Assets are shown as increasing from $31,170.86 at the beginning to $144,617.44 at the end of the period. Merchandise inventory of the furniture business is shown as $2,636.81 at the beginning of 1945 and increased to $72,495.13 at the end of 1950 and reduced to $65,384.07 at the end of 1951. The net worth computation of the respondent is shown in our findings of fact. Some of the items were stipulated. Others were determined from the evidence. The principal items as to which agreement could not be reached consist of (1) the amount of the allowable reserve for depreciation on automobiles for each of the taxable years; (2) 264 the amount of the petitioners' personal living expenses for each of the years 1944 to 1951, inclusive; and (3) the amount of undeposited cash on hand at the end of each of the taxable years 1943 to 1951, inclusive. In this computation the respondent allowed depreciation on automobiles for each of the years 1943 to 1951 although none was claimed on any return except for 1951. Respondent allowed depreciation upon the stipulated cost figures, with reasonable salvage value estimated and assuming use for business purposes of 50 per cent. Although petitioner contends that more than one car was used for business purposes there is nothing in the record to show a higher ratio of business use than that used by the respondent and we find no sufficient basis for a greater allowance for depreciation. The petitioners contend that the living expenses of the family did not exceed some $3,000 to $3,500 per year during the taxable years. The respondent has estimated living expenses as $4,000 in 1944, $5,000 in each of the years 1945 and 1946, $6,500 in each of 1947 and 1948, $7,000 in 1949, $8,000 in 1950 and $9,000 in 1951. During this period the petitioners owned a residence acquired at a cost265 of $7,500, expended $5,500 on improvements in 1948, had furniture costing $6,000, and one or more automobiles costing in excess of $2,500. In 1940 Blackwell's salary was over $7,000, in 1941 it was $8,000; in 1942, $9,100; and in 1943 he received $12,000, as well as proceeds of stocks and bonds. With such amounts available we consider it probable that the living expenses exceeded $3,500 in each of the taxable years. In the year 1950 the petitioner paid insurance premiums in excess of $1,200, and in the return for that year claimed $385 for city, county and state taxes paid and $316 for contributions. This is not consistent with the contention that living expenses did not exceed $3,500. A study of the available figures for other years is convincing that the respondent's estimates of living expenses were not excessive and we accept them and have found that such amounts were in fact the nondeductible living expenses in the taxable years. The principal contention of the petitioner relates to the cash on hand at the beginning of 1944. He alleges that at that time he had in his safe deposit box approximately $100,000 in cash, which was accumulated some time before 1936. He argues that266 since the respondent in computing net worth assumed that the petitioner had no cash on hand at the beginning or end of each year except amounts shown in bank accounts, the entire net worth computation is therefore erroneous and invalid if the petitioner establishes that he had any such cash on hand, and that the evidence he submitted proves that he had the amount alleged. The petitioner is in error in his argument that a showing of some cash on hand on January 1, 1944, in contradiction of the respondent's determination that cash was zero, would invalidate or nullify entirely the deficiencies as determined. He relies upon Holland v. United States, 348 U.S. 121">348 U.S. 121 (1954), requiring the establishment of an opening net worth with reasonable certainty as a starting point from which to calculate future increases in a taxpayer's assets. The respondent has assumed that Blackwell had no cash on hand on the starting date other than that shown in bank accounts. In Baumgardner v. Commissioner, 251 F. 2d 311 (C.A. 9, 1957), affirming a Memorandum Opinion of this Court, the Court of Appeals sustained our finding in a net worth case that the taxpayer had $5,000 in cash at267 the beginning of the period, not $14,000 to $16,000 as contended by the taxpayer, nor $100 as contended by the Commissioner. In Michael Potson, 22 T.C. 912">22 T.C. 912 (1954) we found that the taxpayer had $100,000 in cash at the beginning of the period, not $259,000 as he claimed nor $15.03 as the Commissioner determined. This was affirmed on appeal sub nom Bodoglau v. Commissioner, 230 F. 2d 336 (C.A. 7, 1956). Absolute certitude in the ascertainment of net worth at the beginning of the period is not required, otherwise concealment would form an invincible barrier. United States v. Johnson, 319 U.S. 503">319 U.S. 503 (1943). The petitioner testified in some detail as to the business ventures he undertook while in school and in the years from 1920 through 1935. He professed to have saved some $20,000 or more by about 1925 when he considered buying an established poster exchange for that price before embarking on his own poster exchange business. He also says that about 1934 or 1935 he negotiated with Metro-Goldwyn-Mayer for a contract to operate an advertising accessory department under which he would have to invest $100,000 of his own money and that he then had such268 an amount in his safe deposit box. The petitioner's story of the existence of a cash hoard in the amount stated and on the particular date is uncorroborated. He maintained no record of the cash in the box and it was not counted in the presence of any witness. One witness who saw money in the box in 1935 could not state how much was in it at that time. Nor would the presence of a specific amount then establish that any substantial sum remained several years later, since the testimony is to the effect that the poster exchange business was becoming unprofitable. Petitioner Leone Blackwell visited the box in 1946 and removed some money, but did not count the cash nor remember how much she removed. The cash then present may have come from other sources, such as cash sales withheld by Blackwell in 1945, and therefore this evidence does not establish to any degree how much cash was present at the beginning of 1944. When the contents of the box were inventoried in October 1951 it contained twelve $100 bills, as well as jewelry, stock certificates, Government bonds, insurance policies, a deed, and various old receipts and letters. The box may have been filled at all times with these non cash269 items or similar things. The petitioner's contention is to the effect that he enjoyed considerable success in his business ventures until about 1934 and later drew upon his cash reserve while in the furniture business until the reserve was reduced to $1,200 near the end of 1951. The records of the director of internal revenue do not show the filing of a return by Blackwell prior to 1936 and his returns for 1936 through 1942 show no substantial amounts of reported income over living expenses from which such an amount might have been accumulated. Between October 1930 and January 1934 the petitioner borrowed from a local bank in small amounts secured by Liberty bonds. The balance due ranged from $100 to $500 and the notes were renewed from time to time. He paid interest on these loans. This practice is inconsistent with his story of possession of a large hoard of idle cash. Cefalu v. Commissioner, 276 F. 2d 122 (C.A. 5, 1960), affirming a Memorandum Opinion of this Court. Boyett v. Commissioner, 204 F. 2d 205 (C.A. 5, 1953), affirming a Memorandum Opinion of this Court. When the petitioners bought their home in 1935 they borrowed a large part of the purchase270 price. They sought a reduction in the interest rate and when refused they borrowed $4,000 from an insurance company to pay off the loan. The second loan remained outstanding until March 1938. If the cash hoard existed it is inconsistent that they should go to the trouble and expense of financing and refinancing this purchase. In the period 1945 to 1951 the petitioner borrowed thousands of dollars from a local bank for use in his business at rates of interest of 6 per cent until July 1945 and 4 per cent thereafter. Such borrowings would be unnecessary if he had hoarded cash in larger amounts available. The financial statements given by the petitioner to the bank in support of his applications for loans do not bear out his story of the hoarded cash. The first such statement, dated March 15, 1945, declared by him to be "within 10% of absolute", shows cash of $18,000 with no cash in banks. At the beginning of 1945 his bank records show about $5,500 in bank balances in personal and business accounts and at the end of the year about $10,600. It shows total assets of $46,000, liabilities of $7,100 and net worth of $38,900 excluding home. If the petitioner had at the beginning of 1944271 cash of $100,000 as well as the other assets shown in the net worth statement, excluding home and automobiles, giving a net worth of about $114,000, and he had sustained a net loss for tax purposes of $270 as reported on his return, and living expenses of $3,500 were paid, his net worth on January 1, 1945 would have been in excess of $110,000. His reported income for 1945 was $2,674 and if his living expenses were $3,500 his net worth at the end of that year would have been in excess of $105,000. The financial statement of his assets and liabilities furnished in May 1945 showing a net worth of $38,900 must have omitted over $60,000 of cash. And in that year the evidence indicates that he increased his bank borrowings by $6,500. The petitioner would have us believe that he would borrow a few thousands of dollars at interest when he had much more available cash which was idle and that his statements to the bank in applying for loans omitted a large part of his cash and were false in failing to show his true financial position. As between the statements to the bank and the statements to the Court we consider those made to the bank the more credible. Between the first such statement272 and the last, given as of the end of 1950, there is disclosed an improvement in net worth of about $79,000 in about five and two-thirds years, not considering $5,500 invested in improving the residence. These indicate a net worth increase comparable to that determined by the respondent. Yet petitioner's returns for the six years 1945 through 1950 report a net loss for tax purposes. The accounting method employed by the petitioner in his furniture business made concealment of income easy and verification impossible. The petitioner received checks or cash in payment of some invoices before the sales were entered on the books and retained the cash. The bookkeeper recorded monthly totals purporting to show the amounts so retained but the supporting invoices were destroyed and any method of corroborating these figures was eliminated. The gross sales figures furnished the accountants for preparation of the tax returns could easily have been understated and the percentage of gross profit on sales appears abnormally low. For example, in the return for 1946 gross sales were reported as $380,000 with profit at less than 2 per cent of this amount at a time when goods were scarce. The petitioner273 says that he had to pay overceiling amounts to get furniture since he was just entering the business and had to operate at a very low margin, but if overceiling prices were paid they were not concealed by cash payment, since he said that some, at least, were paid through checks. Furthermore, price ceilings were removed early in the years involved. If a potential source for the unreported income is required to be shown, Thomas v. Commissioner, 232 F. 2d 520 (C.A. 1, 1956) it is here present in the petitioner's furniture business. This "likely source" has not been negated by the petitioner. See United States v. Massei, 355 U.S. 595">355 U.S. 595 (1958). The petitioner's practice of withdrawing receipts and retaining the cash is related to his practice of recording amounts as contributions of capital to his business. He said that these contributions came from his safe deposit box. But the respondent has shown in a number of instances that amounts recorded as currency contributions were deposits of all or a part of proceeds of checks received and cashed. It is a fair inference that the petitioner created the appearance of making cash contributions by using funds which were274 actually business receipts not recorded as such. The petitioner concedes that sales for 1949 and 1950 were understated by $9,000 and $4,000, respectively. The manner in which this understatement was effected is significant. The penciled profit and loss statements found in the safe deposit box were apparently the original ones. That for 1949 showed cash sales of $32,119.56 and computed a net loss from the business. The typed statement which was retained for the business records showed the cash sales as reduced by $9,000 and net income or loss was computed on that basis. In 1950 the first computation showed a profit and the petitioner reduced the cash sales figure by $4,000 thereby reducing the apparent profit to a nominal amount. The figures furnished to the petitioner's accountant for use in preparation of the tax returns showed only the reduced amounts for cash sales. The original penciled statements were kept in the safe deposit box and discovered when the box was inventoried. The petitioner complains that the respondent has failed to investigate the leads given as to the source of the cash on hand. Leads as to the petitioner's earnings prior to 1930 are too remote to be of value. 275 Leads as to his earnings in the 1930's are too vague in nature. While we find incredible the petitioner's statement that he had about $100,000 in cash in his safe deposit box at the beginning of 1944, it is also our opinion that since some money was shown to have been present in the box in 1935, in 1946 and in 1951, the respondent's determination that the petitioner's cash on hand on December 31, 1943, was zero, is questionable. It therefore becomes our duty to determine as nearly as we may from the record the actual amount of cash then present. We have considered the petitioner's earnings in the several years before 1944, his various investments, his approximate living expenses and his probable savings and have found as a fact that he had $5,000 in cash in the same deposit box at the beginning of 1944 and that $2,000 remained on hand at the end of each year thereafter except 1951 when none remained. In the computation necessary under Rule 50, this finding can be given effect and the increases in net worth recomputed from the adjusted starting points. The petitioners allege that the statutory period of limitations bars the assessment of the deficiencies, except as to the year276 1946, where the period was extended by agreement. The respondent counters that the returns of the petitioners were false and fraudulent with intent to evade tax and hence the assessment may be made at any time, section 276(a), Internal Revenue Code of 1939. Blackwell was convicted on charges of income tax evasion for each of the years 1948 through 1951, in violation of section 145(b), Internal Revenue Code of 1939, the conviction was affirmed on Appeal, Blackwell v. United States, 244 F. 2d 423 (C.A. 8, 1957) and certiorari was denied, 355 U.S. 838">355 U.S. 838 (1957). The respondent takes the position that by reason of the conviction the petitioners may not now deny their liability for the additions to the tax for civil fraud for the four years involved in the criminal case. The respondent specifically pleaded the issue of collateral estoppel as to each of such years. In Eugene Vassallo, 23 T.C. 656">23 T.C. 656 (1955) we held that a conviction for income tax evasion was not res judicata in this Court as to the fraud issue. In Meyer J. Safra, 30 T.C. 1026">30 T.C. 1026, 1035 (1958), we held that a petitioner who had been so convicted was not estopped to deny that a277 portion of the deficiencies was due to fraud with intent to evade tax. The respondent contends that this conclusion was erroneous and requests that it be reconsidered. It is argued that where the burden of proving fraud beyond a reasonable doubt has been met in the criminal case it should follow that the lesser burden of proving fraud by clear and convincing evidence as required in the civil case has been met, citing United States v. Accardo, 113 F. Supp. 783">113 F. Supp. 783, affd. 208 F. 2d 632 (C.A. 3, 1953), certiorari denied (1954) 347 U.S. 952">347 U.S. 952. We have held that the fact of the trial and conviction of a petitioner is not to be deemed conclusive in a civil suit arising out of the same matter but is evidence to be given weight according to the circumstances. Thomas J. McLaughlin, 29 B.T.A. 247">29 B.T.A. 247 (1933). In our opinion the record here establishes fraud on the part of Blackwell by clear and convincing evidence as to all the years before us. Therefore it is not necessary to reconsider our opinion in the Safra case, supra. Under the authority of section 276 (a) the deficiencies and additions to tax may be assessed at any time. Our conclusion278 that fraud has been proved by clear and convincing evidence as to all the years at issue is based upon several factors. We may point to (1) the increase shown in net worth by the petitioner's statements made to his bank which is inconsistent with the tax returns reporting negligible income, (2) the method of accounting of the business under which the petitioner could withdraw cash without making a verifiable record, (3) the uncorroborated statement of the cash hoard which is inconsistent with the petitioner's practice of borrowing at interest when he would have been able to pay cash had the money been at hand, and (4) the conviction of the petitioner of fraud as to certain of the years. See Madeline V. Smith, 32 T.C. 985">32 T.C. 985; Abraham Galant, 26 T.C. 354">26 T.C. 354; Eugene Vassallo, supra. In addition to the affirmative evidence presented which is in our opinion adequate to prove fraud, we may state that we were not persuaded by Blackwell's own testimony in regard to matters in which that was the sole evidence offered. The respondent determined additions to the tax for failure to file a timely declaration of estimated tax for 1945, 1948, 1949, 1950 and 1951, 279 but now concedes that the addition for 1951 was improper. The petitioner contends that the declaration of estimate for 1948 was filed in time. The respondent's exhibit, a certificate of assessments on Form 899, shows that such an estimate was received but fails to show the date of receipt. The petitioner put in evidence a memorandum from the files of his accountant indicating that Form 1040ES for 1948 was filed on March 15, 1948. This being the only evidence of the date of filing, we find that the declaration was timely and the addition to tax for 1948 was erroneous. If the declaration was actually received later, the respondent could have offered proof of that fact but has not done so. The respondent concedes that the additions to tax for substantial underestimate are in error. Decisions will be entered under Rule 50. Footnotes. This item appears on "Capital" sheet as "Cash & Check."↩. Return also shows loss from the operation of Calkins-Blackwell Company partnership in the amount of $1,640.77. ↩*. Per original return - amended return reflects net operating loss deduction of $1,210.33, resulting in net profit of $2,315.90.↩1. Income tax net income - Victory tax net income of $2,157.67. ↩2. Income tax - Victory tax of $45.09. ↩3. Per original return - Amended return shows $2,315.90. ↩4. Per original return - Amended return shows $121.55.↩1. Sec. 276(a)↩ False Return or No Return. - In the case of a false or fraudulent return with intent to evade tax * * the tax may be assessed * * * at any time.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624194/	Ralph S. Prickett and Anna Jane Prickett v. Commissioner.Prickett v. CommissionerDocket No. 1416-65.United States Tax CourtT.C. Memo 1967-2; 1967 Tax Ct. Memo LEXIS 259; 26 T.C.M. (CCH) 5; T.C.M. (RIA) 67002; January 5, 1967259 Held: Petitioners were engaged in the business of cattle ranching and are entitled to deduct losses sustained in the operation of their ranch as trade or business expenses under section 162 of the I.R.C. of 1954. [The taxpayers were entitled to an investment credit for depreciable property acquired for the ranch.] Clarence J. Ferrari, Jr., 300 W. Hedding St., San Jose, Calif., and James E. Jackson, for the petitioners. Sheldon M. Sission, for260 the respondent. BRUCE Memorandum Findings of Fact and Opinion BRUCE, Judge: Respondent determined a deficiency in the income taxes of petitioners for the years 1961, 1962 and 1963 in the amounts of $1,118.04, $1,517.24 and $2,427.21, respectively. The primary issue is whether petitioners are entitled to deduct losses incurred in the operation of a cattle ranch under either section 162 of the Internal Revenue Code of 19541 relating to trade or business deductions, or section 212 relating to expenses for the production of income. The parties agree that the resolution of this issue will decide the secondary issue of whether petitioners are entitled to an investment credit under section 38 for certain depreciable property acquired for the ranch in 1963. A minor adjustment for the year 1962 was conceded by petitioners. Findings of Fact 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 who reside at261 Sunnyvale, California. They filed their joint Federal income tax return for the year 1961 with the district director of internal revenue at Los Angeles, California, and their joint returns for 1962 and 1963 with the district director of internal revenue at San Francisco, California. Petitioner Ralph S. Prickett (hereinafter referred to as Ralph) is an engineer. He graduated from the University of Indiana with a major in physics and a minor in mathematics and chemistry. After three years in the Army, he worked for Sandia Corporation in Albuquerque, New Mexico, as a test engineer at a salary of around $7,000 per year. From 1951 to 1959 he was employed at the Naval Ordnance Test Station at China Lake, California, as a project engineer and research scientist for an annual salary of about $10,000. Thereafter he worked for General Electric in Santa Barbara, California, for approximately four years as a senior staff engineer. For the past three years, Ralph has been employed as an advance systems engineer by Lockheed Corporation in Sunnyvale, California, for a salary of $18,200. At both General Electric and Lockheed his hours were from 8 a.m. until 5 p.m. Petitioner became interested262 in cattle raising at an early age. While a Boy Scout in Bloomington, Indiana, his boyhood home, Ralph earned every merit badge in animal husbandry and farming. He became specifically interested in acquiring and operating a cattle ranch toward the latter part of his tour of duty in the Army. While working in New Mexico, he and his wife, petitioner Anna Jane Prickett (hereinafter referred to as Anna), on weekends looked for a ranch to purchase. After moving to California they continued to search for a ranch to buy approximately once a month on weekend trips and vacation hunting trips. From the time he became interested in acquiring a ranch, Ralph collected books and studied data concerning the cattle ranching business and talked to ranchers about the business when Anna and he were on trips looking for a ranch to buy. In 1957 petitioners purchased a ranch consisting of approximately 1,300 acres near Fort Jones in the northern part of California about 400 miles from Sunnyvale. They had previously studied the suitability of that area of California for cattle ranching. The purchase price of the ranch was $21,000 with a $7,000 down payment. Petitioners raised the money for the down payment263 by selling all but a few shares of certain common stock which Anna had inherited. Petitioners renamed the ranch the Highland Ranch. The ranch had improvements consisting of a small house, a barn, a shop, a guest house, a garage, a chickenhouse, water wells and fencing. Subsequent to purchasing the ranch petitioners tore down two outbuildings which were in poor repair and made repairs on other of the buildings, including putting a new roof on the barn. They bought equipment for the ranch, including a Grassland seed drill, a tractor and a reconditioned bulldozer and planted 65 acres of alfalfa, in addition to 60 acres already planted, in line with a conservation report obtained from the Siskiyou County Soil Conservation District authorities. In 1958 petitioners bought one bull, two cows and two heifers of a breed of cattle known as Santa Gertrudis. It was petitioners' intention to develop a herd of purebred cattle to sell for breeding purposes, but because of poor calf crops in certain years it was necessary to sell some cattle for commercial consumption. All bull calves were sold for purebred breeding purposes. In 1961 and 1962 petitioners had 11 and 13 head of cattle, including264 one bull. At the time of the trial, petitioners owned approximately 16 head of cattle. During the three years in issue petitioners lost 3 cows and approximately 15 calves due primarily to disease, such as bloat and scours, or other causes. Ralph was instrumental in organizing a local organization of the Santa Gertrudis Breeders International known as The Far West Santa Gertrudis Association covering California, Oregon, Nevada, Arizona, and Hawaii, as a means of increasing the acceptance and promotion of this breed of cattle. Petitioners generally go to work on the ranch approximately four times a year, once for two weeks in the spring when Ralph takes his paid vacation, sometimes on weekends and part of the time when Ralph is on vacation without pay. All of the family, including petitioners' three children, work on the ranch at these times. In the winter the cattle are cared for and fed by neighboring ranchers with whom petitioners maintain contact by phone. In the fall petitioners do some hunting on the ranch and occasionally invite a friend or two to hunt with them. They otherwise do no entertaining on the ranch. Petitioners maintain an office in their home in Sunnyvale where265 Ralph keeps books and studies cattle ranching. With the help of a certified public accountant petitioners set up books of account of their Highland Ranch operations which Anna keeps. They maintain a bank account under the name of Highland Ranch in the Scotts Valley Bank in Fort Jones, California, which is separate and distinct from their personal account. Some of the equipment initially purchased for the ranch was bought with the money received from the sale of Anna's inherited stock. All other ranch expenses were paid for out of petitioners' salaries. Petitioners have no investment except a savings account which they use periodically for ranch improvements and a Lockheed group life insurance policy covering Ralph and other employees. In 1961 Anna took courses to qualify for a teaching certificate and thereafter taught in the California public school system to help finance the ranch operations. On their joint Federal income tax returns for 1961, 1962, and 1963 petitioners reported farm expenses in the amounts of $1,545.77, $2,381.02 and $3,289.69, respectively, and depreciation on farm property in the amounts of $3,145.79, $2,919.21 and $4,020.14, respectively. They reported no266 farm income in 1961 and 1962 and income from the sale of two cows and one bull in 1963 in the amount of $621.21. In his statutory notice of deficiency dated January 25, 1965, respondent disallowed the farm losses in the amounts of $4,691.56, $5,300.23, and $6,688.62 claimed by petitioners on their returns for 1961, 1962, and 1963, respectively. Respondent also disallowed an investment credit in the amount of $288.62 claimed by petitioners on their 1963 return. During the taxable years in issue petitioners were engaged in the business of cattle ranching on the Highland Ranch. Opinion The principal issue is whether petitioners may deduct expenses incurred in the operation of the Highland Ranch during the taxable years involved. They claim that the amounts in issue were expenses incurred in carrying on a trade or business deductible under section 162, 2 or in the alternative, were expenses incurred for the production of income deductible under section 212. 3267 Respondent contends that petitioners operated the Highland Ranch as a hobby, and without an eye to profit. Under the facts and circumstances of this case, we find that petitioners were operating the Highland Ranch with the intent to make a profit. Unlike the taxpayer in Margit Sigray Bessenyey, 45 T.C. 261">45 T.C. 261, petitioners were not persons of substantial means. During the years involved petitioners' combined gross income, as reported on their joint income tax returns for 1961, 1962, and 1963, was $14,388.78, $19,327.88, and $23,300.19, respectively, consisting entirely of Ralph's salary as an engineer and Anna's wages as a school teacher. In 1957 when they purchased the Highland Ranch, their sole means of support, with the exception of insubstantial dividend and interest income, consisted of Ralph's salary of approximately $10,000 per annum from the Naval Ordnance Test Station at China Lake, California. With the exception of a few shares, Anna sold all of the common stock inherited by her to pay the $7,000 down payment on the ranch and for some of the equipment initially purchased for the ranch. Anna took courses to qualify for a teaching certificate and began teaching268 in the California public school system in 1961 in order to supplement the amount available from Ralph's salary for improving the ranch. During the years in issue all of the expenses in connection with the ranch were paid for out of petitioners' salaries. Petitioners have no investments other than a savings account which is used for ranch improvements and a beneficial interest in a group life insurance policy covering Ralph and other Lockheed employees. Since purchasing the ranch, petitioners have followed a carefully planned program for improving the ranch and developing a herd of purebred Santa Gertrudis cattle. They have purchased equipment and cattle, made repairs, and planted additional acres of alfalfa as their time and money allowed. Ralph spends his paid vacation, weekends and some time without pay working on the ranch; the whole family, including petitioners' three children, contribute to the ranch chores. They do little, if any, entertaining on the ranch. Ralph plans to move his family to the ranch and make cattle ranching his sole occupation. Petitioners' expenditure of time and money from meager resources does not indicate that they were operating Highland Ranch as a hobby. 269 Nor is their expectation of profit from the ranch so unreasonable as to throw doubt on petitioners' intention. We have found as a fact, and so hold, that in addition to their respective occupations of engineering and teaching, petitioners were engaged in the business of cattle ranching during the taxable years in issue. They are therefore entitled to deduct expenses incurred in the operation of the Highland Ranch during those years as trade or business expenses under section 162. Cf. Theodore Sabelis, 37 T.C. 1058">37 T.C. 1058; Dean Babbitt, 23 T.C. 850">23 T.C. 850; Norton L. Smith, 9 T.C. 1150">9 T.C. 1150. Our finding makes it unnecessary to consider whether the amounts in issue are deductible under section 212, and as the parties agree, disposes of the secondary issue of whether petitioners are entitled to an investment credit under section 38 in the taxable year 1963. Decision will be entered under Rule 50. Footnotes1. Except as otherwise indicated, all section references hereinafter will refer to the Internal Revenue Code of 1954.↩2. SEC. 162. TRADE OR BUSINESS EXPENSES. (a) In General. - There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * ↩3. SEC. 212. EXPENSES FOR PRODUCTION OF INCOME. In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year - (1) for the production or collection of income; * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624195/	JAIME AND BERTHA BENREY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentBenrey v. CommissionerDocket No. 30583-85.United States Tax CourtT.C. Memo 1986-135; 1986 Tax Ct. Memo LEXIS 471; 51 T.C.M. (CCH) 796; T.C.M. (RIA) 86135; April 7, 1986. 471 207 days after the mailing of the notice of deficiency, the Court received an "Amended Petition" which was filed as a petition. Ps maintain that an original petition was timely mailed to the Court by ordinary mail 8 days before the expiration of the 90-day period for filing a petition. In response to R's Motion to Dismiss for Lack of Jurisdiction, Ps argue they ar entitled to a presumption that the original petition was received by the Court in the ordinary course of mail. Held, Ps are not entitled to a presumption that the original petition was received by the Court. Accordingly, Ps failed to prove that the original petition was timely filed. R's Motion is granted. Robert D. Grossman, Jr.,1 for the petitioners. 472 David H. Peck and Will E. McLeod, for the respondent. DRENNENMEMORANDUM OPINION DRENNEN, Judge: Respondent's Motion to Dismiss for Lack of Jurisdiction filed herein was assigned to Special Trial Judge Francis J. Cantrel for hearing, consideration and ruling thereon. 2 After a review of the record, we agree with and adopt his opinion which is set forth below. 473 OPINION OF THE SPECIAL TRIAL JUDGE CANTREL, Special Trial Judge: This case is before the Court on respondent's Motion to Dismiss for Lack of Jurisdiction filed on October 25, 1985.Respondent seeks dismissal on the ground that the petition was not filed within the time prescribed by section 6213(a) or 7502. 3Respondent, in his notice of deficiency issued to petitioners on January 10, 1985, determined a deficiency in petitioners' Federal income tax and additions to the tax for the taxable caledar year 1981 in the following respective amounts: Additions to Tax, I.R.C. 1954YearIncome TaxSection 6653(a)(1)Section 6653(a)(2)1981$37,750.00$1,887.5050% of the interestdue on $37,750.00The record is clear that respondent mailed the notice of deficiency on January 10, 1985 by U.S. certified mail (No. 16853) to petitioners at their last known address pursuant to section 6212. Section 6213(a), which permits the filing of petitions with this Court, provides in part: Within 90 days * * after the notice of deficiency authorized in section 6212474 is mailed (not counting Saturday, Sunday, or a legal holiday in the District of Columbia as the last day), the taxpayer may file a petition with the Tax Court for a redetermination of the deficiency. * * The 90th day after the mailing of the notice of deficiency was Wednesday, April 10, 1985, which date was not a legal holiday in the District of Columbia.On August 5, 1985, 207 days after the mailing of the notice of deficiency, the Court received a document entitled "Amended Petition" which was filed by the Court on that same day as petitioners' petition. The cover in which the petition was received is postmarked August 2, 1985, 204 days after the mailing of the notice of deficiency. The petition states, in pertinent part: The petitioners hereby amend their petition filed in the above-entitled case on April 2, 1985 by alleging as follows: 1. On April 2, 1985, the original and three conformed copies of a petition from the respondent's notice of deficiency dated January 10, 1985 were timely mailed to the Clerk of Court. * * * 2. On information and belief, the Clerk's office has no record of receipt of the petition filed on April 2, 1985. 4475 A search of the Court's records revealed that the April 2, 1985 petition (original petition) has not been filed with the Court nor was there any record of its receipt. Petitioners filed a Notice of Objection on November 14, 1985 wherein they opposed respondent's motion on the basis that a petition was mailed on April 2, 1985, 8 days before the expiration of the 90-day period for filing a petition with the Court. It is petitioners' position that they are entitled to a presumption that letters deposited in the United States mails will be received by the addressee in due course. A hearing on respondent's motion was conducted in Washington, D.C. on December 18, 1985, at which time counsel for the parties appeared and presented argument. Petitioners' counsel of record, who prepared and signed both petitions, his secretary, and the law firm's accountant testified at the hearing. Their testimony was offered to establish: 1 - that a petition was prepared on April 2, 1985, 2 - that a check payable to the Tax Court was prepared on April 2, 1985, 3 - that the petition and check were mailed to the Tax Court on April 2, 1985, and 4 - that neither the petition nor the check have476 been returned to the law firm. Petitioners argue that by virtue of the uncontradicted testimony presented to the Court they are entitled to a presumption that the petition was received by the Court in due course. Respondent, by and through his motion and at the hearing at Washington, D.C. on December 18, 1985, urges that we dismiss this case on the ground that the petition, entitled "Amended Petition," was received and filed 207 days after the mailing of the notice of deficiency. With respect to the earlier petition dated April 2, 1985, respondent argues that filing occurs on the physical delivery of the document unless petitioners come within the protection afforded under section 7502. At the conclusion of the hearing, the motion was taken under advisement. The burden of proving that this Court has jurisdiction is upon petitioners. Cassell v. Commissioner,72 T.C. 313">72 T.C. 313, 317-318 (1979); Harold Patz Trust v. Commissioner,69 T.C. 497">69 T.C. 497, 503 (1977), and cases cited therein. A petition for redetermination of a deficiency must be filed with this Court within 90 days, or 150 days if the notice is addressed to a person outside the United States, after477 the notice of deficiency is mailed to a taxpayer. Section 6213. The time provided for the filing of a petition with this Court is jurisdictional and cannot be extended. Failure to file within the prescribed period requires that the petition be dismissed for lack of jurisdiction. Blank v. Commissioner,76 T.C. 400">76 T.C. 400, 403 (1981); Estate of Rosenberg v. Commissioner,73 T.C. 1014">73 T.C. 1014, 1016-1017 (1980); Estate of Cerrito v. Commissioner,73 T.C. 896">73 T.C. 896, 898 (1980); Stone v. Commissioner,73 T.C. 617">73 T.C. 617, 618 (1980); Estate of Moffat v. Commissioner,46 T.C. 499">46 T.C. 499, 501 (1966). Filing is completed when the petition is received by the Court, unless the exception provided in section 7502 applies. Sylvan v. Commissioner,65 T.C. 548">65 T.C. 548, 550 (1975). Congress enacted section 7502 to alleviate the hardships resulting from the failure of the mail to function properly, i.e., alleviate hardships resulting from variations in postal performance when a document is timely mailed. Sylvan v. Commissioner,supra at 551. Section 7502(a) provides as a general rule that if the petition is delivered478 to the Tax Court by United States mail in an envelope properly addressed, postage prepaid "the date of the United States postmark stamped on the cover" in which such petition is mailed "shall be deemed to be the date of delivery" of the petition to the Court, and hence the filing date. The provisions of section 7502(a) are applicable, however, only if the petition is delivered to the Court. Section 301.7502-1(d)(1), Proced. & Admin. Regs. See Deutsch v. Commissioner,599 F.2d 44">599 F.2d 44, 46 (2d Cir. 1979), affg. an order of dismissal by this Court, cert. denied 444 U.S. 1015">444 U.S. 1015 (1980). 5 But, in the case of a petition sent by U.S. registered mail or certified mail, section 7502(c) and section 301.7502-1(d)(1), Proced. & Admin. Regs., establish that actual delivery is not a requirement when registered or certified mail is used, unlike the case when a document is sent by ordinary mail. See Storelli v. Commissioner, 86 T.C. (filed March 24, 1986). However, where a taxpayer must rely on section 301.7502-1(d)(1), Proced. & Admin. Regs., to establish prima facie evidence that the petition was delivered by registered or certified mail, strict proof that479 the requirements of the regulations have been satisfied is necessary before the taxpayer is entitled to a presumption of delivery. See Storelli v. Commissioner,supra.Petitioners attempt to prove delivery and timeliness without benefit of section 7502.It is petitioners' position that they are entitled to a presumption that the original petition mailed 8 days prior to the expiration of the 90-day period was received by the Court in the due course of the mail, and, because respondent did not introduce evidence to rebut that presumption, the original petition should be deemed timely filed under section 6213. Petitioners steered the Court away from the provisions of section 7502 since it is clear that neither the petition received by the Court on August 5, 1985 nor the original petition mailed on April 2, 1985 would be considered timely filed under the objective standards provided by that section. Nonetheless, and in spite of their creative argument, we are not persuaded that the original petition was timely filed under section480 6213. We simply cannot agree that petitioners are entitled to a presumption of delivery. Prior to the enactment of section 7502 courts often invoked a presumption of delivery in due course of the mails in order to mitigate the harsh inequities resulting from a literal adherence to the filing requirements of section 6213. See Wells Marine, Inc. v. Renegotiation Board,54 T.C. 1189">54 T.C. 1189, 1191-1192 (1970), and cases cited therein. Recognizing the inequities and the uncertainty of the measures being taken by the courts to adjust them, Congress enacted section 7502 to alleviate the hardships resulting from the failure of the mail to function properly. See Sylvan v. Commissioner,supra at 557 (Drennen, J., dissenting); Wells Marine, Inc. v. Renegotiation Board,supra.In enacting section 7502 Congress provided a specific means by which a taxpayer could ensure proof of delivery and the timeliness of the petition. See section 7502(c) and the regulations thereunder which set forth the requirements for reliance on registered or certified mail in establishing prima facie evidence of delivery. Congress apparently considered the possibility481 that a petition properly mailed would not be received by the addressee. Had Congress intended that proof of ordinary mailing would constitute prima facie evidence of delivery, it would have so provided. Accordingly, the remedial provisions of section 7502(c) pertaining to prima facie evidence of delivery do not apply when a petition mailed by ordinary mail is not received by the Court. 6Petitioners advocate that section 7502 is not the exclusive exception to the literal language of section 6213 and that they are entitled to a presumption of delivery as invoked by courts prior to the enactment of section 7502. We disagree. As previously stated, for purposes of section 6213 a petition is filed on the date482 it is actually received, except that if the requirements of section 7502 are met, the petition shall be considered to be filed on the postmark date. 7 Because the original petition dated April 2, 1985 was not actually received by the Court, and because petitioners' have failed to satisfy the objective standards of section 7502 thus enabling them to establish prima facie evidence of delivery, respondent's motion to dismiss will be granted. 8483 As stated by this Court in Foerster v. Commissioner,T.C. Memo 1981-32">T.C. Memo. 1981-32, "[W]e are not unmindful that the seeming inequities to the taxpayer would not exist had the alternative procedure provided by section 7502(c)(1) of mailing the petition by registered mail been followed." On the basis of this record, we conclude that we lack jurisdiction over this case. 9An appropriate order of dismissal for lack of jurisdiction will be entered.Footnotes1. Mr. Grossman, while admitted to practice before this Court, has not filed an entry of appearance. However, he was recognized specially for the purpose of presenting argument respecting respondent's motion.↩2. This case was assigned pursuant to sec. 7456(d)(4), Internal Revenue Code of 1954, as amended, and Rule 180, Tax Court Rules of Practice and Procedure.↩3. All section references are to the Internal Revenur Code of 1954, as amended.↩4. Attached to the petition are copies of the original petition dated April 2, 1985, a Place of Trial Designation dated April 2, 1985, and a transmittal letter directed to the Clerk of Court dated April 2, 1985. (Exhibits A-C, respectively.)↩5. See also Foerster v. Commissioner,T.C. Memo 1981-32">T.C. Memo. 1981-32; cf. Herrera v. Commissioner,T.C. Memo. 1984-47↩.6. See Deutsch v. Commissioner,599 F.2d 44">599 F.2d 44, 46 (2d Cir. 1979), affg. an order of dismissal of this Court, cert. denied 444 U.S. 1015">444 U.S. 1015 (1980), where the Court stated, "Both administrative convenience and the likelihood that a petition never received was never sent support the rationale of [section 7502]." In Deutsch↩ the Court barred the taxpayer from proving that he mailed the petition in any way other than as provided by section 7502.7. See Bloch v. Commissioner,254 F.2d 277">254 F.2d 277, 279↩ (9th Cir. 1958), where the Court indicated that since the enactment of sec. 7502, "There are no presumptions which we can indulge in appellant's [taxpayer's] behalf * *." 8. Petitioners reliance on our opinion in Sylvan v. Commissioner,65 T.C. 548">65 T.C. 548 (1975), is misplaced. In Sylvan there was documentary evidence that the petition was mailed since it arrived in the Court's mailroom via U.S. mail, albeit on the 91st day. Thus, the Court could determine by objective proof that the cover was properly addressed and the postage prepaid. Similarly, in Curry v. Commissioner,571 F.2d 1306">571 F.2d 1306↩ (4th Cir. 1978), revg. and remanding an order of dismissal of this Court, the Court had before it objective evidence that the petition was properly mailed since the petition and envelope in which it was contained were before the Court.9. See and compare Miller v. United States, F.2d (6th Cir., Mar. 3, 1986, 86-1 USTC par. 9261), affg. an unreported District Court's order. In Miller↩ the court considered sec. 7502(c)(1) and affirmed the lower court's dismissal for lack of subject matter jurisdiction because plaintiff's claim for refund was never received by the Internal Revenue Service and it was not sent by registered mail.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624197/	Rudolph Investment Corporation1 v. Commissioner. Rudolph Inv. Corp. v. CommissionerDocket Nos: 4798-70, 4799-70, 4800-70.United States Tax CourtT.C. Memo 1972-129; 1972 Tax Ct. Memo LEXIS 130; 31 T.C.M. (CCH) 573; T.C.M. (RIA) 72129; June 12, 1972David R. Frazer and John C. King, for the petitioners. Dennis C. DeBerry, for the respondent. DAWSONMemorandum Findings of Fact and Opinion DAWSON, Judge: In these consolidated cases the respondent determined the following Federal income tax deficiencies: YearPetitionerDkt. No.EndedDeficiencyRudolph Investment Corporation4798-7012-31-66$18,962.5912-31-6719,240.2012-31-686,344.82Rudolph Finance Company4799-708-31-684,475.16Rudolph Chevrolet Inc.4800-7012-31-6840,254.35The issues presented for decision are: 1. Were certain advances made by Rudolph Finance Company to Bill Day Auto Parts, Inc., bona fide loans or contributions to capital? 2. If the131 advances were contributions to capital, did Rudolph Investment Corporation receive a constructive dividend from Rudolph Finance Company because of the advances made by Rudolph Finance Company to Bill Day Auto Parts, Inc.? 3. Did respondent propertly reallocate the purchase price paid by Rudolph Chevrolet, Inc., for the Yolo Ranch between depreciable and nondepreciable assets? 4. Are earthen tanks and dams depreciable assets? 5. What was the correct salvage value for the cows in the breeding herd on the Yolo Ranch? 6. Did respondent correctly allocate the basis for the cows in the Yolo Ranch preeding herd $&574 7. Was respondent correct in disallowing depreciation for yearling heifers? 8. Are roads and trails on the Yolo Ranch subject to an allowance for depreciation? 9. Was respondent correct in disallowing depreciation for the fencing on the national forest permit land? Findings of Fact Some of the facts have been stipulated by the parties. The stipulation of facts and supplemental stipulation, together with the exhibits attached thereto, are incorporated herein by this reference. General Rudolph Investment Corporation is a corporation organized in February132 1962, under the laws of the State of Arizona, with its principal office located in Phoenix, Arizona. It filed Federal income tax returns (Form 1120) on an accrual method of accounting for calendar years ending 1966, 1967 and 1968, with the district director of internal revenue, Phoenix, Arizona. Rudolph Finance Company is a corporation which was organized in Arizona in August 1959 with its principal office located in Phoenix. It filed a Federal income tax return (Form 1120) in the accrual basis of accounting for the fiscal year ending August 31, 1968, with the district director of internal revenue at Phoenix. Rudolph Chevrolet, Inc., is a corporation which was organized in August 1959, under the laws of the State of Arizona, with its principal office located in Phoenix. It filed a Federal income tax return (Form 1120) on an accrual basis of accounting for the calendar year 1968, with the district director of internal revenue at Phoenix. During the years here involved, Rudolph Finance Company was a wholly-owned subsidiary of Rudolph Investment Corporation. During the years here involved, Rudolph Investment Corporation owned 75 percent of the common stock of Rudolph Chevrolet, 133 Inc., and Lou Grubb owned the remaining 25 percent of the common stock. Bill Day Auto Parts, Inc., was formed from a then existing corporation formerly called Rudolph Auto Lease, Inc., with 75 percent of its stock owned by Rudolph Investment Corporation and 25 percent owned by William F. Day, Jr. Rudolph Investment Corporation is a personal holding company that also owned controlling interests in other corporations located in Phoenix, Arizona; El Paso, Texas; and San Diego, California. Advances to Bill Day Auto Parts, Inc. Bill Day Auto Parts, Inc., had 1,333 1/ shares of common stock issued at a $1 per share par value of $1,333.333 in capital. When Bill Day Auto Parts, Inc., started business on March 19, 1963, it procured from Southern Arizona Bank during a period from February through July 1963, on an open loan account, $72,500, primarily used in the purchase of inventory. Bill Day Auto Parts, Inc., gave no security for this loan but Rudolph Chevrolet, Inc., guaranteed the loans made to Bill Day Auto Parts, Inc. Rudolph Finance Company did not participate in the management of Bill Day Auto Parts, Inc. In August 1963, Rudolph Finance Company advanced $15,000 to Bill134 Day Auto Parts, Inc. These funds were applied against the Southern Arizona Bank loan. The Southern Arizona Bank loan and the Rudolph Finance Company advances were shown on the books and records of Bill Day Auto Parts, Inc., as "Notes Payable - So. Arizona Bank and Rudolph Finance Co." During the entire existence of Bill Day Auto Parts, Inc., Bill Day was its president as well as the person who managed and operated it. He had a very good reputation in the automobile parts business, as well as a reputation for integrity and geting things done. The officers of Bill Day Auto Parts, Inc., intended to repay the loans made to it from the Southern Arizona Bank. From the inception of the corporation through its fiscal year ended March 31, 1967, the assets of Bill Day Auto Parts, Inc., exceeded the notes payable to Rudolph Finance Company. The current assets and notes payable at the end of the fiscal years 1964 through 1969 were as follows: Fiscal YearCurrent AssetsNotes Payable1964$ 85,211.26$ 70,500.00196594,194.3966,500.00196698,876.5866,610.421967128,310.6289,529.52196886,649.32111,529.52 575 Rudolph Finance Company expected135 the amounts advanced to Bill Day Auto Parts, Inc., to be repaid because there were enough accounts receivable, inventory and fixed assets of equipment to cover the advances. Rudolph Finance Company received the following notes from Bill Day Auto Parts, Inc.: InterestDateAmountTermRateAug. 16, 1963$ 15,000.001 Year5%Oct. 27, 196685,110.42Demand6 1/2%Mar. 31, 196789,529.52Demand6%Mar. 21, 1968111,529.52Demand6%None of the notes from Bill Day Auto Parts to Rudolph Finance were subordinated to any of the creditors of Bill Day Auto Parts, Inc. None of the notes from Bill Day Auto Parts to Rudolph Finance Company had any preference over any creditors of Bill Day Auto Parts, Inc. None of the notes from Bill Day Auto Parts to Rudolph Finance Company were convertible into stock of Bill Day Auto Parts, Inc. The interest on the advances from Rudolph Finance to Bill Day Auto Parts was accrued on the books of Bill Day Auto Parts on a monthly basis. The interest was paid on a monthly basis from the inception of the advances until the latter part of 1967. Rudolph Finance Company first realized that its advances were not136 secured by the assets of Bill Day Auto Parts, Inc., after it received the financial report for March 31, 1968, which showed a sizeable loss and also a shortage of inventory. Rudolph Finance Company then followed up with phone calls, as it did with any other delinquent account. Based upon the inventory shortages, Rudolph Investment determined that it would sell the assets of Bill Day Auto Parts, Inc., in order to limit its loss. The assets of Bill Day Auto Parts were sold to Bill Day for $20,000, after which Bill Day Auto Parts, Inc., was liquidated. The $20,000 sales price was the best offer received by Bill Day Auto Parts, Inc. At the time of the liquidation of Bill Day Auto Parts, the loans to Bill Day Auto Parts, Inc., became worthless in the amount of $98,393.70. All advances from Rudolph Finance Company to Bill Day Auto Parts, Inc., were bona fide loans and not contributions to capital. Yolo Ranch In the spring of 1968, Bill Waddoups, president of Rudolph Chevrolet, Inc., began negotiating for the purchase of the Yolo Ranch. Throughout the negotiations Waddoups relied upon the advice of Bryce Miller, an accredited rural appraiser, who concluded at the time of the purchase137 that the price was a fair one. Miller made an appraisal of the land on the ranch. This appraisal was used to determine the value of the improvements on the land by subtracting the land appraisal from the total purchase price. The purchase price for the land and improvements under the contract of sale dated July 1, 1968, was $1,016,000. The total purchase price for the cattle on the ranch was $478,000. In the final sales agreement $712,000 was allocated to the improvements. The purchase price for the land included deeded land of 11,957 acres, State lease land of 76,270 acres, Bureau of Land Management land (Taylor Grazing) of 3,470 acres and Forest Service land of 18,300 acres. Both the Bureau of Land Management land and National Forest permit land are leased from the Federal Government on a ten year renewable lease, both of which are automatically renewable unless there is a serious misuse or mismanagement of the Federal land. Spread throughout the entire ranch on all the various types of land, both deeded and leased, are residences, barns, corrals, chutes, fences, pastures and houses. Some of the improvements located on the deeded land are used for the cattle that graze138 on the State lease land. Each cow purchased by Rudolph Chevrolet, Inc., was jointly valued by appraisers at $227.50 per head. There are approximately 153 miles of fencing on the Yolo Ranch. The useful life of these fences in June 1968 was ten years. All of the roads and the trails on the Yolo Ranch lead either to or from various improvements on the ranch. The roads and trails were improved to varying degrees, including gates, cattle guards, drainange drainage ditches and in some cases they were terraced to prevent washout. The purchase price of the Yolo Ranch included 100 percent of the value of the 576 outside boundary fences on the State lease land. There has been no agreement between Rudolph Chevrolet, Inc., and any of the surrounding neighbors indicating an ownership interest by the neighbors in the boundary fences. The improvements on the United States Forest Service land were included in the purchase price of the Yolo Ranch and were owned by Rudolph Chevrolet, Inc. All of the boundary fences on the Yolo Ranch, except for 18 miles of Forest Service boundary fences, are completely maintained by Rudolph Chevrolet, Inc. The cows on the Yolo Ranch herd become breeders139 as yearlings. On June 29, 1968, the deeded land of the Yolo Ranch had a fair market value of $179,355 (or $15 per acre). The Arizona State grazing lease land (without improvements) had a fair market value of $141,100 (or $1.85 per acre). The BLM Taylor grazing land (without improvements) had a fair market value of $4,065 (or $1.173 per acre). The national forest permits had a value of $75,000. The improvements on the Yolo Ranch had a fair market value of $572,300. The fair market value of the improvements on the State lease land was $218,087. The highest and best use for the Yolo Ranch at the time it was purchased was as a cattle ranch. On the date the Yolo Ranch was purchased the fair market values of the cows purchased were as follows: Age of CowFair Market Value2 year old$200.003 year old300.004 year old325.005 year old325.006 year old300.007 year old300.008 year old250.009 year old200.0010 year old175.00The salvage value of a bull is considerably higher than the salvage value of a cow. The salvage value of the bulls in the breeding herd in 1968 was $75 per bull. The salvage value of the cattle purchased by Rudolph140 Chevrolet, Inc., as part of the purchase of the Yolo Ranch in 1968 was $56.50 per cow. There were several earthen tanks on the Yolo Ranch when it was purchased by Rudolph Chevrolet, Inc. Such tanks and dams, as the result of erosion processes, were filled over a period of approximately ten years, so that at the end of the ten-year period they ceased to have any ranch value. The improvements, such as gates, culverts, drainage ditches and terraces, on the roads and trails of the Yolo Ranch have a useful life of ten years. The holders of Federal BLM grazing lease and the Forest Service grazing permits involved herein, as well as the State of Arizona grazing leases, are granted preference rights of renewal. While the leases and permits were limited on their faces to definite terms without expressed absolute right of renewal for additional terms, there was in fact reasonable certainty of continued renewal during an undetermined period in the future. Such leases and permits are customarily renewed at the end of the period and the life thereof is therefore not limited to the term of the current lease or permit. The rights once acquired under such leases and permits are subject to some141 adjustment if it should become necessary for protection of the range. However, such rights are not limited as to time, are basically of indefinite duration and continue until cancelled or revoked. The grounds for cancellation or revocation are wholly contingent and may never happen, and some are wholly within the control of the preference holder. Opinion 1. Advances to Bill Day Auto Parts, Inc. For the taxable year ended August 31, 1968, Rudolph Finance Company claimed a bad debt deduction in the amount of $98,393.70, which resulted from "loans" to Bill Day Auto Parts, Inc. Respondent determined that the "loans" were not bona fide, but were contributions to capital, and therefore disallowed the claimed bad debt deduction. Respondent also determined that the advances made by Rudolph Finance to Bill Day were constructive dividends to Rudolph Investment Corporation, which then made a contribution of such amounts to the capital of Bill Day. Rudolph Finance Company contends that all the advances to Bill Day constituted bona fide loans. To the contrary, respondent argues that the advances were in reality dividends to the parent, Rudolph Investment, and capital contributions therefrom142 to Bill Day. The determination of debt or equity is basically a question of fact. A. R. Lantz Co. 577 v. United States, 424 F.2d 1330">424 F. 2d 1330, 1334 (C.A. 9, 1970). Several factors, which to varying degrees influence the resolution of this issue, are enumerated in O. H. Kruse Grain & Milling v. Commissioner, 279 F.2d 123">279 F. 2d 123, 125-126 (C.A. 9, 1960), as follows: They are (1) the names given to the certificates evidencing the indebtedness; (2) the presence or absence of a maturity date; (3) the source of the payments; (4) the right to enforce the payment of principal and interest; (5) participation in management; (6) a status equal to or inferior to that of regular corporate creditors; (7) the intent of the parties; (8) "thin" or adequate capitalization; (9) identity of interest between creditor and stockholder; (10) payment of interest only out of "dividend" money; (11) the ability of the corporation to obtain loans from outside lending institutions. Here all four certificates of indebtedness are in the normal form of notes. The first note had a maturity date of143 one year, and the other three were demand notes. The sources of the payments on the notes are not known. Rudolph Finance had the legal right to enforce the payment of principal and interest on the notes, and there was no condition attached to the repayment thereof. Rudolph Finance did not participate in the management of Bill Day. None of the notes were subordinated to or had preference over any creditors of Bill Day. The intent of all the parties concerned was to treat the notes as bona fide indebtedness and all parties expected the loans to be repaid. Rudolph Finance expected to be repaid because there were enough accounts receivable, inventory and fixed assets to cover the loans, at least until 1968. Although Bill Day Auto Parts may have been inadequately capitalized initially ($1,333 in cash and a loan of $72,500), the original loan was made by the Southern Arizona Bank and not by any of the Rudolph corporations. Furthermore, "thin" capitalization is only one of the factors to be taken into consideration and is not by itself decisive. See and compare American Processing and Sales Company v. United States, 371 F. 2d 842 (Ct. Cls., 1967); Affiliated Research, Inc. v. United States, 351 F. 2d 646144 (Ct. Cls., 1965); Byerlite Corporation v. Williams, 286 F. 2d 285 (C.A. 6, 1960); Baker Commodities, Inc., 48 T.C. 374">48 T.C. 374 (1967), affd. 415 F. 2d 519 (C.A. 9, 1969); and Leach Corporation, 30 T.C. 563">30 T.C. 563 (1958). Since neither Bill Day nor Rudolph Investment loaned any money to Bill Day Auto Parts, Inc., there is no correlation between the stock ownership and the "loans" to the corporations. Bill Day Auto Parts, Inc., was never in a position to declare a dividend; hence, the payment of interest was not made out of "dividend" money. Finally, Bill Day Auto Parts, Inc., was able to obtain outside loans as evidenced by the original loan from the Southern Arizona Bank. We are indeed confronted with a close question. While our conclusion may not be entirely free from doubt, we think the evidence with respect to the various factors preponderates in favor of the petitioner. Therefore, we hold that the advances to Bill Day Auto Parts, Inc., were bona fide loans and that Rudolph Finance is entitled to the bad debt deduction it claimed. 2145 2. Allocation of purchase price of the Yolo Ranch between depreciable and nondepreciable assets. In its Federal tax return for the year 1968 Rudolph Chevrolet, Inc., allocated the purchase price of the Yolo Ranch to certain depreciable and nondepreciable items. Respondent reallocated the purchase price by increasing the value of the nondepreciables, particularly State grazing lease land which comprised about 90 percent of the ranch, and reducing the value of the depreciable items. Both parties presented expert testimony and appraisal reports. In most respects we accept the appraisal report of petitioner's expert witness. The major point of difference is the valuation of the State lease land. On its tax return Rudolph Chevrolet valued the State lease land without improvements at $1.56 per acre. In his notice of deficiency respondent valued the State lease land without improvements at $4 per acre. At the trial respondent's expert witness expressed his opinion that the State lease land without improvements was $5.80 per acre. It is our conclusion, as shown in our findings of fact that the value of the State lease land without improvements was $1.85 per acre. While we might marshal146 and discuss at length the substantial evidence 578 presented by the experts on both sides, we think such an effort would be without purpose. Extended discussions of factual materials, pro and con, terminating in a conclusion that is based in the last analysis upon a subjective judgment about the weight of all the evidence considered, often gives merely the illusion of a process of reasoning, when in fact the result reached is simply the trial judge's ultimate finding of fact on the record as a whole. See Morris M. Messing, 48 T.C. 502">48 T.C. 502, 512 (1969); Colonial Fabrices v. Commissioner, 202 F. 2d 105 (C.A. 2, 1953), affirming a Memorandum Opinion of this Court. 3. Earthen water tanks and dams. In his notice of deficiency the respondent determined that "the earthen tanks and dams have interminable useful lives that are not reasonably susceptible of measurement and are, therefore, not depreciable." Petitioner offered the testimony and opinion of an accredited appraiser and ranching expert that the earthen tanks and dams on the Yolo Ranch have a useful life of ten years. See Fancher v. United States (D.C.S.D. 1962); Ekberg v. United States, (D.C.S.D. 1959). 147 Accordingly, we hold for the petitioner on this issue. 4. Salvage value of cows in breeding herd. Petitioner Rudolph Chevrolet, Inc., has conceded that its claimed 10 percent salvage value for the purchased bulls and cows in the breeding herd was incorrect. It has been stipulated that the savage value of a bull in the breeding herd is $75, which is the amount determined by respondent. The salvage value of a cow in the breeding herd was also determined by respondent to be $75. However, the testimony of both expert witnesses was that the salvage value of a cow is less than the salvage value of a bull. On this record we hold that the salvage value of a cow in the Yolo Ranch breeding herd was $56.50. 5. Allocation of cost basis for cows in breeding herd. In its Federal income tax return for the year 1968 Rudolph Chevrolet, Inc., allocated $227.50 as the basis of each of the cows it purchased for depreciation purposes. Although this price was apparently based on the price per cow as stated in the contract of sale, Rudolph Chevrolet has conceded that the claimed cost for the cows was not correct and now agrees that the basis for the cows should be allocated according to age. The fair148 market values for the purchased cows are set out in our findings of fact. These values are based on the testimony of petitioner's expert witness. 6. Depreciation for heifers. Respondent determined that yearling heifers could not be depreciated because they were not considered breeders. The evidence is to the contrary since both Mr. Waddoups and petitioner's expert witness testified that cows on the Yolo Ranch became a part of the breeding herd when they were yearlings. Consequently, we hold for the petitioner on this issue. 7. Depreciation on roads - grading and improvements. Respondent determined that depreciation of $1,600.22 claimed by Rudolph Chevrolet, Inc., on the roads and trails of the Yolo Ranch was not allowable because they were not associated with any buildings but only with the land. Rev. Rul. 68-193, 1 C.B. 79">1968-1 C.B. 79, provides that the grading of roads is not depreciable unless the roads would be abandoned or replaced contemporaneously with buildings with which the roads were directly associated. The testimony of Mr. Waddoups was that all of the roads and trails on the Yolo Ranch led to improvements. Thus it appears that the roads would be abandoned149 if the improvements were no longer needed. The depreciation of the roads included not only the cost of grading but also improvements, such as gates, cattle guards, drainage ditches and terraces to prevent washout. The evidence shows that the expenses incurred for these road improvements are depreciable since they are not expenditures related to an improvement or physical development added to the land any more than buildings are improvements that add to physical development of land. See Rev. Rul. 65-265, 2 C.B. 52">1965-2 C.B. 52. We hold for the petitioner on this issue. 8. Depreciation for fencing on national forest permit land. Respondent determined that the fences on lands leased from the United States Forest Service were not depreciable by Rudolph Chevrolet, Inc., because it only leased the land and title to the fences vested in the United States at the time they were made. In our opinion the petitioner is entitled to depreciate the fences even though title belongs to the United States Forest Service. See D. Loveman & Son Export Corporation, 34 T.C. 776">34 T.C. 776, 807 (1960), affd, 296 F. 2d 732 (C.A. 6, 1961); and 579 compare section 1.167(a)-4, Income Tax Regs.150 ; and Catherine B. Currier, 51 T.C. 488">51 T.C. 488, 492 (1968), where a lessee who makes capital improvements on the leased property is entitled to depreciation on the improvements. But since 18 miles of Forest Service boundary are cooperatively maintained by Rudolph Chevrolet and its neighbors, the petitioner may depreciate only one-half of the 18 miles of such fencing. To reflect various concessions and our conclusions on the disputed issues, Decisions will be entered under Rule 50. Footnotes1. Consolidated herewith are Rudolph Finance Company, Docket No. 4799-70, and Rudolph Chevrolet, Inc., Docket No. 4800-70.↩2. Even if the advances were contributions to capital, it would not necessarily follow that there was a constructive dividend from Rudolph Finance Company to Rudolph Investment Corporation. See W. B. Rushing, 52 T.C. 888">52 T.C. 888 (1969), affd. 441 F. 2d 593 (C.A. 5, 1971); and PPG Industries, Inc., 55 TC 928↩ (1970).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624198/	Estate of Delano T. Starr, Deceased, Mary W. Starr, Executrix, and Mary W. Starr, Individually, Petitioners, v. Commissioner of Internal Revenue, RespondentStarr v. CommissionerDocket No. 59307United States Tax Court30 T.C. 856; 1958 U.S. Tax Ct. LEXIS 143; June 30, 1958, Filed 143 Decision will be entered for the respondent. Held, certain payments made under a "Lease Form of Contract" for a sprinkler system are not deductible as rental expenses under section 23 (a) (1) (A), I. R. C. 1939, but were capital expenditures. Roy B. Woolsey, Esq., for the petitioners.J. Earl Gardner, Esq., for the respondent. Bruce, Judge. BRUCE 856 Respondent determined deficiencies in income tax and additions to tax of Delano T. Starr and Mary W. Starr as follows:YearDeficiencyAdditions to taxsec. 294 (d) (2)1951$ 1,939.86$ 831.7319521,155.14429.05857 Delano T. Starr died after the petition was filed and his widow, Mary W. Starr, executrix of the last will and testament of Delano T. Starr, was substituted in his stead.The sole issue for decision is whether payments made for the installation of a building sprinkler system in the amount of $ 1,240 for each of the years 1951 and 1952 are deductible as rental expenses within the meaning of section 23 (a) (1) (A), I. R. C. 1939, or whether these payments are capital expenditures.FINDINGS OF FACT.Delano T. Starr and Mary W. Starr were husband and wife during the years144 involved and resided at 131 East Hillcrest, Monrovia, California.For the calendar years 1951 and 1952 Delano T. Starr and Mary W. Starr filed joint income tax returns with the collector of internal revenue at Los Angeles, California.Throughout the period here involved Delano owned and operated the Gross Manufacturing Company, a sole proprietorship. Early in 1950 a general manager of the Gross Manufacturing Company suggested to Delano that insurance premiums on the building occupied by the company were quite large and should be reduced. The general manager suggested that some sort of sprinkler system be established in the building. Insurance premiums on the building occupied by the company were estimated to be in excess of $ 1,000 per year if the building was not protected by a sprinkler system. If the building was protected by a sprinkler system, the insurance premiums per year were estimated to be only $ 126.29.On or about April 3, 1950, Delano T. Starr, doing business as Gross Manufacturing Company (hereinafter called petitioner), and "Automatic" Sprinklers of the Pacific, Inc. (hereinafter called Automatic), entered into a written agreement which provided for the installation145 of a sprinkler system. The sprinkler system was installed under and pursuant to said written agreement. This written agreement provided in part as follows:LEASE FORM OF CONTRACT"Automatic" Sprinklers of the Pacific, Inc.5508 Alhambra Ave.Los Angeles 32, Calif.Indenture of Lease, Made this 3rd day of April 1950 by and between the "AUTOMATIC" SPRINKLERS OF THE PACIFIC, INC., A corporation of the State of California, with an office at Los Angeles, California, hereinafter called the LESSOR and DELANO T. STARR, DBA GROSS MANUFACTURING COMPANY, having principal office at Monrovia, California, hereinafter called the LESSEE.858 Witnesseth:That in consideration of the mutual covenants LESSOR and LESSEE hereto agree as follows:On the Part of Lessor:1. To install and lease for and during the term of five years from and after approval a wet pipe system of fire extinguishing apparatus, hereinafter referred to as the "system" in certain buildings all as indicated on the plan and shown in the specifications hereto attached in the property owned and occupied by the LESSEE located in Monrovia, California. Legal description of the property is as follows:* * * 2. The system to be146 installed by LESSOR will be in accordance with the provisions and conditions of the specifications attached hereto and made a part hereof consisting of two sheets, with the exceptions noted, if any. All materials will be of standard quality and the work herein specified will be done in a thorough and workmanlike manner under the rules and regulations of NATIONAL FIRE PROTECTION ASSOCIATION and subject to inspection and approval by PACIFIC FIRE RATING BUREAU acting as agent of both LESSOR AND LESSEE.3. LESSOR shall inspect the system at least one (1) time per year after its completion and approval and LESSOR shall repair or replace at its own expense any part if found to be defective or worn out under ordinary usage, provided LESSEE has used due diligence in maintaining the system in proper working order.On the Part of Lessee:4. LESSEE shall pay to the LESSOR, or its successors or assigns at Los Angeles, California, an aggregate rental of SIX THOUSAND TWO HUNDRED DOLLARS ($ 6,200.00) during the term of this lease, payable as follows:One Rental Payment of $ 1,240.00 payable May 1, 1950.One Rental Payment of $ 1,240.00 payable May 1, 1951.One Rental Payment of $ 1,240.00 payable147 May 1, 1952.One Rental Payment of $ 1,240.00 payable May 1, 1953.One Rental Payment of $ 1,240.00 payable May 1, 1954.All deferred rentals shall bear interest at the rate of 6% per annum after maturity.5. LESSEE shall use due diligence in maintaining the system in proper working order and in compliance with Insurance Companies' requirements. Should the system become impaired on account of lack of diligence on the part of LESSEE in properly maintaining same, or if changes or extensions to the system should be required by the Insurance Companies' on account of changes in construction of, or extensions to the buildings, or on account of changes in the contents of the buildings, LESSEE shall notify LESSOR thereof in writing, whereupon LESSOR shall make the required changes in the system at the cost and expense of the LESSEE as soon after receipt of such notification as is practicable. The rentals becoming due and payable during the remainder of the term of this lease shall thereupon be increased in the amount sufficient to reimburse LESSOR for the materials furnished and labor performed.6. The rentals stipulated in this lease are based on the assumption that the work of installing148 the system shall be done only during regular working hours. If overtime work is requested by the LESSEE, the same shall be paid for by the LESSEE as additional rental at the time the next rental payment or payments become due after the performance of such overtime work.859 7. LESSEE will furnish at his own expense, as and where required by the LESSOR, all necessary space for the storage and handling of materials and proper facilities for the speedy and efficient prosecution of the work, including the services of watchman; also light, heat, local telephone service and (when available) elevator service, and unless expressly excepted, all painting, (both as to labor and materials), and permits as required by LESSOR for the installation of the system, and the sufficiency of all thereof both old and new including the property herein proposed to be equipped, is warranted by LESSEE.8. LESSEE agrees that, if prior to the completion of the installation, the work be discontinued by reason of strikes, lockouts, action of the elements, or any cause not LESSOR'S Fault, there shall, at LESSOR'S option, be due and payable by LESSEE to LESSOR upon its demand, a sum equal to the full aggregate149 rentals stipulated herein less an allowance to be made by LESSOR for materials, labor and expense not supplied or incurred.9. LESSEE will supply at his own expense throughout the term of this lease, all necessary water, steam, heat and power required to keep the system in proper working order, including sufficient heat to prevent freezing and will exercise due care and diligence in protecting the same from impairment, injury or destruction, and will promptly give to LESSOR written notice of any impairment, injury or destruction.10. LESSEE will also promptly pay when due and payable, all taxes and assessments of every kind levied upon the land, buildings and contents protected by the system and in lieu of additional rent, upon the system itself and will keep the system (and the materials and component parts thereof during installation) at all times full [sic] insured in satisfactory insurance companies to at least an amount equal to the sum of the total unpaid rentals under paragraph 4 against loss by fire, lightning and wind storm, making "loss, if any, payable to "Automatic" Sprinklers of the Pacific, Inc., or its successors or assigns, as its interest may appear"; and deliver150 to LESSOR the policies for such insurance. In the event LESSEE fails to maintain insurance and/or to deliver to LESSOR the said policies, LESSOR may so insure the premises, including the system for its own benefit to the amount of its interest at the time, and pay the premiums therefore [sic] and upon payment of such premiums by the LESSOR, the same shall forthwith become due and owing from LESSEE to LESSOR without demand. LESSEE shall bear the risk of loss of said property and system from any cause whatsoever.11. LESSEE will not alter, remove or dispose of, or permit the use by others of, the system, or any part thereof, without the written permission of LESSOR, and no discontinuance of ownership or operation of the plant or premises by LESSEE shall terminate or affect the liability of LESSEE hereunder.12. It is hereby expressly understood and agreed that title to the system and all its component parts and materials shall be and remain indefeasibly vested in "AUTOMATIC" SPRINKLERS OF THE PACIFIC, INC., its successors or assigns, and said system shall not be or be deemed to be, a part of or incorporated into the real estate or be deemed to be a fixture.The Lessor and Lessee151 Mutually Agree:13. The following shall be deemed events of default: Failure of LESSEE to make rental payments or otherwise comply with obligations of this lease; appointment of a receiver for LESSEE'S property or business, adjudication of bankruptcy, assignment for benefit of creditors, seizure of the premises herein described by judicial process; the obtaining of a judgment against LESSEE, or the filing of a lien against LESSEE'S property, if said judgment or lien be not satisfied or discharged within ten (10) days thereafter.860 14. Upon the happening of an event of default, LESSOR may in so far as permitted by law, resume possession of the system, which LESSEE agrees to deliver upon demand, and LESSOR or assigns shall have full right to enter any building structure or premises where said system, or any part thereof may be, and remove, control and/or shut the water off the same without resorting to legal process, and at the cost and expense of said LESSEE, the amount whereof as well as reasonable attorney fees and court costs in any litigation arising therein, shall be added to the balance then owing hereunder.15. Upon the happening of an event of default, or in case the152 premises herein described are destroyed in whole or in part by fire, all remaining rental payments shall, at the option of LESSOR, immediately become due and payable, anything herein contained to the contrary notwithstanding. In case of fire, however, the total amount owing to LESSOR, less such amount as may be paid by the Insurance Companies direct to the LESSOR, shall be subject to discount from date of payment of fire loss to the date of scheduled maturity at the rate of six per centum (6%) per annum, and LESSEE may have the same rate of discount for any rentals it may be pleased to make before maturity.16. All rights and remedies hereunder given to LESSOR are cumulative and not exclusive and its failure to exercise any right or remedy upon default shall not be construed as a waiver of the right to exercise the same upon succeeding default.17. LESSOR shall not be liable for any work or materials not furnished by it, nor any loss or damage by reason of the care or character of any walls, foundations, or other structures not erected by it, and any loss or damage from any cause not the fault of LESSOR, to materials, tools, equipment, or work, while in or about the premises shall153 be borne by LESSEE.18. If, in connection with the performance of this lease, any damage be cause [sic], or any claim be made, for which LESSOR may be liable, written notice with an itemized statement thereof, must be given to LESSOR promptly and in any event, within the (10) ten days, thereafter, otherwise LESSOR is released from liability.19. All notices shall be in writing, served by registered mail upon the parties hereto respectively at their respective offices as hereinbefore set forth, or as hereafter designated in writing by one to the other.20. The installation of the required number of Automatic Sprinklers, but no Open Sprinklers, is provided for in the specifications heretofore attached. The price shall not include the installation of extra sprinklers due to changes in the buildings or contents after the completion of LESSOR'S survey.21. It is mutually understood and agreed that any work or materials not specifically described herein, together with what specifically the LESSEE is to supply, shall be supplied by LESSEE at his own expense, as and when required by LESSOR for the prosecution of the work. Upon LESSEE'S failure so to do, LESSOR may, at its option, as154 LESSEE'S agent, supply the same at market prices, and its expense by reason thereof, as well as those resulting from delay, shall be additional to the aggregate rentals mentioned herein and shall be paid to the LESSOR upon demand.22. LESSOR shall not be liable for any loss or damage from delay or otherwise, due directly or indirectly, to strikes, lockouts, embargoes, transportation conditions, action of the elements, acts, orders, rulings, or restrictions of the U. S. Government, or of any instrumentality thereof, or to any cause beyond LESSOR'S control.23. LESSOR shall have and is hereby given the right to assign this lease and the rental installments and the title to the system. In the event of any such 861 assignment, LESSEE, hereby waives any right of set-off, defense, or counterclaim, now or hereafter existing in favor of LESSEE against such assignee, without however, in any wise waiting or releasing his right to assert such claim as against LESSOR.24. That the only agreements, obligations and covenants binding on the parties hereto are those set forth herein.25. In the event of [sic] any of the provisions of this instrument shall be void or unenforcible under 155 the laws of any state where its enforcement is sought, then it is agreed that the LESSOR may exercise all rights and remedies which are conferred upon conditional vendors or holders of chattel mortgages by the laws of the state in which its enforcement is sought, LESSOR to have the right to elect which remedy it will pursue.26. LESSEE represents that the fee simple title to the land and/or buildings described in Paragraph 1 is vested in DELANO T. STARR and WIFE, as joint tenants; that LESSEE'S interest in said land and/or buildings is a fee simple title estate; that there are no encumbrances affecting the title to the said land and/or buildings and/or LESSEE'S interest therein.This representation of fact is made to secure the execution of this lease.Before any work is started under this lease, LESSEE agrees to procure the assent in writing of all the holders of said uncumbrances [sic] and of all the holders of interest or estates in said land and/or buildings to the provisions of this lease, provided that title to the system of fire extinguishing apparatus herein described shall remain in LESSOR and that said apparatus shall remain personally and not become a part of the realty156 during the term of this lease.LESSEE further agrees that no liens or encumbrances of any sort will be placed upon its interest in the said land and/or buildings nor shall said land and/or buildings be sold without first procuring the assent of such lienor, encumbrances or purchaser to the said provisions of this lease.27. This lease shall become a binding and obligatory agreement upon execution by LESSEE: provided, however, that it may thereafter, at the option of the LESSOR, be terminated and cancelled by LESSOR at any time within thirty (30) days after said lease has been received at the Los Angeles, California, office of LESSOR. If so terminated and cancelled, LESSOR shall immediately notify LESSEE.28. At the termination of the period of this lease, if LESSEE has faithfully performed all of the terms and conditions required of it under this lease, it shall have the privilege of renewing this lease for an additional period of five years at a rental of $ 32.00 per year. If LESSEE does not elect to renew this lease, then the LESSOR is hereby granted the period of six months in which to remove the system from the premises of the LESSEE.In Witness Whereof, the parties herein have157 subscribed their respective names in duplicate this 3rd day of April A. D. 1950."Automatic" Sprinklers of the Pacific, Inc.By Carl O. GustafsonPresident.Delano T. Starr DBA Gross Manufacturing CompanyAttest:Olive L. MonsonJune L. GustafsonW. M. AndersonRespondent allowed depreciation in the amount of $ 269.60 for each of the years 1951 and 1952, determined on the basis of a total cost 862 of the sprinkler system of $ 6,200 prorated over a remaining useful life of 23 years for the building from May 1950, when the system was installed.During each of the years 1951 and 1952 petitioner paid $ 1,240 to Automatic pursuant to the contract.Automatic installed building sprinkler systems on a cash basis and on an installment basis. The cash price of the sprinkler system of the type installed in the building occupied by petitioner's business was $ 4,960. The price of the same building sprinkler system on an installment contract basis with payments extending over a 5-year period was $ 1,240 per year, or a total of $ 6,200. The average installment contract entered into by Automatic covered a 5-year period, but customers purchasing building sprinkler systems have been allowed158 as long as 15 years to pay for a sprinkler system under an installment contract. Automatic has sold approximately 1,700 sprinkler systems.The agreement between petitioner and Automatic was recorded on the books of Automatic as a long-term receivable and the profit therefrom was computed in the same manner as the profit from a sale. Automatic has installed approximately 25 building sprinkler systems under agreements of this type, and these agreements were entered into by Automatic to stimulate sales. Automatic has never removed a sprinkler system installed under one of these agreements.Sprinkler systems sold for cash are only inspected once by Automatic. Sprinkler systems sold under contracts of the type between Automatic and petitioner were inspected at least one time per year for the first 5 years after installation. If the contract was renewed for an additional 5 years, Automatic inspected the sprinkler system during the second 5-year period for an additional service charge of $ 32 per year. The contract between petitioner and Automatic has been renewed for an additional 5 years and Automatic has been making an annual inspection of the sprinkler system installed under that159 contract. The cost of this annual inspection to Automatic is $ 64 per year.The estimated useful life of the sprinkler system installed in petitioner's building is 20 years or more.OPINION.The sole question to be determined is whether payments made for the installation of a building sprinkler system in the amount of $ 1,240 for each of the years 1951 and 1952 are deductible as rental expenses under the provisions of section 23 (a) (1) (A) of the Internal 863 Revenue Code of 1939, 1 as contended by petitioner, or constituted capital expenditures as determined by respondent.160 It is well settled that regardless of the form of the transaction, "rental" payments must be treated as partial payments of the purchase price of the property involved, if by virtue of the payments the taxpayer has acquired or will acquire title to, or an equity in, the property. Quartzite Stone Co., 30 T. C. 511; Ersel H. Beus, 28 T. C. 1133 (on appeal C. A. 9). To properly determine the true character of the payment, it is necessary to ascertain the intention of the parties as evidenced by the written agreements, read in the light of the attending facts and circumstances existing at the time the agreement was executed. D. M. Haggard, 24 T.C. 1124">24 T. C. 1124, affd. 241 F.2d 288">241 F. 2d 288. As stated in Breece Veneer & Panel Co. v. Commissioner, 232 F.2d 319">232 F. 2d 319, 323 "[the] intention of the parties cannot be determined unilaterally."Throughout the period involved, petitioner owned and operated a manufacturing business, as a sole proprietorship. He owned the building in which the business was conducted. In 1950, in order to reduce the insurance premiums161 on the building, he entered into an agreement, designated a "Lease Form of Contract," with Automatic for the installation of a sprinkler system. The contract provided that petitioner should pay an aggregate "rental" of $ 6,200 covering a period of 5 years, payable in annual installments of $ 1,240 each, beginning May 1, 1950. At the termination of the 5-year period, petitioner was to have the privilege of renewing the "lease" for an additional 5 years at a "rental" of $ 32 per year. The contract further provided that title to the system should remain in the "lessor" and that if petitioner did not elect to renew the "lease" the "lessor" should have 6 months within which to remove it from petitioner's premises.Officials of Automatic testified that the company sold sprinkler systems on both a cash and installment basis. The cash price of a sprinkler system was $ 4,960, and when sold under a 5-year installment contract it was $ 1,240 per year, or a total of $ 6,200. These officials further testified that the payment of $ 32 per year for the additional 5-year renewal period was a service charge for inspecting the sprinkler system. Automatic's bookkeeper testified that the profit162 from the transaction between petitioner and Automatic was computed on Automatic's books in the same manner as the profit from a 864 sale. Other testimony indicated that Automatic devised the "Lease Form of Contract" to stimulate sales.It thus appears from the contract and the testimony relating thereto that the "rental" payments of $ 1,240 in issue here were intended to be and were in fact partial payments of the purchase price of the sprinkler system involved. The total sales price of the same sprinkler system under a 5-year installment contract was the same as the aggregate "rental" payments under the "Lease Form of Contract" and the testimony of employees of Automatic indicates that the transaction was treated the same as a sale. The fact that the "rental" payments dropped off to $ 32 per year after the first 5 years is strong evidence that the annual payments of $ 1,240 per year for the first 5 years were intended as something more than mere payments for the use of the property.It does not appear that the "Lease Form of Contract" was a more desirable way of obtaining a sprinkler system than by means of an installment sale. The reason for the installation of the sprinkler163 system was to reduce insurance costs, but these costs would have been reduced upon the installation of the sprinkler system regardless of the method of payment therefor. Moreover, testimony indicates that petitioner could have purchased the sprinkler system under very liberal installment terms providing for payment over a period as long as 15 years. Petitioner's motive in entering into the "Lease Form of Contract" was obviously to gain the tax benefit of a "rental" deduction for the annual payments of $ 1,240.Petitioner relies strongly on the provision of the "Lease Form of Contract" which states that title to the sprinkler system remained at all times in Automatic in support of his contention that the payments in issue represented deductible rent. Though a factor to be considered, we do not think it controlling in the instant case when considered in the light of all the circumstances. Even if title has not passed to the "lessees," so-called "rental" payments may be treated as capital expenditures where the facts indicate that the "lessee" is acquiring not merely the right to use the property but a substantial equity in its ownership. See Judson Mills, 11 T. C. 25.164 Here, provisions of the "Lease Form of Contract" and other facts indicate that petitioner acquired a substantial equity in the sprinkler system. Under the "lease" petitioner agreed to pay all taxes levied against the sprinkler system and to maintain insurance on the system in at least an amount equal to the sum of the total unpaid rentals. Paragraph 25 of the "lease" gave Automatic all rights and remedies available to conditional vendors or holders of chattel mortgages in the event any of the provisions of the agreement became void or unenforcible. The provision in the contract, adverted to by petitioner, requiring the "lessor" to repair or replace defective or wornout parts at 865 its own expense was no more than a warranty customarily to be found in contracts of sale. Furthermore, Automatic's general manager testified that although the lease provided for a renewal of only 5 years beyond the initial 5-year period, the practice of the company was to permit renewal of "leases" beyond the initial renewal period and that the company had never removed a sprinkler system sold under a "Lease Form of Contract." He further testified that the estimated useful life of a sprinkler 165 system was at least 20 years and that under installment sales contract agreements, Automatic has allowed as long as 15 years for the payment of the purchase price of a sprinkler system. Clearly, the facts show that petitioner acquired a substantial equity in the sprinkler system by the payment of $ 1,240 during each of the years 1951 and 1952, which interest is essentially the same that he would have acquired if he had purchased the same sprinkler system under an installment sale contract. The substance of the transaction is not changed by the formal contract provision that legal title remained in Automatic.Likewise, the absence of a specific option to purchase upon payment of a further sum is immaterial where, as here, the entire purchase price of the sprinkler system was accounted for in the initial 5-year period and the payment of $ 32 per year thereafter represented a mere service charge for annual inspection of the system.It was stated in Chicago Stoker Corporation, 14 T. C. 441, at 444-445:Cases like this, where payments at the time they are made have dual potentialities, i. e., they may turn out to be payments of purchase price or rent for166 the use of the property, have always been difficult to catalogue for income tax purposes. A fixed rule for guidance of taxpayers and the Commissioner is highly desirable, and it is also desirable that the rule, whatever it is, be as fair as possible, both to the taxpayer and the tax collector. If payments are large enough to exceed the depreciation and value of the property and thus give the payor an equity in the property, it is less of a distortion of income to regard the payments as purchase price and allow depreciation on the property than to offset the entire payment against the income of one year. * The above rule was quoted with approval by the Ninth Circuit Court of Appeals in Oesterreich v. Commissioner, 226 F. 2d 798, reversing a Memorandum Opinion of this Court.Here, the payments are substantially in excess of the depreciated or undepreciated value of the property and the aggregate payments over the 5-year period equal the conditional sale price. The $ 32 payable yearly after the termination of the initial 5-year period does not represent even a token payment on the purchase price of the system but is intended to compensate the167 seller, at least in part, for its annual inspection of the system during the next 5 years. It is also to be noted that respondent has allowed depreciation of $ 269.60 on the sprinkler system for each of the years 1951 and 1952. Thus, in effect, 866 only $ 970.40 of the $ 1,240 payment was disallowed as a deduction for each of the taxable years. Since later depreciation deductions over the remaining useful life of the sprinkler system are allowable in those years in which only $ 32 payments are due from petitioner under the "Lease Form of Contract," respondent's determination results in a less distorted picture of petitioner's income than if deductions of $ 1,240 per year are allowed in the first 5 years of the sprinkler system's useful life.Considering all the facts and circumstances, we hold that the payments made by petitioner for the installation of the sprinkler system in the amount of $ 1,240 for each of the years 1951 and 1952, were not rental expenses within the meaning of section 23 (a) (1) (A) and, accordingly, respondent did not err in disallowing deductions therefor. Benton v. Commissioner, 197 F. 2d 745, reversing a Memorandum168 Opinion of this Court, and Abramson v. United States, 133 F. Supp. 677">133 F. Supp. 677, relied upon by petitioner, are not only distinguishable on the facts but are not contrary in principle.In view of the above holding, respondent's determination of additions to tax under section 294 (d) (2), I. R. C. 1939, was likewise correct.Decision will be entered for the respondent. Footnotes1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions:(a) Expenses. -- (1) Trade or business expenses. -- (A) In General. -- All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including * * ; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4562841/	Filed 9/3/20 P. v. Rangel CA2/4 NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT DIVISION FOUR THE PEOPLE, B303041 Plaintiff and (Los Angeles County Respondent, Super. Ct. No.NA100277) v. JOSE GERARDO RANGEL, Defendant and Appellant. APPEAL from a judgment of the Superior Court of Los Angeles County, James D. Otto, Judge. Affirmed. Christian C. Buckley, under appointment by the Court of Appeal, for Defendant and Appellant. No appearance for Plaintiff and Respondent. INTRODUCTION In a bench trial, Jose Gerardo Rangel was convicted of perpetrating a lewd act upon a child (Pen. Code, § 288, subd. (a)1); orally copulating a person under 14 years of age (former § 288a, subd. (c)(1)2); and orally copulating a child 10 years old or younger (§ 288.7, subd. (b)). We affirmed the judgment, but found the trial court had improperly imposed a multiple victim sentence enhancement. (§ 667.61, subds. (b), (e).) We therefore vacated defendant’s sentence and remanded the cause for resentencing. (See People v. Rangel (Aug. 24, 2017, B271735 [nonpub. opn.].) Following remand, defendant filed a petition for writ of habeas corpus asserting that his waiver of his right to a jury trial was not knowing and intelligent, and that his trial counsel had been ineffective. The trial court denied the petition and resentenced defendant; defendant appealed. Defendant’s counsel filed a brief requesting that we independently review the record for error under People v. Wende (1979) 25 Cal. 3d 436 (Wende). We have conducted an independent examination of the entire record and conclude that no arguable issues exist. We therefore affirm. FACTUAL AND PROCEDURAL BACKGROUND As stated in our previous opinion, People v. Rangel, supra, B271735, “Defendant was charged by information with perpetrating a lewd act upon a child, G.R., with the intent of arousing, appealing to, and gratifying the lust, passions, and sexual desires of G.R. or himself (§ 288, subd. (a), count 1); orally 1Allfurther statutory references are to the Penal Code unless otherwise indicated. 2Effective January 1, 2019, this statute was renumbered as section 287. 2 copulating V.S., a person under 14 years of age who also was more than 10 years younger than he ([former] § 288a, subd. (c)(1), count 2); and orally copulating V.S., a child 10 years old or younger (§ 288.7, subd. (b), count 3). Counts 2 and 3 arose out of a single incident with V.S., who was nine years old. The information alleged a multiple victim enhancement as to all three counts. (§ 667.61, subds. (b) & (e).) [¶] Defendant proceeded to a bench trial, at which the prosecution dismissed the multiple victim allegation as to count 3. The trial court found defendant guilty of all three counts and found true the remaining multiple victim allegations.” “Invoking section 667.61, subdivision (b), the trial court sentenced defendant to 15 years to life on each of counts 1 and 2. The court stated that it had no choice but to run those sentences consecutively, for a total sentence of 30 years to life. The court imposed and stayed a sentence of 15 years to life on count 3, pursuant to section 654. It also imposed various fines and fees, and issued a protective order barring defendant from contacting G.R. and V.S.” (People v. Rangel, supra, B271735.) On appeal, defendant asserted in part that the multiple victim enhancement as to counts 1 and 2 under section 667.61, subdivisions (b) and (e) was not applicable to his case as a matter of law. The Attorney General agreed. We concurred, stating, “Defendant . . . was convicted of only one offense specified in section 667.61, subdivision (c), against only one victim, G.R. The multiple victim enhancement accordingly was inapplicable as a matter of law and must be reversed.” (People v. Rangel, supra, B271735.) We therefore affirmed the judgment, ordered the multiple victim enhancement pursuant to section 667.61, 3 subdivisions (b) and (e) stricken, and remanded the case for resentencing. (Ibid.) Following remand, on December 20, 2017 the private attorney who had previously represented defendant, Oscar Perez, informed the court that he no longer represented defendant. The court appointed the public defender’s office to represent defendant. After several continuances, on April 2, 2019, defendant filed a petition for a writ of habeas corpus. He argued that his “[t]rial counsel failed to properly apprise the petitioner of her [sic] Sixth Amendment right to a jury trial, any resulting jury trial waiver was not knowing and intelligent, and there was no reasonable strategic reason for waiving jury trial in this case.” Defendant represented that the jury waiver occurred as follows: “The Court: Mr. Rangel, I understand you are going to waive your right to a jury trial and have me hear this matter as a court trial? “The Defendant: Yes. “The Court: After discussing this with your attorney, you are waiving your right to a jury trial and agree I can hear this matter; there won’t be a jury? “The Defendant: Yes.” Defendant argued that the “two-question waiver by Judge Otto did not disclose to Mr. Rangel the difference between a court and jury trial, how many individuals would make up a jury, a jury will be from the community and not other Judges, any basic differences between court and jury trial, and thus the only remedy being that Mr. Rangel be given a new jury trial.” Defendant also argued that he received ineffective assistance of counsel during trial. Following appeal and remand, 4 Perez had been unable to locate defendant’s case file. Defendant argued, “Mr. Perez does not have a file associated with Mr. Rangel’s case. . . . There is no indication that there were any kind of investigation [sic] conducted” into the allegations against defendant. Defendant also argued that Perez’s trial performance “falls below the suggested case law,” because his cross- examination of witnesses was “perfunctory,” he did not file trial motions, and he did not file a sentencing memorandum. The court ordered the District Attorney of Los Angeles County (the People) to file a return. The People contended that defendant forfeited any argument that his jury trial waiver was not knowing and intelligent by failing to assert it on direct appeal. The People also argued that because defendant “has waived his right to a jury trial [in] seven separate prior cases,” the argument that defendant did not understand his rights was not credible. The People further contended that defendant failed to prove that his trial counsel’s performance was deficient, or that any such deficiency was prejudicial. At the hearing on October 10, 2019, the court denied defendant’s petition, stating, “[T]he totality of the circumstances, particularly including the seven prior jury waivers in connection with misdemeanor pleas and duly executed Tahl waiver[3] on one, the court finds that the jury waivers here were knowing and intelligently given, notwithstanding the court did not provide a 3 See, e.g., People v. Burns (2019) 38 Cal. App. 5th 776, 782 [“For a plea to be constitutionally valid, the record must demonstrate a defendant’s knowing and voluntary waiver of . . . three constitutional trial rights, now known as a ‘Boykin-Tahl waiver’; waiver cannot be presumed from a silent record. (Boykin [v. Alabama (1969) 395 U.S. 238,] 243, 89 S. Ct. 1709; In re Tahl (1969) 1 Cal. 3d 122, 132, 81 Cal. Rptr. 577, 460 P.2d 449.)”].) 5 full colloquy of the details on the waiver.” The court added that defendant’s failure to argue the issue on appeal barred him from asserting it in a habeas petition. The court continued, “As to the ineffective assistance of counsel claim, that’s denied. There’s no demonstration that the performance was inefficient as [sic] showing a reasonable probability that [defendant] was prejudiced by the deficient performance.” The trial court sentenced defendant to a total of 21 years to life, consisting of 15 years to life on count 3 as the principal term; six years on count 1 to run consecutively; and 15 years to life on count 2, stayed pursuant to section 654. Defendant timely appealed. On appeal, defendant’s appointed counsel filed a brief requesting that we independently review the record for error. (Wende, supra, 25 Cal. 3d 436, 441.) We directed counsel to send the record and a copy of the brief to defendant, and notified defendant of his right to respond within 30 days. We have received no response. DISCUSSION We have examined the entire record, and are satisfied no arguable issues exist in the appeal before us. (Smith v. Robbins (2000) 528 U.S. 259, 278; People v. Kelly (2006) 40 Cal. 4th 106, 110; Wende, supra, 25 Cal.3d at p. 443.) In a non-capital case such as this one, there is “no right to appeal from a superior court denial of habeas corpus relief.” (Briggs v. Brown (2017) 3 Cal. 5th 808, 836.) 6 DISPOSITION The judgment is affirmed. NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS COLLINS, J. We concur: WILLHITE, ACTING P.J. CURREY, J. 7	01-04-2023	09-03-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624199/	IRENE COFFIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Coffin v. CommissionerDocket No. 5930.United States Board of Tax Appeals8 B.T.A. 421; 1927 BTA LEXIS 2885; October 1, 1927, Promulgated 2885 Leslie J. Aker, Esq., for the petitioner. George G. Witter, Esq., for the respondent. ARUNDELL421 ARUNDELL: Deficiency in income taxes for the year 1922 in the amount of $202.15. FINDINGS OF FACT. In 1922, and prior thereto, petitioner was the owner and holder of a promissory note in the principal sum of $3,500, which note was dated April 10, 1917, and payable six months after date. The note was given by the Bar V Cattle Co., a corporation of Boise, Idaho, and B. W. Walker, son-in-law of petitioner, as accommodation maker. No security of any kind was ever given to secure the payment of the note and no payments of principal or interest have ever been made upon the note. The original maker of the note, the Bar V Cattle Co., became insolvent during the year 1922, its assets were entirely disposed of to satisfy mortgage loans and creditors, and its corporate charter was revoked under the Idaho laws for failure to pay license fees. The accommodation maker of the note, B. W. Walker, in 1922 owned no property and was entirely insolvent. The wife of Walker was the owner of separate property and assets worth $30,000 or more, all of which was2886 in her own name. A part of the property owned by Mrs. Walker is income-producing property and the income 422 therefrom is community property. No suit or action or other legal proceeding was ever brought against the Bar V Cattle Co. or B. W. Walker to recover upon the note, and the note was never legally protested or notice of protest given to Walker. The statutes of Idaho provide that an action may be brought on written instruments within five years. More than five years had elapsed between the due date of the note and December 31, 1922. Petitioner deducted, on her personal income-tax returns for the year 1922, $3,500 representing the face amount of the note, and this amount was disallowed upon audit by the Commissioner. The indebtedness of $3,500 was ascertained to be worthless and charged off within the taxable year 1922. Judgment will be entered for the petitioner on 15 days' notice, under Rule 50.Considered by STERNHAGEN and LANSDON.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624200/	CITRUS SOAP CO. OF CALIFORNIA, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Citrus Soap Co. v. CommissionerDocket No. 13249.United States Board of Tax Appeals14 B.T.A. 1155; 1929 BTA LEXIS 2984; January 10, 1929, Promulgated 2984 1. Certain promissory notes held to have been bona fide paid in to the petitioner for shares of its capital stock and to have been of the actual cash value of $350,000, which amount should be included in invested capital for 1920 and 1921. 2. Rate of depreciation of the petitioner's factory, determined. Henry J. Bischoff, Esq., for the petitioner. Irwin R. Blaisdell, Esq., for the respondent. MARQUETTE 1156 This proceeding is for the redetermination of deficiencies in income and profits taxes asserted by the respondent in the amounts of $11,297.38 for the period beginning June 1 and ending December 31, 1920, and $16,916.95 for the year 1921. The deficiencies arise from the reduction by the respondent of the petitioner's invested capital, and the disallowance of a loss claimed by the petitioner to have been sustained on the sale of certain of its assets. FINDINGS OF FACT. For a number of years prior to 1920, the Citrus Soap Co., a corporation, hereinafter called the Old Corporation, was engaged in business in the State of California. Its original capital stock consisted of 361 shares of the par value of $100 each, but early2985 in 1920 it declared a stock dividend of 1000 per cent, which increased its capital stock to 3,971 shares. All of the capital stock, except a nominal amount held by one Fulton, as a director, was owned by Robert P. Franck, Richard H. Franck, Elizabeth Franck, and George T. Franck. They were also officers and directors of the corporation and managed the business. The Citrus Soap Co. of California, the petitioner herein, was organized under the laws of California some time prior to May 21, 1920, with an authorized capital stock of 7,500 shares of common stock and 7,500 shares of 7 per cent preferred stock, of the par value of $100 per share. Both classes of stock had voting rights. On May 21, 1920, the petitioner, by resolution duly adopted by its board of directors, decided to purchase all of the assets of the Old Corporation. On May 24, 1920, the Commissioner of Corporations of the State of California gave the petitioner a written permit to issue 3,971 shares of its common stock to the Old Corporation in exchange for all of the property and assets of that company, and to sell 4,000 shares of its preferred stock to Stephens & Co. for cash at a price to net the petitioner not2986 less than $87.50 per share. On June 1, 1920, an amended permit was issued to the petitioner by the Commissioner of Corporations of the State of California, which is in part as follows: Pursuant to its application, CITRUS SOAP COMPANY OF CALIFORNIA is permitted to sell and issue shares of its capital stock as follows: 1st. 3,971 shares of its common stock to Citrus Soap Company, in exchange for all of the property and assets of said Citrus Soap Company, first to be transferred to applicant, subject only to the liens and indebtedness recited in said application; and thereafter and not otherwise; 2nd. 4,000 shares of its preferred stock to Stephens & Company, in exchange for the 7 promissory notes of said Stephens & Company, for the aggregate 1157 principal sum of $350,000, and in the form of notes filed herein with said application. This permit is issued upon each of the following conditions: (a) That all certificates representing any of said 4,000 shares herein permitted to be sold for notes, shall be retained by said applicant company as a pledge for and until full payment of the note or notes for which they were sold and issued. On the same date the2987 petitioner issued 3,971 shares of its common stock to the Old Corporation in exchange for all of the assets of that company subject to its liabilities. The stock so issued was distributed among the stockholders of the Old Corporation in proportion to their stockholdings therein. The petitioner on June 1, 1920, also issued to Stephens & Co., 4,000 shares of its preferred stock. This stock was represented by certificates Nos. 1 to 7, as follows: SharesCertificate No. 1250Certificate No. 2250Certificate No. 3500Certificate No. 4500Certificate No. 5500Certificate No. 6500Certificate No. 71500In exchange for said 4,000 shares of preferred stock the petitioner received from Stephens & Co. seven promissory notes of that company, as follows: Note No. 1 for $70,000 due June 5, 1920. Note No. 2 for 23,750 due July 1, 1920. Note No. 3 for 43,750 due Sept. 1, 1920. Note No. 4 for 43,750 due Oct. 1, 1920. Note No. 5 for 43,750 due Dec. 1, 1920. Note No. 6 for 43,750 due Jan. 1, 1921. Note No. 7 for 131,250 due Mar. 1, 1922. These notes bore interest at the rate of 7 per cent per annum. When said preferred stock was issued2988 to Stephens & Co. the certificates therefor were immediately endorsed in blank by that company and left with the petitioner as collateral security for the payment of said notes. Stephens & Co. sold said preferred stock to its customers as opportunity occurred. Upon the payment of each note the stock was released, and so much thereof as Stephens & Co. had sold went to the purchasers and the balance went to Stephens & Co. Note No. 1 was canceled when it became due upon the payment by Stephens & Co. of $20,000, the balance being settled by a discount given to Stephens & Co. in order to make the net price of the stock $87.50 per share. All of the other notes were paid, except Note No. 7. About two years after it became due, it and the stock certificate securing it were canceled by mutual agreement between the petitioner and Stephens & Co. This was done because the petitioner needed no further funds. 1158 Stephens & Co. was financially responsible and the said notes were bona fide paid to the petitioner for shares of its capital stock and were of the fair market value of $350,000. The value of the net tangible assets of the Old Corporation and its net income before2989 payment of Federal taxes for the years 1915 to 1919, inclusive, and for the period January 1 to May 31, 1920, as shown by its books, were as follows: YearIncome before tax paidTangiblesFederal taxes1915$59,995.84$76,450.16$599.96191640,452.9091,575.66809.06191729,895.08105,690.087,788.45191832,740.00124,977.0014,647.731919101,691.19147,215.0238,612.475 months, 1920,55,199.41271,408.0121,549.43Total319,974.42817,315.93The petitioner constructed a new factory in the year 1920 at a cost of $138,583.31, divided as follows: Excavation$259.94Foundations16,987.65Brick construction19,529.78Wood construction50,419.87Steel and iron work7,289.39Metal sash and doors7,470.03Roofing$2,186.99Elevators4,315.73Electrical equipment5,732.80Sprinkler system17,776.91Plumbing3,799.71Miscellaneous2,812.51The useful life of the building is 25 years. In its return for 1921 the petitioner claimed and was allowed depreciation on said building computed at the rate of 3.063 per cent. Among the assets acquired by the petitioner from the Old Corporation was a factory2990 building which had been in use for a number of years. About the end of the year 1920 the petitioner disposed of this building and machinery therein, they being no longer needed, for $2,220.60, and in its return for that year it claimed a loss of $13,474.74 thereon. The petitioner, in its income and profits-tax return for the period beginning June 1, and ending December 31, 1920, computed its invested capital at $850,616.65, as follows: Capital stock$397,100.00Capital stock, preferred400,000.00Reserve for taxes53,516.65The respondent eliminated from invested capital good will in the amount of $129,938.04 and $64,109.94 of the value of tangibles claimed to have been acquired from the Old Corporation, and the 1159 reserve for taxes, and disallowed in part the loss claimed on the disposition of its old factory. The respondent included in invested capital on account of the notes received by the petitioner from Stephens & Co. only the amount of said notes actually paid within the taxable year prorated to the dates of payment, and determined a deficiency in tax for the period June 1 to December 31, 1920, in the amount of $11,297.38. For the year2991 1921 the respondent eliminated from invested capital as computed by the petitioner the amount of $129,938.04 claimed as good will acquired from the Old Corporation and $51,377.14 of the claimed value of tangibles acquired from that company, and included in invested capital on account of the notes of Stephens & Co. only the amount of such notes that had actually been paid, and determined a deficiency in tax in the amount of $16,916.95. OPINION. MARQUETTE: The issues raised by the pleadings in this case are: (1) What amount is the petitioner entitled to include in its invested capital for the years 1920 and 1921 on account of the assets acquired by it from the Old Corporation? (2) What amount is it entitled to include in invested capital on account of the seven promissory notes received from Stephens & Co. in payment for its preferred stock? (3) Whether the petitioner is entitled to additional depreciation for the year 1921 on its newly constructed factory. (4) Whether it is entitled to a further deduction from gross income for 1920 on account of the loss on the sale of its old factory building, machinery and equipment. It is the contention of the petitioner that in exchange2992 for its common stock it acquired from the Old Corporation assets of the value of $397,100, including good will; that the notes of Stephens & Co. were bona fide paid in for shares of the petitioner's preferred stock and were of the value of $350,000, which should be included in invested capital; that it is entitled to depreciation on its newly constructed factory and equipment for 1921, computed at the rate of 4.269 per cent, and that it is entitled to a further deduction of $11,718.02 as a loss sustained on the sale of its old factory building. The respondent contends that more than 50 per cent of the ownership or control of the petitioner remained in the same interests that owned or controlled the Old Corporation, and that under section 331 of the Revenue Act of 1918, and section 331 of the Revenue Act of 1921, the petitioner is not entitled to include in its invested capital the assets acquired from the Old Corporation at more than their cost to that company; that the notes of Stephens & Co. were not bona fide 1160 paid in for stock of the petitioner, and that only the amounts actually paid on such notes in 1920 and 1921 should be included in invested capital for those2993 years, and that the petitioner is not entitled to any greater allowance for depreciation on its new factory building or a greater loss on the sale of its old factory, than has heretofore been allowed. The first two issues are so closely related that they will be discussed together. We are of opinion that the restrictions on invested capital imposed by section 331 of the Revenue Acts of 1918 and 1921 do not apply to the transaction under consideration. The evidence shows that on June 1, 1920, the petitioner issued to Stephens & Co. certificates for 4,000 shares of its capital stock, and on the same day it issued 3,971 shares of its capital stock for the assets of the Old Corporation, and that the shares issued to the Old Corporation were promptly distributed among the stockholders of that company. The proportions of the stock so issued then stood: Per centTo Stephens & Co50.2To the Franck family49.8But the respondent urges that the issue to Stephens & Co. was not a bona fide sale because that stock was later sold to various customers of Stephens & Co., and that while it was in form a sale it was in reality merely a contract under which Stephens & 2994 Co. undertook, for a commission, to sell the stock for the petitioner. We do not so regard it. The 4,000 shares of preferred stock were issued to Stephens & Co., who became the owners, entitled to vote it at stockholders' meetings and to the dividends which it earned. It is true that the certificates were endorsed in blank and placed with the petitioner as collateral security for the payment of the purchase money notes given by Stephens & Co., but this did not divest Stephens & Co. of its rights as a stockholder either as to voting or as to dividends. Stephens & Co. purchased the stock in question from the petitioner with the approval of the Commissioner of Corporations of the State of California, and it paid for the stock with notes. Stephens & Co. was a responsible, solvent concern, and the notes had a fair market value of $350,000 and were enforceable to that extent. We do not attach any importance to the fact that the last note and the stock for which it was given were canceled. That was done because at that time the petitioner no longer needed additional funds, and the cancellation of the note and the stock amounted in fact to a retirement of the stock. When the 4,0002995 shares of preferred stock and 3,971 shares of common stock were issued by the petitioner as described in the findings of fact, the legal ownership of more than 50 per cent, and 1161 with it the control of the company, was in the hands of others than those who owned and controlled the Old Corporation. The petitioner is entitled to include the notes of Stephens & Co. in its invested capital at the amount of $350,000, and it is not restricted, in determining the amount at which the assets acquired from the Old Corporation may be included in invested capital, to the value at which they could have been included in the invested capital of that company. The petitioner acquired all the property of the Old Corporation, and since section 331 of the Revenue Acts of 1918 and 1921 does not apply here, it may, under section 326(a)(2) and (5) of the Revenue Acts of 1918 and 1921, include in its invested capital the actual cash value of such property, subject to certain limitations on intangibles, provided such value is capable of ascertainment. As to this issue, however, the petitioner has failed to produce any evidence that would warrant us in disturbing the determination of values2996 made by the respondent. We have before us evidence as to the amounts at which the tangible assets were carried on the books of the Old Corporation and the earnings of that company over a period of years. There is also evidence that an appraisal was made of these assets about 1920, which appraisal is not before us. The book entries of the Old Corporation are not sufficient to prove that the values they purport to give the assets in question are correct, and they are not supported by other evidence. On this issue we must decline to disturb the determination of the respondent. We are of opinion that the petitioner's new factory building had a useful life of 25 years and that it should be allowed depreciation thereon computed at the rate of 4 per cent at a cost of $138,583.31. For the reasons heretofore stated we are unable to determine the cost to the petitioner of the old factory building and we can not, therefore, disturb the respondent's determination as to the amount of the loss sustained in 1920 on the sale thereof. At the hearing it was stipulated that the reverve for taxes which the respondent eliminated from the petitioner's invested capital for 1920 consisted of2997 certain taxes of the Old Corporation, the payment of which the petitioner assumed; that an equal amount of cash was turned over to the petitioner for that purpose, and that the respondent erred in eliminating the reserve from invested capital. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624201/	Floyd L. Freberg and Kathryn B. Freberg v. Commissioner.Freberg v. CommissionerDocket No. 1026-63.United States Tax CourtT.C. Memo 1964-129; 1964 Tax Ct. Memo LEXIS 207; 23 T.C.M. (CCH) 784; T.C.M. (RIA) 64129; May 7, 1964Frank C. Scott, P.O. Box 1904, Stockton, Calif., for the petitioners. Roger A. Pott, for the respondent. RAUMMemorandum Findings of Fact and Opinion Respondent determined deficiencies in income tax of petitioners in the amounts of $12,823.38 for 1959 and $2,344.75 for 1960. The sole issue is whether gain realized by petitioners from the sale of parcels of real property during the years 1959 and 1960 is taxable as ordinary income or capital208 gain. Findings of Fact Some of the facts have been stipulated, and, as stipulated, are incorporated herein by reference. During the years 1959 and 1960, petitioners, husband and wife, resided in Yuba City, Sutter County, California. They filed joint income tax returns for those years with the district director of internal revenue at San Francisco. In 1944, petitioners, then residents of Gustine, Merced County, California, purchased approximately 30 acres of land in Sutter County, California, for $10,500. Approximately 20 acres of this land were improved by a walnut grove, and the remainder was bare arable land. In 1946 petitioners sold from their 30 acres approximately 8.25 acres of land, none of which was planted in walnut trees, to a neighboring land owner. In 1954 they sold two lots each 100 X 150 feet, and deeded a portion of land between the lots, 60 X 100 feet, to Sutter County for purposes of a street (0.8264 acres in all). From 1944 until 1952 petitioners commuted from Gustine to Yuba City on weekends and during vacations to operate the walnut farm. They moved to Yuba City in 1952, and from 1952 through 1960 Floyd $ Freberg was employed by the local walnut association209 as an accountant. When they purchased the 30-acre tract in 1944, it was "out in the country". By 1955, the portion of the tract then owned by them was in a populated area. Sutter County prohibited the use of poisonous insecticide sprays in populated areas, and petitioners had to discontinue the use of such sprays on their walnut trees. The operation of the walnut farm under the conditions then existing was beginning to be "a little bit of a problem" and petitioners decided to subdivide and sell the property. They continued to operate the walnut farm "to a certain extent" during the years 1955 through 1960, and realized some income from the sale of walnuts. On April 1, 1955, petitioners, as Parties of the First Part, entered into an agreement with Leonard B. Stafford and Lavonne Stafford, his wife, as Parties of the Second Part, providing for the subdivision of approximately 20 acres of the petitioners' property. Stafford had previously had some experience in subdividing, developing and promoting the sale of real property. The agreement provided, in part, as follows: WHEREAS, Parties of the First Part with the assistance of Parties of the Second Part intend to subdivide approximately210 twenty (20) acres of land in Sutter County, California, owned by Parties of the First Part and such subdivisions to be designated as Hillcrest Terrace Nos. 3, 4 and 5 each in subdivision blocks of approximately equal proportions, and WHEREAS, the Parties of the Second Part intend to advance the necessary funds for mapping and developing said subdivisions, which advancements are now estimated by the parties to amount to the sum of $13,000.00 as to the first of such subdivisions and $10,000.00 total as to the other two subdivisions: NOW, THEREFORE, IT IS AGREED BETWEEN THE PARTIES FOR THE ACCOMPLISHMENT OF THE ABOVE PURPOSES AS FOLLOWS: Parties of the First Part and Parties of the Second Part shall proceed with the plans for the development of the subdivisions before mentioned and in that connection it shall be the duty of the Parties of the First Part to sign all documents, maps, restrictions and applications necessary to accomplish such purpose. Parties of the First Part shall give to the Parties of the Second Part a Deed of Trust on the first subdivision tract to secure the payments due to Parties of the Second Part hereunder in the amount of $13,000.00 payable on or before211 ten (10) years from this date without interest and on the other subdivisions as and when they are agreed upon an additional deed of trust shall be given by Parties of the First Part to Parties of the Second Part to secure the advances for each. It shall be the obligation of the Parties of the First Part to furnish good title to all of such subdivision land and it shall be the duty of the Parties of the Second Part to process all applications in connection with said proposed subdivisions to the satisfactory approval thereof by the County, State and Federal agencies as shall be desired by the parties. All advancement made by the Parties of the Second Part hereunder shall be returned to them in cash as follows: From the first sale of lots in said subdivisions, one-half of the advancement shall first be returned to the Parties of the Second Part plus ten percent (10%) of the gross sales price of all lots sold, which ten percent (10%) of all lots sold shall be the compensation due to the Parties of the Second Part for their assistance in promotion and sales of said subdivision property. After one-half of said advancements have been paid Parties of the Second Part shall receive a minimum212 of $500.00 from each lot sold until the advancements have been repaid to them in full plus ten per cent (10%) of the gross sales price of each lot in said subdivisions and after all advancements are paid the Parties of the Second Part shall receive ten per cent (10%) on all gross sales of lots in said proposed subdivision in consideration of their services. It is agreed by the Parties of the Second Part that as and when lots are sold from said subdivisions they shall execute partial reconveyances for the particular lots as sold in order to affect release of the deed of trust hereinbefore mentioned. The note balance due Parties of the Second Part shall be left at a minimum of $100.00 until the last lot in each subdivision shall be sold. Parties hereto agree that any advances may by Parties of the Second Part shall be deposited in a joint checking account by the parties in The First Western Bank at Marysville, California, and that all checks against said account shall be signed by at least one of each of the parties. The parties agree as to prices and terms of the lots of said subdivisions they will from time to time reach a mutual agreement thereon and if the parties are unable213 to agree upon the sales price they agree that they will arbitrate the proposed sales price in the following manner: * * It is agreed that all improvement work will be submitted to contractors on a bid basis and that the parties will accept the lowest and best bid for such work. The parties each agree that they will hereafter execute all documents and maps necessary to accomplish the purposes herein contemplated and this agreement shall continue until all lots in said proposed subdivisions shall have been sold. * In 1955 and 1956 petitioners subdivided 7.5 acres known as Highland Estates into 16 lots. Improvements were made to the subdivision and all of the 16 lots were sold in the years 1955 through 1957. The April 1, 1955 agreement was amended on December 22, 1958 to include that portion of the 20 acres not previously subdivided. In the amendment petitioners agreed to give the Staffords a deed of trust on the property to be subdivided in the amount of $22,000, and the terms of repayment of moneys advanced by the Staffords were changed to provide that the Staffords would receive the first $5,000 of sales proceeds, then half of the sales proceeds until one-half214 of the amounts advanced by them had been repaid, and thereafter $1,000 per lot until $100 remained unpaid. In late 1958 petitioners subdivided 12.09 acres known as Highland Estates No. 2 into 30 lots. The subdivision was improved, and 21 lots were sold in 1959, 3 in 1960 and 6 in 1961. The adjusted cost basis of the Highland Estates No. 2 acreage was $3,350 prior to the subdivision. Petitioners made expenditures to improve the subdivided property, the cost of which was as follows: Engineering$ 2,842.27Curbs, Gutters, Roads(Grading and Surfacing)13,818.85Drainage System Installa-tion4,489.99Total Cost of Improvements$21,151.11Other: Clearing Water DisposalEastement$ 605.82Miscellaneous and Legal183.68Total789.50Adjusted Cost Basis of Land3,350.00Total Adjusted Basis Prior to Sale$25,290.61The income of petitioners for the years 1954 through 1960, as reported by them in their income tax returns, was as follows: ,yearNet FarmSalaryCapital GainOtherTotal1954$1,627.20$4,400.00$ 879.00None$ 6,906.2019552,443.224,871.6413,569.48$ (32.24)20,852.1019562,531.554,982.921,285.21558.879,358.551957431.004,982.931,682.96595.657,692.541958549.005,100.00453.96408.046,511.001959513.585,547.9323,753.85456.3630,271.721960564.305,400.007,544.561,205.5214,714.38215 Respondent determined that the lots sold by petitioners in 1959 and 1960 represented property held by them primarily for sale to customers in the course of their trade or business and that the profit realized from the sale of such lots, $47,537.88 in 1959 and $14,980.12 in 1960, was taxable as ordinary income. During the years 1959 and 1960 petitioners held their land in Sutter County primarily for sale to customers in the ordinary course of their trade or business. Opinion RAUM, Judge: Petitioners contend that the lots sold by them in 1959 and 1960 were property used by them in their trade or business of operating a walnut farm, and that under the provisions of Section 1231 of the Internal Revenue Code of 19541 the profit realized by them on such sales represented gain from sales of capital assets only one-half of which was includable in their gross income. They urge that there can be no doubt that their purpose in acquiring the property in 1944 was to engage in the business of operating a walnut farm and that they continued to operate it for that purpose up to 1955; that they derived a profit from this business up to and beyond the year 1955; that216 in these circumstances it would be unreasonable to assume a change either in 1955 or subsequently to a holding of the property by them primarily for sale to customers in any business of selling residential lots imputable to them; that their participation in the subdivision and sales activities was a passive one consisting to a large degree merely of approval of, and signing, deeds and other documents; and that Stafford by reason of his investment of funds in the subdivisions and his say in fixing prices was acting more as a principal in a joint venture than as agent for them. 217 Under the provisions of Section 1231, supra, and Section 1221(1) 2 of the 1954 Code the land owned by petitioners which was subdivided into lots in 1958 and sold in 1959 and 1960 does not qualify as a capital asset if it was held by them primarily for sale to customers in the ordinary course of their trade or business.3 Whether it was so held is essentially a question of fact. In the numerous instances in which this question has been considered by this and other courts certain factors have been recognized as helpful guides in reaching the correct result. Among them are the purposes for which the property was acquired; frequency and continuity of sales as opposed to casual sales; and the activity of the seller or those acting for him in making improvements to the property. See Kelley v. Commissioner, 281 F. 2d 527, 529 (C.A. 9); Pool v. Commissioner, 251 F. 2d 233, 235 (C.A. 9), certiorari denied, 356 U.S. 938">356 U.S. 938; Stockton Harbor Industrial Co. v. Commissioner, 216 F. 2d 638, 650 (C.A. 9); Palos Verdes Corp. v. United States, 201 F. 2d 256, 258 (C.A. 9); Home Co., Inc. v. Commissioner, 212 F. 2d 637, 639218 (C.A. 10).We agree with petitioners that they acquired the 30-acre tract in 1944 for the purpose of operating a walnut farm thereon, and that they held the property primarily for that purpose prior to 1955, the year in which they decided to subdivide it. We do not agree that they continued to hold that property primarily for that purpose in 1955 and subsequent years. The evidence discloses that early in 1955 petitioners experienced difficulty in the operation of their farm because property adjacent to it had become populated and they had to discontinue219 spraying their walnut trees. They then decided to subdivide their land into lots and sell them. They made substantial expenditures for curbs, gutters, roads, and a drainage system to prepare the land for sale which amounted to approximately seven times the adjusted cost basis of the acreage. During the years 1955 through 1960, 40 of the 46 lots in the subdivided land were sold, 21 in 1959 and 3 in 1960. While it is true, as alleged by petitioners in their amended petition and admitted by respondent in his answer, that Stafford acted as their agent in subdividing the property and making the sales, it is well settled that persons may engage in business through an agent and the activities of the agent for their benefit will be imputed to them. Kelley v. Commissioner, 281 F.2d 527">281 F. 2d 527, 529 (C.A. 9); Achong v. Commissioner, 246 F.2d 445">246 F. 2d 445, 447 (C.A. 9); Kaltreider v. Commissioner, 255 F. 2d 833, 838 (C.A. 3); Gamble v. Commissioner, 242 F. 2d 586, 592 (C.A. 5). Viewed in this light there is no merit to petitioners' contention that their participation in the subdivision and sale activities was merely a passive one. The land they decided220 to subdivide and sell was their land; they made substantial improvements to prepare it for sale; acting through their agent they subdivided the land and sold lots; they participated in fixing the sales price for each lot; the lot sales were frequent and continuous; and they signed the deeds given to the purchasers. They were therefore engaged in the trade or business of selling real estate. Although they also continued during the years 1955 through 1960 to sell some walnuts grown on portions of the property that had not been sold, in diminishing quantities as shown in the stipulation of facts, it is apparent from the evidence that the land was not being held during those years primarily to engage in that business activity. The fact that some receipts were obtained through agricultural activities pending the final disposition of the property through the sale of lots does not change the conclusion that it was being held primarily for sale to customers. Stockton Harbor Industrial Co. v. Commissioner, 216 F. 2d 638, 655-656 (C.A. 9). The evidence convinces us, and we have found as a fact, that during 1959 and 1960 the land was held by petitioners primarily for sale to customers221 in the course of their real estate business. In the circumstances the respondent did not err in determining that the gain realized by petitioners from the sale of lots in those years was taxable as ordinary income and not as capital gain. Cf. Kelley v. Commissioner, 281 F. 2d 527 (C.A. 9). Decision will be entered for the respondent. Footnotes1. SEC. 1231. PROPERTY USED IN THE TRADE OR BUSINESS AND INVOLUNTARY CONVERSIONS. (a) General Rule. - If, during the taxable year, the recognized gains on sales or exchanges of property used in the trade or business, plus the recognized gains from the compulsory or involuntary conversion * * of property used in the trade or business and capital assets held for more than 6 months into other property or money, exceed the recognized losses from such sales, exchanges, and conversions, such gains and losses shall be considered as gains and losses from sales or exchanges of capital assets held for more than 6 months. * * * (b) Definition of Property Used in the Trade or Business. - For purposes of this section - (1) General Rule. - The term "property used in the trade or business" means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 167, held for more than 6 months, and real property used in the trade or business, held for more than 6 months, which is not - * * (B) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or * ↩2. SEC. 1221. CAPITAL ASSET DEFINED. For purposes of this subtitle, the term "capital asset" means property held by the taxpayer (whether or not connected with his trade or business), but does not include - (1) * * property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. ↩3. Petitioners concede on brief that the lots sold by them in 1959 and 1960 do not meet the requirements set forth in Section 1237 of the 1954 Code for property which "shall not be deemed to be held primarily for sale to customers in the ordinary course of trade or business at the time of sale * * *."↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624202/	RUSSELL G. FINN AND MARGARET A. FINN, EXECUTRIX OF THE ESTATE OF JOHN FINN, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Finn v. CommissionerDocket No. 9309.United States Board of Tax Appeals22 B.T.A. 799; 1931 BTA LEXIS 2064; March 18, 1931, Promulgated 2064 John P. O'Hara, Esq., for the petitioners. Arthur Carnduff, Esq., for the respondent. VAN FOSSAN 799 The petitioners seek a redetermination of the deficiencies and overassessments in income taxes determined by the respondent for 1920 and 1921. In the case of Russell G. Finn the respondent determined a deficiency of $6,175.32 for 1920 and an overassessment of $830.93 for 1921. In the case of John Finn the respondent determined a deficiency of $6,175.32 for 1920 and an overassessment of $318.49 for the year 1921. By proper order Margaret A. Finn, Executrix of the Estate of John Finn, was substituted for the petitioner, John Finn, deceased. The question raised by the pleadings is the amount of net income derived by the partnership, of which the petitioners were members, from two certain long-term contracts. Evidence was presented by the petitioners at the hearing as to a further issue relating to the disallowance of an alleged bad debt of $13,200, due from the city of Detroit. This issue was not raised in the pleadings, and as it is disregarded and not considered in the brief filed in petitioners' behalf, we assume that it has been abandoned. 2065 In any event, the Board is without jurisdiction to consider issues not properly raised in the pleadings. See , and cases therein cited. FINDINGS OF FACT. During 1920 John Finn and his son, Russell G. Finn, were equal partners in the firm of John Finn and Son. The partnership was engaged in a general contracting business in the city of Detroit, Mich. From the inception of the business and until 1920, it was the accounting practice of the partnership not to recognize or make a formal accounting on its books for the gain or loss on a particular contract job until the job was completed. Upon the completion of each job the difference between the total costs incurred and the total compensation received, representing gain or loss, was transferred to profit and loss account. In 1920 the partnership was engaged in construction work on about twelve contract jobs. As to all but two of these jobs, the compensation provided by contract was a fixed amount or lump sum. The partnership's accounting for the receipts and expenditures of 800 all but the two excepted jobs was consistent with its prior accounting practice; that is2066 to say, the gain or loss on each job, with two exceptions, was accounted for only when the job was completed. The two exceptions are the job known as the Municipal Tuberculosis Sanitarium at Northville, Mich., constructed under contract with the city of Detroit, and hereinafter referred to as the Northville job and the job known as the Oakland Hills Country Club buildings, hereinafter referred to as the Oakland Hills job. The contract for the Northville job contains the following provisions relating to compensation: ARTICLE 3. The owner agrees to pay the Contractor for the services which the Contractor agrees to perform under this contract, a fee equal to seven percent of the total cost of the work which, with said total cost, shall be due and payable in seven day installments as nearly as possible in compliance with city practice, as evidenced by approved statements of the Contractor. The Contractor guarantees that the cost of the work, including his fee, shall not exceed One Million Four Hundred Sixty Thousand, Eight Hundred Dollars ($1,460,800.00) exclusive of fixed allowances. In the event of the cost of the complete work exceeding the Contractor's guaranteed estimate, 2067 there shall be deducted from the Contractor's fee an amount equal to 15% of such excess. * * * ARTICLE 11. In the event of a deduction for overrun of the guaranteed estimate of One Million Four Hundred Sixty Thousand Eight Hundred Dollars (1,460,800.00) the regular rate of percentage (7%) shall be added to the gross cost of construction, then 15% of the amount of the net overrun shall be deducted for the overrun, plus the Contractor's fee. The contract for the Oakland Hills job contains the following provisions relating to compensation: ARTICLE 2. The Owner agrees to pay the Contractor for the services which the Contractor agrees to perform under this contract, a fee equal of 10% of the total gross cost of the work which will said total gross cost, shall be due and payable upon the request of the Contractor, as evidenced by approved statements of the Contractor. The Contractor guarantees that the cost of the work, including his fee, shall not exceed the sum of TWO HUNDRED SEVENTY FIVE THOUSAND DOLLARS ($275,000.00). In the event of the cost of the completed work exceeding the Contractor's guaranteed estimate, there shall be deducted from the Contractor's fee an amount2068 equal to 25% of such excess. In the event of a deduction for over-run, the deduction shall be made as follows: To the total gross cost of the work the Contractor shall add an amount equal to 10% of such gross cost. Then from the actual gross cost of the work (exclusive of the fee) then shall be deducted the amount of the guaranteed estimate ($275,000.00). The remainder of this subtraction shall constitute the over-run. 25% of this over-run shall be deducted from the Contractor's fee. It will thus be established that the Contractor shall receive as compensation for the execution of the above mentioned building, the total gross cost of the work plus a fee of 10%, less 25% of the over-run as computed by the above method. 801 The contracts for the Northville and Oakland Hills jobs were the first of their kind entered into by the partnership. Under all prior contracts, the partnership received a fixed price or lump sum, as compensation, while these two contracts provided for compensation upon the basis of total cost plus a fee representing stated percentages of total cost, less, in each case, a higher percentage of the excess over the guaranteed maximum total cost. It2069 was the desire of the partners that the accounting for the gains or losses on these two jobs should conform with their accounting practice as to all other jobs, that is to say, that no gain or loss on either of these two jobs be recognized or accounted for until the job was completed, and instructions to that effect were given to the bookkeeper. During 1920, the partnership received fees for work completed on the Northville and Oakland Hills jobs, in the amounts of $75,537.06 and $28,047.13, respectively. These fees were credited on the books to a new account denominated "Gross Profits from Contracts." At the close of the year it was believed by the partners that the total cost of each of these jobs would exceed the gauranteed maximum cost in the contract. Based upon known costs incurred to date and estimated costs to complete both jobs, it was estimated that the total amount which would be deducted from the total fees under the two contracts would be not less than $75,000 and perhaps more than $90,000. Accordingly, there was set up on the books a "Reserve for Overrun" of $90,000 to take care of the estimated deductions. Based upon the proportion of expenses for labor and2070 materials incurred to date to the estimated total expenses necessary for full performance of the contracts, the Northville job was approximately 90 per cent completed and the Oakland Hills job was 78.82 per cent completed, at December 31, 1920. The Northville and Oakland Hills jobs were completed in 1921. In each case the total cost of construction, including contractor's fee, exceeded the guaranteed maximum cost in the contract. The amounts charged back to the partnership as deductions from the fees computed according to the contracts on account of exceeding the guaranteed maximum costs, were $26,200.05 in the case of the Northville job, and $29,188.14 in the case of the Oakland Hills job. The partnership filed a return for 1920 on Form 1965. It was the intent and purpose of the partnership, in making the return, to compute the income from the Northville and Oakland Hills jobs on the completed-contract basis, in conformity with the method employed in computing the income from all other contract jobs. It included in gross income total fees received for the Northville and Oakland Hills jobs, amounting to $103,584.19, less $90,000 set aside 802 to the "Reserve for Overrun, 2071 " or a net amount of $13,584.19. The total gross income reported from all contract operations, including the Northville and Oakland Hills jobs, amounted to $86,501.97. The net income shown by the return was $49,362.49. Russell G. Finn and John Finn filed returns for 1920, in which each reported a distributive share in the net income of the partnership of $24,681.24. In 1924 the books of the partnership were examined by a revenue agent, and in a report bearing date of June 5, 1924, covering the tax liability of John Finn for 1920, the agent, without stating his reasons therefor, increased the distributive share of that individual in the partnership net income from $24,681.24, shown in his return, to $81,007.13. In a supplemental report bearing date of August 11, 1925, the same agent, without stating his reasons therefor, reduced the said John Finn's distributive share in the partnership net income from $81,007.13, shown in his first report, to $49,977.20 and recommended the assessment of an additional tax of $6,175.32, the amount of the deficiency determined in the deficiency notice to that individual. In the case of Russell G. Finn, the respondent also determined a deficiency2072 of $6,175.32, without setting forth the basis therefor in the deficiency notice. It was stipulated at the hearing "that the gross income for 1920 as reported by the petitioner on his income tax return is correct and was accepted by the Government; and the deficiency is based solely on the disallowance of the item of $90,000 reserve." OPINION. VAN FOSSAN: The respondent having determined an overassessment for 1921 in the case of both petitioners, the Board is without jurisdiction to determine any issue raised for that year. . Accordingly, the petition, so far as it relates to 1921, is dismissed. The petitioners contend that in computing the income of the partnership from the Northville and Oakland Hills jobs, the full amount of $90,000 set aside as a "Reserve for Overrun" should be allowed as an offset against the fees received on those jobs; or, in the alternative, that the income of the partnership from the Northville and Oakland Hills jobs should be redetermined on the completed contract basis, in accordance with article 36 of Regulations 45. The respondent contends that a portion of the reserve represents a contingent2073 liability which can not properly be taken into consideration in computing the income of the partnership. The respondent makes no defense to the petitioners' alternative contention. We omit consideration of the first contention advanced by the petitioners to consider the alternative one, because we believe that 803 in the latter lies the proper solution of the issue. An individual taxpayer who is a member of a partnership must return as income his distributive share in the partnership net income, section 218(a), Revenue Act of 1918; and the partnership net income must be determined in accordance with the method of accounting regularly employed in keeping the partnership books. Sections 218(d) and 212, Revenue Act of 1918; . The respondent's regulations permit the computation of income from long-term contracts upon the completed-contract basis. Article 26. Regulations 45. The completed-contract basis of computing income clearly reflects the income from long-term contracts. 2074 ; ; and ; and when the taxpayer's books are regularly kept upon the completed-contract basis, income must be computed on the same basis, for the purposes of the income tax. ; and Except for the Northville and Oakland Hills jobs, the accounting for all contract operations of the partnership was made on the completed-contract basis. It was not the intention of the partners that the accounting for the Northville and Oakland Hills jobs should differ, in any respect, from the method followed as to all other jobs; on the contrary, it was their wish, expressly communicated to the bookkeeper, that the accounting for the gains or losses on these two jobs should conform with the accounting practice as to all other jobs. Technically, it did not so conform, because there was an accounting made for the fees, as gains, prior to the completion of the contracts; but the reason for this, according to the bookkeeper's testimony, was his lack of experience and2075 of knowledge of what was required in the way of book entries, considering the peculiar compensation provisions of the two contracts. He had never before made an accounting for operations carried on under contracts which contained similar provisions as to guaranteed maximum costs and reduced fees in the event such guaranteed costs were exceeded. He believed, when he set up the "Reserve for Overrun" of $90,000 to take care of the estimated deductions which would be made from the fees provided in the two contracts on account of exceeding the guaranteed costs, that the accounting for those jobs conformed with the method otherwise used in keeping the books. In that he was mistaken. But his error, due to inexperience, can not alter the accounting method otherwise regularly employed in keeping the partnership books. The partnership having kept its books upon the completed-contract basis, the statute requires that its net income shall be computed upon the same basis. On this basis, gains and losses derived from long-term 804 contracts are to be included in income only when the jobs are completed. Since the Northville and Oakland Hills jobs were not completed until 1921, any*2076 gains in respect of those jobs should be eliminated from the income for 1920. Obviously, it follows that any portion of the "Reserve for Overrun" which has been allowed by the respondent, either as a deduction or as an offset against income for 1920, should be eliminated from the computation of net income. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624203/	Anna Morgan, Petitioner, v. Commissioner of Internal Revenue, Respondent. Samuel Morgan, Petitioner, v. Commissioner of Internal Revenue, RespondentMorgan v. CommissionerDocket Nos. 5699, 5700United States Tax Court5 T.C. 1089; 1945 U.S. Tax Ct. LEXIS 38; November 26, 1945, Promulgated 38 Decisions will be entered for the respondent. Grantors of trusts of which the corpus and accumulated income was invested in stock of wholly owned family corporations, of which their children and grandchildren were beneficiaries, and of which they were trustees with broad powers of management and with discretionary powers as to accumulation of income, held, taxable on income of trusts under section 22 (a) of the Internal Revenue Code. Earl Susman, Esq., for the petitioners.Gene W. Reardon, Esq., for the respondent. Opper, Judge. OPPER1089 OPINION.These proceedings are brought for redetermination of deficiencies in income tax as follows:19401941TotalAnna Morgan$ 604.98$ 1,364.66$ 1,969.64Samuel Morgan1,497.591,746.753,244.34The39 proceedings challenge respondent's inclusion under Internal Revenue Code, section 22 (a), in the respective petitioner's taxable income of income from four trusts of which they were grantors. In making the determinations of deficiencies, respondent allocated the 1090 trust income to the petitioners upon the basis of the percentage of principal transferred by each petitioner to the respective trusts.All of the facts are stipulated and are hereby found accordingly. They are substantially as follows:Petitioners, husband and wife, are individuals residing in Clayton, Missouri. They filed separate income tax returns for the taxable years here involved with the collector of internal revenue for the first district of Missouri.On October 1, 1937, petitioners, as grantors, executed four trust indentures, one each for their four children, Edith Morgan Frank, Frieda Morgan Ferman, Daniel Morgan, and Charles Morgan. Edith Morgan Frank was born October 14, 1915, was married on June 15, 1937, and attained the age of 21 years on October 14, 1936. Frieda Morgan Ferman was born on May 6, 1917, was married on January 12, 1941, and attained the age of 21 years on May 6, 1938. Daniel Morgan40 was born on November 22, 1918, was married on July 30, 1940, and attained the age of 21 years on November 22, 1939. Charles Morgan was born on January 31, 1925, is unmarried at this time, and will attain the age of 21 years on January 31, 1946, and has at all times material hereto lived with his parents. Edith Morgan Frank has two children, born September 12, 1938, and October 4, 1940. Daniel Morgan and Frieda Morgan Ferman each have one child, born July 7, 1941, and September 27, 1944, respectively. None of the three married children resided with their parents during the years 1940 and 1941.At the time of the execution of the trusts petitioner Samuel Morgan transferred 50 shares, par value of $ 100 per share, of the preferred capital stock of Guaranty Motor Corporation, a Missouri corporation engaged in the loan business, to each of the following three trusts: Frieda Morgan Ferman trust, Charles Morgan trust, and Daniel Morgan trust. At the same time petitioner Anna Morgan transferred $ 500 in cash to each of the four trusts. Immediately after the trusts were created the securities transferred were registered in the names of the trustees. On January 3, 1938, petitioner Samuel41 Morgan transferred 50 shares of preferred stock of Guaranty Motor Corporation to each of the four trusts. The name of Guaranty Motor Corporation was subsequently changed to Local Finance Co. The preferred stock involved was nonvoting stock.Substantially all of the net income of the trusts has been invested from time to time in additional preferred capital stock of Local Finance Co., and the assets held in each of the four trusts during the years 1940 and 1941 consisted solely of the preferred stock, 2 1/2 shares of the common stock of Safe-Way Finance Plan, Inc., a Missouri corporation, held in each of the four trusts, and small amounts of cash not currently invested.1091 The four indentures of trust are identical except as to the name of the primary beneficiary. Petitioners are cotrustees of each of the four trusts.The indentures recite petitioners' desires to create irrevocable trusts, and the transfer of property by them to themselves as trustees. The trustees' duties with respect to the management of the trusts stated that they were to receive and hold all income and increase of the trust estate; that in making the investments they should give primary consideration42 to the safety and security of the investment; that they should consider all cash dividends to be income; that they should consider all stock dividends, warrants, and subscription rights to be corpus or principal unless advised by counsel that such action would result in illegal or taxable accumulation, in which event they should have power to distribute the dividend or warrant to the parties entitled to that portion of the assets; that they should render an annual accounting to adult beneficiaries or to the guardian of minor beneficiaries.The trust indentures further recited that the trustees should have the power, as and when they in their absolute discretion should deem best or advisable, to acquire as assets of the trust estate securities, notes, deeds of trust, and other real or personal property; to deal with the trust assets in practically any manner; to cause trust property to be registered or held of record in the joint or several individual names of the trustees; to cause the organization of such corporations as they should deem proper and transfer thereto any or all of the assets of the trust estate, retaining all of the capital stock as trust assets, but permitting such43 stock to be held of record in the names of their nominees to qualify directors; to vote any corporate stock or enter into agreements with reference to reorganization or merger, or consent to the dissolution of any corporation in which the trust held stock; to hold compensating offices or positions in or with corporations or businesses in which the trust may have an interest or investment; "to vote as trustees to elect themselves as individuals to such offices and positions and to fix their own compensation incident to such offices and positions; and to retain such compensation for their personal use and benefit"; to remove liens from trust assets; to borrow money and pledge security therefor; to participate in legal proceedings; to compromise claims involving the trust estate; to employ legal counsel, accountants, and such other assistants as in their opinion should be reasonably necessary or advisable; "to apportion between principal and income any loss or expenditure which, in their opinion, should be apportioned, notwithstanding any legal or equitable rule to the contrary"; to use trust corpus in their absolute discretion in amounts necessary for the proper maintenance, support, 44 care, or education of any beneficiary, only if both grantors were financially unable to provide 1092 such maintenance, support, care, and education; to make distributions of income at the time and in the amounts they should deem convenient and practicable; to transfer to the respective primary beneficiaries, if living, or to further beneficiaries as hereinafter stated, any or all of the principal and income of the trust estate, notwithstanding any other provisions of the indenture, if any tax laws imposed taxes upon the trust or its income or upon the beneficiaries if the trustees should be of the opinion that the tax imposition would constitute an unreasonable or immoderate burden upon the trust or its beneficiaries, and their opinion on this was to be final and conclusive; to make the distributions of principal or corpus provided by the indenture in any proportions of cash or property "as selected, apportioned and evaluated" by the trustees, and their actions in this respect were conclusive; to treat with the property of the trust in all matters as "if they were the owners thereof as individuals."The trust indentures further provided that the trustees should permit the net45 income of the trust to accumulate and in their discretion invest the accumulations until the primary beneficiary reached the age of 30, after which they were to pay the entire net income of the trust to the beneficiary for life, but in their discretion they could pay the primary beneficiary only the amount which would be sufficient for proper and suitable maintenance, support, and care of the primary beneficiary and his children, "having due regard for the other finances and income of" the primary beneficiary and spouse, if any. It was provided that upon the death of the primary beneficiary, whether or not he had attained the age of 30, the trust should continue for the maintenance, support, care, education, and benefit of the then living children of such beneficiary, provided that if there were two or more children surviving, the primary beneficiaries' shares should be divided and held for such children or their child until the beneficiaries' children should attain the age of 21; that if there were no child or grandchild of the beneficiary surviving, all the assets of the trust estate were to be distributed free of trust to the living brothers and sisters of the beneficiary or their46 children, failing which, to the heirs at law of petitioner Samuel Morgan.It was provided that, with respect to every trust estate held for the benefit of a child of the primary beneficiary, the trustees in their discretion should expend what they deemed necessary of the net income for the maintenance, support, care, and education of such child until he reached the age of 21, and thereupon convey the entire trust estate to such beneficiary. Additional provisions were made for gifts over in the event of the decease of a child of a primary beneficiary after the death of the primary beneficiary but during the continuance of the trust.The trust indentures contained spendthrift provisions.1093 They further provided that, on the "inability, failure or refusal" of petitioner Anna Morgan to serve as trustee, petitioner Samuel Morgan was to serve as sole trustee of the trusts; that, in the event of the inability, failure, or refusal of petitioner Samuel Morgan to serve as a trustee, the Missouri Valley Trust Co. should serve with petitioner Anna Morgan as cotrustee; that should neither Anna nor Samuel Morgan serve as trustees, the Missouri Valley Trust Co. should serve as sole trustee. 47 The trust indentures provided that the trustees should receive a sum equal to 5 percent of the reasonable market value of property distributed by them as trustees.The trust indentures further provided that, notwithstanding any other provisions of the indentures, the trustees "in their absolute discretion and without any liability whatsoever" might retain as trust investments any and all property transferred to the trust and should not be required for any reason to convert the property into cash or other forms of investment unless in their discretion they should deem it to be for the best interests of the trust estate; that any successor trustee might accept as conclusive the accounting of all former trustees.Petitioners could make additional contributions to the trusts unless the trustees regarded such contributions as liabilities or potential liabilities.It was recited that the trusts and their provisions should be irrevocable "provided, however, that said trusts may be terminated in accordance with the terms and provisions of the within instrument."Petitioners, either individually or as trustees of the four trusts, owned all of the outstanding preferred stock of the Local Finance48 Co. except 35 shares of preferred stock transferred to each of the three children during the year 1941. The 250 outstanding shares of common stock of Local Finance Co., which carried the voting rights, were and are held as follows: Petitioner Samuel Morgan, 247 shares; petitioner Anna Morgan, 1 share; and 1 share each to 2 nominees or straw parties. Petitioner Samuel Morgan is president, and both he and his wife are directors, of the Local Finance Co.The shares of outstanding preferred stock of Local Finance Co. on January 1, 1940, December 31, 1940, and December 31, 1941, * were held as follows:FriedaEdithSamuelAnnaMorganDanielCharlesMorganMorganMorganFermanMorganMorganFranktrusttrusttrusttrust1/1/4073049028528528522512/31/4085558030730730724312/31/41* 7156273313313312621094 The preferred stock of Local Finance Co. is 8 percent nonvoting stock, and the total amount thereof issued and outstanding on December 31, 1941, was 2,737 49 shares. There was no common stock of Local Finance Co. held in any of the trusts.During the years 1940 and 1941 petitioners, as trustees, held 2 1/2 shares of the stock of Safe-Way Finance Plan, Inc., for each of the four trusts. The only issued and outstanding capital stock of Safe-Way Plan, Inc., a Missouri corporation engaged in the loan business, consisted of 20 shares of common capital stock, par value $ 100 per share. The balance of the outstanding capital stock of Safe-Way Finance Plan, Inc., was held, 5 shares by petitioner Samuel Morgan and 5 shares by petitioner Anna Morgan. No dividends were paid on such stock during either of the years 1940 and 1941.All of the stock certificates held in trust have been held in the name of petitioners as trustees under the several indentures of trust with specific reference to the respective beneficiaries of the trust. At all times herein material a separate bank account was maintained for each trust in the names of the trustees and separate books of account were maintained for each of the trusts. During all of the taxable years involved the trustees returned all of the trust income of each of the trusts in separate income tax returns. 50 The aggregate trust income of the four trusts amounted to $ 8,619.62 in 1940 and $ 9,481.97 in 1941, which respondent has allocated as follows:19401941Samuel Morgan$ 3,113.10$ 3,424.99Anna Morgan5,506.526,056.98For the year 1940 petitioner Samuel Morgan received a salary of $ 24,000 and dividends of $ 25,606.64 from Local Finance Co. For the year 1941 petitioner Samuel Morgan received a salary of $ 12,000 from Safe-Way Finance Plan, Inc., and a salary of $ 12,000 and dividends of $ 6,560.01 from Local Finance Co. Petitioner Anna Morgan received dividends of $ 4,223.34 for 1940 and $ 4,728.66 for 1941 from Local Finance Co.For all of the taxable years involved petitioner Anna Morgan usually took no direct action as trustee. Petitioner Samuel Morgan was usually dominant in all of the activities of the trusts and in the management thereof. In all matters relating to the trusts and their management Anna Morgan usually relied on Samuel Morgan, the other trustee. All investments of the trusts were made by Samuel Morgan, usually without consulting Anna Morgan. All of the many other duties and functions of the trustees, except those which were 1095 peculiarly51 formal, were generally discharged and performed by Samuel Morgan.In the aspect of the present proceedings that petitioners were in a position to accumulate trust income, add it to principal, and thereby succeed in changing the recipient from the income beneficiary to the remainderman, 1 the situation is similar to that in Louis Stockstrom, 3 T. C. 255; affd. (C. C. A., 8th Cir.), 148 Fed. (2d) 491; certiorari denied, U.S. , (Oct. 8, 1945); and see Stockstrom v. Commissioner (C. C. A. 8th Cir.), 151 Fed. (2d) 353. The broad powers of management and control in the grantors as trustees were similar here to those existing in the Stockstrom case.52 In one respect, however, they appear actually to be more extensive. Unlike those circumstances, the subject matter of the present trust was stock of corporations in which the petitioners were actively interested. To illustrate the extent of this factor and the possibility of its use for the realization of actual economic gain, the situation with respect to Safe-Way Finance Plan, Inc., one of the corporations, may be noted briefly. Not much appears as to its operation, the business in which it was engaged, the history of the company, nor the means by which its stock was acquired by the trusts, except that it, like petitioners' other company, was engaged in the loan business. But it does appear that only 20 shares of common stock were outstanding, of which half were held by petitioners and the other half were in the trusts. It follows that without the trust stock petitioners would not have had a majority nor presumably have been in a position to exercise complete control. Nevertheless, with the stock distributed as it was, we find from the stipulation that petitioner Samuel Morgan was the only member of the family to receive any economic benefit from this company in the year 1941, 53 since it paid no dividends, but he received a salary of $ 12,000. This situation consequently presents an instance of the retention of corporate control by means of the creation of a trust, Frederick B. Rentschler, 1 T.C. 814">1 T. C. 814; see also Edison v. Commissioner (C. C. A., 8th Cir.), 148 Fed. (2d) 810; Funsten v. Commissioner (C. C. A., 8th Cir.), 148 Fed. (2d) 805; and it is to be distinguished from such cases as David Small, 3 T. C. 1142, where no alteration in the voting potential resulted from the trusts.No point is made of the fact that in the tax years only one of the children of petitioners who were the trust beneficiaries was still a minor. But in any event the others had apparently reached their majority, married, and established separate homes after the trusts were created, with one possible exception, and control was retained 1096 by the grantors until the beneficiaries should reach 30, which was not yet the case as to any of them. We are unable to conclude that these circumstances indicate the absence of the family solidarity aspect54 of the Clifford2 rule. See Commissioner v. Woolley (C. C. A., 2d Cir.), 122 Fed. (2d) 167; certiorari denied, 314 U.S. 693">314 U.S. 693; Commissioner v. Barbour (C. C. A., 2d Cir.), 122 Fed. (2d) 165; certiorari denied, 314 U.S. 691">314 U.S. 691. Their significance must be viewed in the light of other facts. Here, for example, the beneficiaries of the trusts set up by petitioners constituted all of the members of the petitioners' immediate family. They had no more intimate family group. The fact that the beneficiaries had since established households of their own is not shown to have affected the intimacy of the family group. We conclude that the fact that the beneficiaries of these family trusts established their own homes after the creation of the trusts does not, when considered in the light of all the other circumstances, prevent the application of the doctrine of Helvering v.Clifford in considering the taxability of the trust income in years subsequent to the marriage of the beneficiaries.55 Decisions will be entered for the respondent. Footnotes*. During the latter part of the year 1941, Samuel Morgan transferred 35 shares of preferred stock to each of his 4 children individually.↩1. While the provisions of the trust instrument may not be as clear as could have been desired in this respect, this appears to be the construction adopted by petitioners throughout their briefs, e. g., "The rights to distribute or accumulate trust income did not result in any economic gain to petitioners↩." [Reply brief, p. 10; emphasis added.]2. Helvering v. Clifford, 309 U.S. 331">309 U.S. 331↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624207/	RALPH G. KAZI AND JEAN KAZI, ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Kazi v. CommissionerDocket Nos. 10233-79, 10234-79, 10236-79, 10237-79, 10238-79, 10240-79, 10241-79, 10242-79, 10243-79, 10244-79, 13246-80, 22297-80, 23476-81, 23479-81, 16675-83United States Tax CourtT.C. Memo 1991-37; 1991 Tax Ct. Memo LEXIS 48; 61 T.C.M. (CCH) 1759; T.C.M. (RIA) 91037; January 30, 1991, Filed 48 Decisions will be entered in accordance with respondent's computations in docket Nos. 10234-79, 10236-79, 10238-79, 10240-79, 10242-79, 13246-80, 23476-81, 23479-81 and 16675-83. Decisions will be entered in accordance with respondent's revised computations in docket Nos. 10233-79, 10237-79, 10241-79, 10243-79, 10244-79 and 22297-80. R filed computations for entry of decision in these cases pursuant to Rule 155, Tax Court Rules of Practice and Procedure. Ps filed objections to R's computations for entry of decision. Held, the Court will not consider whether Ps are entitled to a deduction for their out-of-pocket expenses related to their investment in straddle transactions because the deductibility of those expenses is a new issue involving facts not in the record that may not be considered for the first time in a Rule 155 proceeding. Rule 155(c), Tax Court Rules of Practice and Procedure.Held further, the amount of any tax paid on a fictitious straddle gain reduces a deficiency or generates an overpayment for the year in which the gain was reported. Held further, the amount of any deficiency may not be reduced by the amount of tax paid on fictitious straddle49 gains arising in years barred by the statute of limitations because this Court does not have equitable recoupment jurisdiction. Held further, this Court does not have jurisdiction to determine an overpayment for a year not before the Court because I.R.C. section 6214(b) does not confer jurisdiction over that year. Stanley Klein, Elias Rosenzweig and Michael Weitzner, for the petitioners. Victoria Wilson Fernandez and George Soba, for the respondent. NIMS, Chief Judge. NIMSSUPPLEMENTAL MEMORANDUM OPINION On December 15, 1988, the Court filed its opinion in this case, Fox v. Commissioner, T.C. Memo 1988-570">T.C. Memo 1988-570, but withheld entry of decision to enable the parties to submit computations in accordance with Rule 155. (All Rule references are to the Tax Court Rules of Practice and Procedure. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue.) By order dated December 27, 1989, the docketed cases of Jack M. Fox and Marliss S. Fox (docket Nos. 3453-79, 10069-79 and 21879-80) were severed from the group of these consolidated cases and thereafter this case has proceeded under50 the caption Ralph G. Kazi and Jean Kazi, et al. v. Commissioner, docket Nos. 10233-79, et al. In Fox, the parties filed cross-motions for summary judgment pursuant to Rule 121 along with supporting briefs. In their motions, the parties agreed that the sole issue for decision was whether the per se profit motive rule of section 108(b) of the Tax Reform Act of 1984 (Division A of the Deficit Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 494, 630), as amended by section 1808(d) of the Tax Reform Act of 1986 (Pub. L. 99-514, 100 Stat. 2817), applies to protect dealers from a finding that their straddle transactions were shams devoid of economic substance. (Section 108 of the Tax Reform Act of 1984 is subsequently herein referred to as section 108.) In Fox v. Commissioner, supra, we held that: as a matter of law that petitioners' straddle transactions produced no losses to which the per se rule of section 108(b) can be applied. * * Likewise, since the straddle transactions were shams, gains reported by petitioners in the latter years do not constitute taxable income to them. [ T.C. Memo 1988-570">T.C. Memo 1988-570, 1988 Tax Ct. Memo LEXIS 603">1988 Tax Ct. Memo LEXIS 603, 56 T.C.M. (CCH) 863">56 T.C.M. (CCH) 863, 869, T.C.M. (RIA) 51 P88570, at 2951.] We withheld entry of decision in these cases for the purpose of permitting the parties to submit computations pursuant to our determination of the per se profit motive issue. Rule 155(a). On March 29, 1990, respondent filed his computations for entry of decision under Rule 155. On July 20, 1990, petitioners filed their objections to respondent's computations, together with their alternative computations and a memorandum of law in support of their objections and alternative computations. In their objections, petitioners agreed with respondent's computations in the following docketed cases: 10239-79, 13247-80, 13248-80, 22240-80, 22291-80, 22292-80, 22293-80, 22294-80, 22295-80, 22296-80, 23477-81, 23614-81, 31359-81, 974-82, 13919-82 and 13920-82. Consequently, by order dated July 26, 1990, these docketed cases were severed from this case. On August 27, 1990, respondent filed: (1) a response to petitioners' objections and alternative computations and a memorandum of law in support thereof; and (2) revised computations for entry of decision in docket Nos. 10233-79, 10237-79, 10241-79, 10243-79, 10244-79 and 22297-80 to reflect certain concessions52 with regard to some of petitioners' objections. In their objections, petitioners asserted that respondent made various computational errors in docket Nos. 10233-79, 10237-79, 10241-79, 10243-79, 10244-79 and 22297-80. Respondent has conceded these errors. The parties' computations reflect disagreement over whether petitioners are entitled to a deduction for their out-of-pocket expenses related to their investment in the straddle transactions involved herein (out-of-pocket expense issue). The parties' computations also reflect disagreement over whether the amount of any deficiency attributable to a straddle transaction loss may be reduced by the amount of any: (1) tax paid on the corresponding straddle gain reported in a subsequent taxable year not barred by the statute of limitations (offsetting gain issue); (2) tax paid on the corresponding straddle gain reported in a subsequent taxable year barred by the statute of limitations under the doctrine of equitable recoupment or estoppel (equitable recoupment issue); and (3) alleged overpayment arising in a year not before us and unrelated to the issues in this case (unrelated overpayment issue). Out-of-Pocket Expense IssuePetitioners53 in docket Nos. 23476-81, 23479-81 and 16675-83 assert that they are entitled to a deduction for their out-of-pocket expenses related to their investment in the straddle transactions pursuant to section 108(c). Respondent contends that the deductibility of out-of-pocket expenses is a new issue which may not be raised for the first time in a Rule 155 proceeding, citing Rule 155(c). Rule 155 is the mechanism through which the Court enters a decision for the amount of deficiency or overpayment resulting from the disposition of the issues involved in a case. Harwood v. Commissioner, 83 T.C. 692">83 T.C. 692, 694 (1984), affd. without published opinion 786 F.2d 1174">786 F.2d 1174 (9th Cir. 1986); Cloes v. Commissioner, 79 T.C. 933">79 T.C. 933, 935 (1982). Computations under Rule 155 are to be determined solely in accordance with the Court's findings and conclusions and are generally "purely mathematical adjustments." See The Home Group, Inc. v. Commissioner, 91 T.C. 265">91 T.C. 265, 269 (1988), affd. 875 F.2d 377">875 F.2d 377 (2d Cir. 1989); Rule 155(a) and (b). Rule 155(c) provides as follows: (c) Limit on Argument: Any argument under this Rule54 will be confined strictly to consideration of the correct computation of the deficiency, liability, or overpayment resulting from the findings and conclusions made by the Court, and no argument will be heard upon or consideration given to the issues or matters disposed of by the Court's findings and conclusions or to any new issues. This Rule is not to be regarded as affording an opportunity for retrial or reconsideration. [Emphasis added.]Thus, any argument made in a Rule 155 proceeding must be strictly confined to the correct computation of the deficiency, liability or overpayment resulting from the findings of fact and conclusions made in our opinion. No argument may be made in a Rule 155 proceeding which raises a new issue. See Bankers Pocahontas Coal Co. v. Burnet, 287 U.S. 308">287 U.S. 308, 77 L. Ed. 325">77 L. Ed. 325, 53 S. Ct. 150">53 S. Ct. 150 (1932); Cloes v. Commissioner, supra.Petitioners could have raised the issue of whether they were entitled to a deduction for their out-of-pocket expenses in the summary judgment proceeding where the transactions in question were considered on the merits. See Rule 31(c). In their motions for summary judgment, however, petitioners agreed55 that all other issues have been resolved and that the sole issue for decision was whether the per se profit motive rule under section 108(b) applied in this case. Thus, petitioners did not there raise the issue of whether their out-of-pocket expenses were deductible under section 108(c). It is the policy of this Court to adjudicate all issues raised in a case in one proceeding to avoid piecemeal and protracted litigation. Robin Haft Trust v. Commissioner, 62 T.C. 145">62 T.C. 145, 147 (1974), affd. on this issue, vacated and remanded 510 F.2d 43">510 F.2d 43, 45 n.1 (1st Cir. 1975). As a predicate to the allowance of any deduction for out-of-pocket expenses, an evidentiary hearing, or the submission of agreed facts, would be necessary. A Rule 155 proceeding is not appropriate for this purpose. Accordingly, we decline to consider the new issue which petitioners are now attempting to raise. Offsetting Gain IssuePetitioners in all docket Nos. assert that the amount of any deficiency attributable to a straddle loss should be reduced by the amount of any tax paid on the corresponding straddle gain reported in a subsequent year. Respondent contends that any tax paid56 on a fictitious straddle gain reduces the amount of any deficiency or increases the amount of any overpayment in the year the gain was reported. Petitioners first assert that the gain and loss legs from the straddle transactions must be closed out in the same year the transaction arose, the loss year, because "A transaction which is a nullity from inception cannot be divided into components and given partial effect in different tax years." Aside from the fact that this also is a new issue, petitioners do not cite any authority for this assertion. Petitioners reported the loss and gain legs of the sham straddle transactions in different taxable years. Therefore, the gain and loss legs of the sham straddle transactions should be eliminated in the year each gain or loss was reported. Petitioners next assert that the gain and loss legs from their straddle transactions must be closed out in the same year the transaction arose, the loss year, because "merely reversing the reported gain does not adequately implement the Court's relevant findings." Petitioners do not point to any part of our opinion in Fox v. Commissioner, supra, which supports their position. 57 Our holding in Fox that the straddle transactions were shams in substance does not imply that the loss reported in one year must be offset by the corresponding gain reported in a subsequent year. Therefore, the elimination of the gain and loss legs in the year each gain or loss was reported gives full effect to our holding that the straddle transactions were shams. Equitable Recoupment IssuePetitioners in docket Nos. 10238-79, 10242-79 and 13246-80 assert that the amount of any deficiency attributable to a straddle loss should be reduced by the amount of tax paid on the corresponding straddle gain in a subsequent taxable year barred by the statute of limitations under the doctrine of equitable recoupment or equitable estoppel. Respondent contends that this Court may not grant the equitable relief requested by petitioners because to do so would expand this Court's jurisdiction beyond that permitted by statute. It is well established that as a court of limited jurisdiction we cannot expand our jurisdiction by granting equitable relief. Woods v. Commissioner, 92 T.C. 776">92 T.C. 776, 787 (1989); Phillips Petroleum Co. v. Commissioner, 92 T.C. 58 885, 889-890 (1989); Knapp v. Commissioner, 90 T.C. 430">90 T.C. 430, 440 (1988), affd. 867 F.2d 749">867 F.2d 749 (2d Cir. 1989). Accordingly, we hold that the amount of any deficiency attributable to a straddle loss may not be reduced by the amount of tax paid on corresponding fictitious straddle gains arising in years barred by the statute of limitations because this Court does not have equitable recoupment jurisdiction. Unrelated Overpayment IssuePetitioners in docket Nos. 10237-79, 10238-79 and 10242-79 assert that the amount of any deficiency attributable to a straddle loss should be reduced by the amount of an alleged unrelated overpayment of tax made in 1974, a year not before the Court. Respondent contends that this Court does not have jurisdiction to determine an overpayment in a year not before the Court. Section 6213(a) generally authorizes this Court to redetermine respondent's deficiency determinations provided that a timely petition is filed. Section 6214(b) further provides that: (b) JURISDICTION OVER OTHER YEARS * * * -- The Tax Court in redetermining a deficiency of income tax for any taxable year * * * shall consider such facts with relation59 to the taxes for other years * * as may be necessary correctly to redetermine the amount of such deficiency, but in so doing shall have no jurisdiction to determine whether or not the tax for any other year * * * has been overpaid or underpaid. [Emphasis added.]In sum, this Court may consider facts in other taxable years as needed to correctly redetermine a deficiency for a given year. This Court does not, however, have jurisdiction to determine whether petitioners have overpaid or underpaid their taxes in other years not before the Court. See secs. 6211(a); 6214(b); 6512(b); Commissioner v. Gooch Milling & Elevator Co., 320 U.S. 418">320 U.S. 418, 88 L. Ed. 139">88 L. Ed. 139, 64 S. Ct. 184">64 S. Ct. 184 (1943); First Security Bank of Idaho, N.A. v. Commissioner, 592 F.2d 1046 (9th Cir. 1979); Phillips Petroleum Co. v. Commissioner, supra.Accordingly, we hold that the amount of any deficiency for the years in issue is not reduced by the amount of any alleged unrelated overpayment of tax arising in 1974, a year not before the Court. To reflect the foregoing, Decisions will be entered in accordance with respondent's computations in docket Nos. 10234-79, 10236-79, *60 10238-79, 10240-79, 10242-79, 13246-80, 23476-81, 23479-81 and 16675-83. Decisions will be entered in accordance with respondent's revised computations in docket Nos. 10233-79, 10237-79, 10241-79, 10243-79, 10244-79 and 22297-80. Footnotes1. Cases of the following petitioners have been consolidated herewith: Daniel Gutman and Judith Gutman, docket No. 10234-79; Terence J. Horn and Jean Horn, docket Nos. 10236-79 and 16675-83; Arturo Sterling, docket No. 10237-79; Hilary P. Gardner and Judith C. Gardner, docket No. 10238-79; Reed Clark and Audrey I. Clark, docket Nos. 10240-79 and 23479-81; Dwight B. Massey and Joann V. Massey, docket Nos. 10241-79 and 22297-80; Charles H. Falk and Joan A. Falk, docket No. 10242-79; Joseph L. Fraites and Evelyn S. Fraites, docket Nos. 10243-79 and 23476-81; Dominick Cademartori and Jean E. Cademartori, docket No. 10244-79; Charles S. Lerman and Barbara Lerman, docket No. 13246-80.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624209/	Delwin G. Chase and Gail J. Chase, Petitioners v. Commissioner of Internal Revenue, RespondentChase v. CommissionerDocket No. 7562-86United States Tax Court92 T.C. 874; 1989 U.S. Tax Ct. LEXIS 56; 92 T.C. No. 53; April 24, 1989April 24, 1989, Filed 56 Decision will be entered under Rule 155. In substance, the partnership in which petitioners were partners, disposed of the entire interest in an apartment building. Held, this disposition by the partnership did not involve an exchange of like-kind property under sec. 1031. Held, further, petitioners are not entitled to elect installment sale treatment under sec. 453. Held, further, petitioner Delwin Chase failed to liquidate his entire interest in a partnership and is not entitled to capital loss treatment under sec. 731(a). Held, further, only petitioner Gail Chase has satisfied the requirements of sec. 731(a). Neil F. Horton, James G. Roberts, for the petitioners.Rebecca T. Hill, Susan J. Adler, and Bryce A. Kranzthor, for the respondent. Fay, Judge. FAY875 Respondent determined a deficiency in petitioners' Federal income tax for the 1980 taxable year in the amount of $ 1,074,874. After concessions, the following issues are presented for decision:(1) Did petitioners satisfy section 10311 on the disposition of the John Muir Apartments?57 (2) Are petitioners entitled to a short-term capital loss of $ 783,762, under section 731(a)(2), with respect to the receipt of $ 929,582 in complete liquidation of a limited partnership interest held by both petitioners?We hold that, applying the substance over form doctrine, the John Muir Investors, a partnership, rather than petitioners disposed of the John Muir Apartments. Further, we hold that petitioners, as partners of John Muir Investors, are not entitled to the benefits of section 1031 nonrecognition. Further, we hold that petitioners' entitlement to installment sales treatment under section 453 is an untimely raised issue. Finally, we hold that petitioner Gail Chase is entitled to recognize a short-term capital loss in 1980 in connection with her complete liquidation of her entire interest in John Muir Apartments.FINDINGS OF FACTSome of the facts have been stipulated. The stipulated facts and attached exhibits are incorporated herein by this reference.Petitioners Delwin G. Chase (Mr. Chase) and Gail J. Chase (Mrs. Chase), resided in Alamo, California, at the time their petition herein was filed. Petitioners filed a joint Federal income tax return for the year at58 issue.Disposition of the John Muir ApartmentsOn January 26, 1978, Mr. Chase formed John Muir Investors (JMI), a California limited partnership. JMI was 876 formed for the purpose of purchasing, operating and holding the John Muir Apartments, an apartment building located in San Francisco, California (hereinafter referred to as the Apartments), which were purchased by JMI on March 31, 1978, for $ 19,041,024. Subsequently, Triton Financial Corp. (Triton) was added as a general partner of JMI. Triton was a corporation in which petitioner held a substantial interest. Mr. Chase and Triton were general partners who had the exclusive right to manage JMI.Pursuant to JMI's limited partnership agreement, once limited partners made contributions to JMI, they were prohibited from receiving distributions of property, other than cash, in liquidation of their capital contributions to JMI. A section of the JMI limited partnership agreement entitled "status of limited partners" provided as follows:No limited partner shall have the right to withdraw or reduce his invested capital except as a result of the termination of the partnership or as otherwise provided by law. No limited59 partner shall have the right to bring an action for partition against the partnership. No limited partner shall have the right to demand or receive property other than cash in return for his contribution, and no limited partner shall have priority over any other limited partner either as to the return of his invested capital or as to profit, losses or distribution.After JMI held the Apartments for approximately 1 year, there developed a high level of speculative interest in San Francisco in purchasing apartment buildings for conversion to condominium units for sale to individuals. This speculative interest caused the value of real estate capable of being converted to condominium units, such as the Apartments, to appreciate. By mid 1979, JMI was attempting to find a buyer for the Apartments.On January 20, 1980, JMI accepted an offer (first offer) to purchase the Apartments from an unrelated individual for $ 28,421,000. Subsequent to JMI's acceptance of the first offer, but prior to the scheduled closing date, petitioners attempted to structure the sale of the Apartments in such a way that they would not have to recognize any taxable gain. To accomplish this, Mr. Chase caused60 JMI to distribute to himself and his wife a deed to an undivided 46.3527 percent interest in the Apartments in liquidation of petitioners' 46.3527 percent limited partnership interest in JMI. 877 Petitioners attempted to structure the subsequent disposition of the Apartments pursuant to the first offer so that, as to them, such disposition would be treated for Federal tax purposes as a nontaxable nonsimultaneous exchange of real property for other real property.On February 5, 1980, the first offer expired due to the failure of the buyer to deposit funds into escrow by such date as required by the escrow agreement. However, there was a second offer for the purchase of the Apartments on March 21, 1980, at which time an agent of RWT Enterprises, Inc. (RWT), wrote a letter of intent to Triton, one of JMI's two managing general partners, to purchase the Apartments for $ 26,500,000 (second offer). This letter further stated that any broker's commissions would be paid by Triton. This letter did not indicate that RWT believed, or had been informed, that petitioners, individually, had any ownership interest in the Apartments.In connection with the second offer, on March 26, 1980, 61 an officer of Triton wrote a letter on behalf of JMI, in Triton's role as a managing general partner of JMI, to a brokerage company. This letter stated that JMI agreed to pay a real estate brokerage commission of $ 250,000 as a result of the sale to RWT and that this commission was the total commission due. Triton did not mention petitioners' undivided ownership interest in the Apartments, or of any duty by petitioners to pay a pro rata portion of such commission.In preparing to close the sale, an escrow agreement was executed. Under the heading "seller," the escrow agreement was signed, on behalf of JMI, by Mr. Chase. The escrow agreement was not signed by petitioners on behalf of themselves as individual owners of the Apartments.On June 12, 1980, when Mr. Chase was certain that the sale to RWT was going to close, he recorded the deed from JMI, executed in January 1980, for petitioners' undivided interest in the Apartments.Petitioners, as with the first offer, attempted to structure the Apartments' disposition so that it would not be taxable to them. To this end, on June 13, 1980, petitioners entered into a Real Property Exchange Trust Agreement (exchange agreement) with 62 RWT and Dudley Ellis (Mr. Ellis). Mr. Ellis 878 was a former employee of Mr. Chase who agreed to serve as trustee of a trust (the Ellis Trust), created under the exchange agreement. The exchange agreement was executed in anticipation of the sale of the Apartments to RWT, and provided that RWT, as purchaser of the Apartments, would transfer to the Ellis Trust petitioners' share of the proceeds. Pursuant to the exchange agreement, Mr. Ellis, in his capacity as trustee of the Ellis Trust, agreed to transfer to petitioners "like-kind real property" which Mr. Ellis was to purchase with such proceeds. Specifically, the exchange agreement provided that petitioners would locate and negotiate the terms for the purchase of properties to be "exchanged." Petitioners then instructed Marilyn Lamonte, the escrow officer handling the sale, to pay 46.3527 percent of the "net proceeds" from the sale to Mr. Ellis as trustee under the exchange agreement.On July 7, 1980, the John Muir Apartments were sold to Traweek Investment Fund No. 10, Ltd. (Traweek), an entity related to, and substituted as buyer by, RWT. The net proceeds of $ 9,210,876 received from the sale to Traweek were allocated 63 by Lamonte between the Ellis Trust and JMI. The actual payments out of escrow were a check for $ 3,799,653 to Ellis in his capacity as trustee under the Ellis Trust, and a check for $ 4,811,223 paid directly to JMI.Petitioners' instructions to Lamonte, to the effect that Ellis, as trustee, was to be the recipient of 46.3527 percent of "net proceeds" from the sale, were not followed. Rather, the portion of the proceeds distributed to Ellis in trust for petitioners represented an allocation of a distributive share of total net proceeds to petitioners in their capacity as limited partners of JMI in accordance with the terms of the JMI limited partnership agreement and not as a straight allocation of 46.3527 percent of "net proceeds."From January 1980, until the date of the sale was closed, the expenses of operating the Apartments were paid with funds that were in JMI's operating bank account. Petitioners did not pay, with their own money, any of the expenses from January 1980, when they received a deed to the Apartments through July 7, 1980, the date of sale. Petitioners also did not receive any of the rental income earned during this period, such rent continued to be paid to JMI. 64 879 Petitioners' relationship with respect to the Apartments, after they were deeded an undivided interest in such, was in all respects unchanged in relation to their relationship to the Apartments as limited partners of JMI.On June 30, 1981, Ellis, as trustee of the Ellis Trust, assigned to Creston Corp. (Creston), as successor trustee of the Ellis Trust, petitioners' share of the proceeds from the sale. Creston was, at the time of such assignment, a corporation wholly owned by Ellis.By July 23, 1982, Triton, as general partner of entities controlled by petitioner, completed the acquisition of the following three properties which were later acquired from Creston by petitioners: (1) The Snug Harbor Apartments in Dallas, Texas (the Snug Harbor property); (2) a ground lease to commercial real property in Orange County, California (the Irvine property); and, (3) certain commercial real estate in Santa Ana, California (the Woodbridge property).Creston, as trustee under the Ellis Trust, acquired, and immediately transferred to petitioners, the Snug Harbor property on or about October 27, 1982. Petitioners held the Snug Harbor property for 7 months. Creston acquired and then65 transferred to petitioners, the Irvine property on October 29, 1982. Petitioners, in turn, disposed of the Irvine property on the same date. On October 29, 1982, Creston acquired, and then transferred the Woodbridge property to petitioners, who disposed of the property on the same date. In addition to the above properties, Creston, as trustee under the Ellis Trust, also purchased for petitioners three other properties located in the State of Kentucky.Liquidation of the Lockwood InterestOn March 5, 1980, petitioners purchased a 2.92-percent limited partnership interest in JMI from Albert and Hazel Lockwood for $ 230,000 and a 8.78-percent limited partnership interest from Todd and Karen Sue Lockwood for $ 690,000 (hereinafter referred to collectively as the Lockwood interest). The Lockwood interest was a limited partnership interest in addition to the 46.3527-percent interest previously acquired.On July 9, 1980, 2 days after the disposition of the Apartments, petitioners received $ 929,582 in complete liquidation 880 of their 11.72-percent Lockwood interest. Petitioners reported a short-term capital loss of $ 783,762 on their 1980 Federal income tax return as a result66 of this distribution. Petitioners computed their adjusted basis and loss as follows:Cost of Lockwood interest$ 920,000 Distributive share of long-termcapital gain reported from thesale of the John Muir Apartments850,189 Distributive share of operatingloss reported(59,845)Adjusted basis1,710,344 Amount realized926,582 Less adjusted basis1,710,344 Claimed loss(783,762)The $ 929,582 cash distribution from the liquidation of this 11.72-percent interest liquidated petitioners' entire limited partnership interest in JMI held as of this date. Petitioner, however, continued thereafter to hold an interest in JMI as a general partner. After this liquidation of the 11.72-percent interest, JMI continued operating as a partnership for the purpose of investing in other real property.On December 31, 1980, petitioners acquired a 1.31-percent limited partnership interest in JMI from Anthony and Carole Cline.OPINIONThe first issue is whether petitioners met the requirements of section 1031. Section 1031(a) provides that no gain or loss is recognized if property held for productive use in a trade or business or for investment (excluding certain types67 of property not involved herein) is exchanged solely for property of like-kind. Since the distinction between "trade or business" and "investment" in section 1031(a) is immaterial for our purposes, for convenience, we will use the term "held for investment." Based on a number of theories, respondent contends that petitioners are not entitled to nonrecognition under section 1031(a) or, in the alternative, that petitioners must recognize gain under section 1031(b) to the extent that certain of the property ultimately received by petitioners was not held for investment.881 Respondent contends that section 1031(a) is inapplicable because the disposition of the Apartments was, in substance, a sale by JMI, and not an exchange by petitioners of like-kind property. Petitioners contend that we must respect the form in which they structured the disposition of the Apartments, and that such form satisfied the requirements of section 1031(a).To qualify for nonrecognition, a taxpayer must satisfy each of the specific requirements as well as the underlying purpose of section 1031(a). Bolker v. Commissioner, 760 F.2d 1039">760 F.2d 1039, 1044 (9th Cir. 1985), affg. 81 T.C. 782">81 T.C. 782 (1983).68 We must determine whether the "exchange" requirement of that section was satisfied. Respondent argues that the substance over form doctrine is applicable to impute the disposition of the Apartments entirely to JMI and concludes that, in substance, petitioners did not "exchange" any part of the Apartments.The substance over form doctrine applies where the form chosen by the parties is a fiction that fails to reflect the economic realities of the transaction. Commissioner v. Court Holding Co., 324 U.S. 331">324 U.S. 331 (1945); United States v. Cumberland Public Service Co., 338 U.S. 451">338 U.S. 451 (1950). In determining substance, we must look beyond the "superficial formalities of a transaction to determine the proper tax 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). "Transactions, which did not vary, control, or change the flow of economic benefits, are dismissed from consideration." Higgins v. Smith, 308 U.S. 473">308 U.S. 473, 476 (1940). We hold that the substance over form doctrine applies and that, 69 in substance, JMI disposed of the Apartments.Although the general partners of JMI caused JMI to prepare a deed conveying an undivided 46.3527-percent interest in the Apartments to petitioners, at no time did petitioners act as owners except in their roles as partners of JMI. Petitioners were deeded an undivided interest at the time of the first offer because it appeared that a sale was imminent. When this sale failed to close, however, petitioners' deed remained unrecorded until shortly before the disposition in question. There is no indication that any party to the sale believed that anyone other than JMI held 882 title at the time of RWT's offer to purchase. Further, there is no evidence of negotiations by petitioners on behalf of themselves concerning the terms for the disposition of the Apartments. Also, petitioners never paid any of the operating costs of the Apartments or their share of the brokerage commission. Further, petitioners did not receive, or have credited to them, any of the Apartment's rental income.Equally important, in apportioning the net sale proceeds, all parties ignored petitioners' purported interest as direct owners. Rather, petitioners received70 only their distributive share of JMI's net proceeds as limited partners. In addition, the JMI limited partnership agreement provided that no limited partner could demand and receive property other than cash from the partnership. Further, there is no evidence that petitioners were otherwise authorized by the other limited partners to receive a share of the Apartments as a partnership distribution or that the other limited partners were even aware that such a distribution had occurred. We can only conclude that petitioners' failure to respect the form in which they cast this transaction by failing to receive their share of proceeds as direct owners was caused by petitioners' realization that they were not direct owners and could not be so by virtue of the partnership agreement.Petitioners final argument regarding the substance issue is that JMI's general partners acted as petitioners' agents in negotiating the disposition of the John Muir Apartments to Traweek. This, petitioners argue, explains why they did not appear, individually, as parties in most of the documents to this transaction. We find petitioners' argument, in this regard, both self-serving and unsupported by the71 record.Having determined that, in substance, JMI disposed of the Apartments, we must determine whether petitioners are entitled to "exchange" treatment under section 1031(a), which treatment would flow through JMI to all partners in accordance with their distributive share of partnership gain. Sec. 702(a). Petitioners are entitled to nonrecognition of gain under section 1031(a), as a partner of JMI, if JMI has satisfied the requirements of section 1031(a) in disposing of the Apartments.883 Section 1031(a) requires that like-kind property be both given up and received in the "exchange." Here, it is clear that JMI transferred investment property but did not receive like-kind property in "exchange." This is because JMI never held the properties that were ultimately received by petitioners as part of the purported "exchange." Accordingly, JMI never "exchanged" like-kind property.Having concluded that JMI sold the entire interest in the Apartments, and that JMI did not act as petitioner's agent with respect to an undivided interest in such apartment, we hold that petitioners failed to "exchange" like-kind property within the meaning of section 1031(a). Accordingly, petitioners72 are not entitled to the benefits of that section. 2Petitioners argue, alternatively, for the first time on brief, that if section 1031(a) is inapplicable, they now be allowed to elect installment sale treatment under section 453. Petitioners cite Bayley v. Commissioner, 35 T.C. 288">35 T.C. 288 (1960), wherein we permitted a taxpayer to elect, in an amended petition, the installment method under section 453, where the issue of nonrecognition under section 1034 was decided adversely to the taxpayer. Petitioners' argument fails for two reasons. First, petitioners did not amend their pleadings or raise such issue at trial, but only raised such issue on brief. See Seligman v. Commissioner, 84 T.C. 191">84 T.C. 191 (1985) affd. 796 F.2d 116">796 F.2d 116 (5th Cir. 1986); Markwardt v. Commissioner, 64 T.C. 989">64 T.C. 989 (1975). Second, since we find that JMI disposed73 of the Apartments, the election under section 453 can only be made by the partnership. See sec. 703(b); Rothenberg v. Commissioner, 48 T.C. 369">48 T.C. 369 (1967). Accordingly, we hold petitioners are not entitled to elect installment sale treatment under section 453.The final issue is whether petitioners are entitled to claim a short-term capital loss of $ 783,762 under section 731(a)(2) in connection with their receipt of $ 929,582 in complete liquidation of their Lockwood limited partnership interest on July 9, 1980. This issue is raised because petitioner held a general partnership interest in JMI throughout 1980 and petitioners subsequently reacquired a limited partnership in JMI on December 31, 1980. The general rule contained in section 731(a)(2) is that a partner may not recognize a loss 884 from a partnership distribution. Section 731(a)(2) provides an exception to the general rule of nonrecognition, however, if certain requirements are met. First, the distribution must be "in liquidation of a partner's interest in a partnership." Second, no property other than money, unrealized receivables (as defined in section 751(c)), or inventory (as defined74 in section 751(d)(2)) must be received in the liquidating distribution. Third, a loss must be realized. See sec. 731(a)(2).With respect to the first requirement, both parties refer to section 761(d). That section defines, for purposes of subchapter K, the term "liquidation of a partner's interest" as "the termination of a partner's entire interest in a partnership by means of a distribution, or a series of distributions, to the partner by the partnership." (Emphasis added.) Respondent argues that under section 761(d), in order to terminate one's "entire interest" in a partnership, one must terminate both his general and limited partnership interests. Petitioners argue that section 761(d) only requires the termination of either the entirety of one's limited partnership interest or one's general partnership interest. Petitioners further argue that the retention of one's general partnership interest does not prevent, under section 731(a)(2), the recognition of a loss upon the termination of one's entire limited partnership interest.We find, however, that petitioners' argument ignores the plain meaning of the statute which is unambiguous on its face. Section 761(d) provides75 that the term "liquidation of a partner's interest" means the termination of a partner's entire interest by means of a distribution, or a series of distributions, to the partner by the partnership. When petitioners liquidated their Lockwood interest, Mr. Chase still retained an interest in JMI as a general partner and, therefore, he did not liquidate his "entire interest" in JMI. As to Mrs. Chase, she no longer was a partner in JMI after the distribution in liquidation of the Lockwood interest. Although, as noted by respondent, she became a limited partner in JMI on December 31, 1980, she no longer had any interest in JMI, as of July 9, 1980.Respondent argues that no loss can be realized because petitioners received nonqualifying property (46.3527-percent 885 interest in the Apartments), as opposed to money, unrealized receivables, or inventory, as part of a series of liquidating distributions, and that petitioners are thus disqualified from realizing a loss. It is unnecessary to reach this argument since we previously held herein that the distribution to petitioners of an interest in the Apartment was, for Federal tax purposes, illusory. Accordingly, we hold that petitioner76 Gail Chase is entitled to a short term capital loss.To reflect the foregoing.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, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. We do not address respondent's alternative arguments, as those arguments are moot.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624211/	JAMES W. TIPPEN AND BILLIE R. TIPPIN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentTippin v. CommissionerDocket No. 3096-84.United States Tax CourtT.C. Memo 1988-284; 1988 Tax Ct. Memo LEXIS 302; 55 T.C.M. (CCH) 1177; T.C.M. (RIA) 88284; June 28, 1988. James W. Tippin, pro se. Frank M. Schuler and Michael L. Boman, for the respondent. PARKERMEMORANDUM FINDINGS OF FACT AND OPINION PARKER, Judge: Respondent304 determined a deficiency in petitioners' Federal income tax for the year 1980 in the amount of $ 699.83. After concessions 1 the prinicipal issue for decision is whether petitioners' stock in Action Domestic, Inc. became worthless within the meaning of section 165(g) 2 in 1980. If so, there are subsidiary issues as to the amount of the deductible loss that year. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached305 thereto are incorporated herein by this reference. Petitioners, James W. and Billie R. Tippin, are husband and wife who resided at 2001 West 120th Terrace, Leawood, Kansas at the time of the filing of the petition. Petitioners filed a timely joint Federal income tax return for the taxable year 1980 on June 17, 1981, with the Austin Service Center. From 1965 through 1978, Mrs. Tippin was employed as a teacher by the Kansas City, Missouri Board of Education. Mrs. Tippin received a masters degree in 1974 and an educational specialist degree in 1978. In 1979 she took a one-year leave of absence from her employment with the Kansas City Board of Education. During 1979 and until August of 1980, Mrs. Tippin sold real estate. In August of 1980 Mrs. Tippin began working for Blue Hills Homes Corporation in Kansas City, Missouri as an instructional supervisor, directing 15 to 25 teachers and teachers' assistants. During 1980 Mrs. Tippin also worked for the Kansas City, Missouri School District. Mr. Tippin is an attorney. He worked for the Internal Revenue Service until 1976 when he left to go into private practice. Mr. Tippin has been in private practice from 1976306 up to the present time. In 1969 or 1970, before Mr. Tippin became a lawyer, petitioners prepared a business proposal and handbook for a team maid service under the heading "Action Domestic Services, Inc." Action Domestic Services, Inc. was never incorporated but was merely a proposal for a corporation. The proposal for the team maid service stated that its objective was "a solid return on the capital invested for the benefit of the principals." The idea behind the team maid service proposal was that a team consisting of two or three people, with one of these people supervising the others, would be more efficient at cleaning several apartment units in a single building than one person working separately in each unit. The proposal for the team maid service was prepared by Mr. Tippin, apparently in a form designed to try to obtain a grant or financial assistance from the Small Business Administration or some financial institution. The handbook or training manual was prepared by Mrs. Tippin. The handbook describes the proper way for a person to clean various areas and items in a home. The proposal contains objectives for a team maid service, positions that would be available, 307 training techniques, marketing approaches, initial start-up costs, a market survey questionnaire, a list of assets needed, and a projected profit and loss statement. From 1970 to 1972, petitioners tried, without success, to secure financing for the team maid service. The listed necessary assets were never purchased, and petitioners never hired any employees for the team maid service. Petitioners made projections as to income in 1970, but did not make any further projections in later years. After their initial attempt in the early seventies to obtain financing, petitioners did not thereafter do or consider doing any market research for a team maid service. On January 4, 1972, petitioners, with the assistance of an attorney, 3 incorporated Action Domestic, Inc. as a Missouri corporation. At the time of incorporation, petitioners purchased 100 shares of stock at a total cost of $ 1,500, and became the sole equal shareholders of the corporation. Petitioners were elected as the directors of the corporation, along with James M. Reed, at the first meeting of the incorporators of Action Domestic, Inc. At this or at any subsequent corporation meetings, no reference was made to the308 team maid service or to Action Domestic Services, Inc. 4 In addition, the costs incurred in preparing the team maid service handbook and proposal were never transferred to Action Domestic, Inc. At the first board of directors' meeting on January 22, 1972, petitioners became the sole officers of Action Domestic, Inc. At that meeting, the corporation agreed to purchase the goodwill and all of the assets of a laundromat operated at 2631 Holmes, Kansas City, Missouri, from Walter and Elizabeth Meiner for $ 3,200. The corporation also agreed to pay $ 2,237 to Julian Construction Co. 309 for the remodeling and redecorating of the laundromat. The corporation then entered into a four-year lease with Joseph Brugaletta and Anthony Rustici for the first floor of building number 2631 Holmes, Kansas City, Missouri, where the laundromat was located. At this same board of directors' meeting on January 22, 1972, the corporation agreed to try to finance the purchase and remodeling of the laundromat by issuing stock and obtaining a loan. The corporation decided to offer for sale 1,000 shares of common stock at $ 15 per share. At that time Action Domestic, Inc. adopted a plan to issue section 1244 stock. Thus, stock issued prior to January 22, 1974 would qualify as section 1244 stock pursuant to the plan. No stock was ever sold, but stock was issued to petitioners in exchange for advances or capital contributions they made to the corporation. In 1972 Action Domestic, Inc. obtained a loan from Columbia Union Bank and Trust Co. in the amount of $ 8,400 to acquire the assets and goodwill of the laundromat, to remodel and redecorate the laundromat, and to acquire ten new washers from Coin-O-Matic Enterprises. Petitioners in their individual capacity signed this loan as guarantors. 310 Action Domestic, Inc. initially made the payments on the loan, but petitioners as guarantors took over these payments on July 14, 1975, and continued up until the loan was repaid. As petitioners repaid this loan, they claimed the amounts as a bad debt on their Federal income tax returns for the taxable years 1975, 1976, 1977, 1978, and 1979. On December 21, 1972, the corporation held a special stockholders' meeting at which the sole stockholders, petitioners, elected to be taxed as a subchapter S corporation. On January 20, 1973, the corporation held its annual stockholder's meeting. At this meeting the corporate minutes expressed the president's, Mr. Tippin's, optimism, noting the possibility that the corporation might show a profit in the first year of operation. The only major problem of the corporation was that the hot water heater at the laundromat had broken down in early December of 1972 and the corporation was having a difficult time getting replacement parts. The corporate minutes noted that petitioners had advanced $ 620 to Action Domestic, Inc. during 1972, which would be converted to stock at $ 15 a share on January 200, 1973, under the original stock offering311 of January 22, 1972. 5 Petitioners, as sole shareholders, deducted $ 1,907 on their Federal income tax return as their portion (100 percent) of the corporation's net operating loss for 1973. The minutes for the annual stockholders' meeting a year later, on January 19, 1974, discussed the corporation's difficult over a three-month period in getting the hot water heater properly repaired. This damage to the hot water heater caused a loss of customers and a decrease in revenues from about $ 220 per week to approximately $ 132 per week. The corporate minutes also noted that during 1973 petitioners advanced $ 2,540 to the corporation, which was converted to stock at $ 15 per share on January 19, 1974, under the original stock offering of January 22, 1972. 6 Petitioners, as sole shareholders, deducted $ 1,161 on their Federal income tax return as their portion (100 percent) of the corporation's net operating loss for 1974. On January 18, 1975, Action Domestic, Inc. 312 held its last annual stockholders' meeting. The minutes of the meeting described the corporation as being in a "dire financial status." The corporate minutes attributed the decline of revenue to the lack of capital and the time when the laundromat was without hot water because the hot water heater was broken. Due to the lack of capital, a significant amount of routine maintenance in the laundromat had been deferred, with the result that about 25 percent of the washers were inoperative at that time. The average revenue was then down to $ 112.21 per week, although Mr. Tippin indicated at the stockholders' meeting that the corporation needed $ 260 per week. In his progress report at the meeting, Mr. Tippin stated that it did not appear likely that the corporation would receive any additional bank financing to resolve the corporation's financial problems. Mr. Tippin noted that the prospect of selling the business and taking a loss rather than continuing "a losing effort" was suggested. In late 1974 or early 1975, petitioners attempted to sell the corporation, Action Domestic, Inc., but no sale could be consummated. During 1974 petitioners had advanced $ 988 to the corporation, 313 which was converted to stock at $ 15 per share on January 18, 1975, under the original stock offering of January 22, 1972. 7 Petitioners, as sole shareholders, deducted $ 2,226.36 as their portion (100 percent) of the corporation's net operating loss for the taxable year 1975. After 1974 petitioners made no further advances or contributions to capital to Action Domestic, Inc. Action Domestic, Inc. reported $ 100 as gross income on its Federal income tax return for the taxable year 1975. That $ 100 income figure was an estimate made by Mr. Tippin, and possibly on the high side. In 1975 petitioners withdrew all of the remaining cash, totaling $ 371, from Action Domestic, Inc. In 1975 Action Domestic, Inc. surrendered its leasehold interest in real estate located at 2631 Holmes, where the laundromat was located. At that time all of the corporation's depreciable assets were transferred to the landlord in payment of $ 900 back rent, and a loss of $ 1,420 was claimed in connection with those assets on the 1975 corporate return. On its corporate income tax return for 1975 Action Domestic, Inc. also wrote314 off the goodwill that it had purchased from the Meiners and listed under "other assets" on the corporation's 1972, 1973, and 1974 income tax returns. Although Action Domestic, Inc. filed corporate income tax returns for the taxable years 1972, 1973, 1974, and 1975, no further corporate income tax returns were filed after 1975. Also in 1975 the corporation surrendered its corporate charter. In 1979 the Division of Employment Security of the State of Missouri canceled the corporation's employer account since Action Domestic, Inc. had reported no employees after 1974. The corporation never took any steps to renew its employer number or to reinstate its corporate charter. On Schedule A of their 1980 Federal income tax return, petitioners claimed $ 1,550 as bad debts and $ 1,020 of that amount was a loss claimed in regard to petitioners' stock in Action Domestic, Inc. On November 8, 1983, respondent mailed a timely statutory notice of deficiency respecting the taxable year 1980 to petitioners, disallowing $ 1,050 of the claimed $ 1,550 for bad debts. Only the $ 1,020 for the loss on the stock is at issue in this case. OPINION Section 165(g) provides that if any stock becomes315 worthless during the taxable year, the loss is treated as a loss on the last day of the taxable year. The deduction is lost if not taken in the year of worthlessness and there is no partial deduction as in the case of a bad debt. See Butler v. Commissioner,45 B.T.A. 593">45 B.T.A. 593, 600 (1941). 8 Worthlessness is a question of fact in which the taxpayer has the burden of proof as to whether the stock became worthless and whether it became worthless in the year in issue. Boehm v. Commissioner,326 U.S. 287">326 U.S. 287, 293-294 (1945); Scifo v. Commissioner,68 T.C. 714">68 T.C. 714, 725 (1977). The standard for determining worthlessness is a flexible, practical one that varies according to all of the facts and circumstances of each case. Boehm v. Commissioner, supra,326 U.S. at 293; Lincoln v. Commissioner,24 T.C. 669">24 T.C. 669, 694 (1955), affd. 242 F.2d 748">242 F.2d 748 (6th Cir. 1957). To prove that stock became worthless in a certain year, the taxpayer must establish that the stock had value as of the beginning of the year and that an identifiable316 event of series of events destroyed the actual value and the hope or expectation that the stock would become valuable at some future time. Sec. 1.165-1(d)(1), Income Tax Regs.; Boehm v. Commissioner, supra,326 U.S. at 291; Nelson v. United States,131 F.2d 301">131 F.2d 301, 302 (8th Cir. 1942). The stock of a corporation has no actual or liquidating value when the corporation's assets are less than its liabilities, but the stock may still have potential value if there is a reasonable hope or expectation that it may become valuable at some future time. Nelson v. United States, supra;Morton v. Commissioner,38 B.T.A. 1270">38 B.T.A. 1270, 1278 (1938), affd. 112 F.2d 320">112 F.2d 320 (7th Cir. 1940). To prove that the stock has potential value, the taxpayer's belief in the stock's future prospects must be the belief of a prudent businessman and not that of an "incorrigible optimist." United States v. White Dental Co.,274 U.S. 398">274 U.S. 398 (1927); Steadman v. Commissioner,50 T.C. 369">50 T.C. 369, 377-378 (1968), affd. 424 F.2d 1">424 F.2d 1 (6th Cir. 1970), cert. denied 400 U.S. 869">400 U.S. 869 (1970). Identifiable events evidencing317 the loss of potential value are events in the corporation's life which put an end to any reasonable hope and expectation and such events within the corporation that are likely to be immediately known by everyone having an interest by way of stock holdings or otherwise in the affairs of the corporation. Morton v. Commissioner, supra,38 B.T.A. at 1278-1279. These events might include the bankruptcy of the corporation, liquidation of the corporation, appointment of a receiver, or cessation from doing business. Morton v. Commissioner, supra,38 B.T.A. at 1278. Both liquidating value (actual value) and potential value must be wiped out before the stock can be said to be worthless. In this case petitioners argue that their stock in Action Domestic, Inc. did not become worthless until 1980 when petitioners, as the officers, directors, and sole shareholders of the corporation, no longer had time, because of Mr. Tippin's growing law practice and Mrs. Tippin's new job, to operate and manage the corporation, including the team maid service proposal. Petitioners' argument assumes that the stock had some value on January 1, 1980, and lost that value during318 the year. Respondent argues that the stock was worthless in 1975 since Action Domestic, Inc. transferred all of its fixed assets to creditors in payment of debts in 1975, all of the remaining cash was distributed to the shareholders in 1975, the corporate charter was surrendered in 1975, and all normal business operations ceased in 1975. To determine whether the stock became worthless in 1980, we must determine whether it had any value at the beginning of that year, and, if so, whether during that year an identifiable event or series of identifiable events occurred that destroyed the actual value and any reasonable hope or expectation of potential value in the stock. Both parties appear to agree that petitioners; stock in Action Domestic, Inc. had no actual or liquidating value after 1975. Prior to 1975 the revenues of the corporation had steadily declined due primarily to the lack of capital. By December 31, 1975, the balance sheet showed no assets and $ 3,000 still due on the bank loan. Petitioners as guarantors on that loan paid it off over the next four years, claiming bad debt deductions each year for their payments. Since the debts far exceeded any assets in 1975, the319 stock had no actual or liquidating value in 1975 or thereafter. Those who had an interest in or dealings with Action Domestic, Inc. were alerted to identifiable events indicating a loss of the stock's potential value long before petitioners determined in 1980 that they could no longer run the business. By 1975 petitioners no longer made any advances or capital contributions to the corporation. Instead, in 1975 petitioners withdrew all of the remaining cash in the corporation, surrendered the corporation's lease in the building where the laundromat was located, and transferred all of the depreciable assets to the landlord in payment of back rent. In addition, after 1975 the corporation no longer held stockholders' meetings, no longer filed tax returns, and no longer had a corporate charter. Petitioners took over the payments of the corporation's loan in 1975 and deducted the payments as bad debts on their Federal income tax returns for 1975 through 1979. The corporation in 1975 claimed a loss on the assets transferred to the landlord and also wrote off its asset of goodwill on its corporate income tax return for the taxable year 1975. All of these actions indicate petitioners320 did not have any reasonable hope or expectation in the potential value of Action Domestic, Inc. All of these actions would also alert anyone else having an interest in the corporation of this fact. By the end of 1975 the corporation no longer had a leasehold, any assets to run a laundromat or any other business, or any cash. From 1975 to 1980, petitioners had ample time to run a business but there was no business for them to run. Their subjective determination in 1980 that they could no longer devote any time to the corporation did not change anything. In addition, when Action Domestic, Inc. surrendered its Missouri charter in 1975, the corporation lost all the powers, privileges, and franchises conferred upon it under Missouri law. In Missouri if the corporate charter is forfeited, all the powers, privileges, and franchises conferred upon the corporation by the certificate or license are canceled and the corporation is dissolved. Mo. Ann. Stat. 351.525 (Vernon 1966). Any person who exercises the powers, privileges, or franchises of the corporation after the certificate of incorporation has been forfeited is guilty of a misdemeanor. Mo. Ann. Stat. 351.530 (Vernon 1966). 321 The directors and officers in office when the forfeiture occurs become the trustees of the corporation and have full authority to wind up the business. Mo. Ann. Stat. 351.525 (Vernon 1966); Leibson v. Henry,356 Mo. 953">356 Mo. 953, 204 S.W.2d 310">204 S.W.2d 310, 316 (1947). The corporate charter may be reinstated upon payment of all fees, charges, and penalties that may have accrued by reason of the failure to file the registration and antitrust affidavit and the payment of all franchise taxes. Mo. Ann. Stat. 351.540 (Vernon 1966). The reinstatement of the corporate charter can be accomplished at any time and has a retroactive effect that is effective from the date of forfeiture. A.R.D.C., Inc. v. State Farm Fire and Ca. Co.,619 S.W.2d 843">619 S.W.2d 843, 846 (Mo. App. 1981). After 1975 Action Domestic, Inc. no longer had a right to its corporate name and was required to cease all normal business operations. Although petitioners could have reinstated the corporate charter of Action Domestic, Inc., they have never done so. The cessation of normal business operations that occurs with the forfeiture of a corporate charter is another identifiable event in the corporation's life that322 indicates worthlessness of the stock. Steadman v. Commissioner, supra,50 T.C. at 377. Thus, the cessation from doing business and the effective liquidation of Action Domestic, Inc. were identifiable events in 1975 that destroyed the stock's potential value. Petitioners assert, however, that the events in 1975 were not identifiable events indicating worthlessness. They argue that those events did not actually destroy petitioners' reasonable belief and expectation that the stock had value. The corporation still had potential value, petitioners contend, because the corporation still retained a major asset after 1975, the team maid service handbook and proposal, and this value was not destroyed until petitioners no longer had the time to implement the proposal. Petitioners claim that in 1980 they no longer had the time to devote to Action Domestic, Inc., since Mrs. Tippin accepted a new supervisory position that required extensive travel and Mr. Tippin's law practice was growing and expanding by that time. We conclude that petitioners' decision that they no longer had time for the corporation and their subjective determination at that time to abandon the team323 maid service proposal did not constitute identifiable events evidencing the worthlessness of their stock in 1980. On this record, we cannot find that the team maid service proposal and handbook had any value at the beginning of 1980 or were ever assets of Action Domestic, Inc. Petitioners have not shown that Action Domestic, Inc. was no longer able to operate because of petitioners' otherwise full schedules. Petitioners could have accommodated their busy schedules by hiring agents to run Action Domestic, Inc. if, as they say, the corporation and the team maid service proposal and handbook were still viable. However, we are satisfied they were not. Petitioners could not maintain a reasonable belief in the potential value of the corporation based on the team maid service proposal and handbook. The handbook and proposal were never transferred to Action Domestic, Inc., and assuming they had any value at all, they were never shown as assets of the corporation. Any costs petitioners may have incurred in 1969 or 1970 in developing the handbook and proposal were never capitalized or otherwise reflected on the corporation's balance sheet Action Domestic, Inc. was incorporated in 1972; 324 in contrast the $ 200 for goodwill purchased from the Meiners as part of the laundromat business was capitalized and reflected on the balance sheet. The handbook and proposal were merely an idea for a project, entirely separate from Action Domestic, Inc., that never received the financing it needed to get off the ground. No assets were ever purchased for the team maid service, no employees were ever hired, and no market research was ever conducted after 1970 to see if such a project could be a viable business activity. When petitioners incorporated Action Domestic, Inc. in 1972, no mention was ever made of a team maid service in the corporate charter or bylaws, in the minutes of the board of directors' or annual stockholders' meetings, in the balance sheets of Action Domestic, Inc., or in any other corporate book or record. When Action Domestic, Inc. obtained a loan to finance the purchase of the laundromat, the financial agreement with the lender did not indicate that any of the loan proceeds were to be used for the team maid service. We conclude that the potential value of Action Domestic, Inc. did not rest on the possible success or failure of the team maid service proposal325 and handbook since they have not been shown to be assets of Action Domestic, Inc. Even if we could find that the team maid service proposal and handbook were assets of Action Domestic, Inc., we would still find the corporation had no potential value after 1975. The record indicates that the team maid service proposal was not a viable business project project in 1970. After 1970 the team maid service project was never tested and no market research was done to determine whether such a project could ever become a viable business activity. Any hope that petitioners entertained that Action Domestic, Inc. had potential value based on this handbook and proposal would be wholly unreasonable and that of incorrigible optimists. Based on all of the foregoing, we conclude that any reasonable belief in the potential value of Action Domestic, Inc. was destroyed, and all potential value of the corporation was destroyed when petitioners ceased business operations and liquidated the corporation's assets in 1975. Thus, we find as a fact that petitioners' stock became worthless in 1975. 9326 To reflect the concessions and the foregoing holding, Decision will be entered nder Rule 155.APPENDIX Respondent noted in his brief that even if the stock became worthless in 1980 petitioners are not entitled to deduct the entire amount of $ 1,020 as claimed on their 1980 Federal income tax return. Respondent pointed out, and correctly so, that petitioners had failed to reduce their adjusted basis in the stock by their portion of the net operating losses attributable to the stock. Properly computed with such required adjustments to basis, respondent argued, any loss deduction allowable to petitioners would be limited to $ 20. Petitioners did not respond to this argument. However, there is an arithmetical error in respondent's computation, the net operating losses for 1973, 1974, and 1975 totalling $ 5,294.36 rather than the $ 5,254.36 figure used by respondent. Properly computed with the required adjustments to basis and with the correct total net operating loss figure, the amount allowable as a loss deduction appears to be zero. Under section 165(g), a security that becomes worthless during the taxable year is treated as a loss from the sale or exchange of a327 capital asset. The loss from the sale or exchange is the excess of the adjusted basis over the amount realized. Sec. 1001(a). Since the stock is worthless, the amount realized is zero. Under section 1376(b)(1), the basis of stock in a subchapter S corporation is reduced by the stockholder's portion of the net operating loss attributable to the stock. In this case petitioners' basis in their stock is $ 5,648, which includes the stock petitioners originally purchased as well as the stock petitioners received in exchange for the later advances or contributions to capital. Petitioners' portion of the total net operating losses was 100 percent, the total $ 5,294.36. Thus, petitioners' remaining basis is only $ 353.64. This amount must be further reduced by the cash distribution petitioners received from Action Domestic, Inc. in 1975. Under section 301(c)(2), a distribution by a corporation to a stockholder with respect to its stock that is not a dividend is applied to and reduces the adjusted basis of the stock. A dividend is defined as a distribution made by a corporation to its stockholders out of its earnings and profits of the taxable year. Sec. 316(a)(2). Since Action Domestic, 328 Inc. had no earnings and profits, the distribution was not a dividend, and thus petitioners' remaining stock basis of $ 353.64 is reduced by the cash distribution of $ 371. However, that would result in a negative figure, ($ 17.36). Section 1376(b)(1) provides that the basis of the shareholder's stock is reduced "(but not below zero)" by his portion of the corporation's net operating loss for the year. Accordingly, petitioners' adjusted basis in their stock after December 31, 1975 is zero, the amount realized in 1980 is zero, and there would appear to be no loss deduction allowable in 1980. Actually it appears that petitioners may have had a gain of $ 17.36 in 1975 from the cash distribution. 329 Footnotes1. Petitioners conceded respondent's adjustments made in the statutory notice of deficiency for interest expenses, travel expenses, equipment expenses, and publication expenses that petitioners deducted on their Schedule C. Respondent conceded the adjustment made in the statutory notice disallowing an auto expense. The parties agreed that the self-employment tax was an automatic adjustment and would be adjusted based on the final determination in this case. ↩2. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the taxable years in question, and all "Rule" references are to the Tax Court Rules of Practice and Procedure. ↩3. Mr. Tippin had not yet completed law school at that time. ↩4. Petitioners requested a finding of fact that the corporate charter stated that one of the purposes of the corporation was to engage in the business of "providing services to the home-maker." However, neither the articles of incorporation nor any bylaws were offered in evidence, and there is no support in the record for petitioners' requested finding. Moreover, "providing services to the home-maker" does not necessarily refer to the team maid service and could well apply to the laundromat service that the corporation engaged in. ↩5. Petitioners' stock ownership thus increased from 50 shares each to 70-1/2 shares each. ↩6. Petitioners' stock ownership thus increased from 70-1/2 shares each to 155-1/2 shares each, when rounded off. ↩7. Petitioners now each had 188-1/2 shares in Action Domestic, Inc. ↩8. Universal Consolidated Oil Co. v. Commissioner,T.C. Memo. 1961-246↩. 9. While worthless stock cases can and do present complex factual issues, it is unfortunate that the parties did not resolve this case without litigation. The small deficiency in issue hardly warranted the parties' expenditure of time and effort at trial and on brief. More importantly, the amount of any allowable loss deduction here, even if petitioners had prevailed on the disputed factual issue, is not merely the small amount of $ 20, as calculated by respondent on brief, but apparently zero. See Appendix to this Opinion. The interests of both the parties and this Court would have been better served had there been a proper analysis before trial or at least on brief as to exactly what, if anything, was really at stake in this case. All that remains is to give effect to respondent's concession of a $ 237 auto expense item. ↩. The record does not indicate whether petitioners reported any of the $ 371 cash distribution as income in 1975, so as to acquire a nominal increase in basis under sections 1373(b) and 1376(a). Also the record does not indicate whether in 1975 petitioners deducted all of the $ 2,226.36 net operating loss of the subchapter S corporation for 1975 as an ordinary loss. Sec. 1244(a). Some $ 988 of petitioners' basis related to non-section 1244 stock, and section 1374(c)(2) provides that the shareholder's portion of the subchapter S corporation's net operating loss cannot exceed the adjusted basis of his stock. Thus in 1975 an allocation of the loss should have been made between section 1244 stock and non-section 1244 stock. See sec. 1.1376-2(a)(2)(1), Income Tax Regs.; sec. 1.1244(d)-2, Income Tax Regs.↩ Thus, some portion of the 1975 loss would have been capital loss, rather than ordinary loss, and the $ 17.36 gain would probably be capital gain rather than ordinary income.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624213/	California Properties Company v. Commissioner.California Properties Co. v. CommissionerDocket No. 110151.United States Tax Court1943 Tax Ct. Memo LEXIS 433; 1 T.C.M. (CCH) 659; T.C.M. (RIA) 43096; February 25, 1943433 Marshall P. Madison, Esq., 225 Bush St., San Francisco, Calif., Gerald S. Levin, Esq., 225 Bush St., San Francisco, Calif., and Sigvald Nielson, Esq., 225 Bush St., San Francisco, Calif., for the petitioner. Frank T. Horner, Esq., for the respondent. MELLOTTMemorandum Findings of Fact and Opinion MELLOTT, Judge: The Commissioner made several adjustments to the net income (or loss) shown by petitioner's returns for the calendar years 1938 and 1939 and determined the following deficiencies: IncomeExcess ProfitsYearTaxTax1938$ 179.58None19395,062.30$2,098.07 Some of the adjustments are not contested. The petitioner alleges that respondent erred in determining the fair market value of certain property acquired by petitioner on December 20, 1937. It is claimed that petitioner has made an overpayment of income tax for the year 1939 in the amount of $1,793.70. The issues as originally framed by the pleadings involved three tracts of ground. One, referred to as Parcel 1, was sold by the petitioner in 1938 for $6,500. Respondent allocated to it a cost basis of $3,765.77 with a resultant profit of $2,734.23. He now concedes that no gain was realized from the434 sale of this property. Since the other adjustments made to the net income reported for that year are not questioned and since the elimination of the item in issue leaves the petitioner with a net loss for that year, decision of no deficiency for the year 1938 will be entered. The sole issue to be determined is the fair market value on December 20, 1937 of 98.5 acres of unimproved real estate on the edge of the city of Oakland in the county of Alameda, State of California, adjacent to the city of San Leandro. The property is referred to in the pleadings and the evidence as Parcels 2 and 3. Findings of Fact Petitioner is a corporation duly organized under the laws of the State of California on December 20, 1937. Its income tax returns were filed with the collector of internal revenue for the first district of California. In the income and excess profits tax return for the year 1939 no income or excess profits tax indicated and none was paid, except as hereinafter set out. On March 20, 1941, petitioner paid to the collector of internal revenue for the first district of California the sum of $1,901.32. The check, payable to the collector, bears the notation "deficiency $1,793.70, 435 Interest $107.62." In connection with the organization of petitioner it acquired four parcels of real property known as the San Leandro property (including the two now in issue) and also some property known as the St. Mary's property and the San Mateo property, solely in exchange for 13,265 shares of its common capital stock. Immediately after such exchange the persons by whom the properties were transferred and to whom the shares of stock were issued were in control of petitioner and the amount of stock and securities received by each was substantially in proportion to his interest in the properties prior to the exchange. Parcel 2 of the San Leandro property comprises 68.8 acres. Parcel 3 contains 29.7 acres. The two tracts of ground are contiguous and form a rough triangle immediately across the road from the city of San Leandro, the base of the triangle being Foothill Boulevard, an arterial highway leading northward from the city of Oakland. Parcels 2 and 3 above referred to were sold by petitioner to E. W. Field Corporation on January 26, 1939, for the sum of $85,000. The fair market value of said property on December 20, 1937 was $75,000. Opinion The finding which has been436 made disposes of the only issue submitted. Both parties recognize that the question is one of fact, that previously decided cases are not particularly helpful, that valuation of real estate is at best a mere "approximation derived from the evaluation of elements not easily measured," and that all credible evidence should be weighed and considered. (For a more detailed discussion of valuation see ; ; and .) As is frequently the case where witnesses are called by the parties to express opinions as "experts", a substantial portion of the brief and argument of each is devoted to extolling the wisdom, experience and capabilities of the witnesses called by him while pointing out the frailties, lack of experience and bias of those called by his opponent. This is not said in a spirit of criticism but merely suggests the difficulty triers of fact experience in attempting to determine actual fair market value on the basic date. The valuations range from $40,899.77437 (determined by respondent) to $98,075, the latter amount being that fixed by Edward B. Field, a stockholder in the purchaser, upon whose advice the property was purchased in January, 1939, for $85,000. Intermediate estimates are: $51,250, made by respondent's witness, which has caused him (respondent) to abandon his own determination of $40,899.77; $61,000, the assessed valuation for the four parcels, which, under the method of allocation apparently adopted by both parties, would mean that the two parcels in issue were assessed for approximately $40,000; and $89,000, the estimate made by petitioner's other witness. Then there are also the observations made by Field to the effect that there was "no conceivable difference," that he "couldn't see an iota of difference between the value of the property in January, 1939, and its value on the basic date. To this may be added the suggestion contained in the record that the taxing authorities were thought to have valued the property at approximately one-third of its actual value, thereby indicating a possible value of $120,000. A general description of the property aids but slightly in determining its value on the basic date. The two parcels438 are roughly in the shape of a triangle, the base running in a general north and south direction along Foothill Boulevard, a well improved arterial highway leading to Oakland. The 69 acre tract lies along the boulevard, is largely flat land and well adapted to subdivision for residential purposes. The 30 acre tract rises in a slope and, while adaptable for residential purposes, would require larger expenditures for grading, curbing, guttering and installing sewers and utilities. Few additional subdivisions were then being laid out in the general area and not many vacant lots were being sold though many were for sale. Transportation to Oakland was only fair, the interval between buses being 40 minutes and the fare 14 cents each way. While a school was available it was not ideally situated so far as this particular property was concerned; for children would be required to walk a distance of a mile or so along an arterial highway or cross it into the city of San Leandro. This property, however, was the only large tract of land in the area available for subdivision. It lay just across the road from the city of San Leandro, making shopping facilities readily available. Some of these facts*439 were relied upon by the witnesses to support a high valuation and others to support a low. Each extreme seems unreasonable. One witness for petitioner admitted that he would not have purchased the tract at the price fixed by him and would not have recommended that a client of his do so. On the other hand it seems unreasonable to suppose that the property would have increased in value 66 percent in a little more than one year - from $51,250 to $85,000. The witness making this appraisal had but slight knowledge of the property on the basic date and expressed his opinion after projecting his thinking back five years, following an inspection of it just shortly before the hearing. Yet it is not unreasonable to conclude that some increase occurred during the 13 months it was held by the owner. Due consideration has been given to all of the evidence and the implications arising therefrom, as well as to the arguments and suggestions of counsel. Conclusion has been reached that the fair market value of the property on the basic date was $75,000 and we now so hold. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624216/	CITIZENS TRUST CO., BY MARINE TRUST CO., SUCCESSOR BY MERGER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Citizens Trust Co. v. CommissionerDocket No. 38027.United States Board of Tax Appeals20 B.T.A. 392; 1930 BTA LEXIS 2143; July 29, 1930, Promulgated 2143 Organization expenses of a state bank held not deductible as a loss when such bank was merged with another bank under the laws of the State of New York. E. C. Gruen, C.P.A., for the petitioner. Ralph S. Scott, Esq., and E. M. Niess, Esq., for the respondent. SEAWELL392 This proceeding involves a deficiency in income tax as determined by the Commissioner for the period January 1, 1923, to December 15, 1923, in the amount of $8,747.79. The issue involved is whether organization expenses which were paid by the Citizens Trust Co. from 1917 to 1920, inclusive, and disallowed by the Commissioner as a deduction in those years, may be allowed as a deduction in computing net income of the Citizens Trust Co. for the period January 1, 1923, to December 15, 1923, on the ground that on the latter date the corporate existence of the Citizens Trust Co. ceased. FINDINGS OF FACT. The Citizens Trust Co. (hereinafter sometimes referred to as the "company") was a banking institution organized under the laws of New York in or prior to 1917 and had its principal office in Buffalo. In connection with the organization of the Citizens Trust Co. 2144 , this company expended $26,234.43. Of that amount, $22,188.92 was disallowed by the Commissioner as a deduction in computing the company's net income for 1917 and $4,045.50 was disallowed as a deduction in computing the company's net income for 1918, 1919, and 1920. The foregoing amounts were included by the Commissioner in the company's invested capital for the appropriate years from 1917 to 1920, inclusive. On December 15, 1923, the Citizens Trust Co. was absorbed by merger under the banking laws of New York by the Marine Trust Co. of Buffalo. 393 In computing the net income of the Citizens Trust Co. for the period January 1, 1923, to December 15, 1923, the Commissioner disallowed a deduction claimed in the amount of $26,234.43 on account of the foregoing organization expenses. OPINION. SEAWELL: What is here contended is that since the amounts expended in connection with the organization of the Citizens Trust Co. were capital items which could not be exhausted over the life of the corporation (), the cost of such capital items constituted a deductible loss to the Citizens Trust Co. when such company was2145 merged with the Marine Trust Co. on December 15, 1923. The facts are very meager as to what occurred in such merger, the only information we have being that "the Citizens Trust Co. was absorbed by merger, under the Banking Laws of the State of New York, by the Marine Trust Co." That is, as we understand the situation, the corporate activities of the two institutions were continued under the corporate name and identity of the Marine Trust Co. In McKinney's Consolidated Laws of New York, vol. 4, p. 432, the following statements and citations of authorities appear with respect to the merger of banks under the laws of New York: Status of merged corporation generally. - A merged corporation does not continue to exist after the merger nor is it identical with the one into which is is merged. , affirming . But the scheme of the Banking Law is "that the corporation which is merged with another should lose its identity only so far as its separate existence is concerned, and that it should be swallowed up in the other and become an integral part thereof, carrying into the corporation2146 which survived all its rights, powers, liabilities and assets, except the indicia and attributes of a corporate body, distinct from that into which it is merged." ; , affirmed in (1912) . Upon the evidence before us and under the laws of New York governing mergers of this character, we fail to see the justification for saying that a loss was sustained by the Citizens Trust Co. in the merger on account of the expenditures incident to its original organization. Such an ending of the corporate life of a corporation is entirely unlike that involved in , where there was a surrender of the corporate charter and a dissolution of the corporation. There a complete extinction of the corporation occurred, whereas in the instant case all "rights, powers, liabilities and assets" survived except the "indicia and attributes 394 of a corporate body distinct from that into which it is merged." Besides, we have no evidence from which we2147 could conclude that the transaction was one which would give rise to a taxable gain or deductible loss under the Revenue Act of 1921 or, if it were such a transaction, that a loss was in fact sustained. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624219/	JAMES E. COOPER and JO ELLA COOPER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentCooper v. CommissionerDocket No. 38199-84.United States Tax CourtT.C. Memo 1987-334; 1987 Tax Ct. Memo LEXIS 334; 53 T.C.M. (CCH) 1304; T.C.M. (RIA) 87334; July 6, 1987. 334 During 1981 and 1982, Ps were employed and filed joint Federal income tax returns but they claimed that their wages were not taxable because they were payable in Federal Reserve notes. Ps also claimed that they were in the horse-breeding business in those years, and they incurred certain medical expenses for which they claim deductions under sec. 213, I.R.C. 1954. Held:(1) The wages are taxable income. (2) Ps are liable for addition to tax under sec. 6653(a)(1) and (2), I.R.C. 1954, for negligence or intentional disregard of rules and regulations. (3) Ps did not engage in the horse-breeding activities with the actual and honest objective of making a profit. (4) Ps are not allowed medical deductions under sec. 213, I.R.C. 1954, because they failed to prove that the expenses were not reimbursed. James E. Cooper and Jo Ella Cooper, pro se. Brett J. Miller, for the respondent. SIMPSONMEMORANDUM FINDINGS OF FACT AND OPINION SIMPSON, Judge: The Commissioner determined the following deficiencies in, and additions to, the petitioners' Federal income taxes: Additions to TaxSec. 6653(a)(1) 1Sec. 6653(a)(2)YearDeficiencyI.R.C. 1954I.R.C. 19541981$24,392.83$1,219.6450% of theinterest due on$24,392.83198213,788.16689.4150% of theinterest due on$13,788.16337 After concessions, the issues remaining for decision are: (1) Whether wages received by the petitioners during 1981 and 1982 are taxable; (2) whether the petitioners engaged in their horse-breeding activities with a profit objective within the meaning of section 183; (3) whether the petitioners' medical expenses for 1981 and 1982 are deductible under section 213; and (4) whether the petitioners are liable for the additions to tax for negligence or intentional disregard of rules and regulations under section 6653(a)(1) and (2). FINDINGS OF FACT The petitioners, James E. and Jo Ella Cooper, husband and wife, maintained their legal residence in Mooresville, Indiana, at the time the petition in this case was filed. They filed their joint Federal income tax returns for 1981 and 1982 with the Internal Revenue Service. Mr. and Mrs. Cooper were both employed by General Motors Corporation, Detroit Diesel Allison Division (GM), in Indianapolis, Indiana, during 1981 and 1982. The petitioners normally left for work at 2:00 p.m. and returned home at 12:30 a.m. Occasionally, 338 Mrs. Cooper worked overtime, and on those days, she left for work as early as 11:00 a.m. Mrs. Cooper has had major surgery on a number of occasions in the 1980s, and in 1981, she was absent from work on sick leave for several months. In 1977, the petitioners bought six acres of land on which they built their residence. During 1979, since they both liked horses, the petitioners decided to begin a breeding farm. They started building a barn in 1980 which remained unfinished at the time of the trial of this case. The petitioners then purchased a mare and a registered stud. They purchased a second mare that turned out to be sterile. The petitioners also purchased a gelding for their children. In 1983, the registered stud attacked and almost killed the gelding and bit the petitioners' son. Because of these unfortunate mishaps and Mr. Cooper's dislike of the economic and managerial aspects of the horse activity, the petitioners sold all of their horses in 1984. The petitioners conducted the horse-breeding activity on the same six acres as their personal residence was located. They never kept any books or records in ledger form indicating expenses for their horse-breeding and sales339 activity. They never showed the horses, nor did they attend horse shows. The petitioners rode the horses which they had purchased for the breeding activity for recreational purposes, and feed acquired for such horses was also used for their children's horses. The petitioners subscribed to one publication, Horse Rider Magazine, incident to the horse-breeding activity. Neither of the petitioners ever attended any course at any local college concerning the horse-breeding and sales activity. The petitioners never hired a consultant nor requested a survey of their facilities in order to determine the feasibility of the horse-breeding activity in that area. The petitioners did not sell any horses during 1981 or 1982. They utilized the field breeding method of impregnation by leaving the stud and mare in the open pasture. There were three unsuccessful attempts to breed the mare which was capable of reproducing. During 1981 and 1982, the petitioners incurred a number of medical expenses. However, the petitioners could not establish that they had not been reimbursed for a number of such expenses. The petitioners were covered by a Blue Cross and Blue Shield medical insurance plan340 maintained by GM during 1981 and 1982. On their Federal income tax returns for 1981 and 1982, the petitioners reported the wages received by them from GM and certain other income, but they treated the wages and most of the other income as not taxable because they were payable in Federal Reserve notes. The petitioners showed that they had no tax liability for such years. In his notice of deficiency, the Commissioner determined that the wages and other income received by the petitioners were taxable and that they were liable for the additions to tax under section 6653(a)(1) and (2) for negligence or intentional disregard of rules and regulations. OPINION At the trial of this case, the petitioners claimed that if their wages and other income are taxable, they are entitled to a number of deductions, including deductions for the expenses of their horse-breeding activity and for their medical expenses. The Commissioner conceded that the petitioners are allowed many of the deductions claimed by them. Four issues remain for our decision. The first of these issues is whether wages received by the petitioners are required to be included in gross income. The petitioners bear the burden341 of proof concerning this issue. Rule 142(a), Tax Court Rules of Practice and Procedure.2 Both of the petitioners received wages in 1981 and 1982, and there is no dispute as to the amounts. Section 61(a) states that "gross income means all income from whatever source derived, including (but not limited to) * * * compensation for services." It is well settled that wages, payable in Federal Reserve notes for services, are income within the meaning of Federal taxing statutes, and the petitioners' contention to the contrary is frivolous and does not merit further discussion. Lonsdale v. Commissioner,661 F.2d 71">661 F.2d 71 (5th Cir. 1981), affg. a Memorandum Opinion of this Court; United States v. Buras,633 F.2d 1356">633 F.2d 1356 (9th Cir. 1980); United States v. Benson,592 F.2d 257">592 F.2d 257 (5th Cir. 1979); United States v. Ware,608 F.2d 400">608 F.2d 400 (10th Cir. 1979); Rowlee v. Commissioner,80 T.C. 1111">80 T.C. 1111 (1983); Gajewski v. Commissioner,67 T.C. 181">67 T.C. 181 (1976), affd. without published opinion 578 F.2d 1383">578 F.2d 1383 (8th Cir. 1978). 342 The next issue for decision is whether the petitioners engaged in their horse-breeding activities with a profit objective within the meaning of section 183. This issue is one of fact to be resolved, not on the basis of any one factor, but on the basis of all of the facts and circumstances of the case. Engdahl v. Commissioner,72 T.C. 659">72 T.C. 659, 666 (1979); Allen v. Commissioner,72 T.C. 28">72 T.C. 28, 34 (1979). Section 183(a) provides that if an individual engages in an activity, and if that activity is not engaged in for profit, then no deduction attributable to that activity shall be allowed except as provided in such section. Section 183(b)(1) states that deductions which would be allowable without regard to whether the activity is engaged in for profit shall be allowed, and section 183(b)(2) provides that deductions which would be allowable only if the activity is engaged in for profit shall be allowed, but only to the extent that gross income from the activity exceeds the deductions allowable by reason of section 183(b)(1). Section 183(c) defines an activity not engaged in for profit as "any activity other than one with respect to which deductions are343 allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212." Deductions are allowable under section 162 for expenses of carrying on activities which constitute a trade or business of the taxpayer and under section 212 for expenses incurred in connection with activities engaged in for the production or collection of income. Except as provided in section 183, no deductions are allowable for expenses incurred in connection with activities which are not engaged in for profit. Sec. 1.183-2, Income Tax Regs.Section 1.183-2(b), Income Tax Regs., lists some of the relevant factors to be considered in determining whether or not an activity is engaged in for profit. These factors include: (1) The manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer or his advisors; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on other similar or dissimilar activities; (6) the taxpayer's history of income or losses with respect to the activity; (7) the amount of occasional profits, 344 if any, which are earned; (8) the financial status of the taxpayer; and (9) elements of personal pleasure and recreation. For an activity to be engaged in for profit, the facts and circumstances must indicate that the taxpayer entered into the activity, or continued the activity, with the actual and honest objective of making a profit. Dreicer v. Commissioner,78 T.C. 642">78 T.C. 642, 645 (1982), affd. without opinion 702 F.2d 1205">702 F.2d 1205 (D.C. Cir. 1983). In the present case, the manner in which the petitioners carried on the activity tends to show no profit objective. The petitioners failed to maintain any books or records in ledger form showing expenses or income relating to the horse-breeding activity. They never showed the horses and never attended any horse shows. There were three unsuccessful attempts to impregnate the mare capable of reproducing. Thus, this horse-breeding activity was not carried on in a businesslike manner, and such circumstances are indicative of an absence of a profit motive. Sec. 1.183-2(b)(1), Income Tax Regs.Another factor to be considered is the expertise of the petitioners or their advisors. Preparation for the activity by extensive345 study of its accepted business, economic, and scientific practices, or consultation with those who are expert therein, may indicate that the taxpayer has a profit motive where the taxpayer carries on the activity in accordance with such practices. Sec. 1.183-2(b)(2), Income Tax Regs. However, neither petitioner ever attended any course at any local college concerning the horse-breeding activities. They never hired a consultant or expert nor requested a survey of the facilities in order to determine the feasibility of the horse-breeding business in that area. With the exception of subscribing to one magazine concerning horse breeding and sales, the petitioners offered no evidence of their expertise or of any advisors. The time and effort expended by the taxpayer is also a relevant factor. Substantial income from sources other than the activity (particularly if the losses from the activity generate substantial tax benefits) may indicate that the activity is not engaged in for profit. Sec. 1.183-2(b)(8), Income Tax Regs. The petitioners were both employed full-time during the years at issue as employees of GM, except for several months in 1981 when Mrs. Cooper was off on sick leave. 346 They were employed on the second shift which required them to leave home at approximately 2:00 p.m. and return at 12:30 a.m. Mrs. Cooper occasionally worked overtime causing her to leave home as early as 11:00 a.m. Neither petitioner withdrew from employment to engage in the horse-breeding activity. The petitioners earned substantial income from working at GM in 1981 and 1982 from which they wish to offset expenditures for this horse-breeding activity. The evidence presented indicates that the petitioners spent a large amount of their time and effort working for GM. They have offered no credible evidence that they expended sufficient time and effort in the horse-breeding activity to indicate a profit motive. The personal pleasure and recreation elements in this case also indicate no profit objective. The presence of personal motives in the carrying on of an activity may indicate that the activity is not engaged in for profit, especially where there are recreational or personal elements involved. Sec. 1.183-2(b)(9), Income Tax Regs. The petitioners testified that they both rode the horses for recreational purposes. In addition, the hay and barn, claimed to be secured for the347 business, were also used to feed and shelter the horses belonging to their children. The evidence of personal and recreational use of the horses and facilities is yet another relevant factor indicating the absence of any good-faith profit objective. The petitioners put forth no credible evidence reflecting any profit objective during the time they were engaged in the horse-breeding activities. After considering all the circumstances, we are convinced that the petitioners' horse-breeding activities were not engaged in for profit within the meaning of section 183(a), and the petitioners have not shown that they are entitled to deduct any of the expenses of such activity. Sec. 183(b). The third issue to be decided is whether the petitioners' medical expenses for 1981 and 1982 are deductible pursuant to section 213. Once again, the petitioners bear the burden of proof concerning this issue. Rule 142(a). They presented numerous exhibits which allegedly represent medical expenses incurred during 1981 and 1982. Section 213(a) allows a deduction, subject to certain limitations, for expenses, not compensated for by insurance, paid for the medical care of the taxpayer, his spouse, 348 and dependents. A deduction is allowable only with respect to medical expenses actually paid during the taxable year. Sec. 1.213-1(a), Income Tax Regs.To be entitled to deduct a medical expense, the petitioners must also show that they did not receive reimbursement of the expense. During the years in issue, the petitioners were insured by Blue Cross and Blue Shield through their employer, GM. The insurance was characterized as "major medical" by the petitioners. Yet, the petitioners admitted that they were unsure whether or not they were reimbursed for a number of their expenses. The petitioners failed to convince us that they were not reimbursed for some portion of their medical expenses. Therefore, we must hold that none of the medical expenses are deductible; to do otherwise would require this Court to engage in mere speculation. The final issue for decision is whether the petitioners are liable for the additions to tax under section 6653(a)(1) and (2) on the grounds that all of the petitioners' underpayment of income taxes was due to negligence or intentional disregard of rules and regulations. The petitioners have the burden of proof on this issue. Rule 142(a); Enoch v. Commissioner,57 T.C. 781">57 T.C. 781 (1972).349 The petitioners offered no evidence or explanation as to the reasons for their underpayment; therefore, we hold that they are liable for the additions to tax as determined by the Commissioner. Because of concessions by the Commissioner, Decision will be entered under Rule 155.Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as in effect during the years in issue.↩2. Any reference to a Rule is to the Tax Court Rules of Practice and Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624220/	MANISTIQUE LUMBER AND SUPPLY COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Manistique Lumber & Supply Co. v. CommissionerDocket No. 52588.United States Board of Tax Appeals29 B.T.A. 26; 1933 BTA LEXIS 1011; September 14, 1933, Promulgated 1011 1. Where petitioner constructed a roadway which, under the facts, was permanent in its nature, it will not be permitted to deduct its cost as current expense. 2. Where petitioner elected in 1927 to charge off specific items as bad debts, it will not be permitted in subsequent years to charge off other specific bad debts and set up a reserve for unspecified bad debts without the consent of the Commissioner of Internal Revenue. Harry H. Meisner, Esq., for the petitioner. Owen W. Swecker, Esq., for the respondent. ADAMS 26 This proceeding involves the correctness of the income tax deficiency found by the Commissioner of Internal Revenue as against the petitioner, for the years 1927 and 1928. On December 13, 1930, the Commissioner forwarded to the petitioner a sixty-day letter showing an income tax deficiency for the year 1927, in the sum of $98.46, and for the year 1928, in the sum of $704.40, claiming a total deficiency of $802.86. The petitioner filed its petition in due time with the United States Board of Tax Appeals seeking a review of the Commissioner's finding. FINDINGS OF FACT. We find the facts to be as follows: The Manistique1012 Lumber & Supply Co., the petitioner herein, was incorporated under the laws of the State of Michigan in April 1927, and was authorized to engage in the lumber and building supply business. After its incorporation, and during the year 1927, the corporation purchased certain unimproved lands to be used as a lumberyard. At the time of such purchase there were no roadways on the property and it became necessary for the corporation to construct a roadway on the same in order that it and its customers might have ingress and egress to and from its place of business. This construction was accomplished during the year 1927 at a total cost to petitioner, according to its books, of $1,557.16, which amount was set up on the corporation's books under the heading "Yard Improvement." On its 1927 income tax return the corporation deducted $689.29 of the total cost of the roadway as an expense incurred during that year. In its 1928 income tax return the remaining portion of the cost of the road, namely, $867.87, was deducted as expense. The corporation filed its first income tax return in March 1928, for the period April 1 to December 31, 1927, in which it set up an 27 item of $883.071013 as loss on specific bad debts charged off during that period. In its 1928 return the corporation claimed a deduction of $8,248.78, of which amount $6,248.78 represented specific bad debts charged off during 1928, and $2,000 represented a provision for reserve for bad debts. The corporation's balance sheet as of December 31, 1927, filed with its 1927 income tax return, does not disclose any provision for reserve for bad debts. The first provision for a reserve for bad debts appears in petitioner's balance sheet as of December 31, 1928, in which a reserve for bad debts is disclosed in the amount of $2,000. The respondent allowed the bad debt deduction of $883.07 for the year 1927, and $6,248.78 of the deduction claimed for the year 1928, but refused to allow the $2,000 item set up as a reserve for bad debts December 31, 1928. At the trial petitioner introduced, as a witness, Glenn P. Thomas, petitioner's vice president and treasurer. He testified that he was familiar with the item of $689.29 and that it was a charge for cinders put in the yard in order to make a level road, so that the road could be used to take care of their business. He testified that it was not a permanent1014 improvement because it continually had to be filled in; that it was constructed after they opened the business by putting in stone and various debris from building jobs and material and cinders and gravel put on top of that; that the original cost of building the road was approximately $1,557.16. We find, under all the testimony in this case, that the item of $867.87 which petitioner seeks to deduct for the year 1928 as current expense was incurred in the permanent improvement of petitioner's property. On the second question, the matter of the deductibility of the $2,000 item set up as a reserve for bad debts, we find the facts to be: That in reporting its income tax for 1927, petitioner elected to adopt the method of charging off its specific bad debts. In its return for 1928 it undertook to change this method by setting up on its books certain specific losses from bad debts and properly setting up a reserve for bad debts; that this was done without the consent of the respondent. OPINION. ADAMS: The questions presented in this case are two: First, whether under the above facts, the respondent erred in failing to allow the deduction claimed in petitioner's income tax return1015 for the year 1928, of the sum of $867.87 as ordinary and necessary business expense, or whether it constituted a permanent improvement which was properly chargeable to permanent improvement of petitioner's property, and, as such, represented a capital expenditure. 28 The pertinent portions of section 215(a) of the Revenue Act of 1926 and the regulations thereunder are as follows: SEC. 215. (a) In computing net income no deduction shall in any case be allowed in respect of - * * * (2) Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate. Section 24(a) of the Revenue Act of 1928 is identical with the above quoted portion of the 1926 Act. Article 292, Regulations 69, reads as follows: ART. 292. Capital expenditures. - Amounts paid for increasing the capital value or for making good the depreciation (for which a deduction has been made) of property are not deductible from gross income * * . Under these provisions and the above findings of fact, it seems to us clear that the determination of the respondent was correct, and as to this matter, his findings are approved. 1016 We feel that this question has been settled by the opinions of the Board and the Courts. This Board has held that expenditures for items that are to continue in use in the business are to be classified as capital items. ; ; ; . The Board has also held that, in the absence of evidence, if expenditures were made for repairs the Commissioner's determination should be approved. . In this case it is clear that the expenditures were not made for repairs, since the expenditures were for the original construction of the road necessary to the petitioner's business, which was afterwards repaired from time to time. The second question presented is whether or not the Commissioner erred in refusing to allow the petitioner to set up, in its 1928 income tax return, loss both for specific bad debts and also a reserve for bad debts which have not been ascertained definitely to constitute losses. Under the findings1017 above, we believe this question to be determined by the Revenue Act of 1928, together with the regulations thereunder, the pertinent portions of such act and regulations being as follows: [Sec. 23.] In computing net income there shall be allowed as deductions: * * (j) Bad Debts. - Debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts); and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part. Article 191, Regulations 74, reads in part as follows: ART. 191. Bad Debts. - Bad debts may be treated in either of two ways - (1) By a deduction from income in respect of debts ascertained to be worthless in whole or in part, or (2) By a deduction from income of an addition to a reserve for bad debts. 29 Under the law and the authorities, petitioner had the option to adopt and use either one of these methods, but it did not have the right, without the approval of the Commissioner, to use both, according to its caprice or its interest. 1018 Petitioner did not request the respondent to change the method which he had adopted, and was not given any authority to do so, and therefore had no legal right to change the method which it had originally adopted. The authorities on this question are uniform and it seems to be well settled. ; affd., , held that the taxpayer's election to deduct specific bad debts for a given year was binding for subsequent years. ; . Many other cases announcing the same doctrine might be cited, but we feel it unnecessary to do so. We have noted petitioner's citation of the case of , but in our opinion it does not apply to the present situation. The finding of the Commissioner on the second issue is affirmed. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624222/	Kenneth P. Griswold and Florine Griswold, Petitioners v. Commissioner of Internal Revenue, RespondentGriswold v. CommissionerDocket No. 9370-84United States Tax Court85 T.C. 869; 1985 U.S. Tax Ct. LEXIS 14; 85 T.C. No. 51; 6 Employee Benefits Cas. (BNA) 2465; November 26, 1985, Filed 14 Decision will be entered under Rule 155. During the year in issue, petitioner-husband was the owner of an annuity contract issued by JH, an insurance company. On July 1, 1980, petitioner-husband entered into a loan transaction with JH pursuant to which he borrowed against the loan value of the annuity. At the time of such borrowing, the annuity qualified as an individual retirement annuity, as defined in sec. 408(b), I.R.C. 1954. Held: Petitioner-husband's borrowing from JH was a borrowing under or by use of an individual retirement annuity. Under sec. 408(e)(3), the annuity ceased to qualify as an individual retirement annuity as of Jan. 1, 1980, and petitioners must include in gross income for such year the fair market value of the annuity as of that date. Louis J. McCoy, for the petitioners.John C. Schmittdiel, for the respondent. Fay, Judge. FAY869 OPINIONRespondent determined a deficiency of $ 3,787 in petitioners' 1980 Federal income tax. After concessions, the 870 sole issue is whether, under section 408(e)(3), 1 petitioner Kenneth P. Griswold's borrowing against an annuity contract during 1980 caused such contract to cease being an individual retirement annuity and required petitioners to include in their gross income for 1980 the fair market value thereof.The facts have been fully stipulated and are so found.Petitioners Kenneth P. Griswold and Florine Griswold are husband and wife. They resided in St. Paul, Minn., at the time they filed the petition herein.During the year in issue, petitioner Kenneth P. Griswold (herein18 petitioner) was the owner of an annuity contract with John Hancock Mutual Life Insurance Co. (herein John Hancock). The fair market value of this contract as of January 1, 1980, was $ 6,866.On July 1, 1980, petitioner obtained a loan from John Hancock by borrowing against the loan value of the annuity contract. 2 At the time of this borrowing, the annuity contract satisfied the requirements set forth in section 408(b), and thus was an individual retirement annuity within the meaning of that section. Petitioner had been advised by a representative of John Hancock that such borrowing was without income tax consequences so long as the loan was repaid. Petitioner repaid the loan in full prior to April 15, 1981.In late June or early July of 1981, petitioner received a check from John Hancock in the amount of $ 8,510.27, representing the entire balance of his annuity contract. On July 21, 1981, petitioner reinvested the entire amount received from John Hancock19 with Delaware Charter Guaranty & Trust Co. through Piper, Jaffray & Hopwood, Inc.In his notice of deficiency, respondent determined that, by reason of petitioner's borrowing against the individual retirement annuity contract, petitioners were required under section 408(e)(3) to include in their gross income for 1980 the sum of $ 6,866, representing the fair market value of such contract as of January 1, 1980. Respondent also made several other adjustments concerning petitioners' Federal income tax liability, as to which the parties have reached agreement. Thus, the sole remaining issue is whether, under section 408(e)(3), 871 petitioner's borrowing against the annuity contract caused such contract to cease being an individual retirement annuity and required petitioners to include in gross income for 1980 the value of such contract as of January 1, 1980. 3Individual retirement annuities, like individual retirement20 accounts, are a form of tax-favored retirement savings arrangement. 421 The rules governing their taxability are generally contained in section 408. As relevant herein, section 408(d)(1) sets forth the general rule that amounts paid or distributed under an individual retirement annuity shall be included in gross income for the taxable year in which the payment or distribution is received. The owner of an individual retirement annuity thus is generally not taxed with respect thereto until amounts are received by him under the annuity contract. Cf. sec. 408(d)(1), sec. 1.408-4(a), Income Tax Regs.5However, an exception to this general rule is contained in section 408(e)(3), which provides as follows:(3) Effect of borrowing on annuity contract. -- If during any taxable year the owner of an individual retirement annuity borrows any money under or by use of such contract, the contract ceases to be an individual retirement annuity as of the first day of such taxable year. Such owner shall include in gross income for such year an amount equal to the fair market value of such contract as of such first day.Section 1.408-3, Income Tax Regs., sets forth rules pertaining to individual retirement annuities. Of particular relevance herein is section 1.408-3(c), Income Tax Regs., which provides as follows:(c) Disqualification. -- If during any taxable year the owner of an22 annuity borrows any money under the annuity or endowment contract or by use of such contract (including, but not limited to, pledging the contract as security for any loan), such contract will cease to be an individual retirement annuity as of the first day of such taxable year, and will not be an individual 872 retirement annuity at any time thereafter. If an annuity or endowment contract which constitutes an individual retirement annuity is disqualified as a result of the preceding sentence, an amount equal to the fair market value of the contract as of the first day of the taxable year of the owner in which such contract is disqualified is deemed to be distributed to the owner. Such owner shall include in gross income for such year an amount equal to the fair market value of such contract as of such first day. The preceding sentence applies even though part of the fair market value of the individual retirement annuity as of the first day of the taxable year is attributable to excess contributions which may be returned tax-free under section 408(d)(4) or 408(d)(5).Under the clear language of section 408(e)(3) and section 1.408-3(c), Income Tax Regs., the owner's borrowing23 under or by use of an individual retirement annuity is a disqualifying event having two distinct consequences. First, it causes the annuity contract to cease being an individual retirement annuity as of the first day of the taxable year in which such borrowing occurs. Thus, as of such date, the annuity contract ceases to be eligible for the favorable tax treatment generally accorded to individual retirement annuities. Second, an amount equal to the fair market value of such contract on the first day of the taxable year in which the borrowing occurs is deemed distributed to the owner, who is required to include such amount in gross income for such taxable year.Application of these principles to the facts of the instant case requires a holding for respondent. During 1980, petitioner was the owner of an annuity contract with John Hancock. On July 1, 1980, petitioner obtained a loan from John Hancock by borrowing against the loan value of the annuity contract. At the time of such borrowing, the contract satisfied the requirements set forth in section 408(b) and thus was an individual retirement annuity within the meaning of that section. We conclude that the loan from John Hancock24 to petitioner was a borrowing under or by use of an individual retirement annuity. Accordingly, we hold under section 408(e)(3) that the borrowing caused petitioner's annuity contract to cease being an individual retirement annuity as of January 1, 1980, and that petitioners must include in their gross income for 1980 the sum of $ 6,866, representing the fair market value of the annuity contract with John Hancock as of January 1, 1980.Our conclusion is supported not only by the express language of the statute and the regulations, but also by the 873 legislative history relating to the Employee Retirement Income Security Act of 1974, Pub. L. 93-406, 88 Stat. 829 (herein ERISA) as part of which section 408 was enacted into law. In adopting the individual retirement provisions of ERISA, 6Congress' goal was to create a system whereby employees and self-employed persons not covered by qualified retirement plans would have the opportunity to set aside at least some retirement savings on a tax-sheltered basis. See H. Rept. 93-807, at 126, 1974-3 C.B. (Supp.) 236, 361; S. Rept. 93-383, at 131, 1974-3 C.B. (Supp.) 80, 210. Under25 the statutory framework thus established, individuals could obtain a deduction for amounts contributed to individual retirement accounts, individual retirement annuities and individual retirement bonds, and earnings on such amounts could accrue tax free. See secs. 219, 408, 409. See also H. Rept. 93-807, supra at 126-127, 1974-3 C.B. (Supp.) at 361-362; S. Rept. 93-383, supra at 130-131, 1974-3 C.B. (Supp.) at 210; Orzechowski v. Commissioner, 69 T.C. 750">69 T.C. 750, 752-753 (1978), affd. 592 F.2d 677">592 F.2d 677 (2d Cir. 1979).In adopting this statutory framework, Congress intended that funds contributed to an individual retirement account, individual retirement annuity, or individual retirement bond be used for retirement purposes. Accordingly, it sought to discourage certain transactions which would circumvent26 this statutory purpose. See H. Rept. 93-807, supra at 127, 138, 1974-3 C.B. (Supp.) at 362, 373; cf. S. Rept. 93-383, supra at 134, 1974-3 C.B. (Supp.) at 213. One such transaction, which it sought to prevent by means of section 408(e)(3), was the borrowing under or by means of an individual retirement annuity. The House Ways and Means Committee described the consequences of such a borrowing as follows:With respect to individual retirement annuities (which are nontransferable and cannot be hypothecated), the bill prohibits the owner of the contract from borrowing money from the insurance company issuing the contract, under or by use of the contract. If any prohibited borrowing occurs, (regardless of the amount involved) the contract is to lose its qualification as an individual retirement annuity as of the first day of the taxable year of the contract owner in which the borrowing occurs. In this case, the owner is to include in income for that year the fair market value (which may or may not 874 be the same as the cash surrender value) of the contract as of the first day of that year. Since the owner's basis27 in the contract is to be zero the entire amount deemed distributed is to be taxable to him as ordinary income. * * (If the annuity contract is sold, exchanged or hypothecated, in violation of its terms, it is intended that the same consequences will occur as with a prohibited borrowing from an insurance company.) [H. Rept. 93-807, supra at 136-137, 1974-3 C.B. (Supp.) at 236, 371-372. See also Conf. Rept. 93-1280, at 339, 3 C.B. 415">1974-3 C.B. 415, 500.] 728 The foregoing excerpt from the legislative history of section 408(c)(3) makes it clear that petitioner's borrowing from John Hancock against his annuity contract was precisely the type of transaction which Congress sought to discourage by means of that statutory provision.A contrary holding is not required by the parties' stipulation that petitioner received the balance of his annuity contract from John Hancock in July 1981 and reinvested the proceeds thereof within 60 days. It is true that under section 408(d), certain amounts paid under an individual retirement annuity will not be includable in gross income if they are, within 60 days of receipt, reinvested in a "rollover" transaction as prescribed in that section. See secs. 408(d)(1), 408(d)(3). However, petitioners can take no comfort in this section. First, the record does not establish that the reinvestment of the proceeds was made in the manner prescribed by section 408(d)(3). Furthermore, insofar as is relevant herein, section 408(d) applies only to amounts paid out of or distributed under an individual retirement annuity. See secs. 408(d)(1), 408(d)(3). We have held, however, that petitioner's borrowing against the29 annuity contract with John Hancock on July 1, 1980, caused such contract under section 408(e)(3) to cease being an individual retirement annuity as of January 1, 1980. Thus, after giving effect to section 408(e)(3), those statutory provisions which relate to individual retirement annuities, such as section 408(d), can have no application with respect to petitioner's annuity contract on or after January 1, 1980.875 Thus, we hold that under section 408(e)(3), petitioner's borrowing against the annuity contract with John Hancock during 1980 caused the contract to cease being an individual retirement annuity as of January 1, 1980. Under the provisions of that section, petitioners are required to include in their gross income for 1980 the sum of $ 6,866, representing the fair market value of such contract as of January 1, 1980. 830 To reflect concessions and the foregoing,Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code of 1954 as amended and in effect during the year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩2. The record does not reflect the amount of this loan.↩3. We note that petitioners have not filed either an original brief or a reply brief in this case.↩4. The statutory provisions relating to individual retirement annuities and individual retirement accounts were first introduced with the enactment of the Employee Retirement Income Security Act of 1974, Pub. L. 93-406, 88 Stat. 829. See H. Rept. 93-807, at 126-127, 1974-3 C.B. (Supp.) 236, 361-362. Conf. Rept. 93-1280, at 335-336, 3 C.B. 415">1974-3 C.B. 415, 496-497. See generally Orzechowski v. Commissioner, 69 T.C. 750">69 T.C. 750, 752-753 (1978), affd. 592 F.d 677 (2d Cir. 1979). See also the discussion at note 6 and accompanying text, infra↩.5. See also H. Rept. 93-807, at 135 note 11, 1974-3 C.B. (Supp.) 236, 370 note 11, which indicates "As with annuities generally [sic] the owner of an individual retirement annuity is not to be currently taxed on the annual increased value of the annuity, but is taxed on receipt of annuity payments."↩6. See sec. 2002 of Pub. L. 93-406, 88 Stat. 958-971, which added secs. 219, 408, 409, 4973, 4974, and 6693.↩7. While the legislation history does not expressly so indicate, it is inferable therefrom that a borrowing against an individual retirement annuity would frustrate the statutory purpose in that it would allow the owner to, in effect, have the use of the retirement funds prior to his retirement. Such a borrowing could leave the owner without funds for retirement, a result which Congress clearly sought to discourage. Cf. H. Rept. 93-807, supra↩ at 138, 1974-3 C.B. (Supp.) at 373; S. Rept. 93-383, at 134, 1974-3 C.B. at 213.8. Our holding is not affected by the fact that petitioner engaged in the borrowing herein in reliance upon the erroneous advice of a representative of John Hancock. By means of the clear language of sec. 408(e)(3)↩, Congress has prescribed the consequences of a borrowing under or by use of an individual retirement annuity, and we must apply the law as so written.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624224/	A. T. Miller and Estate of Eleanor A. Miller, Deceased, First Trust Company of Saint Paul, Special and General Administrator, Petitioners, v. Commissioner of Internal Revenue, Respondent. A. T. Miller and Estate of Eleanor A. Miller, Deceased, First Trust Company of Saint Paul, Administrator, Petitioners, v. Commissioner of Internal Revenue, RespondentMiller v. CommissionerDocket Nos. 87484, 91439United States Tax Court39 T.C. 940; 1963 U.S. Tax Ct. LEXIS 177; March 20, 1963, Filed 177 Decisions will be entered under Rule 50. Held, the administration of the Estate of Addison Miller was unduly prolonged beyond the end of 1955 and consequently the income of said estate for 1956 and part of 1957 was properly includable in petitioner's income for 1956 and 1957. Held, further, petitioner is not entitled to a deduction for the loss of purported goodwill in 1958 as a result of the cessation of business operations in that year. Held, further, petitioner is not entitled to a deduction for club dues as ordinary and necessary business expenses. James R. Oppenheimer, Esq., for the petitioners.Robert F. Cunningham, Esq., for the respondent. Mulroney, Judge. MULRONEY 940 The respondent determined the following deficiencies in the petitioners' income tax for the years 1956, 1957, and 1958:YearDeficiency1956$ 43,205.9219578,112.82195892,337.60The issues are (1) whether the administration of the estate of Addison Miller (who died in 1944) should have been180 closed prior to 1956, in which event certain income reported by the estate in 1956 and 1957 would be taxable to petitioners in those years; (2) whether petitioners are entitled to a deduction in 1958 arising from the purported loss of goodwill in that year; and (3) whether petitioners are entitled to a deduction of certain club expenditures as business expenses in 1958.FINDINGS OF FACT.Some of the facts were stipulated and they are found accordingly.A. T. Miller and Eleanor A. Miller were husband and wife during the years here involved and were residents of St. Paul, Minn. They filed joint income tax returns for the years 1956, 1957, and 1958 with the district director of internal revenue, St. Paul, Minn. Eleanor A. Miller died May 11, 1959. A. T. Miller will hereinafter sometimes be called the petitioner.Prior to 1938 Addison Miller, Inc., a Minnesota corporation, was engaged in the business of performing certain services for railroad companies under contracts, such as furnishing railroad boarding 941 camps with meals and lodging, operating retail concessions, manufacturing, harvesting, and handling ice, icing railroad cars, cleaning railroad cars, operating coal docks, 181 and similar operations. The stockholders and the percentage of stock held by them in the corporation were Addison Miller, 55 percent; petitioner, 20 percent; and George Faltico, 25 percent.In 1937 a partnership was formed by Addison Miller (petitioner's brother), petitioner, and George Faltico with the ownership of said partnership and the interest in the profits and losses thereof being 55 percent, 20 percent, and 25 percent, respectively. This partnership was known as the Addison Miller Co. The partnership maintained its books and records on an accrual basis.Shortly after the formation of Addison Miller Co., Addison Miller, Inc. (Minnesota corporation), discontinued the services which it had previously carried out for various railroad companies. Thereafter, through renegotiation or assignment of the contracts with the railroads, Addison Miller Co. conducted said services for the railroad companies. Most of the equipment, title to which remained in Addison Miller, Inc. (Minnesota corporation), necessary to perform the various services for the railroad companies was leased to the Addison Miller Co.Addison Miller died September 7, 1944, a resident of Pasco County, Fla. His182 will named petitioner as sole heir and executor. The will was duly admitted to probate by the Court of County Judge, Pasco County, Fla., and petitioner, under orders of said court, became the duly appointed, acting, and qualified executor of the estate of Addison Miller.On January 24, 1945, the Court of County Judge, Pasco County, Fla., ordered that "Allen T. Miller in his representative capacity as Executor of the Last Will and Testament of Addison Miller, deceased, is hereby authorized and empowered to carry on the business of Addison Miller Company for and in behalf of this estate."Addison Miller, as of the date of his death, in addition to his interest in Addison Miller, Inc. (Minnesota corporation), and Addison Miller Co., owned among other interests the majority of stock in the following corporations: (1) Addison Miller, Inc., an Illinois corporatin; (2) Great Northern Icing Co.; and (3) Commercial Investment Co.On September 7, 1944, the interests of Addison Miller, petitioner, and George Faltico in the partnership profits and losses were 55 percent, 20 percent, and 25 percent, respectively. The estate of Addison Miller succeeded to the decedent's 55-percent interest in183 the partnership after September 7, 1944. George Faltico died on July 29, 1945, and the petitioner acquired Faltico's 25-percent partnership interest from his estate, so that on January 1, 1946, the partners and 942 their partnership interests in Addison Miller Co. were the estate of Addison Miller, 55 percent, and petitioner, 45 percent. A. T. Miller also acquired in 1945 the 25-percent interest held by Faltico in Addison Miller, Inc. (Minnesota corporation), and Addison Miller, Inc. (Illinois corporation).On June 6, 1945, the Federal District Court for the District of Minnesota issued its "Findings and Order" in Civil Action No. 255 brought by the U.S. Department of Labor against Addison Miller Co. and other defendants. The defendants were found guilty of contempt of court for failing to comply with a judgment of the Federal District Court entered on July 17, 1941, which had adjudged that the defendants were liable for certain wage and hour payments under the Fair Labor Standards Act of 1938.Addison Miller Co. on January 14, 1942, had moved to vacate or modify the 1941 judgment on several grounds. The Federal District Court held that it lacked jurisdiction to order Addison184 Miller Co. to make payments of restitution and to that extent vacated and modified its earlier decree. On appeal to the Court of Appeals for the Eighth Circuit the appellate court held that the lower court did have the jurisdiction to order restitution. On March 13, 1944, the U.S. Supreme Court denied defendant's petition for certiorari. The June 6, 1945, order of the Federal District Court specified that the defendants were within a prescribed time to pay the sum of $ 100,645.24 to the U.S. Department of Labor. Addison Miller Co. during the months of June and July of 1945 issued checks totaling $ 90,714.54, which sum represented the total amount paid by Addison Miller Co. pursuant to the June 6, 1945, order of the Federal District Court.The books and records of Addison Miller Co. did not show any wage and hour liability as of September 7, 1944.An adjusted trial balance prepared from the books and records of Addison Miller Co. as of September 7, 1944, showed the following:AssetsCash$ 23,233.32 Receivables1,012,631.50 Inventory102,309.10 Investments8,300.00 Prepaid expense25,337.13 Net depreciation assets15,312.66 1,187,123.71 LiabilitiesPayables650,755.71 Intercompany account318,172.72 968,928.43 Net worthReserve for contingencies$ 23,000.80 Profit and loss accounts144,274.16 Addison Miller92,794.55 A. T. Miller(1,879.75)George Faltico(39,994.48)218,195.28 1,187,123.71 185 943 The adjusted trial balance above reflects a net profit of $ 144,274.16 for the period from January 1, 1944, to September 7, 1944, which represents the allocated portion of the net profit of $ 210,375.87 for the entire year 1944.The profit and loss of Addison Miller Co. for the year ended December 31, 1944, shows the following gross income:DepartmentGross incomeRetail$ 669,665.52Boarding3,381,121.37Rental4,855.93Ice Manufacturing134,816.54Ice Harvesting51,550.33Car Icing98,262.57Car Cleaning25,565.34Coal Handling134,746.20Storage17,417.69Quarry37,483.35Engineering13,457.05General Management5,794.85Total gross income4,574,736.74In its partnership returns of income for the years 1954, 1955, 1956, and 1957 (January 1, 1957-February 28, 1957) the Addison Miller Co. showed net profits of $ 95,735.44, $ 86,576.42, $ 94,914.17, and $ 6,489.36, respectively.In the tax return filed for Addison Miller for the taxable period January 1 to September 7, 1944, there was reported distributable net income from the partnership in the amount of $ 79,350.79 (55 percent of $ 144,274.16).In the Federal estate tax return for the estate of186 Addison Miller the decedent's 55-percent interest in Addison Miller Co. was listed in schedule F at a value of $ 4,560.45. There was listed in the same schedule the amount of $ 92,794.55, representing the amount in decedent's drawing account due from the partnership. Respondent in 1948 determined a deficiency in the estate tax of the estate of Addison Miller. A settlement was reached by the parties and a decision was entered by the Tax Court in June 1954. Among the adjustments made the fair market value of decedent's 55-percent interest in Addison 944 Miller Co. was determined to be $ 175,301.21, and this valuation was used by the parties in the final settlement.The estate of Addison Miller reported the following amounts of income in its fiduciary income tax returns as follows:Income fromYearAddison Miller Co.Total income1944 (Sept. 8-Dec. 31)$ 36,355.94$ 56,106.42194582,340.1089,394.99195452,654.4961,767.33195547,617.0353,040.47195652,202.7958,259.56In its final return for the period January 1 to July 30, 1957, the estate reported income of $ 3,569.15 from Addison Miller Co. and $ 30 of dividend income. It reported no other income187 in the final return.In 1947 and 1948 the respondent proposed certain adjustments in taxable net income and distributable net income of Addison Miller Co. for the years 1937 through 1944, and for the years 1945 through 1947 under section 45 of the Internal Revenue Code of 1939 against Addison Miller Co. and A. T. Miller, individually and as executor of the estate of Addison Miller. This matter was settled on or about October 25, 1951.The commissioner of taxation for the State of Minnesota in two separate orders ordered additional income tax against the estate of Addison Miller for 1942 and 1944. Thereafter the Board of Tax Appeals of the State of Minnesota reversed the commissioner of taxation in both cases holding that Addison Miller was domiciled in Florida during the years involved. On July 19, 1953, the Supreme Court of the State of Minnesota issued its opinion affirming the Board of Tax Appeals of the State of Minnesota ( Miller's Estate v. Commissioner of Taxation, 59 N.W. 2d 925 (Minn. 1953)).For the years 1940 and 1942 through 1947 the commissioner of taxation for the State of Minnesota increased the amount of income of Addison Miller, 188 Inc. (Minnesota corporation), for Minnesota income tax purposes, by way of rent for the equipment to the corporation from Addison Miller Co. and also increased the corporation's gross income by way of interest on the average amount of indebtedness due the corporation in each of those years from Addison Miller Co. The Board of Tax Appeals of the State of Minnesota affirmed the orders of the commissioner of taxation, and on February 8, 1957, the Supreme Court of the State of Minnesota issued its opinion and order affirming the decision of the Board of Tax Appeals of the State of Minnesota. ( Addison Miller, Inc. v. Commissioner of Taxation, 81 N.W. 2d 89 (Minn. 1957)).On July 17, 1952, Gerald R. Stintzi, employed by Addison Miller Co. at Yardley, Wash., was injured and in August 1952, he commenced an action against the Northern Pacific Railway Co. and 945 sought recovery of $ 160,000. The insurance coverage carried by Addison Miller Co. was $ 100,000 for one individual. At the time of the accident Addison Miller Co. was performing icing services for Northern Pacific Railway Co. under a contract dated July 18, 1936, and under which it had 189 agreed to indemnify and save the railway company harmless from all claims and causes of action by employees or third persons on account of personal injuries, death, or damage to property in any manner caused by, arising from, or accruing out of the maintenance or operation of said ice plant or handling of ice under the contract. On February 8, 1954, Stintzi filed an amended complaint increasing the amount of damages claimed to $ 250,000. The matter was tried in Federal District Court in the State of Washington and on July 3, 1954 the jury awarded the plaintiff $ 148,000. The award was appealed to the Federal Court of Appeals for the Eighth Circuit and argument was made before the court on September 7, 1955. On September 20, 1955, the above case was settled for $ 96,500.On December 28, 1956, the Illinois Central Railroad notified the Addison Miller Co. that the railroad had received a refund from the Internal Revenue Service of certain payroll taxes paid in connection with the Addison Miller Co. employees on the ground that such employees performing services for the railroad were not in the service of the railroad and therefore their wages were not subject to payroll taxes. A 190 portion of the refund was to be repaid to the employees and a portion retained by the railroad.There were ancillary proceedings for the estate of Addison Miller in Minnesota, Washington, and Montana. The Minnesota ancillary proceedings were closed in December 1955, the Washington ancillary proceedings were closed in the fall of 1957, while the ancillary proceedings in Montana had not yet been closed at the time of trial.In a letter dated May 9, 1956, written at petitioner's suggestion, request was made of Sam Y. Allgood, the Florida attorney for the estate of Addison Miller, about proceeding to close the administration of the estate. In a reply dated May 23, 1956, Allgood referred to a Florida statute allowing a sole beneficiary of an estate to waive the annual and final accountings and he enclosed such a waiver and consent for A. T. Miller's signature, as well as a petition for distribution and discharge. The waiver was executed by petitioner, individually, under date of February 19, 1957, and the petition for order of distribution and discharge of executor was executed by him, as executor of the estate, on the same date.On March 29, 1957, the Court of the County Judge for Pasco191 County, Fla., entered its "Order waiving annual and final accountings and directing distribution" in the matter of the estate of Addison Miller. Florida probate proceedings for the estate were completed in June 1957.946 As of February 28, 1957, as shown by the books and records of Addison Miller Co., petitioner received as an heir from the estate of Addison Miller the estate's interest in the Addison Miller Co.The principal contracts under which Addison Miller Co. operated were cost-plus contracts with the various railroad companies. Under these contracts Addison Miller Co. would settle with the railroad companies at the end of each calendar year after an audit of all costs and expenditures were made. Addison Miller Co. generally made monthly billings for services to the various railroads. All of the contracts provided for termination dates ranging from 30 days to 6 months after notice.On February 28, 1957, the following contracts were in effect between Addison Miller Co. and the indicated railroads: 1 A. Contract dated May 1, 1936, with Great Northern Railway Co.2 B. Contract dated May 18, 1938, with Northern Pacific Railway Co.2 C. Contract dated January 1, 192 1955, with Northern Pacific Railway Co.2 D. Contract dated January 1, 1957, with Northern Pacific Railway Co.2 E. Contract dated September 1, 1936, with Northern Pacific Railway Co.1 F. Contract dated January 1, 1951, with Spokane, Portland, and Seattle Railway Co.2 G. Contract dated October 20, 1944, with Illinois Central Railroad Co.3 H. Contract dated October 20, 1944, with Illinois Central Railroad Co.4 I. Contract dated April 2, 1940, with Great Northern Railway Co.J. Contract dated January 31, 1952, with Soo Line (Minneapolis, St. Paul & Sault Ste. Marie Railroad Co.)K. Contract dated January 31, 1952, with Wisconsin Central Railroad Co.L. Contract with Duluth, South Shore, and Atlantic Railroad Co.Great Northern Railroad Co. guaranteed expenses under the contract (I) leasing certain depot concessions to Addison Miller Co. and the contract also provided that the railroad would share in any net profits.Effective February 28, 1957, all of the contracts193 outstanding on that date were, with the consent of the respective railroad companies, transferred from Addison Miller Co. to petitioner, doing business as Addison Miller Co. During the years 1957 and 1958 the contract (designated A) with Great Northern Railway Co. accounted for about 55 percent of the business of Addison Miller Co.The two contracts with Illinois Central Railroad Co. (listed above as G and H) were replaced by the contracts dated May 27, 1958. They were executed by the railroad and by petitioner, doing business as Addison Miller Co.947 The contracts listed above, including the two contracts dated May 27, 1958, which replaced contracts G and H, were canceled as follows:ContractEffective cancellation dateCanceled by --ADecember 31, 1958Railroad.BDecember 31, 1957Addison Miller Co.CdoDo.DdoDo.EFebruary 14, 1958Do.FDecember 31, 1958Railroad.GdoAddison Miller Co.HdoDo.IApril 21, 1958Jointly.JDecember 31, 1958Railroad.KdoDo.A. T. Miller, doing business as Addison Miller Co., discontinued operations in 1958.Great Northern Icing Co. was liquidated about 1955; Addison Miller, Inc. (Minnesota194 corporation), and Addison Miller, Inc. (Illinois corporation), were liquidated in 1957.Respondent determined in his statutory notice of deficiency that the administration of the estate of Addison Miller was terminated sometime prior to 1956 and therefore included the income of the estate, as well as other adjustments, in petitioner's income for the years 1956 and 1957. Respondent disallowed a deduction of $ 170,740.76 claimed by petitioner for the year 1958 as "Loss on Goodwill" attributable to the cessation by petitioner of the business operations of Addison Miller Co. Respondent also disallowed a deduction of $ 1,058.18 claimed by petitioner in his 1958 return for expenditures at various clubs.OPINION.The first issue is whether, as respondent argues, the administration of the estate of Addison Miller should have been terminated sometime prior to 1956, in which event the income reported by the estate in the years 1956 and 1957 would be includable in the petitioner's income for those years. In support of his argument the respondent relies on section 1.641(b)-3, Income Tax Regs., which this Court has sustained as valid and reasonable. 1Edwin M. Petersen, 35 T.C. 962">35 T.C. 962.195 In the 948 Petersen case the Court stated that "The essence of that regulation is that, for Federal income tax purposes, the duration of the administration of an estate is the period actually required by the executor or administrator using reasonable diligence, to perform the ordinary duties of administration, whether or not this period coincides with the duration of the estate as determined by State law." Petitioner recognizes the rule that the "continuation of administration long after an estate should have been closed and the use thereof as a means of splitting income will not be condoned" but argues that the administration of the estate here was completed as soon as reasonably possible and that it should be regarded as a continuing tax entity in the years 1956 and 1957.196 The ordinary duties of the administration of an estate are, generally, the collection of assets and the payment of debts and legacies. It is the time reasonably required to perform these ordinary administrative duties that is controlling, and as we pointed out in Joseph M. Roebling, 18 T.C. 788">18 T.C. 788, "An executor cannot extend the period of administration by engaging in activities which are not part of his administrative duties. * * The criterion, as we see it, is not as petitioners contend, analogous to the 'business purpose' test but is an 'administrative purpose' test."Petitioner was sole heir and executor under decedent's will. In such an estate the executor is spared the necessity of annual and final accounting and settlement, distribution, and closing of the estate is rendered simple. This estate remained open for over 12 years with the result that Addison Miller Co.'s income was each year split between petitioner as executor and petitioner as a partner. Distribution would change Addison Miller Co. to petitioner's sole proprietorship with all income taxable to him. However, there was some justification for keeping the estate open beyond197 the ordinary period of administration. During these years the executor was engaged in controversies and litigation involving the estate's liability for Federal estate and income taxes and State (Minnesota) taxes. This all ended before July of 1954. It is true that also during these years the Addison Miller Co. was engaged in litigation with the U.S. Department of Labor but this apparently ended in 1945. Also during these years the Addison Miller Co. might be said to have had a contingent liability in the Stintzi litigation. This was settled, without liability to the Addison Miller Co., in September of 1955. Even if it be thought the estate should remain open until the litigation involving Addison Miller Co. (not the estate) was terminated, and we need not decide that issue, it surely 949 should have been closed within a reasonable time after that litigation was all ended in September of 1955. All that respondent's determination seeks to tax to petitioner is the income reported by the estate for 1956 and 1957.The record does not show that any administrative duties remained which would have made it reasonable for petitioner, as executor, to prolong the administration198 of the estate beyond 1955 to the middle of 1957. Petitioner has the burden to show that such valid and compelling reasons existed to prolong the administration. There certainly was no reason for the estate to remain open in 1956 and 1957 to continue as partner in Addison Miller Co. The partnership duties (such as they were) performed by petitioner in his capacity as executor could just as easily have been performed by petitioner himself. See Marin Caratan, 14 T.C. 934">14 T.C. 934. There was nothing in the contracts that the partnership had with the railroads that made the partnership essential, and in fact some of these contracts were transferred with great facility in 1957 to petitioner, individually, doing business as Addison Miller Co.Petitioner calls our attention to the fact that the estate, in addition to being a partner in Addison Miller Co., also owned a majority of the stock in four other corporations. We fail to see the relevance of this since there was nothing to prevent the estate from distributing the stock to petitioner prior to 1956. See Joseph M. Roebling, supra;Alma Williams, 16 T.C. 893">16 T.C. 893;199 William C. Chick, 7 T.C. 1414">7 T.C. 1414, affd. 166 F.2d 337">166 F. 2d 337.Great Northern Icing Co., one of the four corporations, was liquidated in 1955. Addison Miller, Inc. (Minnesota corporation), and Addison Miller, Inc. (Illinois corporation), were liquidated in 1957 and prior to that the petitioner had requested a tax audit of the two corporations which was completed toward the end of 1956. Petitioner seems to argue these events required that the estate remain open. As we have indicated above, these events in 1956 and 1957 could just as easily have taken place after the stock was distributed by the estate. It was not necessary to hold the estate open until the corporations were audited and liquidated. Such delay would certainly not be a part of the normal administrative duties of an executor. Nor was there any reason to hold the estate open until February 8, 1957, when a State tax dispute involving the Minnesota corporation was finally adjudicated by the State courts. This was a corporate matter, not an estate matter.There is no merit to the contention that delay was caused by the fact that the original attorney for the estate died200 and a new attorney appointed. The original attorney died in 1954 and there is nothing to indicate that the new attorney required time beyond the end of 1955 to become acquainted with the estate. Moreover, we have examined 950 the correspondence between the Florida attorney and representatives of the estate in Minnesota and we do not think it supports petitioner's contention on brief that these geographical distances contributed appreciably to any delay in closing the estate. In fact, the correspondence certainly indicates that there was a delay but that such delay all occurred in Minnesota. On May 23, 1956, the Florida attorney wrote to representatives of the estate in Minnesota outlining the procedure for closing the estate under Florida law, and some 9 months later (February 9, 1957) again wrote to express his concern that "I have not heard from you since my letter outlining the procedure and I have been worried for fear that you are waiting for me to do something else, which I do not understand."Petitioner also mentions other "incidental" matters which caused delay beyond the end of 1955, such as the completion of ancillary probate proceedings in Washington in 1957 and201 the refund of payroll taxes received in December 1956 by the Illinois Central Railroad. A portion of this refund was payable to employees of Addison Miller Co., and the railroad company made the computation of the net tax refund due each employee. No reason existed for prolonging the administration of the estate of Addison Miller for this purely ministerial chore which really concerned only the employees of the partnership. Nor can we perceive any justification for prolonging the estate administration until the completion of the various ancillary proceedings in 1957 and subsequent years. See Estate of J. F. Hargis, 19 T.C. 842">19 T.C. 842. Indeed, it appears that the ancillary proceedings in Montana still remained open at the time of trial, and it is plain that this would not justify keeping the estate open until 1962. Petitioner found the open ancillary estate in Montana no obstacle to his closing the Florida estate in 1957.It is also of some significance, in deciding the reasonableness of the duration of the administration of the estate, that a Florida statute permitted a sole beneficiary to waive annual and final accountings. The expeditious procedure 202 was adopted in this case when the estate was actually closed early in 1957 and it is revealing that a little more than a month elapsed between the date that the estate representative in Minnesota mailed to the Florida attorney the "Waiver and Consent" and "Petition for Order of Distribution and Discharge of Executor" and the issuance by the Court of the County Judge in Florida of the order waiving annual and final accounting and directing distribution. We should also add at this point that the order of the Court of the County Judge in 1945 empowering the estate to continue as partner in the business of Addison Miller Co. certainly cannot, under these facts, be interpreted to mean that it was reasonable to prolong the estate administration until 1957. It cannot preclude this Court, in 951 deciding the issue of reasonableness, from examining the other evidence before us.We find that the record presents no basis for extending the administration of the estate of Addison Miller beyond the year 1955 and therefore conclude that the period of administration for the purpose of this case terminated in the year 1955. We hold that the income reported by the estate in the years of 1956203 and a portion of the year 1957 is properly includable in petitioner's income for those years.The next issue is whether petitioner is entitled to a deduction in 1958 of $ 170,740.76 which purportedly represents a loss of goodwill incurred by him when the railroad contracts were canceled in that year and he ceased operations of Addison Miller Co. (a sole proprietorship at that time). We have examined petitioner's arguments under this issue and find them to be completely without merit.Petitioner's arguments are more difficult to state than to refute. Essentially, petitioner argues that the decedent's 55-percent interest in the partnership (Addison Miller Co.) was included in his estate at a value of $ 268,095.76 and that this became the "cost basis" of such interest; that "The difference between this cost and the value of the assets underlying [decedent's] 55% interest (the liquidating value of said 55% interest) therefore became goodwill in the hands of the Estate"; that the books and records of the partnership as of the date of decedent's death (September 7, 1944) showed the "liquidating value" of his 55-percent interest to be zero "so that a goodwill item of $ 268,095.76 was created"; 204 that this goodwill item passed into petitioner's hands as sole heir when the estate was closed in 1957; and that when the railroad contracts under which petitioner was by then doing business as Addison Miller Co. were canceled in 1958 he sustained a loss in that year (in which he ceased business operations) measured by his basis in the goodwill item. On brief he argues that even if certain adjustments are made in the value of partnership assets as of September 7, 1944, the value of goodwill would still be in excess of $ 170,740.76.The value of decedent's 55-percent partnership interest had originally been included in the Federal estate tax return at $ 4,560.45. This and other items were disputed by respondent and in 1954 a settlement of estate tax liability was reached by the parties, and as part of such settlement the fair market value of the decedent's 55-percent partnership interest was determined to be $ 175,301.21. Thus, at the very outset we perceive that the figure of $ 268,095.76 used by petitioner as a "cost basis" of the good will item is contrary to the facts as they appear in the record. Petitioner argues that the amount in decedent's partnership drawing account on205 September 7, 1944, in the amount of $ 92,794.55, was erroneously listed on the estate tax returns as one of 952 decedent's assets, in addition to the value of his 55-percent partnership interest, and that this erroneously included item should be added to the established fair market value of the 55-percent partnership interest to increase that fair market value to $ 268,095.76. Both the statute and the regulations make it abundantly clear that property or interests of a decedent are to be included in his estate at their fair market value at the time of his death. (Sec. 811, I.R.C. 1939; Regs. 105, sec. 81.10.) The basis of property acquired by bequest, devise, or inheritance, or by a decedent's estate from the decedent "shall be the fair market value of such property at the time of such acquisition." (Sec. 113(a)(5), I.R.C. 1939.) Petitioner has not shown that the fair market value of the 55-percent partnership interest was other than $ 175,301.21. Certainly the fair market value of an interest cannot be arbitrarily increased by an item erroneously included in the estate tax return.Moreover, it is inconceivable that, as petitioner argues, the "liquidating value" of the 55-percent206 partnership interest at the date of decedent's death was zero and that the entire fair market value of the interest was attributable to goodwill. First, the books and records of the partnership do not show a zero valuation. The partnership performed its services to the railroads mostly under cost-plus contracts, with monthly billings and yearend adjustments of all costs and expenditures. In 1944 the partnership earned a net profit of $ 210,375.87 and the record shows that the portion allocable to the period ending September 7, 1944, was $ 144,274.16. Petitioner, in reaching his zero valuation would have us ignore this latter amount. In addition, there was a reserve for contingencies on the books in the amount of $ 23,000. 2 It can readily be seen that decedent's 55-percent share of the $ 144,274.16 and the $ 23,000 contingency account would amount to about $ 92,000, and if we add to this the amount in decedent's drawing account, or $ 92,794.55, then the "liquidating value" of the decedent's 55-percent partnership interest as of the date of his death would be about $ 184,000.207 Second, the petitioner has not even attempted to demonstrate, apart from the mathematics involved, that the partnership even possessed goodwill on September 7, 1944. One does not ordinarily think of goodwill attaching to a business that engages in the business of performing a dozen short-term service contracts. No goodwill account appeared on the partnership books, and it would not seem from the nature of the partnership business that goodwill existed or was of particular importance. The partnership performed services for railroads under contracts cancellable on rather short notice. The services 953 were to furnish railroad boarding camps with meals and lodging, to operate retail concessions, to manufacture, harvest, and handle ice, to ice and clean railroad cars, to operate coal docks, and similar operations. Absent any further evidence, we cannot say that service operations of this nature indicate the presence of goodwill. Moreover, it appears that the partnership's contracts were limited to about seven railroads, that some of the contracts went back to 1936 and 1938, and that one of these contracts in later years accounted for more than half of the partnership business. 208 The business of the partnership appears to have been profitable, but it is established that high earnings do not by themselves constitute goodwill. Donal A. Carty, 38 T.C. 46">38 T.C. 46; Estate of Henry A. Maddock, 16 T.C. 324">16 T.C. 324; Estate of Leopold Kaffie, 44 B.T.A. 843">44 B.T.A. 843. Such earnings may be caused by the efforts of the partners, the exercise of business judgment, favorable contracts, or to fortuitous circumstances unrelated to goodwill. See Estate of Henry A. Maddock, supra.There is no merit to petitioner's conclusion that existence of goodwill may be "reached by another route", namely by use of the partnership sections in the Internal Revenue Code of 1954. Petitioner touches upon sections 705, 731, 732, 734, 742, 743, 752, 754, and 755. We have carefully examined this phase of his argument and it will suffice to say that the sections relied upon do not support the existence of goodwill.Petitioner on brief also makes an argument that the doctrine of equitable recoupment should be applied here to enable petitioner to recoup the additional estate tax paid through the209 erroneous inclusion among the decedent's assets of the $ 92,794.55 which was in his partnership capital account at the time of his death.This Court is without equity jurisdiction. Lorain Avenue Clinic, 31 T.C. 141">31 T.C. 141. The Supreme Court, in Rothensies v. Electric Storage Battery Co., 329 U.S. 296">329 U.S. 296, has held that the Tax Court has no jurisdiction to consider recoupment.We find that petitioner has failed to establish the existence of goodwill in the partnership as of September 7, 1944, and that consequently no such item was acquired by him at any time. We hold that petitioner is not entitled to a deduction of $ 170,740.76, or any other amount, attributable to the loss of goodwill in 1958. 3210 The last issue is whether petitioner is entitled to a business expense deduction of $ 1,058.18 in 1958 which represents expenditures at the Minnesota Club, Somerset Club, and the Chicago Club. The petitioner 954 has the burden to show that this amount or some portion of it, was an ordinary and necessary business expense under section 162, I.R.C. 1954. Petitioner has failed to meet his burden. We have only the testimony of petitioner's employee, Buckley, on this point, and the testimony is brief and couched in very broad generalities. He testified that in his opinion these "were necessary expenses" and that "those are clubs where businessmen get together and exchange ideas, negotiate work and so forth." It appears that these expenditures were, in fact, annual membership dues at these clubs and that the clubs were used for social purposes. We cannot, on the basis of the meager evidence, find that any portion of the club expenditures was ordinary and necessary business expenses. We sustain respondent on this issue.Decisions will be entered under Rule 50*211 . Footnotes1. Boarding contracts.↩2. Ice harvesting, manufacture, and/or icing service contracts.↩3. Cleaning railroad cars, handling livestock and mail, and other services.↩4. Operating retail concession.↩1. SEC. 1.641(b)-3. Termination of estates and trusts.(a) The income of an estate of a deceased person is that which is received by the estate during the period of administration or settlement. The period of administration or settlement is the period actually required by the administrator or executor to perform the ordinary duties of administration, such as the collection of assets and the payment of debts, taxes, legacies, and bequests, whether the period required is longer or shorter than the period specified under the applicable local law for the settlement of estates. For example, where an executor who is also named as trustee under a will fails to obtain his discharge as executor, the period of administration continues only until the duties of administration are complete and he actually assumes his duties as trustee, whether or not pursuant to a court order. However, the period of administration of an estate cannot be unduly prolonged. If the administration of an estate is unreasonably prolonged, the estate is considered terminated for Federal income tax purposes after the expiration of a reasonable period for the performance by the executor of all the duties of administration. Further, an estate will be considered as terminated when all the assets have been distributed except for a reasonable amount which is set aside in good faith for the payment of unascertained or contingent liabilities and expenses (not including a claim by a beneficiary in the capacity of beneficiary).↩2. The partnership, as of Sept. 7, 1944, showed cash in the amount of $ 23,233.32, receivables of $ 1,012,631.50, and a total of assets amounting to $ 1,187,123.71. There were payables of $ 650,755.71 and an intercompany account of $ 318,172.72, for a total of liabilities in the amount of $ 968,928.43.↩3. It appears that the figure of $ 170,740.76 represents the difference between the amount of $ 4,560.45, which was the valuation originally given in the estate tax return to the decedent's 55-percent interest in the partnership, and $ 175,301.21, the valuation which formed the basis of the settlement of the estate tax liability in 1954. It is exactly this difference which petitioner is attempting to label as goodwill and this appears in paragraph 6 of his petition in Docket No. 91439.↩	01-04-2023	11-21-2020